<PAGE>
- --------------------------------------------------------------------------------
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
Mark One:
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 1-11968
SAF T LOK INCORPORATED
(Exact name of small business issuer
as specified in its charter)
FLORIDA 65-0142837
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
18245 S. E. Federal Hwy.
Tequesta, FL 33469
(Address of principal executive offices)
Telephone No. (561) 743-5625
-----------------------
(Former name, former address and former fiscal year, if changed
since last report.)
-------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days: Yes X No
-- --
As of July 31, 1998 there were 13,609,957 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format: Yes No X
-- --
- --------------------------------------------------------------------------------
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statement.
The registrant's financial statements for the quarter ended June 30, 1998 are
attached hereto.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of important
factors accompanying the forward-looking statements. The following discussion
should be read in conjunction with the unaudited financial statements and notes
thereto, attached hereto, and in conjunction with the audited financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K filed with the SEC on May 13, 1998.
Management's Discussion and Analysis Section of the Form 10Q
------------------------------------------------------------
Second quarter of 1998 versus the second quarter of 1997
- --------------------------------------------------------
Revenues for the second quarter of 1998 were $952,029 compared to revenue of
$6,106 for the second quarter of 1997. The increased revenues were due to the
fulfillment of the remainder of shipments under the United Safety Action
contract, completing the first installment on a $6,000,000 purchase order to the
Company, as previously reported, and additional shipments required under the
contract. Shipments for this quarter consisted of both the older grip lock and
the first shipments of the new magazine lock. Additional costs associated with
the ramp up of the assembly lines and start up of the new magazine lock coupled
with expected lower margins on the magazine lock resulted in a gross profit of
27% for this quarter. That compares to a second quarter 1997 gross profit of
31%.
The selling, general and administration expenses for the second quarter of 1998
were $1,238,146 compared to $147,742 for the same period last year. Included in
the second quarter 1998 SG&A is $190,094 which is the amortized portion of the
value of the stock purchase warrants issued in connection with the distribution
agreement with United Safety Action, Inc. for a total of 2,000,000 shares
exercisable at $5.00 per share with a 5-year term and issued as a commission on
the anticipated sales under the distribution agreement. The Company had placed
an aggregate value on these stock purchase warrants of
2
<PAGE>
$473,000. However, due to concern from the Company's independent auditor the
Company retained an independent expert to consult with the auditors on the
valuation of the warrants. The warrants have now been revalued at $1,888,400 for
which the quarterly amortized expense is now $157,367. The second quarter 1998
charge of $190,094 includes the understated amount of $32,727 from the first
quarter 1998. Applying the new valuation to the first quarter of 1998 does
not result in a material difference sufficient to justify restating the first
quarter 1998 results.
The SG&A expenses for the second quarter of 1997 were $147,742, being unusually
low because of the waiver of most executive salaries and the reversal of
$122,000 in accrued salaries. This compares with an SG&A of $472,722 for the
second quarter of 1998 if the charges for commissions, consulting and legal fees
in connection with capital raising activities are not included and the amortized
portion of the stock purchase warrants issued in connection with the United
Safety Action, Inc. distribution agreement is not included. Not counting these
irregular fees not related to the operations would yield an operational loss of
$.02 per share for the second quarter of 1998 as compared to $.08 per share loss
with all costs included. Likewise, adjusting the second quarter of 1997 for the
reversal of salaries would result in an operational loss of $.06 per share as
compared to a loss of $.03 per share as reported.
Six months year to date 1998 versus six months year to date 1997
- ----------------------------------------------------------------
Revenues for the first two quarters of 1998 were $1,229,465 compared to revenues
of $33,521 for the first two quarters of 1997. The increased revenues were due
to completion of the $1,000,000 prepaid order as the first installment on a
$6,000,000 purchase order to the Company, under the United Safety Action
distribution contract, as previously reported, and additional shipments also
required under the contract. Shipments for the first quarter consisted only of
the older grip lock but shipments for the second quarter also consisted of the
new magazine lock. 1998 six month YTD gross profits were 37% versus a gross
profit of 42% for the same period in 1997. Volume pricing concessions in the
distribution agreement will be reflected in lower gross profit percentages as
these sales continue to be a large portion of total sales. Additional costs
associated with the ramp up of the assembly lines and start up of the new
magazine lock coupled with expected lower margins on the magazine lock also
resulted in lower gross profits.
The selling, general and administration expenses for the first two quarters of
1998 were $1,465,577 compared to $360,832 for the same period last year.
Included in the 1998 six months YTD SG&A is $209,824 which is the amortized
portion of the value of the stock purchase warrants issued in connection with
the distribution agreement with United Safety Action, Inc. for a total of
2,000,000 shares exercisable at $5.00 per share with a 5-year term and issued as
a commission on the anticipated sales under the distribution agreement. The
Company had placed an aggregate value on these stock purchase warrants of
$473,000. However, due to concern from the Company's independent auditor the
Company retained an independent expert to consult with the auditors on the
valuation of
3
<PAGE>
the warrants. The warrants have now been revalued at $1,888,400 for which the
quarterly amortized expense is now $157,367.
The SG&A expenses for the first two quarters of 1997 were $360,832, being
unusually low because of the waiver of most executive salaries and the reversal
of $122,000 in accrued salaries. This compares with an SG&A of $591,423 for the
first two quarters of 1998 if the charges for commissions, consulting and legal
fees in connection with capital raising activities are not included and the
amortized portion of the stock purchase warrants issued in connection with the
United Safety Action, Inc. distribution agreement is not included. Not counting
these irregular fees that are related to the raising of capital and not to the
operations would yield an operational loss of $.02 per share for the first two
quarters of 1998 as compared to $.10 per share loss with all costs included.
Likewise, adjusting the first two quarters of 1997 for the reversal of salaries
would result in an operational loss of $.10 per share as compared to a loss of
$.07 per share as reported. Comparing in actual dollars, the six months YTD 1998
loss before financing expenses was $228,845, as compared with the six months YTD
1997 loss of $433,189.
As of June 30, 1998, the company had $2,883,120 of cash on hand as compared to
$237,198 on June 30, 1998 reflecting the Company's capital raising efforts and a
portion of the $1,100,000 prepayment on the wholesaler purchase order.
Prepaid expenses as of June 30, 1998 were $6,070,883 consisting primarily of the
value of 1,000,000 shares of common stock issued to United Safety Action, Inc.
in connection with the distributor agreement. The 1,000,000 issued to United
Safety Action, Inc. were valued at $3,781,000 using the latest trade price on
Nasdaq as of the day before the United Safety Action, Inc. was signed. These
shares are held as collateral by the company and will be released as United
Safety Action, Inc. makes advertising expenditures over the next 18 months ( 2
years from the date of the agreement ). United Safety Action, Inc. is obligated
to spend $5,000,000 over this period in advertising. The value of the shares
will be amortized as the shares are released from the collateral agreement.
Deferred compensation totaling $856,773, of which $223,642 is treated as both a
current asset and current liability and $633,131 which is treated as both an
other asset and a long term liability, is compensation to be recognized in the
future as a result of stock options granted to certain employees in 1997.
Notes payable were reduced to $0 in the second quarter of 1998 as the note to
Franklin Brooks using all the Company's patents as collateral was paid off.
The complex accounting for the value of stock options and stock purchase
warrants has caused the capital in excess of par to increase from $9,976,948 on
June 30, 1997 to $25,874,041 on June 30, 1998. Of this amount, only $5,456,403
is the net amount received by the company for the sale of stock and the exercise
of stock options and warrants during that 12-month period. The balance of the
increase is the value attributed to the stock purchase warrants and the value
attributed to the 1,000,000 shares of
4
<PAGE>
common stock issued to United Safety Action, Inc. in connection with the
distribution agreement.
Year 2000 compliance. The Company believes that its existing computer programs
are fully Year 2000 compliant and that it will not be necessary to incur any
material expenses with regard to Year 2000 issues in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Part II. Other Information
Item 1. Legal proceedings
In December 1996, Lisa Broderick Fogel and her husband Bruce Fogel sued the
Company and Franklin Brooks for defamation and loss of consortium arising out of
Mrs. Fogel's brief tenure in November 1996 as president of the Company. No
monetary damages are being sought. The Company's insurance company is providing
for the defense of the Company and Mr. Brooks. The Company does not believe this
lawsuit will have a materially adverse effect on the company.
On July 24, 1998, Joseph Yud filed a class action civil complaint against the
Company, Franklin Brooks and John Gardner. Plaintiff alleges violation of
Federal securities laws by misrepresenting material information concerning the
Company's financial condition, including the efficacy of a product development
agreement with Semiconductor Laser International Corporation. The Company's
insurance company is providing for the defense of the Company and Mr.
Brooks.
The Company is not a party in any other ongoing or pending legal proceedings,
nor are any of the Company's properties the subject of litigation, and the
Company is not aware of any pending or contemplated proceeding against it by
governmental authorities concerning environmental matters. The Company knows of
no legal proceedings, pending or threatened, or judgments entered against any
director or officer of the Company in his capacity as such.
Item 2. Changes In Securities.
During the period of April 1, 1998 through June 30, 1998, 1,666,666 shares of
common stock were issued due to the exercise of warrants at $2.00 per share
pursuant to Regulation S.
5
<PAGE>
During the period of April 1, 1998 through June 30, 1998, R. E. B. Properties,
Inc. was issued 50,880 restricted common shares at $1.00 per share as payment
for rental of the office building for 12 months during 1997 and 1998.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission Of Matters To A Vote Of Security Holders.
During the second quarter of 1998, no matters were submitted to a vote of
security holders through the solicitation of proxies or otherwise.
Item 5. Other Information
On May 12, 1998 it was announced that Stephen S. Eccher was hired as the
Company's Vice President in charge of Marketing to head up the Company's
internal sales force that will focus on bringing the Saf T Lok products to the
law enforcement industry.
On May 14, 1998 Mr. Eugene Horanoff resigned from the Board of Directors for
personal reasons.
On May 26, 1998 the Company announced that it had entered into a development
agreement with Semiconductor Laser International Corporation to produce a laser
enhanced gun locking mechanism.
On June 11, 1998 the Company announced that it terminated the employment of its
president and CEO Mr. John Gardner.
On June 11, 1998 the Company announced that it terminated the agreement with
Semiconductor Laser International Corporation.
On June 18, 1998 the Company announced that it entered into a two year licensing
agreement for worldwide endorsement rights with the Grand Lodge of the Fraternal
Order of Police, the nation's largest police organization.
On July 20, 1998 the Company received official notice of the issuance of patent
number 5782029 which provides broad coverage patent protection for the new
magazine lock.
On July 21, 1998 the Company announced that it had received an "informal
inquiry" from the Division of Enforcement of the Securities and Exchange
Commission and that the Company has voluntarily provided all the requested
documents and will cooperate fully with the Commission.
6
<PAGE>
On July 21, 1998 the Company also announced that it is considering restating its
unaudited Financial Statements for the quarter ended March 31, 1998 because the
Company's independent auditors have expressed concern over the valuation of some
warrants. However, applying the new valuation to the first quarter of 1998 does
not result in a material difference sufficient to justify restating the first
quarter 1998 results.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K.
1. Form 8K filed July 21, 1998, reporting SEC informal inquiry and possible
restatement of first quarter earnings.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAF T LOK INCORPORATED
By: /s/ Franklin W. Brooks Date: August 12, 1998
Franklin W. Brooks, Chairman, President, Chief Executive Officer
7
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
INDEX
-----
Page
----
BALANCE SHEETS F2 - F3
STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY F4
STATEMENTS OF OPERATIONS F5
STATEMENTS OF CASH FLOWS F6 - F7
NOTES TO FINANCIAL STATEMENTS F8 - F11
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
----------------------------
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 2,883,120 $ 237,198
Accounts Receivable (less allowance
for doubtful accounts of $14,510 and
$21,229 respectively) 145,661 4,841
Notes Receivable, current portion 12,640 --
Inventories 1,250,386 468,748
Prepaid Expenses 6,070,883 37,086
Deferred Compensation, current portion 223,642 --
----------- -----------
Total Current Assets $10,586,332 $ 747,873
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION $ 1,340,503 $ 861,591
OTHER ASSETS
Patents (less accumulated amortization
of $78,264 and $28,000 respectively) $ 335,513 $ 355,147
Notes Receivable, less current portion 162,545 189,279
Deferred Compensation, less current portion 633,131 --
Other Assets 2,150 1,695
----------- -----------
Total Other Assets $ 1,133,339 $ 546,121
TOTAL ASSETS $13,060,174 $ 2,155,585
</TABLE>
F-2
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Notes Payable, current portion $ 0 $ 76,217
Accounts Payable 579,450 527,737
Accrued Compensation 223,642 --
Prepayments 76,816 --
------------ ------------
Total Current Liabilities $ 879,908 $ 603,954
LONG TERM LIABILITIES
- ---------------------
Notes Payable, less current portion $ 0 $ 37,996
Accrued Compensation, less current portion 633,131 --
------------ ------------
Total Long term Liabilities $ 633,131 $ 37,996
TOTAL LIABILITIES $ 1,513,039 $ 641,950
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value,
20,000,000 shares authorized, 13,276,623
and 6,194,235 shares issued and
outstanding, in 1998 and 1997 respectively,
of which 1500 shares were held in treasury $ 132,766 $ 61,942
Capital in Excess of Par 25,874,041 9,976,948
Accumulated Deficit (14,459,672) (8,525,256)
TOTAL SHAREHOLDERS' EQUITY $ 11,547,135 $ 1,513,634
TOTAL LIABILITIES & EQUITY $ 13,060,174 $ 2,155,585
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 5,655,255 56,553 9,167,898 (8,092,067) 1,132,384
Issuance of common stock in
connection with conversion
of debentures 2,147,247 21,472 985,671 1,007,143
Issuance of common stock in
connection with severance agreement 30,000 300 78,450 78,750
Issuance of common stock in
connection with repayment
of loans to major shareholder 102,012 1,020 198,980 200,000
Issuance of common stock to
suppliers and service providers 169,486 1,695 370,653 372,348
Issuance of common stock to
offshore investors 1,683,077 16,830 3,033,170 3,050,000
Issuance of common stock to
an officer upon exercise of
stock options 200,000 2,000 69,200 71,200
Contributed capital 2,752,094 2,752,094
Net loss (5,264,606) (5,264,606)
------------ ---------- ---------- ------------ -------------
BALANCE - DECEMBER 31, 1997 9,987,077 99,870 16,656,116 $(13,356,673) $ 3,399,313
Issuance of common stock to
offshore investors 250,000 2,500 497,500 500,000
Issuance of common stock to
2 consultants upon exercise
of stock options 160,000 1,600 398,400 400,000
Issuance of common stock to
2 director/employees upon
exercise of stock options 137,000 1,370 12,330 13,700
Issuance of common stock in
connection with a marketing agreement 25,000 250 68,500 68,750
Issuance of common stock in
connection with exercise of warrants 1,666,666 16.667 3,316,664 3,333,331
Issuance of common stock in
connection with distributor agreement 1,000,000 10,000 2,990,000 3,000,000
Issuance to landlord for payment of
Rent 50,880 509 46,131 46,640
Issuance of warrants in connection with
distributor agreement 1,888,400 1,888,400
Net Loss (1,102,999) (1,102,999)
BALANCE - JUNE 30, 1998 13,276,623 132,766 25,874,041 (14,459,672) (11,547,135)
</TABLE>
F-4
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AS OF JUNE 30, 1998 AND 1997
----------------------------
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30 Ended June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUE
Revenue $ 952,029 $ 6,106 $ 1,229,465 $ 33,521
Cost of Sales 688,225 4,204 763,003 19,205
------------ ------------ ------------ ------------
Gross Profit $ 263,804 $ 1,902 $ 466,462 $ 14,316
EXPENSES
- --------
Selling, General and Administrative
before expenses relating to
Capital Raising $ 472,722 $ 147,742 $ 591,423 $ 360,832
Depreciation 51,942 41,550 103,884 86,673
------------ ------------ ------------ ------------
NET (LOSS) before
Capital Raising $ (260,860) $ (187,390) $ (228,845) $ (433,189)
(LOSS) PER COMMON SHARE
before Capital Raising (.02) -- (.02) --
Expenses relating to Capital Raising $ 765,424 -- $ 874,154 --
NET LOSS $ (1,026,284) $ (187,390) $ (1,102,999) $ (433,189)
(LOSS) PER COMMON SHARE (.08) (.03) (.10) (.07)
Weighted Average number of common
shares outstanding 12,667,148 6,194,235 11,350,446 6,194,235
</TABLE>
F-5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $(1,102,999) $ (433,189)
NET (LOSS) (1,102,999) (433,189)
----------- -----------
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 103,884 86,673
Change in assets and liabilities:
Decrease (increase) in accounts receivable 141,037 5,578
(Decrease) increase in allowance for bad debts -- 2,500
Increase in prepaid expenses (5,831,128) (15,975)
Decrease in prepaid expenses 473,338 --
Increase in inventories (902,704) (2,068)
Decrease in deferred compensation 80,638 --
(Decrease) increase in accounts payable 80,704 (77,860)
Increase in accrued liabilities 1,100,000 --
(Decrease) in accrued liabilities (645,280) --
Increase (Decrease) in Prepayments (1,023,184) --
Automobile transferred pursuant to consulting agreement -- 22,734
Issuance of stock for advertising services 68,750 --
Issuance of warrants pursuant to distribution agreement 1,888,400 --
Issuance of stock in settlement of Accounts Payable 46,640 --
Issuance of stock pursuant to distribution agreement 3,000,000 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,521,904) (411,607)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in current portion of note receivable 8,308 10,563
Payments for the purchase of equipment (172,965) --
Decrease in Other Assets 18,000 720
(Decrease) in notes payable (121,760) (9,410)
NET CASH PROVIDED BY INVESTING ACTIVITIES (268,417) 1,873
----------- -----------
</TABLE>
F-6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500,000 550,000
Principal payments on borrowings/capital leases -- (1,436)
Issuance of stock upon exercise of warrants 3,333,331 --
Issuance of stock upon exercise of options 413,700 --
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,247,031 548,564
---------- ----------
Net increase (decrease) in cash and equivalents 1,456,710 148,240
Cash and equivalents at beginning of year 1,426,410 88,956
---------- ----------
Cash and equivalents at end of period $2,883,120 $ 237,198
========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest $ 4,373 $ 212
========== ==========
</TABLE>
F-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information furnished herein reflects all
adjustments, which, in the opinion of management, are necessary to
fairly state the Company's financial position, the changes in its
financial position and the results of its operations for the periods
presented. This report on Form 10-QSB should be read in conjunction
with the Company's financial statements and notes thereto included on
Form 10-KSB for the year ended December 31, 1997. The Company presumes
that users of the interim financial information herein have read or
have access to the audited financial statements for the preceding
fiscal year and that the adequacy of additional disclosure needed for
a fair presentation may be determined in that context. Accordingly,
footnote disclosure, which would substantially duplicate the
disclosure contained in the Company's financial statements for the
year ended December 31, 1997, has been omitted. The results of
operations for the six-month period ended June 30, 1998 are not
necessarily indicative of results for the entire year ending December
31, 1998.
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprised the following as of June 30, 1998
and 1997:
1998 1997
----------- -----------
Cash in banks $ 2,883,120 $ 237,198
=========== ===========
NOTE 3 - INVENTORIES
Inventories are comprised of the following as of June 30, 1998 and
1997:
1998 1997
----------- ---------
Finished Goods $ 0 $210,611
Raw Materials 1,158,386 182,597
Supplies 92,000 75,540
---------- --------
TOTAL $1,250,386 $468,748
========== ========
F-8
<PAGE>
NOTE 4 - PREPAID EXPENSES
Prepaid expense is comprised of the following as of June 30, 1998 and
1997:
1998 1997
----------- --------
Agreement and Warrant expenses 2,326,563 -
Prepaid marketing and advertising 3,620,400 -
Deposit on patent costs 93,000 -
Prepaid show expenses 23,090 3,709
Prepaid insurance 3,318 -
Prepaid other 4,512 -
Prepaid rent - 16,000
----------- --------
TOTAL $ 6,070,883 $ 19,709
=========== =========
On January 20, 1998 the Company issued 416,667 warrants in connection
with the purchase of 250,000 shares of the Company's common stock from
three offshore investors. The warrants grant the right to purchase
416,667 shares of the Company's common stock (333,334 shares at an
exercise price of $2.00 per share and 83,333 at an exercise price of
$3.00 per share). The warrants expire in two years. The fair market
value of the warrants calculated using the Black-Scholes option
pricing model is $1,060,489.
Pursuant to the February 11, 1998 Distribution Agreement, the
distributor is obligated to create and place advertising totaling
$5,000,000. The Company has issued 1,000,000 shares of its common
stock in connection with the Distribution Agreement, which has been
pledged by the distributor as security for the obligation to place the
advertising. As the distributor fulfills its obligation, the Company
will release the pledged shares at the rate of one share for each five
dollars of advertising placed. Based on a fair market valuation at
close of business on the day prior to issuance, the value of these
shares is $3,781,000. This will be expensed as the obligation is
fulfilled.
In connection with the Distribution Agreement, on February 11, 1998
the Company entered into an agreement with three unaffiliated
companies, granting them stock purchase warrants for an aggregate
total of 2,000,000 shares of common stock with an exercise price of
$5.00 per share and a term of five years. These companies were
instrumental in assisting the Company in finding the Wholesaler and
the Distributor. The Company placed an aggregate value on these
warrants of $1,888,400. This is the amount the Company believes a
reasonable investor would pay for these warrants as of the date the
warrants were issued.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of June 30,
1998 and 1997:
F-9
<PAGE>
1998 1997
-------- --------
Equipment $418,493 $373,344
Furniture and fixtures 51,578 52,997
Tools and die 1,438,413 792,295
Software 37,214 37,214
Leasehold improvements 11,436 11,436
---------- ----------
TOTAL 1,957,134 1,267,287
Less accumulated depreciation 616,631 405,696
---------- ----------
TOTAL 1,340,503 861,591
========== ==========
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following
as of March 31, 1998 and 1997:
1998 1997
-------- --------
Accounts payable $ 579,450 $ 527,737
Accrued compensation-current 223,642 -
Prepayments 76,816 -
--------- -------------
TOTAL $ 879,908 $ 527,737
========= =============
NOTE 7 - SHAREHOLDERS' EQUITY
On January 20, 1998 the Company issued 416,667 warrants in connection
with the purchase of 250,000 shares of the Company's common stock from
three offshore investors. The warrants grant the right to purchase
416,667 shares of the Company's common stock (333,334 shares at an
exercise price of $2.00 per share and 83,333 at an exercise price of
$3.00 per share). The warrants expire in two years. The price of the
common stock sold was $2.50 per share.
Pursuant to the February 11, 1998 Distribution Agreement, the
distributor is obligated to create and place advertising totaling
$5,000,000. The Company has issued 1,000,000 shares of its common
stock in connection with the Distribution Agreement, which has been
pledged by the distributor as security for the obligation to place the
advertising. As the distributor fulfills its obligation, the Company
will release the pledged shares at the rate of one share for each five
dollars of advertising placed. Based on a fair market valuation at
close of business on the day prior to issuance, the value of these
shares is $3,781,000.
On March 25, 1998, the Company issued 25,000 shares of common stock
valued at $2.75 per share to the Financial Public Relations firm.
F-10
<PAGE>
In February 1998, two consultants exercised 80,000 options. The
exercise price of these options was $2.50.
In March 1998, two employee/directors exercised a total of 137,000
options. The exercise price of these options were $.10 per share.
In April 1998, two consultants exercised 40,000 options. The exercise
price of these options was $2.50.
In May 1998, three offshore investors exercised 1,666,666 warrants.
The exercise price of these warrants was $2.00.
In May 1998, two consultants exercised 20,000 options. The exercise
price of these options was $2.50.
In June 1998, the Company issued 50,880 shares of restricted stock in
payment of accrued rent.
In June 1998, two consultants exercised 20,000 options. The exercise
price of these options was $2.50.
NOTE 8 - SUBSEQUENT EVENTS
In July 1998, three offshore investors exercised 333,334 warrants. The
exercise price of these warrants was $2.00.
F-11
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<PERIOD-START> JAN-01-1998
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<COMMON> 132,766
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