<PAGE> 1
As filed with the Securities and Exchange Commission on January 18, 2001.
Registration No. 333-38044
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
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(Exact name of Registrant as specified on its Charter)
Delaware 7385 93-1197477
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(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classi- Identification
fication Code Number)
Number)
11 Sundial Circle, Suite 17
Carefree, Arizona 85377
(480) 575-6972
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(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
J. Andrew Moorer
Guardian Technologies International, Inc.
11 Sundial Circle, Suite 17
Carefree, Arizona 85377
(480) 575-6972
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(Name, address, including zip code, and telephone number of
agent for service of process)
Copies to:
David H. Drennen, Esq.
Neuman & Drennen, LLC
5445 DTC Parkway, PH-4
Englewood, Colorado 80111
(303) 221-4700
Fax: (303) 488-3454
<PAGE> 2
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the Registration
Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 3
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class Amount Maximum Maximum Amount of
of Securities to be To be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
------------------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Common Stock, $.0005
par value to be sold by
the Selling Stockholders 4,400,800 $.34 $1,496,192 $3,950.16
TOTAL: 4,400,800 $.34 $1,496,192 $3,950.16
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Calculation based on the closing price of the Registrant's common stock on
Nasdaq on January 8, 2001. This calculation is made in accordance with Rule
457(c). Pursuant to Rule 416, there are also being registered such additional
shares and warrants as may become issuable pursuant to anti-dilution provisions
upon the exercise of the warrants
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 4
You should rely only on the information incorporated by reference or provided in
this prospectus. We have not authorized anyone to provide you with different
information. We are not making an offer of these securities in any state where
the offer would not be permitted. You should not assume that the information
contained in this prospectus is accurate as of any date other than the date on
the front of this document or the date of documents incorporated by reference.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary 8
Risk Factors 10
Forward-Looking Statements 20
Trademarks 20
Capitalization 21
Dividend Policy 21
Use of Proceeds 22
The Market for Our Securities 22
Selected Consolidated Financial Data 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Business 33
Management 42
Executive Compensation 44
Certain Relationships and Related Transactions 45
Principal Stockholders 47
Selling Stockholders 49
Plan of Distribution 52
Limitation on Directors' Liability Indemnification 54
</TABLE>
<PAGE> 5
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
CROSS-REFERENCE INDEX
<TABLE>
<S> <C>
Item No. and Heading
in Form SB-2 Location
Registration Statement in Prospectus
1. Front of Registration Statement and Forepart of Registration
Outside Front Cover of Prospectus Outside Front Cover Page
Statement; of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back
Pages of Prospectus Cover Pages of Prospectus
3. Summary Information and Risk Factors Front Cover Page
4. Use of Proceeds Use of Proceeds; Risk Factors
5. Determination of Offering Price *
6. Dilution Dilution; Risk Factors
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Management
Promoters, and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Limitation on Directors'
Indemnification for Securities Act Liability; Indemnification
Liabilities
15. Organization Within Last Five Years Prospectus Summary - General
Information About Us and Our
Business
16. Description of Business Prospectus Summary; Risk
Factors; Business
17. Management's Discussion and Management's Analysis of
Analysis or Plan of Operations Financial Condition and
Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Relationships and
Transactions Related Transactions
20. Market for Common Equity and The Market for our Securities
Related Stockholder Matters
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with *
Accountants on Accounting and
Financial Disclosure
</TABLE>
* Omitted from prospectus because item is inapplicable or answer is in
the negative
<PAGE> 7
PROSPECTUS
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
4,400,800 SHARES OF COMMON STOCK
This is a public offering of 4,400,800 Shares of our common stock.
800,800 of the Shares are being offered by certain stockholders who acquired
them from us in private transactions. The remaining shares may be offered by
such persons if they exercise warrants or options we have issued to them. We
will not receive any of the proceeds from the offer and sale of the shares. If
the warrants or options are exercised in full, we will receive proceeds of
$4,312,500 from such exercise.
The Nasdaq Small Cap Market lists our shares under the symbol "GRDN."
INVESTING IN THE SHARES INVOLVES RISKS. YOU SHOULD NOT PURCHASE THE
SHARES UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. It is illegal for anyone to tell you
otherwise.
The information in this prospectus is not complete. It might change.
The selling stockholders are not allowed to sell the shares offered by this
prospectus until the registration statement that we have filed with the SEC
becomes effective. This prospectus is not an offer to sell the securities- and
does not solicit offers to buy-in any state where the offer or sale is not
permitted.
The date of this prospectus is January, 2001.
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<PAGE> 8
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the shares of the common stock being sold
in this offering and our historical financial statements and notes thereto
included elsewhere in this prospectus. Our board of directors authorized a
two-for-one forward split of our common stock, which was effective on April 3,
2000. All share amounts reflect that stock split, including historical numbers
and stock prices.
GENERAL INFORMATION ABOUT US AND OUR BUSINESS
Guardian Technologies International, Inc., a Delaware corporation, was
originally incorporated in 1989. We manufacture and distribute ballistic
protective equipment, including equipment commonly referred to as body armor.
Our product lines include four basic types of ballistic protective vests,
ballistic protective shields, a ballistic protective vests for police dogs,
aircraft ballistic protective equipment, and assorted other ballistic protective
devices, such as ballistic protective blankets and seat cover liners.
We also are engaged in the specialty steel fabrication business through
our 50%-owned subsidiary, Structural Holdings, Inc.
We also have a wholly-owned subsidiary, Palo Verde Group, Inc., which
owns some undeveloped real estate in Arizona and a commercial building and real
estate in Wyoming.
Our executive offices are located at 11 Sundial Circle, Suite 17,
Carefree, Arizona 85377, telephone (480) 575-6972. We use the calendar year for
our fiscal year.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered 4,400,800 shares
Common stock to be outstanding after 8,374,262 shares
this offering
Nasdaq Market Symbol GRDN
</TABLE>
The total number of shares outstanding after the offering is based on
4,112,462 shares outstanding as of January 8, 2001, and the 4,400,800 shares
offered by this prospectus. It excludes:
- 300,000 options granted or to be granted under an employment
agreement outstanding on January 8, 2001, and
- 1,628,712 shares issuable upon exercise of warrants that are
exercisable at $7.50 per share.
All of the shares are being offered by selling stockholders, who must
deliver a copy of this prospectus to persons who buy them. The selling
stockholders will probably sell the shares at prevailing market prices, through
broker-dealers, although they are not required to do so. The selling
stockholders will retain all of the proceeds of their sales, except for
commissions they may pay broker-dealers. We will not receive any money when they
sell. However, we will receive the proceeds from the exercise of the warrants.
We are paying the costs of registering the shares.
The market price of our common stock has fluctuated significantly since
it was first traded. The last price that the shares were sold for on January 8,
2001, was $.34.
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<PAGE> 9
SUMMARY FINANCIAL DATA
The following financial information summarizes the more complete historical
financial information enclosed in this prospectus. You should read the
information below along with all other financial information and analyses in
this prospectus. Please do not assume that the results below indicate results we
will achieve in the future.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
1999 September 30, 2000
------------ ------------------
<S> <C> <C>
Current assets $ 868,459 $ 1,086,068
Equity investment 1,027,376 771,365
Property and equipment, net 52,064 342,373
Total assets 1,960,109 2,340,220
Current liabilities 362,030 156,348
Working capital 506,429 929,720
Shareholders' equity $ 1,561,590 2,075,091
</TABLE>
<TABLE>
<CAPTION>
For the Periods Ended Nine Months
December 31, Ended September 30,
1999 1998 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,100,076 1,656,649 460,218 $ 852,071
Gross profit 163,424 278,672 69,033 191,836
Operating loss (954,220) (419,184) (705,619) (409,808)
Equity in net earnings
(loss) of investment 33,467 -- (211,011) 300,000
Net income (loss) $ (825,076) (447,255) (754,020) 36,202
</TABLE>
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<PAGE> 10
RISK FACTORS
You should carefully consider the risks and uncertainties described
below before making an investment decision. The risks described below are not
the only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations. Our
business, financial condition, or operating results could be materially
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
RISKS RELATING TO OUR BUSINESSES
IF WE ARE UNABLE TO COMPLETE AND INTEGRATE ACQUISITIONS, WE MAY BE
UNSUCCESSFUL.
We intend to grow through the acquisition of businesses and assets that
will complement our current businesses. We cannot be certain that we will be
able to complete attractive acquisitions, obtain financing for acquisitions on
satisfactory terms, or successfully acquire identified targets. We may not be
successful in integrating acquired businesses into our existing operations. This
integration may result in unanticipated liabilities or unforeseen operational
difficulties, which may be material, or require a disproportionate amount of
management's attention. Competition for acquisition opportunities in our
industries may rise, thereby increasing our cost of making acquisitions or
causing us to refrain from making further acquisitions.
We intend to consider acquisitions of and alliances with other
companies in industries that could complement our business, including the
acquisition of entities in diverse geographic regions and entities offering
greater access to industries and markets that we do not currently serve. We
cannot provide assurance that suitable acquisition or alliance candidates can be
identified or, if identified, that we will be able to consummate such
transactions. We also cannot assure that we will be able to integrate
successfully any acquired companies into our existing operations, which could
increase our operating expenses. Moreover, any acquisition may result in
potentially dilutive issuances of equity securities, incurrence of additional
debt, and amortization of expenses related to goodwill and intangible assets,
all of which could adversely affect our profitability. Acquisitions involve
numerous risks, such as diverting attention of our management from other
business concerns, our entrance into markets in which we have had no or only
limited experience, and the potential loss of key employees of the acquired
company, any of which could have a material adverse effect on our business,
financial condition and operating results.
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OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. IF
WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE WILL BE UNABLE TO SUCCEED
IN OUR BUSINESS PLAN.
Our success depends on the continued services of our senior
management and key employees, particularly Messrs. Moorer and Payne, as well as
our ability to attract additional members to our management team with experience
in the steel fabrication and protective equipment industries. Although we intend
to implement a stock option plan designed to retain key management and other
employees, and we believe that we offer competitive compensation to such
personnel other than with Mr. Moorer, we have no employment agreements with our
management or key employees. The unexpected loss of the services of any of our
management or other key personnel, or our inability to attract new management
when necessary, could have a material adverse effect upon us.
THE INDUSTRIES IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE. IF WE ARE
UNABLE TO BE COMPETITIVE, OUR PROFIT MARGINS MAY SUFFER.
The industries in which we operate are highly competitive in
all product and service lines. Some of our competitors have significantly
greater financial resources, larger facilities and operations and depth and
experience of personnel. In the security industry, some of our competitors have
more recognizable trademarks for products similar to those sold by us. In
addition, our competitors may develop or improve their products, which could
render our products obsolete or less marketable. The security industry is
extremely competitive and highly fragmented. We expect that the level of
competition will increase in the future. We cannot assure you that we will be
able to continue to compete successfully.
Many small and various large companies offer fabrication,
erection, and related services that compete with those we provide. Local and
regional companies offer competition in one or more of our geographic markets or
product segments. Out of state or international companies may provide
competition in any market. We compete for every project we obtain. Although we
believe customers consider, among other things, the availability and technical
capabilities of equipment and personnel, efficiency, safety record and
reputation, price competition usually is the primary factor in determining which
qualified contractor with available equipment is awarded a contract. Competition
has resulted in pressure on pricing and operating margins, and the effects of
competitive pressure in the industry may continue. Many of our competitors have
greater capital and other resources than we do and are well established in their
respective markets. We cannot assure that our competitors will not substantially
increase their commitment of resources devoted to competing aggressively with us
or that we will be able to compete profitably with our competitors.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, COMPLIANCE WITH WHICH COULD
BE COSTLY AND ERODE OUR PROFITABILITY, OR SUBJECT US TO GOVERNMENTAL ENFORCEMENT
ACTIONS.
We are subject to federal licensing requirements with respect
to the sale in foreign countries of certain of our protective equipment
products. In addition, we are obligated to comply with a variety of federal,
state and local regulations governing certain aspects of our operations and the
workplace, including regulations promulgated by, among others, the U.S.
Departments of Commerce, State and Transportation, and the U.S. Environmental
Protection Agency
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<PAGE> 12
To the extent that we sell our products internationally, we
are subject to the Foreign Corrupt Practices Act and other laws which prohibit
improper payments to foreign governments and their officials by U.S. and other
business entities. We operate in countries known to experience endemic
corruption. Our activities in such countries, though limited, create the risk of
an unauthorized payment by an employee or agent of ours that would be in
violation of various laws including the Foreign Corrupt Practices Act.
Violations of the Foreign Corrupt Practices Act may result in severe criminal
penalties that could have a material adverse effect on our business, financial
condition, and operating results.
Many aspects of our operations are subject to governmental
regulations in the United States, including regulations relating to occupational
health and workplace safety, principally the Occupational Safety and Health Act
and regulations thereunder. In addition, we are subject to licensure and we hold
or have applied for licenses in each of the states in the United States in which
we operate and in certain local jurisdictions within such states. Although we
believe that we are in material compliance with applicable laws and permitting
requirements, there can be no assurance that we will be able to maintain this
status. Further, we cannot determine to what extent our future operations and
earnings may be affected by new legislation, new regulations, or changes in or
new interpretations of existing regulations.
THE FAILURE OF OUR PRODUCTS COULD GIVE RISE TO PRODUCT LIABILITY CLAIMS
Our protective equipment products are used in applications
where their failure could result in serious personal injuries and death. We
believe that the insurance coverage that we maintain is adequate under the
circumstances. However, we cannot assure that this coverage would be sufficient
to cover the payment of any potential claim. In addition, we cannot assure that
this or any other insurance coverage will continue to be available or, if
available, that we will be able to obtain it at a reasonable cost. Any
substantial uninsured loss could have a material adverse effect on our business,
financial condition, and operating results. In addition, the inability to obtain
product liability coverage would prohibit us from bidding for orders from
certain municipal customers since, at present, many municipal bids require such
coverage, and any such inability would have a material adverse effect on our
business, financial condition and operating results.
THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS WHICH COULD MAKE US
VULNERABLE TO PRICE INCREASES AND/OR PRODUCT SHORTAGES.
The primary raw material that we use in manufacturing ballistic- resistant
garments is Spectrashield, a patented product of Honeywell. Although we enjoy a
good relationship with Honeywell, if our supply of that material were cut off or
if there were a material increase in the prices of that material, our
manufacturing operations could be severely curtailed and our business, financial
condition and operating results would be materially adversely affected.
Although the raw materials we use in our steel fabrication business are
available from numerous suppliers, steel prices have risen in the past and may
rise again. An unexpected rise in the price of steel or other raw
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<PAGE> 13
materials would increase our costs on projects, and could result in reducing our
profit margins, or even create losses on certain projects.
MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS WHICH COULD RESULT IN REDUCED
DEMAND FOR OUR PRODUCTS.
Customers for our protective equipment products include law
enforcement and governmental agencies. Government tax revenues and budgetary
constraints, which fluctuate from time to time, can affect budgetary allocations
for law enforcement. Many domestic and foreign government agencies have
experienced budget deficits that have led to decreased spending in certain
areas. Our operating results may be subject to substantial period-to-period
fluctuations as a result of these and other factors affecting capital spending.
A reduction of funding for law enforcement related to security products or
funding for military base construction related to steel fabrication products
could have a material adverse effect on our business, financial condition, and
operating results.
WE ARE DEPENDENT UPON OUR PROPRIETARY TECHNOLOGY
We are dependent in our protective equipment business upon a
variety of methods and techniques that we regard as proprietary trade secrets.
We are also dependent upon a variety of trademarks, service marks, and designs
to promote brand name development and recognition. We rely on a combination of
trade secrets, copyright, patent, trademark, unfair competition and other
intellectual property laws as well as contractual agreements to protect our
rights to such intellectual property. Due to the difficulty of monitoring
unauthorized use of and access to intellectual property, however, such measures
may not provide adequate protection. In addition, there can be no assurance that
courts will always uphold our intellectual property rights, or enforce the
contractual arrangements that we have entered into to protect our proprietary
technology. Any unenforceability or misappropriation of our intellectual
property could have a material adverse effect on our business, financial
condition, and operating results. In addition, if we bring or become subject to
litigation to defend against claimed infringement of our rights or of the rights
of others or to determine the scope and validity of our intellectual property
rights, such litigation could result in substantial costs and diversion of our
resources which could have a material adverse effect on our business, financial
condition and operating results. Unfavorable results in such litigation could
also result in the loss or compromise of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties, or
prevent us from selling our products which could have a material adverse effect
on our business, financial condition and operating results.
OUR STEEL FABRICATION BUSINESS' DEPENDENCE ON THE CONSTRUCTION INDUSTRY MAY
CREATE VARIATIONS IN OUR OPERATING RESULTS.
Our steel fabrication business has experienced variations in
its operating results because of a number of factors, many of which are outside
our control. We expect that those variations may continue. In particular, our
operating results may vary because of downturns in one or more segments of the
building construction industry, changes in economic conditions, our failure to
obtain, or delays in awards of, major projects, the cancellation of major
projects, our failure to timely replace projects that have been
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completed or are nearing completion, or declines in the amount of our billings
in excess of costs and recognized earnings on uncompleted projects. Any of these
factors could result in the periodic inefficient or underutilization of our
resources and could cause our operating results to fluctuate significantly from
period to period, including on a quarterly basis.
Our steel fabrication business earns virtually all of its revenues in
the building construction industry, which is subject to local, regional, and
national economic cycles. Those revenues and cash flows depend to a significant
degree on major construction projects in various industries, including
government military installations, commercial offices and hotels, and school
systems, each of which industries may be adversely affected by general or
specific economic conditions. If construction activity declines significantly in
our principal markets, our business, financial condition and operating results
would be adversely affected.
When we bid on projects, we estimate our costs, including projected
increases in costs of labor, materials, and services. Costs and gross profit
realized on a fixed price contract may vary from estimated amounts because of
unforeseen conditions or changes in job conditions, variations in labor and
equipment productivity over the terms of contracts, higher than expected
increases in labor or material costs, and other factors. These variations could
have a material adverse effect on our business, financial condition, and
operating results for any period.
We routinely rely on subcontractors to perform a portion of
our fabrication and all of our project detailing to fulfill projects that we
cannot fulfill in-house due to capacity constraints, or that are in markets in
which we have not established a strong local presence. In order to complete
these projects successfully we must retain and successfully manage these
subcontractors. Any difficulty we may have in attracting and retaining qualified
subcontractors on terms and conditions favorable to us could have an adverse
effect on our ability to complete these projects in a timely and cost effective
manner.
OUR USE OF PERCENTAGE OF COMPLETION ACCOUNTING MAY ADVERSELY AFFECT OPERATING
RESULTS IN FUTURE PERIODS.
We recognize steel fabrication revenues using the percentage
of completion accounting method. Under this method, we recognize revenue based
on the ratio that costs incurred to date bear to the total estimated costs to
complete the project. We estimate losses on contracts in full when we determine
that we will incur a loss on the project. We frequently review and revise
revenues and total cost estimates as work progresses on a contract and as
contracts are modified. Accordingly, we reflect revenue adjustments based upon
the revised completion percentage in the period that estimates are revised.
Although we base revenue estimates on management assumptions supported by
historical experience, these estimates could vary materially from actual
results. To the extent percentage of completion adjustments reduce previously
reported revenues, we would recognize a charge against operating results, which
could have a material adverse effect on our operating results for the applicable
period.
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<PAGE> 15
THE CONCENTRATION OF OUR STEEL FABRICATION OPERATIONS IN ONE INDUSTRY AND IN ONE
GEOGRAPHICAL REGION MAY CREATE PERIODIC FLUCTUATIONS OF OUR REVENUES.
Our fabrication and erection operations currently are
conducted primarily in the governmental sector of the construction industry,
which has experienced substantial growth during recent years. Because of this
concentration, future construction activity and our business may be adversely
affected in the event of a downturn in economic conditions existing in the
governmental sector, including military base construction as well as commercial
construction in the Oklahoma area and in the Southern United States generally.
Factors that may affect economic conditions include increases in interest rates
or limitations in the availability of financing for construction projects,
decreases in the amount of funds budgeted for governmental projects, decreases
in capital expenditures devoted to the construction of plants, distribution
centers, industrial facilities, hotels, office buildings, convention centers,
and other facilities, and downturns in occupancy rates, office space demand,
tourism and convention related activity and population growth.
THE NATURE OF OUR OPERATIONS CREATES RISKS OF COSTLY LITIGATION AND DAMAGES THAT
WE MAY NOT BE ADEQUATELY INSURED AGAINST.
Construction and heavy steel plate weldments involve a high
degree of operational risk. Natural disasters, adverse weather conditions,
design, fabrication, and erection errors, and work environment accidents can
cause death or personal injury, property damage and suspension of operations.
Furthermore, delays in project deliveries can result in significant back charges
and/or liquidated damages. The occurrence of any of these events could result in
loss of revenues, increased costs, and liability to third parties. Although we
are not currently involved in any such claims, we are subject to litigation
claims in the ordinary course of our business, including backcharges and
liquidated damage claims, and the resultant lawsuits asserting substantial
claims. Currently, we do not maintain any reserves for potential litigation, and
we expense litigation costs if and when we incur them. We maintain risk
management, insurance, and safety programs intended to prevent or mitigate
losses. There can be no assurance that any of these programs will be adequate or
that we will be able to maintain adequate insurance in the future at rates that
we consider reasonable.
OUR OPERATING LOSSES COMBINED WITH THE NATURE OF OUR BUSINESS HAS RESULTED IN A
WORKING CAPITAL SHORTAGE.
Since our inception we have incurred continuing losses, including
$825,076 in 1999 and $447,255 in 1998, respectively. If losses continue and/or
we are unable to raise adequate capital to fund future operations, we may be
required to curtail operations, liquidate assets or enter into capital or
financing arrangements on terms which may have an adverse effect on future
operations.
Our steel fabrication operations require significant amounts
of working capital to procure materials for contracts to be performed over
relatively long periods, and for purchases and modifications of heavy-duty and
specialized fabrication equipment. In addition, our contract arrangements with
customers sometimes require us to provide payment and performance bonds and, in
selected cases, letters of credit, to partially secure our obligations under our
contracts, which may require us to incur significant expenditures prior to
receipt of payments. Furthermore, our customers often will retain a portion of
amounts otherwise payable to us
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<PAGE> 16
during the course of a project as a guarantee of completion of that project. To
the extent we are unable to receive project payments in the early stages of a
project, our cash flow would be reduced, which could have a material adverse
effect on our business, financial condition and operating results. To finance
our operations, we are customarily highly leveraged, which creates a substantial
risk that we would be unable to make timely payments on our debt.
Structural's notes payable and line of credit have various financial
and operational covenants, including certain working capital and debt to equity
ratios, operating cash flow to annual debt service ratios, net worth
requirements, a limitation on capital expenditures, and a minimum cash flow
requirement. It was not in compliance with certain covenants as of December 31,
1999 and as of September 30, 2000. It is currently seeking a waiver of said
covenants. Management believes the waiver will be granted; however, we have
included the related indebtedness as a current liability until such time that
the waiver has been granted.
WE MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS.
We are subject to federal, state, and local laws and
regulations governing the protection of the environment, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. We cannot assure you that we are at all times in
complete compliance with all such requirements. Like all companies, we are
subject to potentially significant fines or penalties if we fail to comply with
environmental requirements. We have made and will continue to make capital
expenditures in order to comply with environmental requirements. Environmental
requirements are complex, change frequently, and could become more stringent in
the future. Accordingly, we cannot assure you that these requirements will not
change in a manner that will require material capital or operating expenditures
or will otherwise have a material adverse effect on us in the future.
Our operations and properties are affected by numerous
federal, state and local environmental protection laws and regulations, such as
those governing discharges to air and water and the handling and disposal of
solid and hazardous wastes. Compliance with these laws and regulations has
become increasingly stringent, complex, and costly. There can be no assurance
that such laws and regulations or their interpretation will not change in a
manner that could materially and adversely affect us. Certain environmental
laws, such as the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and its state law counterparts, provide for strict and
joint and several liability for investigation and remediation of spills and
other releases of toxic and hazardous substances. These laws may apply to
conditions at properties currently or formerly owned or operated by an entity or
its predecessors, as well as to conditions at properties at which wastes or
other contamination attributable to an entity or its predecessors come to be
located. Although we have not incurred any material environmental related
liability in the past and we believe that we are in material compliance with
environmental laws, there can be no assurance that we will not incur such
liability in connection with the investigation and remediation of facilities we
currently operate (or formerly owned or operated) or other locations in a manner
that could materially and adversely affect us.
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<PAGE> 17
DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.
Our certificate of incorporation makes us subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits publicly held Delaware corporations to which it
applies from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. This provision could discourage
others from bidding for our shares and could, as a result, reduce the likelihood
of an increase in our stock price that would otherwise occur if a bidder sought
to buy our stock.
DELAWARE LAW AND OUR BY-LAWS PROTECT OUR DIRECTORS FROM CERTAIN TYPES OF
LAWSUITS.
Delaware law provides that our directors will not be liable to us or
our stockholders for monetary damages for all but certain types of conduct as
directors. Our Bylaws require us to indemnify our directors and officers against
all damages incurred in connection with our business to the fullest extent
provided or allowed by law. The exculpation provisions may have the effect of
preventing stockholders from recovering damages against our directors caused by
their negligence, poor judgment or other circumstances. The indemnification
provisions may require us to use our assets to defend our directors and officers
against claims, including claims arising out of their negligence, poor judgment,
or other circumstances. We have also entered into indemnity agreements with each
of our directors and officers, and we have directors' and officers' liability
insurance.
RISKS RELATED TO OUR SHARES
THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE.
The market price for our common stock has been highly
volatile. We believe that a variety of factors, including announcements by us or
our competitors, quarterly variations in financial results, trading volume,
general market trends, and other factors, have caused, and may in the future
cause the market price of our common stock to fluctuate substantially. Due to
our relatively small size, our winning or losing a large contract may have the
effect of distorting our overall financial results.
WE WILL HAVE BROAD DISCRETION TO ALLOCATE ANY PROCEEDS WE RECEIVE FROM THE
EXERCISE OF WARRANTS. WE CANNOT GUARANTEE THAT THE MONIES RECEIVED WILL
IMPROVE OUR OPERATIONS.
Any monies we may receive from the exercise of the warrants have been
allocated generally to provide funds for future acquisitions and for working
capital for operations. As such, we will use funds as they are received for such
purposes and in such proportions as we deem advisable. While we will apply the
proceeds in a manner consistent with our fiduciary duty and in a manner
consistent with our best interests, we cannot assure you that the monies
received will result in any present or future improvement in our operating
results.
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<PAGE> 18
THE SALES OF RESTRICTED SECURITIES AND SHARES UNDERLYING OPTIONS AND WARRANTS
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Actual sales or the prospect of future sales of shares of our common
stock under Rule 144, and sales or the prospect of sales of shares by means of
this prospectus may have a depressive effect upon the price of, and market for,
our common stock. As of September 30, 2000, 3,973,462 shares of our common stock
were issued and outstanding. Approximately 836,800 of those shares are not
presently available to be sold in the public market. If all of the warrants and
options covered under this prospectus are exercised, an additional 4,070,000
shares will be issued, or a 100% increase in our shares. Upon the effectiveness
of the registration statement of which this prospectus is a part, all of the
shares that are issued upon exercise of the warrants, as well as 800,800 of the
restricted shares, will be newly available for sale on the open market.
We cannot predict what effect, if any, that sales of shares of common
stock, or the availability of these shares for sale, will have on the market
prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of common stock may be sold in the public market will
probably adversely effect prevailing prices for our common stock and could
impair our ability to raise capital in the future through the sale of equity
securities.
THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS AND/OR OUR ABILITY TO ISSUE
ADDITIONAL SECURITIES WITHOUT STOCKHOLDER APPROVAL COULD HAVE SUBSTANTIAL
DILUTIVE AND OTHER ADVERSE EFFECTS ON EXISTING STOCKHOLDERS AND INVESTORS IN
THIS OFFERING.
We are authorized to issue up to 1,000,000 shares of preferred stock.
We can fix and determine the relative rights and preferences of preferred shares
and may issue these shares without further stockholder approval. As a result, we
could authorize the issuance of a series of preferred stock that would:
- grant to holders preferred rights to our assets upon
liquidation;
- grant to holders the right to receive dividend coupons before
dividends would be declared to common stockholders; and
- grant to holders the right to the redemption of those shares,
together with a premium, prior to the redemption of common
stock. Common stockholders have no redemption rights.
We also have the authority to issue additional shares of common stock
and to issue options and warrants to purchase shares of our common stock without
stockholder approval. We could issue large blocks of voting stock to fend off
unwanted tender offers or hostile takeovers without further stockholder
approval. We currently have outstanding options exercisable to purchase up to
470,000 shares of common stock at a weighted average exercise price of $1.04,
and warrants exercisable to purchase up to 1,628,712 shares of common stock at
an exercise price of $7.50 per share. We also issued warrants to purchase
3,600,000 shares of common stock, exercisable at a weighted average price of
$1.06 per share, in January 2000. Holders of the options or warrants can be
expected to exercise them at a time when we would, in all likelihood, be able to
obtain any needed capital on terms which are more favorable to us than the
exercise terms provided by such options or warrants. Exercise of these warrants
and options could have a
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<PAGE> 19
further dilutive effect on existing stockholders and you as an investor in this
Offering.
THE TRADING VOLUME OF OUR COMMON STOCK MAY DIMINISH SIGNIFICANTLY IF OUR COMMON
STOCK IS PROHIBITED FROM BEING TRADED ON THE NASDAQ SMALL CAP MARKET.
The over-the-counter markets for securities such as the shares offered
hereby historically have experienced extreme price and volume fluctuations
during certain periods. These broad market fluctuations and other factors, such
as new product developments and trends in our industry and investment markets
generally, as well as economic conditions and quarterly variations in our
operating results, may adversely affect the market price of our common stock.
Although our common stock is currently included in Nasdaq Small Cap
Market, there can be no assurance that they will remain eligible to be included
in Nasdaq. At September 30, 2000, our net tangible assets were slightly above
the level required to maintain the listing of our common stock on Nasdaq. In the
event that our common stock were no longer eligible to be included in Nasdaq,
trading in our common stock could be subject to rules adopted by the Commission
regulating broker-dealer practices in connection with transactions in "penny
stocks" which could materially, adversely affect the liquidity of our
securities. The regulations define a penny stock as any equity security not
listed on a regional or national exchange or Nasdaq that has a market price of
less than $5.00 per share, subject to certain exceptions. The material, adverse
effects of such designation could include, among other things, impaired
liquidity with respect to our securities and burdensome transactional
requirements associated with transactions in our securities, including, but not
limited to, waiting periods, account and activity reviews, disclosure of
additional personal financial information and substantial written documentation.
These requirements could lead to a refusal of certain broker-dealers to trade or
make a market in our securities.
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<PAGE> 20
FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our
expectations to our investors. Accordingly, this prospectus contains discussion
of events or results that have not yet occurred or been realized. Certain of the
matters discussed concerning our operations, economic performance, financial
condition, including in particular the execution of acquisition strategies,
expansion of product lines and increase of distribution networks or product
sales, are areas, among others, which include forward- looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Statements that are predictive in nature, that depend upon or refer to
future events or conditions, or that include words such as, "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. You should read forward-looking
statements carefully because they discuss our future expectations, contain
projections of our future operating results or of our financial position, or
state other expectations of future performance. The actions of current and
potential new competitors, changes in technology, seasonality, business cycles,
and new regulatory requirements are factors that impact greatly upon strategies
and expectations and are outside our direct control. There may be events in the
future that we are not able accurately to predict or to control. The factors
listed in the section captioned "Risk Factors," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ from the expectations we express in
our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in the section
caption "Risk Factors" and elsewhere in this prospectus could materially
adversely affect our business, financial condition, and operating results.
TRADEMARKS
The Spectra(-Registered Mark-), Spectra Shield(-Registered Mark-),
Spectra Flex(-TM-), Gold Shield(-TM-) and Gold Flex(-TM-) trademarks included in
this prospectus are owned by Honeywell International, Inc.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our total capitalization as of December
31, 1999 and September 30, 2000. We have not made any adjustment for the
possible exercise of any options or warrants, although shares sold under this
prospectus would have been acquired by the Selling Shareholder through exercise
of warrants.
This section should be read in conjunction with the financial
statements and notes to the financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of As of
December 31,1999 September 30, 2000
---------------- ------------------
<S> <C> <C>
Long term debt, net of current portion 36,489 108,781
Stockholders' equity:
Preferred stock, $.20 par value,
1,000,000 Shares authorized; no shares
issued and outstanding
Common stock, $.001 par value; 15,000,000 shares authorized; 2,762,668
shares issued and outstanding on December 31, 1999; 3,973,462 shares
issued and outstanding on
September 30, 2000 $ 2,763 $ 3,974
Additional paid-in capital 4,660,908 5,927,218
Accumulated deficit (3,102,081) (3,856,101)
Total stockholders' equity 1,561,590 2,075,091
Total capitalization $ 1,598,079 $ 2,183,872
------------ ------------
</TABLE>
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
do not intend to pay dividends on our share of common stock. We intend to retain
all future earnings, if any, for use in our business. Future cash dividends, if
any, will be at the discretion of our board of directors and will depend upon
our future operations and earnings, capital requirements, and surplus, general
financial condition, contractual restrictions, and other factors as the board of
directors may deem relevant.
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<PAGE> 22
USE OF PROCEEDS
We will not receive any of the proceeds from the offer and sale of the
shares; however, 4,070,000 of the shares being offered are issuable upon the
exercise of warrants and options. If all of those warrants are exercised, we
will receive proceeds of $4,312,500. The selling stockholders will not pay any
of the expenses that are incurred in connection with the registration of the
shares, but they will pay all commissions, discounts, and other compensation to
any securities broker-dealers through whom they sell any of the shares.
We will utilize the net proceeds, if any, realized from the exercise of
the warrants for acquisitions, working capital, and for general corporate
purposes, at our discretion. Actual expenditures may vary substantially
depending upon economic conditions and opportunities we are unable to identify
at this time.
THE MARKET FOR OUR SECURITIES
Our common stock trades on the Nasdaq Small Cap Market under the symbol
"GRDN."
The following table sets forth the high and low sales prices for each
quarter during 1998 and 1999 and for the first, second, and third quarters of
2000.
<TABLE>
<CAPTION>
COMMON STOCK
QUARTER ENDED LOW HIGH
-------------- ------------- -------------
<S> <C> <C>
March 31, 1998 $ 1.33 $ 2.88
June 30, 1998 $ 2.19 $ 3.31
September 30, 1998 $ 2.00 $ 3.75
December 31, 1998 $ 1.25 $ 3.81
March 31, 1999 $ 1.04 $ 1.88
June 30, 1999 $ 1.19 $ 2.12
September 30, 1999 $ 1.18 $ 1.50
December 31, 1999 $ 1.06 $ 2.12
March 31, 2000 $ 1.00 $ 4.50
June 30, 2000 $ 0.69 $ 2.53
September 30, 2000 $ 0.72 $ 1.47
December 31, 2000 $ 0.25 $ 1.72
</TABLE>
There were 71 record holders and approximately 1,400 beneficial owners
of our common stock as of January 8, 2001.
No dividends have been declared or paid by the Company, nor does the
Company anticipate paying cash dividends on the shares of common stock in the
foreseeable future.
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<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial
data. You should read this information together with our financial statements
and the notes to those financial statements beginning on page F-1 of this
prospectus, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The selected
balance sheet and statement of operation data is derived from our audited
consolidated financial statements and related notes included elsewhere in this
prospectus and is qualified by reference to these consolidated financial
statements and the related notes thereto.
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
1999 1998 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 1,100,076 $ 1,656,649 $ 460,218 $ 852,071
Gross Profit 163,424 278,672 69,033 191,836
Operating Expenses 1,117,644 697,856 774,652 601,644
Operating Loss (954,220) (419,184) (705,619) (409,808)
Loss Before Minority
Interest and Earnings
from Equity Investment -- -- (592,009) (263,800)
Loss Before Earnings
From Equity Investment (858,552) (447,255) (543,009) (263,800)
Net Income (Loss) $ (825,076) $ (447,255) $ (754,020) $ 36,202
Basic and Diluted Loss
Per Share (1) $ (.62) $ (.40) $ (.22) $ .03
Weighted Average Number of Shares
Outstanding 1,338,513 1,120,310 3,399,450 1,310,498
</TABLE>
(1) Based upon the weighted average number of shares outstanding for the
years ended December 31, 1998 and 1999; and for the nine-months ended
September 30, 2000 and 1999.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
At December 31, At September 30,
1999 2000
-------------- ---------------
<S> <C> <C>
Total Assets $ 1,960,109 $ 2,340,220
Working Capital 506,429 929,720
Total Liabilities 398,519 265,129
Accumulated Deficit (3,102,081) (3,856,101)
Stockholders' Equity $ 1,561,590 $ 2,075,091
</TABLE>
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<PAGE> 24
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
ARMOR:
In late 1999, the Company decided to restructure its armor business in
order to achieve profitability. Management began implementing the restructuring
plan during the first quarter of 2000 with full implementation expected by the
end of the third quarter. The successful implementation of the restructuring
strategy is intended to produce positive cashflow in the armor business by
year-end. The basic elements involved in the strategy are outlined below:
a) To retain experienced senior management and sales
personnel able to capitalize on the newly developed,
light weight, lower priced armor products in order to
increase sales volume.
- In early May 2000, the Company retained the
services of Steven Young, an experienced
industry professional. Mr. Young assumed the
role of President of the Company's armor
division responsible for day to day
operations.
b) To outsource the Company's manufacturing operation to
reduce production costs.
- In conjunction with bringing Mr. Young on
board, management decided to relocate
manufacturing to North Carolina, the heart
of the textile belt and Mr. Young's base of
operation. The relocation process was
started during the latter half of the second
quarter and completed by September 30.
c) To develop new products that will make the Company
more competitive in the market. During the third
quarter, the Company developed an entire new line of
low-cost, lightweight body armor designed to make the
Company competitive in the market. The new line will
be manufactured and marketed
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<PAGE> 25
through the Company's majority-owned subsidiary
ForceOne. Manufacturing will take place at ForceOne's
new facility located in North Carolina's textile
belt. The new line was certified by the National
Institute of Justice's recently adopted "04" standard
requiring greater protection and reduced trauma. The
new line was introduced for the first time at the
International Association of Chiefs of Police
Convention held in San Diego, California during
November 2000.
STRUCTURAL HOLDINGS:
During 1999 the Company sold its land and building. Proceeds from the
sale were used to purchase 50% of the outstanding shares of common stock of
Structural Holdings, Inc., a Delaware holding company (Structural). Structural
has no operations and was formed specifically to purchase 100% of the
outstanding shares of common stock of H&M Steel, Inc., an Oklahoma corporation
(H&M). H&M is engaged in the business of structural steel fabrication. The
Company believes this fragmented industry represents an opportunity to complete
a consolidation strategy. After the acquisition of H&M, Structural embarked on
an aggressive acquisition campaign in the area of structural steel fabrication.
Several non-binding letters of intent were executed by Structural to acquire
synergistic fabrication facilities. However, H&M operations since the
acquisition by Structural have been negatively impacted by contract overruns.
These two factors have forced Structural's management to suspend the acquisition
strategy until H&M's current base of operations is running more smoothly and a
new lender is found.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales for 1999 were $1,100,076 compared to $1,656,649 in 1998, a
decrease of $556,573 or 33.6%. Sales in 1999 lagged behind 1998 due to limited
government funding of local law enforcement programs. Although the "Bulletproof
Vest Partnership Act of 1998" was enacted, the funding for this program was
slow. In addition, the funding that was received did not materialize in
quantities expected by industry. The "Bulletproof Vest Partnership Act of 1998"
provides matching funds to law enforcement agencies for purposes of procuring
body armor for law enforcement personnel. In essence, the matching funds would
cover roughly half of the cost of procuring body armor. Due to the slow nature
and quantity of funding available under this program, many procurement
departments delayed the purchase of body armor. Revenues in 1999 were also
negatively impacted by a smaller than anticipated order from a distributor that
supplies armor products to an allied government. A similar order in 1998 from
this same distributor was nearly double the size of the 1999 order.
Our gross profit in 1999 was $163,424 or 14.8% compared to gross profit
of $278,672 or 16.8%. As the gross margin percentage remained relatively stable,
the reduction in gross margin dollars of $115,248 was the result of reduced
sales volume.
Total operating expenses of $1,117,644 during 1999 were comprised of
selling expenses of $83,955 and general and administrative expenses of
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<PAGE> 26
$1,033,689. Total operating expenses of $697,856 during 1998 were comprised of
selling expenses of $129,070 and general and administrative expenses of
$568,786. Selling expenses decreased $45,115 primarily from reduced sales
consultant costs. Management increased general and administrative expenses by
$464,903 in order to properly position the Company for long-term growth and was
attributable primarily to the following:
a) Salary, travel and related costs of $118,500. These costs were
partially offset by $45,000 in fees we are to receive under a
management contract with Structural. Our fees under the
management contract should increase significantly if
Structural completes another acquisition.
b) $30,000 in audit fees we incurred in connection with the
acquisition of H&M by Structural.
c) Rent expense of $50,000 associated with our manufacturing
operation in Dulles, Virginia for the period April 1, 1999 to
December 31, 1999. Prior to this time, we owned the building
that housed our manufacturing operation and therefore did not
incur rent expense.
d) Increased investor relations fees of $65,000 related to actual
cash payments and options granted to an outside firm to assist
us in the dissemination of information to the investing
public.
e) Consulting fees paid to an officer and director of $169,000
($64,000 in the value of stock grants and the balance in cash)
and $50,000 paid to a related party entity for financial
advisory services.
Other income was $95,668 in 1999 compared to other expenses of $28,071
in 1998. Other income recorded in 1999 was comprised of the gain on sale of the
Company's land and building of $107,974 and rental income of $49,233 received
prior to the building sale. Partially offsetting 1999 other income were
miscellaneous expenses of $62,533. Other expense in 1998 was comprised of
interest expense of $100,717 related to loans associated with our building prior
to its sale and costs incurred related to a failed acquisition of $111,423.
These expenses were partially offset by rental income of $184,069.
We incurred a net loss in 1999 of $825,076 or $.62 per share compared
to a net loss of $447,255 or $.40 per share for 1998. Lower sales volume coupled
with increased general and administrative expenses (discussed in detail above)
produced a loss from armor operations of $954,220 for the period. Partially
offsetting this loss was income of $33,476 from the Company's equity method
investment for the period related to the Company recognizing its pro-rata share
of earnings in Structural, the parent of H&M.
As previously stated, H&M is engaged in the business of structural
steel fabrication. Structural purchased H&M in 1999 for approximately
$5,000,000. The purchase resulting in the recognition of approximately
$3,025,000 of goodwill which is being amortized over 15 years. The purchase was
financed by Structural with approximately $1,700,000 in cash (of which $850,000
was paid by the Company), a $650,000 note payable to the seller and a 3-year
$2,650,000 term loan from a financial institution. Additionally, H&M obtained a
3-year $2,350,000 revolving line of credit from the same financial institution.
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<PAGE> 27
Since H&M is involved in the fabrication of products used in the construction
industry, H&M often enters into long-term contracts with its customers and
recognizes revenue on a percentage of completion basis, which requires
significant estimates. During the fourth quarter of 1999, the Company recognized
a loss of approximately $267,000 on its equity in net earnings of Structural.
This loss was primarily the result of H&M revising its calculation for profit on
long-term contracts prior to the Company's fourth quarter.c
Also at December 31, 1999, H&M was not in compliance with certain financial
covenants of its financial institution. H&M is currently attempting to obtain
waivers of these loan covenant violations. Management believes these waivers
will be obtained.
The table below presents summarized financial information for Structural:
SUMMARIZED FINANCIAL INFORMATION FOR STRUCTURAL HOLDINGS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1999
------------------
<S> <C>
Current assets $ 5,464,000
Total assets $ 10,241,000
Current liabilities $ 7,810,000
Total liabilities $ 8,450,000
Total stockholders' equity $ 1,790,000
Sales revenue $ 7,005,000
Gross margin $ 1,675,000
Net income $ 90,000
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
Net sales for the nine months ended September 30, 2000 were
$460,218 compared to $852,071 for the same period in 1999, a decrease of 45%.
The decrease in revenues during the nine-month period is attributable to reduced
demand for the Company's previously outdated product line (see discussion above
on new armor product line development) and reduced sales efforts during the
Company's relocation of its armor production capability to North Carolina and
elimination of the Dulles, Virginia work force.
Gross profit for the nine months ended September 30, 2000 was
$69,033 or 15% compared to gross profit of $191,836 or 23% for the nine months
ended September 30, 1999. The reduction in gross margin dollars is a function of
reduced sales volume (as previously discussed). The reduction in gross margin
percentage is a function of inefficient production during the relocation of the
manufacturing facility to North Carolina.
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<PAGE> 28
Total operating expenses for the nine months ended September
30, 2000 were $774,652 comprised of selling expenses of $55,211 and general and
administrative expenses of $719,441. Total operating expenses for the nine
months ended September 30, 1999 were $601,644 comprised of selling expenses of
$57,420 and general and administrative expenses of $544,224.
The Company posted a net loss for the nine months ended
September 30, 2000 of $754,020 or $0.22 per share compared to a net profit of
$36,202 or $0.03 per share for the same period a year ago.
After adjusting for the loss allocated to the minority
interest shareholders in the Company's armor business, the Company posted a loss
from armor operations of $656,619 for the period compared to a loss from armor
operations of $409,808 a year ago. The loss is attributable to reduced sales
volume during the period.
Net results for the nine months ended September 30, 2000 were
negatively impacted by the recognition of a $211,011 loss associated with the
Company's equity investment in Structural Holdings. The Company recorded its
equity investment in estimated earnings of Structural Holdings totaling $33,476
at December 31, 1999 based on Structural's management's best estimate of profit
on uncompleted contracts at the time the Company's Form 10-KSB was required to
be filed with the SEC. However, Structural had not completed the audit of its
December 31, 1999 financial statements as of that date. In completing the audit,
Structural's management changed some of its estimates in the cost to complete
certain jobs, thereby changing its percentage of completion calculation at
December 31, 1999. These changes in estimate reduced Structural's net income to
a net loss. As a result, the Company reduced its equity in earnings of
Structural for the nine months ended September 30, 2000 by $84,976, which
represents the Company's pro-rata portion of the reduction in net income of
Structural for the year ended December 31, 1999. This amount coupled with the
Company's attributable loss of Structural's net loss for the nine months ended
September 30, 2000 of $126,035, results in a net equity loss of $211,011 for the
nine months ended September 30, 2000 as reported on the Company's books.
Through the nine months ended September 30, 2000 H&M has
struggled to complete several fabrication jobs. One job, to supply fabricated
steel to a large military base construction site, was the largest project ever
undertaken by H&M. Design delays encountered during 1999 caused significant
production delays. However, the completion schedule was never amended to reflect
the design delays. Through September 30, 2000 labor cost overruns incurred to
complete this job on a timely basis have pushed what would otherwise have been a
highly profitable endeavor into a loss position. A second job that has affected
the third quarter was actually underbid when submitted to the general contractor
over two years ago. The estimator on the job had significantly underbid material
costs on the job, the impact of which was not known until the job was being
fabricated in 2000. The estimator on the job was terminated after the facts were
known, but no contract price adjustment was allowed by the general contractor.
This project is nearing completion and has run into a loss position. As H&M has
encountered several problems in the area of estimation and analysis of costs to
complete on contracts in progress, management has undertaken the task of
developing stringent procedures for preparing, analyzing and reconciling actual
costs and costs to complete to mitigate these types of problems in the future.
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<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1999
During the twelve months ended December 31, 1999, the Company used net cash in
operating activities of $391,893 compared with $331,182 last year. Cash used in
operating activities was provided by $585,937 in available cash existing at the
beginning of the year.
In March 1999 the Company sold its land and building generating net cash of
$684,793 after the repayment of a 1st mortgage on the facility in the amount of
$1,834,581.
In June 1999 the Company sold 133,334 shares of common stock generating proceeds
of $100,000.
The net proceeds from the sale of the building and the private placement
proceeds referred to above were used to fund the Company's 50% investment in
Structural of $850,000, plus acquisition related expenses totaling $98,900.
The Company does not anticipate any significant capital expenditures for
property and equipment in the coming year.
The Company's only long-term indebtedness at December 31, 1999 relates to a
three-year premium financing arrangement for Director's and Officer's insurance
in the amount of $36,489.
The Company had notes receivable of $235,000 at December 31, 1999. In March 2000
the Company collected $50,000 of the outstanding balance of notes receivable.
Management believes the remaining balance of notes receivable will be collected
by June 30, 2000 which will provide an additional $185,000 of cashflow to the
Company for working capital purposes.
From January 2000 through March 2000, options for 424,000 shares of common stock
were exercised generating net proceeds to the Company of $530,000. These funds
will be used for general working capital purposes.
Subsequent to December 31, 1999, the Company sold 150,000 units (comprised of 2
common shares and warrants for the purchase of 4 shares of common stock) for
$1.50 each receiving net proceeds of $225,000. The warrants have the following
terms:
<TABLE>
<CAPTION>
WARRANT PRICE PERIOD*
<S> <C> <C>
Class A $.7500 30 days
Class B $.8750 60 days
Class C $1.000 90 days
Class D $1.125 120 days
Class E $1.250 150 days
Class F $1.375 180 days
</TABLE>
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<PAGE> 30
* The exercise period begins upon the effective date of a
registration statement registering the underlying shares of
common stock issuable upon the exercise of these warrants.
Warrants must be exercised in alphabetical order by warrant
class. If any warrant is not exercised during the term of the
warrant by an individual warrant holder, all remaining classes
of warrants will automatically expire.
Should all warrants be exercised the Company will receive additional proceeds
from this offering of $3,825,000. These funds will be used for acquisitions and
general working capital purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2000
During the nine months ended September 30, 2000, the Company used net
cash in operating activities of $631,061. Cash used in operating activities was
provided by $191,690 in available cash balances existing at the beginning of the
year, collection of Notes Receivable and the completion of various equity
transactions during the period.
The Company had Notes Receivable from an unrelated party of $150,000 at
year-end. In January the Company collected $50,000 of this amount. In May 2000,
the Company loaned an additional $150,000 to the same unrelated party and
extended the due date of the Note Receivable to December 31, 2000. Management
believes the $250,000 Note Receivable will be paid in full in January 2001.
From January 2000 through March 2000, options represented by 384,000
shares of common stock were exercised generating net proceeds to the company of
$530,000. These funds were used for general working capital purposes.
In January 2000 the Company sold 150,000 units (comprised of 2 common
shares and 24 common stock purchase warrants) for $1.50 each receiving net
proceeds of $225,000. The warrants have the following terms:
<TABLE>
<CAPTION>
WARRANT PRICE PERIOD*
<S> <C> <C>
Class A $.7500 30 days
Class B $.8750 60 days
Class C $1.000 90 days
Class D $1.125 120 days
Class E $1.250 150 days
Class F $1.500 180 days
</TABLE>
*The exercise period begins upon the effective date of a registration statement
registering the underlying shares of common stock issuable upon the exercise of
these warrants. Warrants must be exercised in alphabetical
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<PAGE> 31
order by warrant class. If any warrant is not exercised during the term of the
warrant by an individual warrant holder, all remaining classes of warrants will
automatically expire.
Should all warrants be exercised, the Company will receive additional
proceeds from this offering of $3,825,000. These funds will be used for
acquisitions and general working capital purposes.
Structural's wholly-owned subsidiary, H&M, has a $2,350,000 3-year
operating line of credit with a financial institution with two 1-year automatic
renewal terms unless terminated earlier under certain conditions. Interest is at
prime plus 1.5%. Additionally, for each quarter, H&M must pay an unused line of
credit fee equal to 1/2% of the difference between $2,350,000 and the average
outstanding daily balance. The amount of borrowing under the line of credit is
limited to 80% of the net amount of eligible receivables, less any allowance for
doubtful accounts.
H&M's notes payable and line of credit with the financial institution
are collateralized by all of H&M's assets and Structural's ownership in the
common stock of H&M. Additionally, Structural has guaranteed the notes payable
and line of credit.
The notes payable and line of credit have various financial and
operational covenants, including certain working capital and debt to equity
ratios, operating cash flow to annual debt service ratios, net worth
requirements, a limitation on capital expenditures and a minimum cash flow
requirement. Additionally, the notes payable and line of credit restricts H&M's
ability to pay dividends, salaries and fees to the principals/shareholders of
Structural. H&M was not in compliance with certain covenants as of December 31,
1999 and as of September 30, 2000. H&M is currently seeking a waiver of said
covenants and is trying to negotiate changes in certain covenants to better
reflect the nature of H&M's business. However, until such time as waiver is
granted and covenants changed the indebtedness has been classified as a current
liability on H&M's financial statements.
On September 27, 2000, the Company, completed the acquisition of 100%
of the issued and outstanding shares of common stock of Palo Verde Group, Inc.,
a Colorado corporation. In the transaction, the Company issued 361,800 shares of
its common stock to Redwood MicroCap Fund, Inc., the sole shareholder of Palo
Verde Group, Inc. Under the terms of the agreement, the Company has agreed to
register the distribution of the 361,800 shares of the Company's common stock to
the shareholders of Redwood MicroCap Fund, Inc., pro rata, which is a publicly
reporting company whose shares are traded on the over-the-counter market and
quoted on the OTC Electronic Bulletin Board. The Company maintains Palo Verde
Group as a wholly-owned subsidiary.
The assets of Palo Verde Group, Inc. consist of certain real property
located in Carefree, Arizona and a commercial building and associated real
property located in the State of Wyoming. The Arizona property is held for
development.
On September 30, 2000, the Company completed a reorganization and
restructuring of its armor division.
The Company had previously formed and organized a wholly-owned
subsidiary, Guardian Security and Safety Products, Inc. ("GSSP"). In
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<PAGE> 32
forming that subsidiary, the Company transferred all of its assets and
liabilities associated with its armor manufacturing division to GSSP in exchange
for a total of 3,611,662 shares of GSSP common stock.
Following the restructuring, the Company then formed and organized
Guardian Armor, LLC, a Delaware limited liability company. Guardian Armor, LLC
then changed its name to ForceOne, LLC. GSSP then transferred to ForceOne, LLC
certain assets and liabilities associated with the armor division consisting of
accounts receivable, accounts payable, inventory and fixed assets. The assets
and liabilities transferred to ForceOne, LLC had a net value of approximately
$50,000, for which GSSP received a 51% membership interest in ForceOne, LLC.
The remaining 49% membership interests in ForceOne, LLC were sold to
the following: Composix, Inc. purchased an undivided 24.5% membership interest
and Steven A. Young purchased the remaining 24.5% membership interest. The
membership interests purchased by Composix and Young were issued in
consideration of promissory notes in the amount of $24,500 each, payable June
30, 2001.
Composix has paid its notes in full.
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<PAGE> 33
BUSINESS
GENERAL
We are engaged in three different businesses:
- the manufacture and distribution of ballistic protective
equipment,
- specialty steel fabrication, and
- real estate interests.
BALLISTIC PROTECTIVE EQUIPMENT BUSINESS
We manufacture ballistic protective equipment, including equipment
commonly referred to as body armor. Our product lines include four basic types
of ballistic protective vests, K-9 ballistic protective vests, and assorted
other ballistic protective devices, such as aircraft ballistic protective
equipment and ballistic protective shields, blankets, and seat cover liners.
OVERVIEW OF THE INDUSTRY
We participate in the global security industry through the manufacture
of security products marketed to law enforcement and correctional personnel.
Increasingly, governments, businesses, and individuals have recognized the need
for our products to protect them from the risks associated with physical attacks
and threats of violence.
Certain industry studies estimate that worldwide expenditures
for security products will grow at a compounded annual rate of 7.9% from
approximately $14 billion in 1990 to approximately $60 billion in 2010. Although
these statistics do not correlate directly to our product lines, we believe that
the increasing spending in the private security sector is indicative of a
greater demand for our products in the law enforcement, correctional and
governmental sectors.
In response to an increased emphasis on safety and protection,
the number of police officers has increased significantly over the past several
years. By 1996 there were approximately 738,000 full-time sworn law enforcement
officers in the U.S. In 1993, a U.S. Department of Justice survey of local
police departments indicated that 65% of such organizations have purchased body
armor for all of their officers, 60% supply their officers with pepper spray,
35% supply their officers with tear gas and 10% maintain inventories of stun
grenades and less-than-lethal projectiles. In addition, the U.S. prison
population has doubled since 1985 to approximately 1.8 million inmates in 1998.
We believe this rise in the prison population has spurred demand from
institutional correctional facilities for manufactured security products.
OUR PRODUCTS
We manufacture and sell body armor products that are designed to
protect against bodily injury caused by bullets. Our principal armor products
are ballistic resistant vests and shields. Our line of ballistic
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<PAGE> 34
protective vests provides varying levels of protection depending upon the
configuration of ballistic materials and the standards (domestic or
international) to which the armor is built. We recently introduced a lighter,
more comfortable and flexible ballistic resistant vest under the brand name Thin
Blue Line.
Based on studies and testing performed at an independent testing
laboratory and our own test experience, we believe that protective vests and
equipment manufactured with Honeywell's 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.
MANUFACTURING
We manufacture substantially all of our products under our own label at
our facility in Dulles, Virginia.
RAW MATERIALS
We manufacture our products primarily with high performance Spectra
1000 woven fabric and non-woven composite ballistic materials Spectra Shield,
Spectra Flex, Gold Shield, and Gold Flex. These materials are available only
from Honeywell International, Inc., which holds the patent for the
unidirectional fiber/resin process incorporating Spectra ultra high molecular
weight polyethylene fibers. Honeywell also controls the proprietary
thermoplastic process used to manufacture its Shield and Flex materials.
OUR CUSTOMERS
Sales to the US government represented 23% of our total sales in 1999.
Sales to municipal law enforcement agencies represented 20% of our total sales
in 1999. Approximately 20% of our total sales were made to a distributor who
purchased products on behalf of a foreign police and military organization.
MARKETING AND DISTRIBUTION
We market our products directly and through selected dealers of police
equipment to local, state, and federal agencies, private security
companies, and private individuals with legitimate security needs. Our
marketing methods include personal sales presentations, advertising in magazines
and periodicals aimed at the law enforcement profession, direct mail campaigns,
and participation in selected trade shows and conferences. We also make joint
presentations with other companies to bring together technical expertise, sales
and marketing efforts, and production capabilities; and we respond to agency and
department solicitations for bids and proposals.
In June 1997, we entered into a four-year contract with the General
Services Administration (GSA) - the federal government's principal procurement
channel - that enables us to sell all of our products directly through GSA.
We have our own home page (www.guardiantech.com) and E-Mail address
([email protected]) that have become channels for marketing products in the
United States and around the world.
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<PAGE> 35
We subscribe to two 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. In order to respond to
Defense Department solicitation opportunities, we seek manufacturers of
compatible products and/or materials with which we can match our technical
expertise, sales and marketing efforts and production capabilities.
OUR COMPETITION
The ballistic protective equipment business is highly competitive. We
have at least five major competitors in the domestic law enforcement, federal
government, and military markets,. We believe 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, we frequently bid for orders in response to
invitations for bidding which set forth product performance specifications.
Although our products are priced slightly higher than that of our competition,
we believe that our prices are justified by our products' better craftsmanship,
the higher ballistic capability of the materials we use, the fact that our
products generally provide more body area coverage, and the fact that we provide
a longer warranty. In international markets, our competition consists of several
American competitors and a few international companies.
ENVIRONMENTAL MATTERS
We are subject to federal, state, and local laws and
regulations governing the protection of the environment, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. While we always strive to operate in compliance with
these requirements, we cannot assure you that we are at all times in complete
compliance with all such requirements. Like all companies, we are subject to
potentially significant fines or penalties if we fail to comply with
environmental requirements. Although we have made and will continue to make
capital expenditures in order to comply with environmental requirements, we do
not expect material capital expenditures for environmental controls in 2000.
However, environmental requirements are complex, change frequently, and could
become more stringent in the future. Accordingly, we cannot assure you that
these requirements will not change in a manner that will require material
capital or operating expenditures or will otherwise have a material adverse
effect on us in the future.
SPECIALTY STEEL FABRICATION BUSINESS
Through Structural Holdings, Inc., our 50%-owned subsidiary,
we fabricate and erect structural steel for governmental, military, commercial
and industrial construction projects such as dormitories, aircraft hangers,
special operations centers, high and low rise buildings and office complexes,
hotels and casinos, convention centers, sports arenas, shopping malls, and
hospitals, and a variety of customized projects. We seek to differentiate our
operations by offering complete, turnkey steel construction services featuring
engineering, detailing, shop fabrication and field erection. Certain turnkey
services are provided by subcontractors in the areas of detailing and erection.
By offering an integrated package of
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<PAGE> 36
steel construction services from a single source, we are able to respond more
efficiently to the design and construction challenges associated with large,
complex, "fast track" construction projects.
We provide our integrated steel services primarily to general
contractors and engineering firms, including, among others, the US Army Corps of
Engineers, Flintco, McMasters, and Manhatten, that focus on a wide variety of
projects, including hotels, office complexes, hospitals, shopping malls and
centers, sports stadiums, restaurants, convention facilities, entertainment
complexes, aircraft facilities, schools, churches and warehouses. Representative
projects include: the Marriott Renaissance Hotel, Special Operations Aircraft
Facility, Fine Airport Parking Facility, and Dobson Communications Corporate
Office buildings. We maintain relationships with a number of local or regional
general contracting and engineering firms.
OVERVIEW OF INDUSTRY
Companies engaged in the steel fabrication and erection
industry prepare detailed shop drawings, fabricate, and erect structural steel
and steel plate weldments, and perform related engineering services for the
construction of various facilities. The primary customers for these services are
private developers, general contractors, engineering firms, and governmental
agencies involved in a variety of large scale construction projects.
Historically, these customers have relied on multiple subcontractors to perform
various services to complete a single project, primarily because few companies
in this industry offer fully integrated engineering, detailing, fabrication and
erection services.
We believe that the steel fabrication and erection industry is highly
fragmented and that many of our competitors are businesses operating in local or
regional markets. Given the trend toward the use of fully integrated contractors
and the large number of smaller companies engaged in this industry, we believe
the industry may experience consolidation.
BUSINESS STRATEGY
Our objective is to achieve and maintain a leading position in
the geographic and project markets in which we compete by providing timely, high
quality services to our customers, continuing to grow internally, and making
selected strategic and consolidating acquisitions. We believe that the steel
fabrication industry will continue to be characterized by large, complex, fast
track projects. The complexity and size of these projects requires companies
with extended financial and operational capabilities. We intend to take
advantage of this trend with our integrated service capabilities. Additionally,
the fragmented nature of the industry provides us with opportunities for growth.
We seek to achieve continued growth and diminish the impact of business and
economic cycles by pursuing a growth strategy consisting of the following
components:
We are pursuing this objective with a strategy comprised of the
following components:
- Expand Revenue Base. We are seeking to expand our revenue base
by internal growth and through making strategic acquisition,
thereby leveraging our long-term relationships with regional
and national
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<PAGE> 37
construction and engineering firms, national and regional
accounts, and other customers. We also intend to continue to
grow our operations by developing new project capabilities and
services and by targeting specific types of projects in which
we have an existing reputation for expertise, such as military
base projects. We believe that continuing to diversify our
revenue base will reduce the impact of periodic adverse market
or economic conditions.
- Promote Internal Growth. We intend to pursue continued
internal growth by adding sales and marketing personnel to
dedicated, fast growing markets in which we are actively
pursuing new projects, by further developing our engineering
and design capabilities and fabrication capacity, and by
continually updating our fabrication and detailing equipment
and technologies. We believe that these efforts will enhance
our market share, revenues, and operating income in our
existing and targeted principal markets and improve our
operating capacity.
- Acquire Synergistic Businesses. We intend to pursue selective
acquisitions of steel detailing, fabrication and erection
companies that offer us increased plant facilities,
opportunities to increase market share in selected geographic
markets, penetration of new product market segments, and
access to domestic and international markets targeted by us
for geographic expansion. Such acquisitions may also provide
the continued and additional benefits of increased purchasing
efficiencies with respect to steel and other raw materials,
payment and performance bonding and insurance premiums, and
more efficient allocation and utilization of labor resources
among projects within our geographic markets. We believe that
many of our competitors operate primarily on a local or
limited geographic basis and, while having established
relationships in those markets, lack the resources to compete
for large or more complex projects. In addition, the industry
is highly fragmented with many of our competitors being
closely or family held entities.
- Manage Capacity Through Outsourcing. We increase our project
capacity by outsourcing certain amounts of our detailing,
fabrication and erection work to reputable subcontractors.
Outsourcing has enabled us to effectively increase the
capacity of our fabrication facilities while usually
maintaining margins comparable to in-house services. We
believe outsourcing will play a key role in our strategy to
continue to expand our presence in selected international
markets, where we typically provide design engineering and
project management services and utilize local subcontractors
for fabrication and erection. The ability to expand or
contract capacity through the use of outsourcing provides us
flexibility to meet changing market demands in a
cost-effective manner.
- Maintain Entrepreneurial Environment. We believe that our
management and operating structure, which emphasizes quality,
innovation, flexibility, performance and safety, has
contributed significantly to profitability and the ability to
develop new business in competitive or difficult economic
environments. Our
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<PAGE> 38
operating structure provides incentives to employees at all
levels to focus on pursuing profitable growth opportunities,
attaining financial objectives and delivering superior
customer service.
- Emphasize Innovative Services. We focuses our engineering,
detailing, fabrication and erection expertise on distinct
product segments requiring unique or innovative techniques,
where we typically experience less competition and more
advantageous negotiated contract opportunities. We have
extensive experience in providing services requiring complex
fabrication and erection techniques and other unusual project
needs, such as specialized transportation, steel treatment or
specialty coating applications. These service capabilities
have enabled us to address such design sensitive projects as
the Denver Courthouse.
- Diversify Customer and Product Base. Although we seek to
garner a leading share of the geographic and product markets
in which we compete, we also seek to diversify our projects
across a wide range of commercial, industrial, and specialty
projects.
We believe that our combined diversification into new geographic,
specific product and national markets will enable us to expand our revenue base
and to reduce the impact of periodic market or economic conditions adversely
impacting one or more of our market segments.
PRIMARY MARKETS AND PRODUCTS
Our current principal geographic markets include the Southwest,
principally Oklahoma, Texas, and Colorado.
Our projects are awarded through a competitive bid process or are
obtained through negotiation, in either case generally using fixed price or
cost-plus pricing. While customers may consider a number of factors, including
availability, capability, reputation, and safety record, price and the ability
to meet customer imposed project schedules are the principal factors on which we
obtain contracts. Generally, our contracts and projects vary in length from one
to twelve months depending on the size and complexity of the project, project
owner demands, and other factors.
Our contract arrangements with customers sometimes require us
to provide payment and performance bonds to partially secure our obligations
under our contracts. Bonding requirements typically arise in connection with
public works projects and sometimes with respect to certain private contracts.
BACKLOG
We consider backlog an important indicator of our operating
condition because our engineering, detailing, fabrication, and erection services
are characterized by long lead times for projects and orders. We define our
backlog of contract commitments as the potential future revenues to be
recognized upon performance of contracts awarded to us. Backlog increases as new
contract commitments are obtained, decreases as work is performed and the
related revenues are recognized, and increases or decreases as modifications in
work are performed under a contract.
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<PAGE> 39
COMPETITION
The principal geographic and product markets we serve are highly
competitive. We compete with other contractors on a local and regional basis,
and in certain cases, on a national basis. We have different competitors for
each of our services and product segments and within each geographic market we
serve. Among the principal competitive factors within the industry are price,
timeliness of completion of projects, quality, reputation, and the desire of
customers to utilize specific contractors with whom they have favorable
relationships and prior experience. Certain of our competitors have financial
and operating resources greater than ours.
GOVERNMENTAL REGULATION
Our operations are governed by and subject to government
regulations, including laws and regulations relating to workplace safety and
worker health, principally the Occupational Safety and Health Act and
regulations thereunder. Our operations are subject to the risk of changes in
federal, state, and local laws and policies that may impose restrictions on us.
We believe that we are in material compliance with the laws and regulations
under which we operate, and we do not believe that future compliance with such
laws and regulations will have a material and adverse effect on us. We cannot
determine, however, to what extent our future operations and earnings may be
affected by new legislation, new regulations, or changes in or new
interpretations of existing regulations.
We are subject to licensure in each of the states in the United States
in which we operate and in certain local jurisdictions within such states. We
believe that we are in material compliance with all contractor licensing
requirements in the various states in which we operate. The loss or revocation
of any license or the limitation on any of our services thereunder in any state
in which we conduct substantial operations could prevent us from conducting
further operations in such jurisdiction and would have a material adverse effect
on us.
OUR SUPPLIERS
We currently purchase a majority of our steel and steel components from
several domestic and foreign steel producers, suppliers, and warehouses.
However, steel is readily available from numerous foreign and domestic steel
producers and we are not dependent on any one supplier. We believe that our
relationships with our suppliers are good. We have no long-term commitments with
any of our suppliers. In recent periods, there has been an increased demand for
steel from domestic mills and we have purchased a greater portion of our steel
requirements from warehouses.
OUR EMPLOYEES
As of January 8, 2001, we had 10 full time and 5 part time employees,
including two full time and 2 part time employees in management and
administration; one full time sales person; and seven full time and three part
time employees in manufacturing. We consider our relationship with our employees
to be good.
LEGAL PROCEEDINGS
We are not presently involved in any material legal proceedings.
However, construction in general and the fabrication and erection of structural
steel and heavy steel plate in particular involve a high degree
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<PAGE> 40
of operational risk. Adverse weather conditions, operator and other error, and
other unforeseen factors can cause personal injury or loss of life, severe
damage to or destruction of property and equipment, and suspension of
operations. Litigation arising from such occurrences may result in the Company
being named as a party to lawsuits asserting substantial claims or to
administrative or criminal actions that may involve substantial monetary
penalties or the restriction of the Company's operations in one or more
jurisdictions. The Company may become a defendant in lawsuits from time to time,
including lawsuits arising in the normal course of its business.
We maintain workers compensation insurance that provides full coverage
of statutory workers compensation benefits. We also maintain employer liability
insurance in our principal geographic markets and umbrella coverage. We also
maintain insurance against property damage caused by fire, flood, explosion, and
similar catastrophic events that may result in physical damage or destruction of
our facilities and property. All policies are subject to various deductibles and
coverage limitations. Although management believes that our insurance is
adequate for its present needs, there can be no assurance that we will be able
to maintain adequate insurance at premium rates that management considers
commercially reasonable, nor can there be any assurance that such coverage will
be adequate to cover all claims that may arise.
PROPERTIES
On March 31, 1999, we sold our land and building for $2,825,000. The
building was constructed in 1997 for a total cost of $2,762,119 comprised of
$237,339 for land and $2,524,780 in building costs. As a result of the sale we
no longer received rental income from sublease agreements or incurred
depreciation expense and other operating expenses associated with owning and
managing a commercial building. Following the sale we signed a five-year lease
to occupy 15,000 square feet of space for approximately $14,000 per month.
Structural Holdings, operates through its wholly-owned subsidiary, H&M
Steel, owns and operates its fabrication facilities which consist of five metal
buildings containing approximately 40,000 square feet, located on 73.8 acres in
Luther, Oklahoma. Structural also leases office space in Oklahoma City from
which its estimating, marketing, accounting, and executive management services
are provided. The monthly rent on the office space is $1,375; the lease is
cancellable upon 30-days written notice.
REAL ESTATE INTERESTS
In September 2000, we acquired from Redwood MicroCap Fund, Inc. the
Palo Verde Group, Inc., in consideration of the issuance of 361,800 shares
of our common stock.
Palo Verde Group holds two separate real estate interests:
- Five acres of undeveloped real property located in Carefree
Arizona. The property is zoned residential and is held for
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development. The property has an estimated value, based upon a
recent real estate appraisal, of approximately $350,000, and
is held subject to a first mortgage with a principal balance
of approximately $100,000.
- An 8,000 square foot commercial building and associated real
estate located in Thermopolis, Wyoming. The building is held
for lease, but is currently vacant. The property is held
subject to a $75,000 first mortgage.
- Palo Verde Group, Inc. also owns 40,000 shares of restricted
common stock of iRV, Inc., a Colorado-based public company
whose shares of common stock are traded on the
over-the-counter market and quoted on the OTC electronic
bulletin board under the symbol "IRVV." These shares of common
stock are held for investment.
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<PAGE> 42
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers and directors 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Oliver L. North 57 Chairman of the Board, and
Secretary
J. Andrew Moorer 38 President and CEO
Herbert M. Jacobi* 60 Director
Kevin L. Houtz* 38 Director
David W. Stevens* 64 Director
David R. Payne 42 President, Structural Holdings
Steve Young 57 President of ForceOne, LLC
</TABLE>
* Members of the Audit Committee
OLIVER L. NORTH is our Chairman of the Board and Secretary. From our
inception until February 1999 Mr. North was also our President and Chief
Executive Officer. In February 1999, Mr. North resigned as President and CEO
because of increased responsibilities associated with his broadcasting
interests. Mr. North graduated from the United States Naval Academy in June 1968
and served in the United States Marine Corps for twenty 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
Mohmar Quaddafi's terrorist training camps in Libya. He retired from the Marine
Corps in 1988.
J. ANDREW MOORER has been our President and Chief Executive Officer
since February 1999. Mr. Moorer was named Chief Operating Officer of the
Company in l998. He was Chief Financial Officer of Redwood MicroCap Fund
from 1994 until 1998. Mr. Moorer began his career as a Certified Public
Accountant in the Audit and Emerging Business Services Group of the
international accounting firm of PriceWaterhouseCoopers. Since leaving
public accounting in l987, Mr. Moorer has held various positions in finance
with increasing levels of responsibility, including the position of Chief
Financial Officer for several firms. Mr. Moorer received his formal
education at Loyola College of Maryland.
HERBERT M. JACOBI has been an attorney in private practice in New
York, New York, since 1967.
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<PAGE> 43
KEVIN L. HOUTZ is the founder of Elements of Design, a full service
graphic design firm located in Baltimore, Maryland. The firm, which specializes
in the development of corporate identity and collateral and packaging design,
has served a variety of regional and national clients since its inception in
1989. Mr. Houtz graduated from the University of Maryland in 1984 receiving a
Bachelor of Arts degree in Visual Arts/Design.
DAVID W. STEVENS has been the Chief Operations Officer of Hargrove,
Inc., a company specializing in exhibits and special events, for more than the
past five years. He has been the CEO of several public and private companies for
the past twenty-four years. His assignments have focused on restructuring and
turnaround situations in the manufacturing, defense electronics, and engineering
services industries. Mr. Stevens is also a consultant to the International
Finance Corporation of the World Bank Group in organizational development.
DAVID R. PAYNE has been President of Structural Holdings, our 50% -
owned subsidiary, since its formation in April 1999. Prior to serving as
President, Mr. Payne was employed as President of D.R. Payne & Associates,
Inc., a financial management and consulting firm based in Oklahoma. Mr.
Payne received a Bachelor of Science Degree in accounting from Oklahoma
Christian University.
STEVE YOUNG has been President of ForceOne LLC, our wholly-owned armour
subsidiary, since July 2000. From 1995 to the present, he has been Vice
President, Armor Systems, of Safariland Ltd., Inc., a manufacturer of law
enforcement business products. From 1969 to 1995, he served as Manager of
Business Development for Allied Signal, Inc. in its Spectra High Performance
Fibers Division. He is a member of the National Association for the Advancement
of Law Enforcement Technology as well as the National Association of Police
Equipment Distributors. He earned a Bachelor of Science degree in Chemistry and
Mathematics from Mars Hill College in 1965.
BOARD OF DIRECTORS
Our certificate of incorporation authorizes our board to consist of
either five or seven directors. There are presently six directors. The
certificate provides that board will be divided into three (3) classes of
directors, which classes serve for varying terms. The certificate also grants 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. Beginning in 1998 all directors were elected
for one-year terms. At the next annual meeting, the Board intends to nominate
candidates to fill staggered terms as provided in the articles. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or of our management.
Our board of director has an audit committee. The audit committee makes
recommendations to the board of directors regarding the selection of independent
accountants, and reviews the results and scope of audit and other services
provided by our independent accountants, and reviews and evaluates our audit and
control functions. The board intends to form a compensation committee in the
near future, which will consist of a majority of board members who are not
employees. The compensation committee will administer our stock plans, and will
make decisions concerning salaries and incentive compensation for our employees.
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<PAGE> 44
We do not currently provide our directors with cash compensation for
their services as members of the board of directors. However, each member of the
board of directors is reimbursed his actual expenses in attending meetings. In
addition, each director was issued 20,000 shares of common stock for his
services as a director in 1999.
EXECUTIVE COMPENSATION
The following table sets forth the executive compensation paid to Mr.
North, our President for the in January and February 1999, and Mr. Moorer, who
succeeded Mr. North in February 1999. No other executive officer of the Company
was paid compensation in excess of $100,000 in 1999.
<TABLE>
<CAPTION>
TABLE 1
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) LONG TERM COMPENSATION
-------------------------- ---------------------------------
OTHER AWARDS
NAME AND COMPEN- STOCK PAYOUTS
PRINCIPAL YEAR SALARY BONUS SATION AWARD(S) OPTIONS/
POSITION ENDED ($) ($) ($) ($) SARS
----------------- ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Oliver L. North, 1999 $ -0- -0- $ 55,000 100,000 -0-
Chairman and
Secretary
J. Andrew Moorer, 1999 $82,500 $12,175 -0- -0- 100,000
President and
Chief Executive
Officer
</TABLE>
(1) The above table reflects salary expenses as recorded on the Company's
financial statements in accordance with generally accepted accounting
principles. As such, the amounts may differ from the base salary rates
discussed below.
-44-
<PAGE> 45
TABLE 2
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS/SAR
GRANTED TO EXERCISABLE
EMPLOYEES OR
OPTIONS/SAR IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
J. Andrew 100,000 100% $.70 February
Moorer 2007
</TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR 1999 YEAR-
END OPTION VALUES
The following table sets forth information concerning option exercises and
option holdings for each of the names executive officers during the fiscal year
ended December 31, 1999. All of the listed options were exercisable at December
31, 1999.
TABLE 3
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexercised In-the-Money
Options at Options
Name at 12/31/99 at 12/31/99
-------------------- ---------------------- -------------
<S> <C> <C>
Oliver L. North, 110,000 -0-
Chairman and
Secretary
J. Andrew Moorer, 140,000 $30,000
President and CEO
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1999, Mr. North granted Mr. Moorer an option to acquire
from Mr. North 100,0000 shares of our common stock at an exercise price of $1.75
per share for a period of six months and 57,990 shares of common stock at an
exercise price of $5.00 for a period of one year. During 1999
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<PAGE> 46
Mr. Moorer exercised the option to purchase 100,000 shares of common stock from
North for $175,000. The remaining 57,990 options expired unexercised.
During 1999, we paid Mr. North $55,000 in cash and issued him 75,006
shares of common stock valued at $51,087 for consulting services.
In 1999 we sold TAIM Special Equities III 133,334 shares of common
stock for $100,000. TAIM owns 50% of Structural.
During 1999 we loaned TAIM $85,000. The interest rate on the note is
9%, with interest due monthly and with principal due June 30, 2000. The note is
collateralized by 10% of TAIM's ownership of Structural and consulting fee
payments of $12,500 per month made to TAIM by Structural.
During 1999 we issued Redwood MicroCap Fund, Inc. 66,666 shares of
common stock valued at $50,000 for services Redwood provided in connection
with the acquisition of Structural. Mr. Moorer was an officer of Redwood
at the time. We also paid Redwood $50,000 for financial advisory services.
In January 2000 we issued 20,000 shares of common stock to each of our
five directors as compensation to them for their services as directors in 1999.
The shares were valued at $.98 per share.
In January 2000, we sold in a private offering 150,000 units, each
consisting of two shares of common stock and twenty-four warrants. The units
were priced at $1.50, so that the total proceeds from the offering were
$225,000. The common stock component of the units and the common stock into
which the warrants are exercisable are the shares being sold in this offering.
Two of our directors, Messrs. Houtz and Stevens, purchased 10,000 units and
2,000 units, respectively, in the offering.
We issued 194,000 options in 1999. 100,000 of those options were
issued to Mr. Moorer. The Options to Mr. Moorer have an exercise price of
$.705 per share and expire in 2006. We issued an additional 100,000
options to Mr. Moorer in January 2000 that are exercisable at $1.00 per
share and expire in 2007.
On April 1, 2000, Mr. Moorer exercised 40,000 options to purchase
common stock at $1.25 per share by issuing a note payable to us. The interest
rate on the note is 8%. The note has been repaid.
While we have not formally adopted any policy controlling transactions
with our affiliates and principal shareholders, in each instance we believe
that the terms of these arrangements are commercially reasonable. All
transactions between the company, on the one hand, and one of our officers and
directors, on the other, have been approved by a majority of our disinterested
directors.
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<PAGE> 47
PRINCIPAL STOCKHOLDERS
To our knowledge, the following table sets forth information regarding
ownership of our common stock by:
- beneficial owners of more than 5% of the outstanding shares of
Common Stock;
- each director and each executive officer; and
- all directors and executive officers as a group.
Except as otherwise indicated below and subject to applicable community property
laws, each owner has sole voting and sole investment powers with respect to the
stock listed.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) OF CLASS(2)
----------------------------- -------------------------- ------------
<S> <C> <C>
J. Andrew Moorer 420,000(3) 11.0%
P.O. Box 3618
Carefree, AZ 85377
Oliver L. North 229,980 6.4%
Rt. 1, Box 560
Bluemont, VA 20135
Herbert M. Jacobi 20,000 nil
8 West 38th Street
New York, NY 10018
Kevin L. Houtz 284,000(4) 7.6%
3000 Chestnut Ave.,
Ste. 343D
Baltimore, MD 21211
David W. Stevens
312 Greenwood Point Rd 46,000(5) 1.3%
Grasonville, MD 21638
All Officers and Directors as 999,980 25.3%
a Group (5 Persons)(6)
</TABLE>
(1) Under SEC Rules, we include in the number of shares owned by each
person the number of shares issuable under outstanding options or
warrants if those options or warrants are exercisable within 60 days of
the date of this prospectus. We calculate the ownership of each person
who owns exercisable options by adding (i) the number of exercisable
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<PAGE> 48
options for that person only to (ii) the number of total shares
outstanding and dividing that result into (iii) the total number of
shares and exercisable options owned by that person.
(2) In calculating percentage ownership, all shares of Common Stock that
the named stockholder has the right to acquire within 60 days upon
exercise of any option or warrant are deemed to be outstanding for the
purpose of calculating the percentage of Common Stock owned by such
stockholder, but are not deemed outstanding for the purpose of
computing the percentage of Common Stock owned by any other
stockholder. Shares and percentages beneficially owned are based upon
3,973,462 shares outstanding.
(3) Includes 200,000 shares purchasable upon exercise of options.
(4) Includes 120,000 shares purchasable upon exercise of warrants.
(5) Includes 24,000 shares purchasable upon exercise of warrants.
(6) Includes Messrs. Moorer, North, Jacobi, Houtz and Stevens.
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<PAGE> 49
SELLING STOCKHOLDERS
The selling stockholders have indicated that they may sell the shares
from time to time by them or by their pledgees, donees, transferees or other
successors in interest.
We have also registered in the registration statement of which this
prospectus is a part an additional number of shares of our common stock that we
may be required to issue to the selling stockholders as a result of any stock
split, stock dividend, or similar transaction involving our common stock, in
order to prevent dilution, in accordance with Rule 416 under the Securities Act
of 1933. In the following table, we have calculated percentage ownership by
assuming that all shares of common stock which the selling stockholder has the
right to acquire within 60 days from the date of this prospectus upon the
exercise of options, warrants, or convertible securities are outstanding for the
purpose of calculating the percentage of common stock owned by such selling
stockholder.
Except as noted in the tables below, within the past three years none
of the selling stockholders have held any position or office with us; or entered
into a material relationship with us.
There is no assurance that the selling stockholders will sell the
warrants or shares offered by this prospectus.
The following table sets forth:
- The name of each of the selling stockholders;
- The number of shares of our common stock owned by each of them
as of January 8, 2000;
- The number of shares offered by this prospectus that may be
sold from time to time by each of them;
- The number of shares of our common stock that will be
beneficially owned by each of them if all of the shares
offered by them are sold;
- The percentage of the our total shares outstanding that will
be owned by each of them at the completion of this offering,
if the stockholder sells all of the shares included in this
prospectus.
-49-
<PAGE> 50
SHARES OF COMMON STOCK
<TABLE>
<CAPTION>
Percentage of
Number of Common
Number of Shares Stock That
Shares Number of Beneficially Will be
Beneficially Shares Owner Beneficially
Name of Selling Owned Prior Offered After Owned After
Stockholder to Offering Hereby Offering Offering
------------------ --------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
James Amira 6,000 72,000 -0- -0-
Cassandra Appleman 6,666 79,992 -0- -0-
Marga D. Armenta 5,000 60,000 -0- -0-
Ashland Capital Advisors,
Inc. 6,666 79,992 -0- -0-
Neil Berman 22,000 264,000 -0- -0-
Steve and Deborah
Calandrella(1) 24,000 288,000 -0- -0-
Dorothy Calandrella 6,500 78,000 -0- -0-
Allan Williams 15,000 180,000 -0- -0-
Chase Investment Group 16,000 192,000 -0- -0-
Kim Davis 66,666 799,992 -0- -0-
Thomas DeMere 4,000 48,000 -0- -0-
Linda DeGregorio 6,666 79,992 -0- -0-
Edward and Joanne Gizdich 4,000 48,000 -0- -0-
Nannette Goldberg(5) 8,670 556,040 -0- -0-
Steve Goodman 12,000 144,000 -0- -0-
Marie L. Kanger 6,500 78,000 -0- -0-
Kevin Houtz(2) 10,000 120,000 154,000 4.6%
Carla Lattinelli 5,000 60,000 -0- -0-
John R. Overturf, Jr. 6,000 72,000 -0- -0-
Ralph S. Pittman, Jr. 2,000 24,000 -0- -0-
Evan Posses 5,000 60,000 -0- -0-
Ratna Enterprises, LLC(3) 2,000 24,000 -0- -0-
Redwood MicroCap Fund,
Inc.(4) 361,800 -0- -0- -0-
Thomas Reid 6,000 72,000 -0- -0-
Steven B. Rosner 6,666 79,992 -0- -0-
Donald Samaria 4,000 48,000 -0- -0-
Roger Schwartz 4,000 48,000 -0- -0-
Mary Jane Stevens and David
Woods Stevens(2) 2,000 24,000 20,000 *
Sunrise Capital, Inc.(6) 220,000 220,000 -0- -0-
Triumph Capital, Inc.(7) 269,000 269,000 -0- -0-
</TABLE>
(1) 16,000 of these shares are owned by the Calandrella Family Foundation.
Steve and Deborah Calandrella, who are husband and wife, are the sole
directors of the Foundation. Mr. Calandrella was a director of the
Company until January 2000.
(2) Mr. Houtz and Mr. Stevens are directors of the Company.
-50-
<PAGE> 51
(3) Ratna Enterprises, LLC, is beneficially owned by Clifford Neuman. See
"Legal Matters."
(4) Redwood MicroCap Fund, Inc. is a closed-end management company
registered under the Investment Company Act of 1940. Voting and
investment power with respect to its shares is exercised by its board
of directors, whose members are John C. Power, Joseph O. Smith and
Peter Hirschburg. Mr. Power was formerly a member of our board of
directors. The 361,800 shares of our common stock being offered by
Redwood under this prospectus were issued to Redwood in
consideration of its sale to us of Palo Verde Group, Inc. in
September 2000. We agreed to register those shares for resale by
Redwood as part of that transaction. Our President, J. Andrew Moorer,
was formerly a director of Redwood. He resigned that position in
June, 2000.
(5) Includes 50,000 shares purchasable upon exercise of options.
(6) Includes 150,000 shares purchasable upon exercise of options.
(7) Includes 200,000 shares purchasable upon exercise of options.
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<PAGE> 52
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares through the Nasdaq Small
Cap Market or other over-the-counter markets or otherwise at prices and at terms
then prevailing or at prices related to the then current market price or in
negotiated transactions. These shares may be sold in one or more of the
following types of transactions:
- A block trade in which the broker or dealer so engaged will
attempt to sell shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction.
- Purchases by a broker or dealer as principal and resale by a
broker or dealer for its account in accordance with this
prospectus.
- Ordinary brokerage transactions and transactions in which the
broker solicits purchasers.
- In privately negotiated transactions not involving a broker or
dealer.
- Redwood MicroCap Fund, Inc. has informed us that they intend
to distribute their 361,800 shares of our common stock to its
shareholders of record as a partial liquidating distribution.
Redwood is a publicly reporting investment company whose
shares are traded in the over-the-counter market. Redwood has
informed us that they do not intend to engage the services of
any broker or dealer or pay any commissions or fees in
connection with completing the distribution of our shares to
its shareholders.
In effecting sales, brokers or dealers engaged to sell the shares may
arrange for other brokers or dealers to participate. Brokers or dealers engaged
to sell the shares will receive compensation in the form of commissions or
discounts in amounts to be negotiated immediately prior to each sale. Those
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933 in
connection with these sales. We anticipate that the brokers or dealers, if any,
participating in the sales of the shares will receive the usual and customary
selling commissions.
To comply with the securities laws of some states, if applicable, the
shares will be sold in those states only through brokers or dealers. In
addition, in some states, the shares may not be sold in those states unless they
have been registered or qualified for sale in those states or an exemption from
registration or qualification is available and is complied with.
In addition to any other applicable laws or regulations, the selling
shareholders must comply with regulations relating to distributions by
selling shareholders, including Regulation M under the Securities Exchange Act
of 1934 as amended. Regulation M prohibits selling shareholders from offering to
purchase or purchasing our common stock at certain periods of time surrounding
their sales of shares of our common stock under this prospectus.
-52-
<PAGE> 53
We have agreed to indemnify the selling shareholders against specified
liabilities including liabilities under the Securities Act in connection with
their offering. The selling shareholders have agreed to indemnify us and our
directors and officers, as well as any persons controlling our company, against
certain liabilities, including liabilities under the Securities Act.
We will pay all expenses to register the shares, except that the
selling shareholders will pay any underwriting and brokerage discounts, fees and
commissions, specified attorney fees and other expenses to the extent applicable
to them.
-53-
<PAGE> 54
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Our articles of incorporation limit the liability of a director for
monetary damages for his conduct as a director, except for:
- Any breach of the duty of loyalty to Guardian or its
stockholders,
- Acts or omissions not in good faith or that involved
intentional misconduct or a knowing violation of law,
- Dividends or other distributions of corporate assets from
which the director derives an improper personal benefit.
- Liability under federal securities law
The effect of these provisions is to eliminate our right and the right
of our stockholders (through stockholder's derivative suits on our behalf) to
recover monetary damages against a director for breach of his fiduciary duty of
care as a director, except for the acts described above. These provisions does
not limit or eliminate our right or the right of a stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach of a director's duty of care. Our by-laws provide that if Delaware law
is amended, in the case of alleged occurrences of actions or omissions preceding
any such amendment, the amended indemnification provisions shall apply only to
the extent that the amendment permits us to provide broader indemnification
rights than the law permitted prior to such amendment.
Our articles of incorporation and by-laws also provide that we shall
indemnify, to the full extent permitted by Delaware law, any of our directors,
officers, employees or agents who are made, or threatened to be made, a party to
a proceeding by reason of the fact that he or she is or was one of our
directors, officers, employees or agents. The indemnification is against
judgments, penalties, fines, settlements, and reasonable expenses incurred by
the person in connection with the proceeding if certain standards are met.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons in
accordance with these provisions, or otherwise, we have been advised that, in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
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<PAGE> 55
DESCRIPTION OF SECURITIES
We are authorized to issue up to 15,000,000 shares of common stock and
1,000,000 shares of preferred stock. The shares of common stock covered by this
prospectus, when they are received upon exercise of warrants or options, will be
fully paid and nonassessable.
COMMON STOCK
Each holder of our common stock is entitled to one vote for each share
held of record. Voting rights in the election of directors are not cumulative,
and, therefore, the holders of more than 50% of our common stock could, if they
chose to do so, elect all of the directors.
The shares of common stock are not entitled to preemptive rights and
are not subject to redemption or assessment. Subject to the preferences that may
be granted to holders of preferred stock, each share of common stock is entitled
to share ratably in distributions to stockholders and to receive ratably such
dividends as we may declare. Upon our liquidation, dissolution or winding up,
subject to prior liquidation or other preference rights of holders of preferred
stock, if any, the holders of common stock are entitled to receive pro rata
those assets which are legally available for distribution to stockholders. The
issued and outstanding shares of common stock are validly issued, fully paid,
and nonassessable.
PREFERRED SHARES
Our articles of incorporation authorize issuance of a maximum of
1,000,000 preferred shares. No shares of preferred stock have been issued. The
articles of incorporation give the board of directors the authority to divide
the class of preferred shares into series and to fix and determine the relative
rights and preferences of the shares of any such series so established to the
full extent permitted by the laws of the State of Delaware and those articles of
incorporation in respect of, among other things, the number of preferred shares
to constitute such series, and the distinctive designations thereof, the rate
and preference of dividends, if any, the time of payment of dividends, whether
dividends are cumulative and the date from which any dividend shall accrue;
whether preferred shares may be redeemed and, if so, the redemption price and
the terms and conditions of redemption; the liquidation preferences payable on
preferred shares in the event of involuntary or voluntary liquidation; sinking
fund or other provisions, if any, for redemption or purchase of preferred
shares; the terms and conditions by which preferred shares may be converted, if
the preferred shares of any series are issued with the privilege of conversion;
and voting rights, if any. The board of directors has not designated any series
of preferred stock.
In the event of a proposed merger, tender offer, proxy contest or other
attempt to gain control of us, which we have not approved, we could authorize
the issuance of one or more series of preferred stock with voting rights or
other rights and preferences which would impede the success of the proposed
merger, tender offer, proxy contest or other attempt to gain control of us. Such
issuance would be subject to any limitations imposed by applicable law, our
Certificate of Incorporation, the terms and conditions of any outstanding class
or series of preferred shares and the applicable rules of any securities
exchanges upon which our securities are at any time listed or of other markets
on which our securities are at any time
-55-
<PAGE> 56
listed. The issuance of preferred stock may have an adverse effect on the rights
(including voting rights) of holders of common stock.
WARRANTS
The following summarizes the terms of the warrants.
We sold a total of 150,000 Units at a price of $1.50 per Unit. Each
Unit consisted of two shares of Common Stock, four Class A Common Stock Purchase
Warrants ("Class A Warrants"), four Class B Common Stock Purchase Warrants
("Class B Warrants"), four Class C Common Stock Purchase Warrants ("Class C
Warrants"), four Class D Common Stock Purchase Warrants ("Class D Warrants"),
four Class E Common Stock Purchase Warrants ("Class E Warrants"), and four Class
F Common Stock Purchase Warrants ("Class F Warrants"). The six classes of
warrants will be referred to as an aggregate as the "Warrants."
The six classes of warrants are identical, except for their exercise
periods and exercise prices. Each Warrant is exercisable to purchase one share
of Common Stock. The Warrants are exercisable at the prices and for the periods
set forth below:
<TABLE>
<CAPTION>
WARRANT EXERCISE PRICE EXERCISE PERIOD(1)
<S> <C> <C>
Class A $ .75 30 days
Class B $ .875 60 days
Class C $ 1.00 90 days
Class D $1.125 120 days
Class E $ 1.25 150 days
Class F $1.375 180 days
</TABLE>
(1) The Exercise Period of all of the Warrants begins on day the
registration statement of which this prospectus is a part is declared
effective.
The holder of a Warrant is not entitled to exercise any Warrant to the
extent that after such exercise the sum of (i) the number of shares of common
stock beneficially owned prior to such exercise and (ii) the number of shares of
common stock issuable upon exercise of such Warrants with respect to which the
determination of this limitation is made, would result in beneficially ownership
by the holder and its affiliates of more than 4.99% of the outstanding shares of
our common stock. This provision does not apply if the holder beneficially owned
more than 4.99% of the outstanding shares prior to the exercise.
The Warrants contain provisions that provide that if we should sell
shares of common stock (other that pursuant to the exercise of outstanding
options and warrants, including the Warrants) at a price below the exercise
price of the Warrants while the Warrants are outstanding, the exercise price of
the outstanding Warrants shall be adjusted down to such lower price.
-56-
<PAGE> 57
Additionally, we have agreed that, so long as any of the Warrants are
outstanding and unexercised, we will not issue any additional options, warrants,
or other debt or equity instruments convertible into Common Stock (except
pursuant to existing stock incentive plans) without the consent of the holders
of the Warrants. The holders of the Warrants cannot unreasonably withhold their
consent to such issuances.
We have the right to redeem any or all outstanding and unexercised
Warrants at a redemption price of $.01 per Warrant upon thirty days written
notice in the event (i) the registration statement is in effect on the date of
written notice and on the redemption date set forth in the notice; (ii) there
has been maintained and continues to exist on the date of the written notice a
public trading market for the common stock and such securities are listed for
quotation on the Nasdaq Stock Market or the OTC Electronic Bulletin board; and
(iii) the public trading closing price of the Common Stock has equaled or
exceeded 200% of the exercise price of such Warrant for twenty or more
consecutive trading days.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
AND DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law,
an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an "interested
stockholder" is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging takeover attempts that might result in a premium over the
market price for the shares of common stock held by stockholders.
TRANSFER AND WARRANT AGENT
Signature Stock Transfer, Inc., Dallas, Texas, is the transfer agent
and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. We have 3,973,462 shares
of common stock outstanding. Of these shares, 2,911,660 shares are freely
tradable without restriction under the Securities Act. The remaining 836,800
shares are "restricted securities" as defined in Rule 144 and may be sold under
Rule 144.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year is entitled to sell, within any three- month
period, a number of shares that does not exceed the greater of 1% of the
-57-
<PAGE> 58
then outstanding shares of the issuer's common stock or the average weekly
trading volume during the four calendar weeks preceding such sale, provided that
certain public information about the issuer as required by Rule 144 is then
available and the seller complies with certain other requirements. Affiliates
may sell such shares in compliance with Rule 144, other than the holding period
requirement. A person who is not an affiliate, has not been an affiliate within
three months prior to sale, and has beneficially owned the restricted securities
for at least two years, is entitled to sell such shares under Rule 144 without
regard to any of the limitations described above.
LEGAL MATTERS
Our legal counsel, Neuman & Drennen, LLC, will issue an opinion
regarding the legality of the shares. Clifford L. Neuman, a member of the firm,
owns 2,000 shares of our common stock and warrants to purchase an additional
24,000 shares.
ADDITIONAL FILING AND COMPANY INFORMATION
We have filed a registration statement on Form SB-2 with the
Commission. This prospectus, which is a part of the registration statement, does
not contain all of the information included in the registration statement.
Certain information is omitted and you should refer to the registration
statement and its exhibits. You may review a copy of the registration statement,
including exhibits, at the Commission's public reference rooms at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven World Trade
Center, 13th Floor, New York, New York 10048, or Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms.
We also file annual, quarterly, and current reports, proxy statements,
and other information with the Commission. You may read and copy any reports,
statements, or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Commission.
Our Commission filings and the registration statement can also be
reviewed by accessing the Commission's Internet site at http://www.sec.gov,
which contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission.
EXPERTS
The financial statements of Guardian Technologies International, Inc.
as of December 31, 1999, and for each of the years ended December 31, 1999 and
1998, have been incorporated by reference herein in reliance upon the reports of
Hein + Associates LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
-58-
<PAGE> 59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORTS............................................................................................F-2
CONSOLIDATED BALANCE SHEETS - September 30, 2000 (Unaudited) and December
31, 1999 ................................................................................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Nine Months Ended September 30,
2000 and 1999 (Unaudited) and For the Years Ended December 31, 1999
and 1998.................................................................................................................F-4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - For the Nine Months
Ended September 30, 2000 and 1999 (Unaudited) and For the Years
Ended December 31, 1999 and 1998.........................................................................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Nine Months Ended September 30,
2000 and 1999 (Unaudited) and For the Years Ended December 31, 1999
and 1998.................................................................................................................F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...............................................................................F-7
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Guardian Technologies International, Inc.
Dulles, Virginia
We have audited the accompanying balance sheet of Guardian Technologies
International, Inc. as of December 31, 1999 and the related statements of
operations, changes in shareholders' equity, and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 state ments. 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, 1999, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, in conformity
with generally accepted accounting principles.
Hein + Associates llp
Denver, Colorado
March 16, 2000
F-2
<PAGE> 61
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 139,009 $ 191,690
Accounts receivable, no
allowance considered necessary 59,299 185,279
Inventories 147,952 158,745
Notes receivable:
Related party 159,500 85,000
Other 402,699 150,000
Prepaid expenses and other 177,609 97,745
------------- -------------
Total current assets 1,086,068 868,459
Equity Investment 771,365 1,027,376
Property and Equipment, net 342,373 52,064
Deposits and Other 140,414 12,210
------------- -------------
Total Assets $ 2,340,220 $ 1,960,109
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt $ 60,874 $ 33,133
Accounts payable 95,474 218,243
Accrued director fees -- 97,655
Accrued payroll and related benefits
expenses -- 12,999
------------- -------------
Total current liabilities 156,348 362,030
Long-Term Debt, net of current portion 108,781 36,489
SHAREHOLDERS' EQUITY:
Preferred stock, $.20 par value, 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par value; 15,000,000 shares authorized,
3,611,662 shares issued and
outstanding 3,974 2,763
Additional paid-in capital 5,927,218 4,660,908
Note Receivable Officer
Accumulated deficit (3,856,101) (3,102,081)
------------- -------------
Total shareholders' equity 2,075,091 1,561,590
------------- -------------
Total Liabilities and Shareholders'
Equity $ 2,340,220 $ 1,960,109
============= =============
</TABLE>
F-3
<PAGE> 62
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine For the Years
Months Ended Ended
September 30, December 31,
2000 1999 1999 1998
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 460,218 $ 852,071 $ 1,100,076 $ 1,656,649
Cost of goods sold 391,185 660,235 936,652 1,377,977
------------- ------------- ------------- -------------
Gross Profit 69,033 191,836 163,424 278,672
Operating Expenses:
Selling expenses 55,211 57,420 83,955 129,070
General and
administrative 719,441 544,224 1,033,689 568,786
------------- ------------- ------------- -------------
Total operating
expenses 774,652 601,644 1,117,644 697,856
------------- ------------- ------------- -------------
Operating Loss (705,619) (409,808) (954,220) (419,184)
Other Income (Expense):
Interest income
(expense) 31,111 (7,731) 994 (100,717)
Rental income 26,200 49,234 49,233 184,069
Gain on sale of assets (1,007) 109,759 107,974 --
Miscellaneous income
(expense) 57,306 (5,254) (62,533) --
Costs related to failed
acquisition -- -- -- (111,423)
------------- ------------- ------------- -------------
Total other income
(expense) 113,610 146,008 95,668 (28,071)
------------- ------------- ------------- -------------
Loss Before Minority Interest and
Earnings From Equity
Investment (592,009) (263,800) (858,552) (447,255)
Minority Interest 49,000 -- -- --
------------- ------------- ------------- -------------
Loss Before Earnings From
Equity Investment (543,009) (263,800) (858,552) (447,255)
Equity in net income
(loss) of investment (211,011) 300,000 33,476 --
------------- ------------- ------------- -------------
Net Income (Loss) $ (754,020) $ 36,202 $ (825,076) $ (447,255)
============= ============= ============= =============
Net Loss per Common Share,
Basic and Dilutive $ (.22) $ .03 $ (.62) $ (.40)
============= ============= ============= =============
Average Common Shares
Outstanding, Basic
and Dilutive 3,399,450 1,310,498 1,338,513 1,120,310
============= ============= ============= =============
</TABLE>
F-4
<PAGE> 63
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Balances, Shares Amount Capital Deficit Total
------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
January 1, 1998 2,228,402 $ 2,228 $ 4,106,310$ (1,829,750) $ 2,278,788
Exercise of
Options 200,000 200 249,800 -- 250,000
Issuance of common
stock 59,260 60 49,940 -- 50,000
Net Loss -- -- -- (447,255) (447,255)
----------- ----------- ----------- ----------- -----------
Balances,
December 31, 1998 2,487,662 2,488 4,406,050 (2,277,005) 2,131,533
Issuance of common
stock:
Cash 133,334 133 99,867 -- 100,000
Services 141,672 142 154,991 -- 155,133
Net Loss -- -- -- (825,076) (825,076)
----------- ----------- ----------- ----------- -----------
Balances,
December 31, 1999 2,762,668 2,763 4,660,908 (3,102,081) 1,561,590
Issuance of common
stock:
Cash 724,000 724 754,276 -- 755,000
Palo Verde
Acquisition 361,800 362 361,438 -- 361,800
Services 124,994 125 130,973 -- 131,098
Other -- -- 19,623 -- 19,623
Net loss -- -- -- (754,020) (754,020)
----------- ----------- ----------- ----------- -----------
Balances,
September 30,
2000 3,973,462 $ 3,974 5,927,218 (3,856,101) 2,075,091
=========== =========== =========== =========== ===========
</TABLE>
F-5
<PAGE> 64
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine For the Years
Months Ended Ended
September 30, December 31,
2000 1999 1999 1998
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss) $ (754,020) $ 36,202 $ (825,076) $ (447,255)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and
amortization of property
and equipment 14,722 37,920 40,720 92,949
Common stock and options
for services 131,098 -- 155,133 --
Write down of assets to
net realizable value -- -- -- 68,224
(Gain) loss on sale of
property and equipment 1,007 (109,759) 107,974 --
Cash received in Palo
Verde acquisition (9,365) -- -- --
Minority Interest (49,000) -- -- --
Equity in net income
(loss) of investment 211,011 (300,000) (33,476) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 125,980 62,472 (32,748) 42,382
Inventories 10,793 36,900 22,040 235,550
Prepaid expenses and
other (79,864) (117,793) 50,889 (66,697)
Increase (decrease) in:
Accounts payable (122,769) (90,161) 122,171 (155,725)
Accrued expenses and
other (110,654) 25,057 792 (19,629)
Customer deposits -- -- (312) (80,981)
------------ ------------ ------------ ------------
Net cash used in
operating activities (631,061) (419,162) (391,893) (331,182)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property
and equipment -- (648) (3,248) (7,729)
Sale of property
and equipment 11,505 877,941 2,519,374 --
Issuance of notes
receivable (249,000) (505,000) (505,000) (500,000)
Payments on notes
receivable 50,000 620,000 670,000 100,000
Investment in Structural
Holdings, Inc. -- (850,000) (948,900) --
------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities (187,495) 142,293 1,732,226 (407,729)
Cash Flows from Financing Activities:
Proceeds from issuance of
notes payable -- 91,978 -- 1,926,161
Other 19,623 -- -- --
Payment on notes payable (8,748) (170,728) (1,834,581) (1,010,774)
Exercise of options 530,000 -- -- 250,000
Proceeds of common
stock issued 225,000 100,000 100,000 50,000
------------ ------------ ------------ ------------
Net cash provided by
financing activities 765.875 21,250 (1,734,581) 1,215,387
------------ ------------ ------------ ------------
Increase (Decrease) in Cash
and Cash Equivalents (52,681) (255,619) (394,248) 476,476
Cash and Cash Equivalents,
beginning of period 191,690 585,937 585,938 109,461
------------ ------------ ------------ ------------
Cash and Cash Equivalents,
end of period $ 139,009 $ 330,318 $ 191,690 $ 585,937
============ ============ ============ ============
Supplemental Schedule
of Cash Flow Information:
Cash paid for interest $ 5,275 $ 37,609 $ 39,685 $ 146,842
============ ============ ============ ============
Debt assumed by buyer
in sale of building $ -- 1,857,379 1,857,379 $ --
============ ============ ============ ============
</TABLE>
F-6
<PAGE> 65
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AFTER DECEMBER 31, 1999 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - Guardian Technologies International, Inc. (the
"Company") is incorporated in the State of Delaware. 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. During 1999, the Company acquired a 50% interest
in Structural Holdings, Inc. (Structural). Structural is a holding
company and its only investment at December 31, 1999 is 100% of the
common stock of H&M Steel (H&M). H&M is engaged in the business of
structural steel fabrication.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Guardian Technologies, Inc. and its
subsidiaries (collectively the "Company"). All significant
intercompany transactions accounts have been eliminated
INVESTMENTS - The Company's 50% ownership interest in Structural is
accounted for under the equity method of accounting and is recorded at
cost as adjusted for its proportionate share of earnings and
distributions.
REVENUE RECOGNITION - Manufacturing revenue is recognized upon shipment
of product.
USE OF ESTIMATES - The preparation of the Company's financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates. H&M enters into
long-term contracts with its customers and recognizes revenue on a
percentage of completion basis, which requires significant estimates.
Financial Instruments - The estimated fair value of cash and cash
equivalents, accounts receivable, notes receivable, accounts payable
and accrued expenses approximate their carrying amounts in the
financial statements due to the short-term nature of these instruments.
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 approximates its carrying value.
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.
F-7
<PAGE> 66
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 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. At December 31, 1999, the Company had cash in banks in excess
of FDIC insured limits of approximately $87,200.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
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 at September 30, 2000
and December 31, 1999 to be fully collectible.
INVENTORIES - Inventories consist of purchased materials and
components, work-in-process, and finished goods. Inventories are stated
at the lower of cost or market, with cost being determined on a
first-in, first-out basis. Inventories consisted of the following at
December 31, 1999:
<TABLE>
<S> <C>
Raw materials and components $ 135,437
Finished goods 23,308
$ 158,745
</TABLE>
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost
and depreciated over their estimated useful lives. 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:
<TABLE>
<S> <C>
Office furniture and equipment 5 - 7 years
Manufacturing equipment 7 - 8 years
</TABLE>
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.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company performs an assessment
for impairment whenever events or changes in circumstances indicate
that the carrying amount of a long-lived asset may not be recoverable.
If the net carrying value exceeds estimated undiscounted future net
cash flows, then impairment is recognized to reduce the carrying value
to the estimated fair value.
RENTAL INCOME - The Company leased a portion of the building which it
owned until March 31, 1999. Rental income and payments are recorded and
received on a monthly basis. Rental income was $49,233 in the nine
months ended September 30, 1999 and fiscal year ended December 31, 1999
and $184,069 in the fiscal year ended December 31, 1998.
F-8
<PAGE> 67
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.
NET LOSS PER COMMON SHARE - The Company has adopted 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 EPS - 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. All potential dilutive securities are
antidilutive as a result of the Company's net loss for the nine months
ended September 30, 1999 and for the years ended December 31, 1999 and
1998. Accordingly, basic and diluted EPS are the same for all periods
presented.
COMPREHENSIVE LOSS - SFAS No. 130 establishes standards for reporting
and display of comprehensive loss, its components and accumulated
balances. Comprehensive loss is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Comprehensive loss was the same as net loss in
all periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT - SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998.
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for the Company's financial
statements for the year ended December 31, 2000 and the adoption of
this standard is not expected to have a material effect on the
Company's financial statements.
2. LIQUIDITY:
The Company has incurred losses since inception, including $345,848
during the nine months ended September 30, 2000, $825,076 in 1999 and
$447,255 in 1998, respectively. If losses continue and/or the Company
is unable to raise adequate capital to fund future operations, the
Company may be required to curtail operations, liquidate assets or
enter into capital or financing arrangements on terms which may have an
adverse effect on future operations. In an effort to improve operations
and cash flow, the Company is currently pursuing the following
activities:
o Outsourcing of the manufacture of its ballistic
product line to reduce labor and overhead costs
(mostly rent) incurred in the production process at
its Dulles, Virginia facility. The
F-9
<PAGE> 68
Company is also working with several vendors to
provide a lightweight ballistic material in order to
reduce material costs in its product lines. The
Company anticipates that these actions will not only
increase gross margin percentages, but will allow the
Company to lower the price on its product lines.
Management is also seeking experienced body armor
sales personnel that will be able to capitalize on
this lower priced product line, thereby increasing
sales volume.
o Seeking profitable and privately held strategic
acquisition candidates that are in the security and
safety product industry. The Company intends to
acquire the candidates through a combination of cash
(raised through equity financings) and common stock
of the Company.
o During the nine months ended September 30, 2000, the
Company raised additional equity financing of
$225,000 and $530,000 through proceeds from a private
placement and option exercises, respectively. The
Company anticipates the exercise of warrants included
in the private placement in fiscal 2000. Assuming all
warrants are exercised, the Company would receive
proceeds of $3,825,000. However, there can be no
assurances that any of these warrants will be
exercised.
For these reasons, management believes that no adjustments or
reclassifications of recorded assets and liabilities is necessary at
this time.
3. INVESTMENT IN STRUCTURAL HOLDINGS:
In 1999, the Company purchased a 50% interest in Structural for
$850,000 cash and incurred $98,900 of costs directly associated with
this investment. The investment is accounted for under the equity
method of accounting.
SUMMARIZED FINANCIAL INFORMATION FOR STRUCTURAL HOLDINGS
<TABLE>
<CAPTION>
For the Nine For the Year
Months Ended Ended
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Net sales $ 12,516,531 $ 7,005,000
Cost of sales $ 11,667,032 5,330,000
Depreciation $ 657,484 ?
Net income $ (252,069) 90,000
Guardian share of net income $ (126,035) 33,476
Current assets $ 4,515,000 5,464,000
Noncurrent assets $ 4,789,768 4,777,000
Total assets $ 9,304,768 10,241,000
Current liabilities $ 7,412,051 7,810,000
Noncurrent liabilities $ 542,152 640,000
Total liabilities $ 7,954,203 8,450,000
Net assets $ 1,350,565 $ 1,791,000
</TABLE>
F-10
<PAGE> 69
The Company recorded its equity in estimated earnings of Structural
totaling $33,476 at December 31, 1999, based on Structural's
management's best estimate of profit on uncompleted contracts at the
time the Company's Form 10-K was required to be filed with the SEC.
However, Structural had not completed the audit of its December 31,
1999 financial statements as of that date and the audit still has not
yet been issued. Based on a change of estimate in the cost to complete
certain jobs, Structural changed its percent of completion calculation
at December 31, 1999, thereby reducing its net income to a net loss. As
a result, the Company reduced its equity in earnings of Structural for
the nine months ended September 30, 2000 by $84,976, which represents
50% of the reduction in net income of Structural for the year ended
December 31, 1999. This amount coupled with Guardian's share of
Structural's net loss for the nine months ended September 30, 2000 of
$126,035, results in a net equity loss of $211,011 for nine months
ended September 30, 2000 as recorded on the Company's books. The
December 31, 1999 unadjusted column above represents amounts prior to
Structural's change in its estimate of percentage of completion. The
December 31, 1999 adjusted column above represents amounts adjusted for
Structural's change in its estimate of percentage of completion.
Structural purchased an entity (H&M) in 1999 for approximately
$5,000,000. The purchase of H&M was accounted for under the purchase
method of accounting, and as a result, approximately $3,025,000 of
goodwill was recorded which is being amortized over 15 years. The
purchase was financed by Structural with approximately $1,700,000 in
cash (of which $850,000 was paid by the Company), a $650,000 note
payable to the seller and $2,650,000 of 3-year term loans to a
financial institution to H&M. Additionally, H&M obtained a $2,350,000
3-year revolving line-of-credit from the same financial institution.
H&M was not in compliance with certain financial covenants of the
financial institution as of December 31, 1999 and June 30, 2000 and as
such, the notes have been classified as current. However, H&M is
currently attempting to obtain waivers of these loan covenant
violations. The loan agreements have restrictions on payment of
dividends, salaries and fees to the principals/shareholders of
Structural. Consulting fees of $225,000, primarily related to obtaining
the loan from the financial institution, were paid to an entity that
has a common equity interest holder with a shareholder of Structural.
The equity interest holder is also the chief executive officer of
Structural. This fee has been recorded as deferred financing fees and
is being amortized over the 3-year life of the loans.
The Company receives fees of $5,000 per month from Structural. Included
in the Company's investment in Structural is a $5,000 and a $45,000
receivable due from Structural for accrued fees as of September 30,
2000 and December 31, 1999, respectively. As of December 31, 1999, the
net investment in Structural of approximately $982,000, after deducting
the fee receivable, differs from the Company's 50% interest in the net
equity of Structural totaling $895,000. This difference, totaling
$87,000, is the result of the Company capitalizing direct costs it
incurred for the purchase of its 50% interest in Structural and a
timing difference from when Structural effectively acquired H&M and
when the Company acquired its interest in Structural for purposes of
allocating net income. This difference is being amortized over 15
years.
F-11
<PAGE> 70
4. NOTE RECEIVABLE:
In conjunction with a failed acquisition of an entity in 1998, the
Company loaned $500,000 to this entity. The interest rate is 8%. A 637-
acre parcel of land and a building have been pledged as collateral on
the note. At December 31, 1999, the note balance had been reduced to
$100,000. In June, in order to facilitate the timely delivery of
products sold to the federal government by this entity, the Company
increased the Note by an additional $150,000. The Note is to be repaid
from proceeds from the close-out of the federal contract following
delivery. The interest rate on the Note is 8%. A 637-acre parcel of
land and a building have been pledged as collateral on the Note. In
conjunction with the increase in the Note, the due date on the Note was
extended from June 30, 2000 to December 31, 2000. Management believes
the Note will be repaid in full in January 2001.
The Company loaned $50,000 to an unrelated entity. The interest rate is
12% and the principal plus interest is payable in full on March 31,
2000. An interest in the underlying mortgage was assigned to the
Company by the entity's lender as collateral on the note. This note was
repaid during the nine months ended September 30, 2000.
A related party note receivable of $85,000 is from an entity that is a
stockholder in the Company and the other 50% stockholder in Structural.
The interest rate is 9%, with interest due monthly with the principal
due December 31, 2000. This note is collateralized by 10% of the
entity's common stock ownership of Structural and consulting fee
payments of $25,000 per month made to the entity by Structural. The
note was paid in January 2001.
5. NOTE RECEIVABLE OFFICER:
On April 1, 2000, an officer of the Company exercised 40,000 options to
purchase common stock at $1.25 per share by issuing a Note Receivable
(the "Note") to the Company. The interest rate on the Note is 8% and
due in one year. The Note was repaid on September 29, 2000.
6. ACQUISITION AND REORGANIZATION:
On September 27, 2000, the Company, completed the
acquisition of 100% of the issued and outstanding shares of common
stock of Palo Verde Group, Inc., a Colorado corporation. In the
transaction, the Company issued 361,800 shares of its common stock to
Redwood MicroCap Fund, Inc., the sole shareholder of Palo Verde Group,
Inc. Under the terms of the agreement, the Company has agreed to
register the distribution of the 361,800 shares of the Company's common
stock to the shareholders of Redwood MicroCap Fund, Inc., pro rata,
which is a publicly reporting company whose shares are traded on the
over-the-counter market and quoted on the OTC Electronic Bulletin
Board. The Company maintains Palo Verde Group as a wholly-owned
subsidiary.
The assets of Palo Verde Group, Inc. consist of certain real property
located in Carefree, Arizona and a commercial building and associated
real property located in the State of Wyoming. The Arizona property is
held for development.
F-12
<PAGE> 71
On September 30, 2000, the Company completed a reorganization and
restructuring of its armor division.
The Company had previously formed and organized a wholly-owned
subsidiary, Guardian Security and Safety Products, Inc. ("GSSP"). In
forming that subsidiary, the Company transferred all of its assets and
liabilities associated with its armor manufacturing division to GSSP in
exchange for a total of 3,611,662 shares of GSSP common stock.
Following the restructuring, the Company then formed and organized
Guardian Armor, LLC, a Delaware limited liability company. Guardian
Armor, LLC then changed its name to ForceOne, LLC. GSSP then
transferred to ForceOne, LLC certain assets and liabilities associated
with the armor division consisting of accounts receivable, accounts
payable, inventory and fixed assets. The assets and liabilities
transferred to ForceOne, LLC had a net value of approximately $50,000,
for which GSSP received a 51% membership interest in ForceOne, LLC.
The remaining 49% membership interests in ForceOne, LLC were sold to an
individual and entity. The membership interests purchased by the
individual and entity were issued in consideration of promissory notes
in the amount of $24,500 each, payable June 30, 2001. The entity has
paid its note in full.
7. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Land $ 275,000 --
Manufacturing equipment 10,692 74,494
Furniture and fixtures 50,623 74,555
Computer equipment 56,968 44,800
Leasehold Improvements 9,683 --
402,966 193,849
Accumulated depreciation (60,593) (141,785)
-------------- --------------
$ 342,373 $ 52,064
</TABLE>
Depreciation expense for the nine months ended September 30, 2000 and
1999 and for the years ended December 31, 1999 and 1998 was $14,722,
$37,920, $40,720 and $92,949, respectively.
On March 31, 1999, the Company sold its land and building for
$2,825,000, which was greater than its net cost of approximately
$2,640,000. In conjunction with the sale, the purchaser assumed the
Company's note payable which is collateralized by the building, which
balance was approximately $1,857,000 on the date of the sale. The total
proceeds to the Company was approximately $883,000. The Company also
signed a 5-year lease totaling approximately $13,000 per month on the
building after it was sold. In conjunction with the sale, the Company
will no longer
F-13
<PAGE> 72
recognize rental income nor will it recognize depreciation expense
related to the building or general operating costs attributable to
being the owner of a building.
8. NOTES PAYABLE:
Included in notes payable as of December 31, 1999 are two insurance
premium finance agreements totaling $36,489. The agreements mature in
May 2000 and April 2001 and call for monthly payments of principal and
interest of $2,585 and $2,492 with interest at 10.5% and 8.375%,
respectively.
The following is a schedule of future principal payments as of December
31, 1999:
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------
<S> <C>
2000 $ 33,133
2001 27,775
2002 8,714
69,622
Less current portion (33,133)
----------
$ 36,489
</TABLE>
9. LEASE COMMITMENTS:
OFFICE LEASE - The Company leases office space, under a five-year
operating lease. Total rental expense was $131,500 for the year ended
December 31, 1999. The total minimum rental commitments at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 175,300
2001 175,300
2002 175,300
2003 175,300
2004 43,800
-----------
$ 745,000
</TABLE>
10. SHAREHOLDERS' EQUITY:
STOCK SPLIT - Subsequent to December 31, 1999, the Company's Board of
Directors approved a 2 for 1 reverse stock split. Accordingly, all
common stock reflected in the accompanying financial statements and
notes reflect this split.
PREFERRED STOCK - The Company has the authority to issue 1,000,000
shares of preferred stock. The Board of Directors has the authority to
issue
F-14
<PAGE> 73
such preferred shares in series and determine the rights and
preferences of the shares as may be determined by the Board of
Directors. There were no outstanding shares of preferred stock in 1999
or 1998.
ISSUANCES OF COMMON STOCK - During 1999, the Company issued 66,666
shares of common stock valued at $50,000 to an entity which has a
common officer with the Company for services provided in connection
with the acquisition of Structural (see Note 3). In addition to $55,000
in cash for consulting services to a shareholder/director, the Company
issued 75,006 shares of common stock to an entity owned by this
shareholder/director for consulting services valued at $51,087. During
1999, the Company issued 133,334 shares of common stock for $100,000 to
an entity that owns 50% of Structural.
During the nine months ended September 30, 2000, the Company granted
124,994 shares of common stock valued at $131,098 to the directors of
the Company for services performed in fiscal 1999. Of this amount,
$98,000 was recorded as an accrued liability as of December 31, 1999
and as an increase to common stock and additional paid-in capital.
From January 1, 2000 through September, 2000, options for 424,000
shares of common stock were exercised resulting in total proceeds of
$530,000.
During the nine months ended September 30, 2000, the Company sold
150,000 units for $1.50 each, totaling $225,000. Each unit is comprised
of two shares of common stock and four Class A, Class B, Class C, Class
D, Class E, and Class F warrants. The warrants have the following
terms:
<TABLE>
<CAPTION>
WARRANT EXERCISE PRICE EXERCISE PERIOD*
<S> <C> <C>
Class A $ .750 30 days
Class B $ .875 60 days
Class C $ 1.000 90 days
Class D $ 1.125 120 days
Class E $ 1.250 150 days
Class F $ 1.375 180 days
</TABLE>
* The exercise period begins the effective date of a registration
statement registering the underlying shares of common stock issuable
upon exercise of these warrants. Warrants must be exercised in
alphabetical order by warrant class. If any warrant is not exercised
during the term of the warrant by an individual warrant holder, all
remaining classes of warrants will automatically expire.
Additionally, options for the purchase of 100,000 shares of common stock were
granted during the nine months ended September 30, 2000 with an exercise price
of $.70, and which expire in 2007
WARRANTS - In conjunction with the initial public offering in 1996, the Company
issued 1,628,712 warrants. These warrants have an exercise price of $7.50 per
share and expire in the year 2001. None of these warrants have been exercised.
F-15
<PAGE> 74
STOCK OPTION PLANS - In 1997, the shareholders 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% 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 10 years from the date of grant for
non-qualified and incentive stock options and options granted to employees
expire 90 days after termination. Following is a summary of activity under the
stock option plan for the years ended December 31, 1999 and 1998:
F-16
<PAGE> 75
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------------------- ------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
year 466,666 $ 1.165 66,666 $ .660
Granted 194,000 .970 600,000 1.250
Exercised -- -- (200,000) 1.250
Expirations (66,666) .660 -- --
Outstanding, end of year 594,000 $ 1.160 466,666 $ 1.165
Vested Options 508,284 $ 1.235 466,666 $ 1.165
</TABLE>
Of the 194,000 options issued in 1999, 100,000 options were issued to
officers and directors of the Company and 94,000 were issued to
employees and unrelated parties for services. All options granted
during 1998 were to employees and directors.
If not previously exercised or forfeited, vested options outstanding at
December 31, 1999 will expire in the year ending December 31, 2000 at a
weighted average exercise price of $1.165 per share. The remaining
85,716 options will vest ratably each quarter over seven years and will
expire in February 2006 at a weighted average exercise price of $.705
per share. At December 31, 1999, the weighted average remaining
contractual life of options outstanding was approximately 14 months.
Presented below is a comparison of the weighted average exercise price
and fair values of the Company's common stock on the measurement date
for all stock options granted to employees during 1999:
<TABLE>
<CAPTION>
Number of Exercise Fair
Shares Price Value
--------- -------- --------
<S> <C> <C> <C>
Market price equal to exercise price 100,000 $ .705 $ .705
Exercise price greater than market
price 24,000 1.250 1.188
Exercise price greater than market
price 70,000 1.250 1.235
194,000 $ 1.070 $ 1.040
</TABLE>
PRO FORMA STOCK-BASED COMPENSATION DISCLOSURES - The Company applies
APB Opinion 25 and related interpretations in accounting for its stock
F-17
<PAGE> 76
options and warrants which are granted to employees. Accordingly, no
compensation cost has been recognized for grants of options and
warrants to employees since the exercise prices were not less than the
market value of the Company's common stock on the grant dates. Had
compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS
No. 123, the Company's net loss and EPS would have been increased to
the pro forma amounts indicated below.
F-18
<PAGE> 77
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Net loss applicable to common shareholders:
As reported $ (460,897) $ (447,255)
Pro forma $ (596,542) $ (579,363)
Net loss per common shareholders:
As reported - basic and diluted $ (.33) $ (.40)
Pro forma - basic and diluted $ (.43) $ (.52)
</TABLE>
The fair value of each option granted was estimated on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
--------- ---------
<S> <C> <C>
Expected volatility 125.3% 165.2%
Risk-free interest rate 5.3% 5.5%
Expected dividends -- --
Expected terms (in years) 3.7 2.0
</TABLE>
11. INCOME TAXES:
There was no provision for income taxes for the years ended December
31, 1999 or 1998 due to net operating losses, and deferred tax assets
being offset by a valuation allowance.
The net deferred tax asset for the years ended December 31, are comprised
of the following items:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Options $ 20,000 $ --
Net operating loss carryforward 1,112,000 843,000
Other 37,000 37,000
Gross deferred tax assets 1,169,000 880,000
Deferred tax liability:
Equity investment (12,000) --
Property and equipment (2,000) (65,000)
Net deferred tax asset before
valuation allowance 1,155,000 815,000
Less deferred tax asset valuation
allowance (1,155,000) (815,000)
Net deferred tax asset $ -- $ --
</TABLE>
F-19
<PAGE> 78
Total income tax expense for 1999 and 1998 differed from the amounts
computed by applying the U.S. Federal statutory tax rates to pre-tax
income as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Statutory rate (34)% (34)%
State income taxes, net of Federal
income tax benefit (4)% (4)%
Increase (reduction) in valuation
allowance related to of net
operating loss carryforwards and
change in temporary differences 38% 38%
</TABLE>
In 1999, the valuation allowance increased $344,000. At December 31,
1999, the Company has net operating loss carryforwards of approximately
$2,980,000 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 from December
31, 2010 through December 31, 2018.
12. 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 2% of sales in 1999 and
1998 were to foreign governments and agencies.
Percentage of sales to major domestic customers at December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
GOVERNMENT CUSTOMER:
U.S. Government Agency and subcontract 23% 19%
Municipal law enforcement agency 20% 26%
NON-GOVERNMENTAL CUSTOMER 20% 49%
</TABLE>
13. 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
by one company only. As of December 31, 1999 and 1998, Guardian
Technologies International, Inc., owed $72,700 and $80,600,
respectively, to this company.
F-20
<PAGE> 79
14. FOURTH QUARTER ADJUSTMENT:
During the fourth quarter of 1999, the Company recognized a loss of
$267,000 on its equity in net earnings of Structural. This loss was
primarily the result of Structural revising its calculation for profit
on long-term contracts prior to the Company's fourth quarter.
F-21
<PAGE> 80
GUARDIAN TECHNOLOGIES
INTERNATIONAL, INC.
4,400,800
SHARES OF COMMON STOCK
PROSPECTUS
January, 2001
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, by-law, contract, or other
arrangement under which any controlling person, director or officers of the
Registrant is insured or indemnified in any manner against any liability which
he may incur in his capacity as such, is as follows:
The Company's Articles of Incorporation permit and its By-laws require
the Company to indemnify officers and directors to the fullest extent permitted
by the Delaware Business Corporation Law (OBCA). The Company has also entered
into agreements to indemnify its directors and executive officers to provide the
maximum indemnification permitted by Delaware law. These agreements, among other
provisions, provide indemnification for certain expenses (including attorney
fees), judgments, fines and settlement amounts incurred in any action or
proceeding, including any action by or in the right of the Company.
Article VI of the Company's By-laws permits the Company to indemnify
its directors, officers, employees and agent to the maximum extent permitted by
the OBCA. Section 317 of the OBCA provides that a corporation has the power to
indemnify and hold harmless a director, officer, employer, or agent of the
corporation who is or is made a party or is threatened to be made a party to any
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative, against all expense, liability and loss actually and
reasonably incurred by such person in connection with such a proceeding if he or
she acted in good faith and in a manner he or she reasonably believed to be in
the best interest of the corporation, and, with respect to any criminal
proceeding, had no reasonable cause to believe that the conduct was unlawful. If
it is determined that the conduct of such person meets these standards, such
person may be indemnified for expenses incurred and amounts paid in such
proceeding if actually and reasonably in connection therewith.
If such a proceeding is brought by or on behalf of the corporation
(i.e., a derivative suit), such person may be indemnified against expenses
actually and reasonably incurred if such person acted in good faith and in a
manner reasonably believed to be in the best interest of the corporation and its
stockholders. There can be no indemnification with respect to any matter as to
which such person is adjudged to be liable to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite such adjudication but in view of all of
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
Where any such person is successful in any such proceeding, such person
is entitled to be indemnified against expenses actually and reasonably incurred
by him or her. In all other cases (unless order by a court), indemnification is
made by the corporation upon determination by it that indemnification of such
person is proper in the circumstances because such person has met the applicable
standard or conduct.
i
<PAGE> 82
A corporation may advance expenses incurred in defending any such
proceeding upon receipt of an undertaking to repay any amount so advanced if it
is ultimately determined that the person is not eligible for indemnification.
The indemnification rights provided in Section 317 of the OBCA are not
exclusive of additional rights to indemnification for breach of duty to the
corporation and its stockholders to the extent additional rights are authorized
in the corporation's articles of incorporation and are not exclusive of any
other rights to indemnification under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, with as to action in his
or her office and as to action in another capacity which holding such office.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by us, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC Filing Fee $ 8,649
Printing Expenses* 600
Accounting Fees and Expenses* 2,000
Legal Fees and Expenses* 10,000
Blue Sky Fees and Expenses* 1,000
Registrar and Transfer Agent Fee* 1,000
Miscellaneous* 751
Total* $24,000
</TABLE>
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
a. In 1998 the Registrant sold 59,260 shares to Redwood MicroCap
Fund, Inc for $50,000. The Registrant relied on Section 4(2)
for the issuance. The investor was sophisticated and was given
access to all material information about the Registrant.
b. During 1998 officer and directors of the Registrant exercised
options to purchase a total of 100,000 shares of Common Stock.
The Registrant relied on Section 4(2) for the issuances.
c. During 1999 the Registrant issued 75,006 shares of Common
Stock to its Chairman, Oliver North, for consulting services.
The Registrant relied on Section 4(2) for the issuance.
d. During 1999 the Registrant sold TAIM Special Equities III
133,334 shares of Common Stock for $100,000. TAIM owns 50% of
Structural Holdings, the Company's 50%-owned subsidiary. The
Registrant relied on Section 4(2) for the issuance. TAIM is a
sophisticated investor that was given access to all material
information about the Registrant.
ii
<PAGE> 83
e. During 1999 the Registrant issued to Redwood MicroCap Fund,
Inc., 66,666 shares of common stock for services provided in
connection with the acquisition of Structural. Mr. Moorer, the
Registrant's President, is an officer of Redwood. The
Registrant relied on Section 4(2) for the issuance. Redwood is
a sophisticated investor that was given access to all material
information about the Registrant.
e. In January 2000 the Registrant issued 20,000 to each of its
five directors as partial compensation for their services as
directors in 1999. Each of the directors was accredited and
had all material information about the Registrant.
f. In January 2000 the Registrant sold a total of 150,000 Units
to 28 investors at a purchase price of $1.50 per Unit. Each
Unit consisted of two shares of Common Stock and twenty-four
Common Stock Purchase Warrants. The Warrants are described in
the section of the Prospectus "Description of Securities -
Warrants." The offering was made pursuant to Section 4(2) and
Regulation D; each investor was a sophisticated, accredited
investor, who was given access to all material information
about the Registrant.
g. In January 2000 the Registrant issued 24,994 shares of Common
Stock to its Chairman, Oliver North, for consulting services.
The Registrant relied on Section 4(2) for the issuance.
h. In April 2000, the Registrant issued 40,000 shares of Common
Stock to Mr. Moorer upon his exercise of incentive stock
options at an exercise price of $1.25 per share. The
securities, which were taken for investment and were subject
to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act and
Rule 701 under the Securities Act.
i. In September 2000, the Registrant issued 361,800 shares of
Common Stock to Redwood MicroCap Fund, Inc., a registered
investment company. The shares were issued in consideration of
the transfer of 100% of the outstanding Common Stock of Palo
Verde Group, Inc. The shares, which were taken for investment
and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the
Securities Act.
ITEM 27. EXHIBITS
a. The following Exhibits are filed as part of this Registration
Statement pursuant to Item 601 of Regulation S-B:
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.*
5.1 Opinion of Neuman & Drennen, LLC.
iii
<PAGE> 84
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.**
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.***
10.13 Stock Purchase Agreement dated August 12, 1999 between the Company
and Taim Investment Company regarding Structural Holdings, Inc.****
10.14 Employment Agreement between the Company and J. Andrew Moorer dated
February 1, 1999.*****
10.15 Option dated February 19, 1999 by and between J. Andrew Moorer and
Oliver North.*****
10.16 Promissory Note dated May 1, 1999 from Taim Special Equities III to
the Company.*****
10.17 Consulting Agreement between the Company and Structural Holdings,
Inc. dated April 1, 1999.*****
10.18 Consulting Agreement between the Company and Oliver L. North dated
February 19, 1999.*****
10.19 Consulting Agreement between the Company and Redwood MicroCap Fund,
Inc. dated December 31, 1998.*****
11.0 Statement re: Computation of Per Share Earnings*****
21.1 Subsidiaries *******
23.1 Consent of Neuman & Drennen, LLC
23.2 Consent of Hein & Associates
24 Power of Attorney (included in the Signature Page to this
Registration Statement)
27.0 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.
*** Filed as an Exhibit to the Company's 1997 Form 10-KSB dated March 31,
1998 and incorporated herein by reference.
v
<PAGE> 85
**** Filed as an Exhibit to the Company's Current Report on Form 8- K/A-3
filed with the Commission on August 16, 1999
***** Filed as an Exhibit to the Company's 1999 Form 10-KSB dated April 14,
2000, and incorporated herein by reference.
****** Filed as an Exhibit to the Company's Form 10-QSB dated May 22, 2000,
and incorporated herein by reference
******* Filed as an Exhibit to the Company's Registration Statement on
Form SB-2 dated May 30, 2000, and incorporated herein by
reference.
----------
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
a. Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement;
c. Include any additional or changed material information on the
plan of distribution.
2. That, for determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
3. To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
5. In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred and paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereby, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
vi
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing the Form SB-2 Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized. In the City of
Carefree, State of Arizona, on the 16th day of January, 2001.
GUARDIAN TECHNOLOGIES INTERNATIONAL,
INC., A Delaware Corporation
By: /s/ J. Andrew Moorer
---------------------------------
J. Andrew Moorer, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Andrew Moorer his true and lawful
attorney-in-fact and agent, with full power of substitution and re-
substitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1933,
this Registration Statement on Form SB-2 has been signed by the following
persons in the capacities with Guardian Technologies International, Inc. and on
the dates indicated.
<PAGE> 87
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ J. Andrew Moorer President, Chief Executive Officer January 16, 2001
-------------------- and Director
J. Andrew Moorer
/s/ Oliver L. North Chairman of the Board January 16, 2001
--------------------- and Secretary
Oliver L. North
/s/ Kevin L. Houtz Director January 16, 2001
---------------------
Kevin L. Houtz
/s/ David W. Stevens Director January 16, 2001
---------------------
David W. Stevens
/s/ Herbert M. Jacobi Director January 16, 2001
---------------------
Herbert M. Jacobi
</TABLE>
<PAGE> 88
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.*
5.1 Opinion of Neuman & Drennen, LLC.
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.**
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.***
10.13 Stock Purchase Agreement dated August 12, 1999 between the Company
and Taim Investment Company regarding Structural Holdings, Inc.****
10.14 Employment Agreement between the Company and J. Andrew Moorer dated
February 1, 1999.*****
10.15 Option dated February 19, 1999 by and between J. Andrew Moorer and
Oliver North.*****
10.16 Promissory Note dated May 1, 1999 from Taim Special Equities III to
the Company.*****
10.17 Consulting Agreement between the Company and Structural Holdings,
Inc. dated April 1, 1999.*****
10.18 Consulting Agreement between the Company and Oliver L. North dated
February 19, 1999.*****
10.19 Consulting Agreement between the Company and Redwood MicroCap Fund,
Inc. dated December 31, 1998.*****
<PAGE> 89
Exhibit
Number Description
------- -----------
11.0 Statement re: Computation of Per Share Earnings*****
21.1 Subsidiaries *******
23.1 Consent of Neuman & Drennen, LLC
23.2 Consent of Hein & Associates
24 Power of Attorney (included in the Signature Page to this
Registration Statement)
27.0 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.
*** Filed as an Exhibit to the Company's 1997 Form 10-KSB dated March 31,
1998 and incorporated herein by reference.
**** Filed as an Exhibit to the Company's Current Report on Form 8- K/A-3
filed with the Commission on August 16, 1999
***** Filed as an Exhibit to the Company's 1999 Form 10-KSB dated April 14,
2000, and incorporated herein by reference.
****** Filed as an Exhibit to the Company's Form 10-QSB dated May 22, 2000,
and incorporated herein by reference
******* Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 dated May 30, 2000, and incorporated herein by reference.
