<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 September 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 October 30, 1998 there were 13,609,957 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
================================================================================
<PAGE>
Part I. Financial Information
Item 1. Financial Statement.
The registrant's financial statements for the quarter ended September 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
------------------------------------------------------------
Third quarter of 1998 versus the third quarter of 1997
- ------------------------------------------------------
Revenues for the third quarter of 1998 were $472,333 compared to revenues of
$5,010 for the third quarter of 1997. The increased revenues were due almost
entirely to additional shipments scheduled under the United Safety Action, Inc.
Distribution Agreement. However, shipments for this quarter were less than
anticipated because the United Safety Action, Inc. did not purchase all the
locks required by the Distribution Agreement.
Shipments consisted of both the grip lock and the new magazine locks for Glock
and Beretta pistols. Gross profit for the third quarter of 1998 was a loss of
$164,492, influenced heavily by adjustments of $223,354 in the value of the
inventory. During this quarter the production operation found it necessary to
move from temporary quarters to a permanent location that has enough space to
house both the main offices and the production facility. While this move will
result in a long term cost savings, there was an immediate expense that
negatively impacted the bottom line. A positive operating gross profit of
$58,862 or 12.5% results if the inventory adjustment is backed out compared to a
gross profit of $3,005 or 60.0% for the third quarter of 1997 which had no
inventory adjustment. Contributing to this quarter's higher expenses were once-
a-year costs of
1
<PAGE>
$34,296 related to the annual shareholder meeting and $54,707 in marketing show
expenses because of the concentration of trade shows in the latter part of the
year. Additional costs associated with the continued ramp up of the assembly
lines and development of added magazine lock versions, coupled with the lower
expected margins of the United Safety Action, Inc. Distribution Agreement,
contributed to the reduction in margins. However, the Company has successfully
completed the ramp up in assembly, proving that it can mass produce quality
locks in large volumes. Taking a product from the concept/prototype stage to
mass production normally requires minor part design modifications and trial and
error at the production facility. High costs for inefficient labor and
production tooling are encountered until final design and assembly procedures
are refined. That learning curve is now behind us so these unusually high costs
are not expected in the future.
Development continues on more versions of the magazine lock with the popular
Beretta models commencing shipment in this quarter. Having both the most popular
Beretta and Glock models now allows the Company to begin the Law Enforcement
marketing effort in earnest. To enhance the sales efforts, three sales
representatives have been engaged. Versions for the remaining popular law
enforcement handguns in a number of the Sig Sauer and Smith & Wesson models are
expected to be ready for shipment during the fourth quarter.
The Company attended three important trade shows this quarter, the National
Sheriffs Association, the International Association of Law Enforcement Trainers,
and the American Society for Industrial Security. The new magazine lock is being
well received by the law enforcement community as they become more concerned
with their officers' gun safety when off the job.
The selling, general and administration expenses for the third quarter of 1998
were $1,222,720 compared to $303,602 for the same period last year. Included in
the third quarter 1998 SG&A is $537,181 in non-cash expenses related to the
raising of capital. Excluding these non-operating expenses and including
depreciation results in an operating loss of $850,031 or $.06 per share in the
third quarter of 1998 compared to last year's unadjusted third quarter results
showing a loss of $300,602 or $.04 per share. Including all expenses for the
third quarter of 1998 the net loss is $1,387,212 or $.10 per share compared to a
loss of $300,602 or $.04 per share for the same period last year.
Nine months year to date 1998 versus nine months year to date 1997
- ------------------------------------------------------------------
Revenues for the first three-quarters of 1998 were $1,705,793 compared to
revenues of $38,531 for the first three quarters of 1997. The increased revenues
were due to completion of both the $1,000,000 prepaid order and additional
shipments under the United Safety Action Distribution Agreement. Shipments for
the first quarter consisted only of the grip lock but shipments for the second
and third quarters also consisted of the new magazine lock. 1998 nine-month YTD
gross profits are 19% versus a gross profit of
2
<PAGE>
45% on much lesser shipments for the same period in 1997. Volume pricing
concessions in the Distribution Agreement will result in lower gross profit
percentages until the shipment volume increases, effecting a larger dilution of
overhead and start-up costs.
The selling, general and administration expenses for the first three-quarters of
1998 were $2,817,156 compared to $751,111 for the same period last year.
Included in the 1998 nine months YTD SG&A is $367,191 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 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 three-quarters of 1997 were $751,111, being
unusually low because of the waiver of $218,750 in executive salaries and the
reversal of $122,000 in accrued salaries which were recorded in the 4th quarter
of 1997. This compares with an SG&A of $1,405,821 for the first three quarters
of 1998 if the charges for commissions, consulting and legal fees in connection
with capital raising activities and the amortized portion of the stock purchase
warrants issued in connection with the United Safety Action, Inc. Distribution
Agreement are not included.
Eliminating the irregular fees that are related to the raising of capital and
not to the operations would yield an improved operating loss of $1,078,855 or
$.08 per share for the first three quarters of 1998 as compared to the first
three quarters of 1997 which, with the reversal of salary waivers which were
recorded in the 4th quarter of 1997, would have resulted in an operating loss of
$1,074,540 or $.14 per share.
As of September 30, 1998, the company had $1,320,800 of cash on hand as compared
to $452,308 on September 30, 1997. For the first three-quarters of 1998, net
property, plant and equipment increased to $1,433,327 from $1,092,730 for the
same period last year, primarily as a result of building tooling and assembly
fixtures for the new magazine lock. Inventories were increased to $2,117,921 for
the first nine months of 1998 from $457,950 for the same period last year in
order to meet the anticipated increased sales volume necessitated by the United
Safety Action, Inc. Distribution Agreement. However, accounts receivable for the
first nine months of 1998 increased to $487,023, almost entirely as a result of
non-payment by United Safety Action, Inc. for the last shipments made to them.
The Company ceased shipping to United Safety Action, Inc. once payments became
delinquent under the terms of the contract. As a result, the assembly operations
have been cut back. The Company is concerned whether United Safety Action, Inc.
will have the resources needed to continue to honor their part of the
Distribution Agreement. However, according to an October 22, 1998 press release
by Enzone, Inc., a sub-distributor to United Safety Action, Inc., Enzone has
sold stocking orders to 370 retail outlets across the United States, including
the Sports Authority chain. The Company may find it
3
<PAGE>
beneficial to renegotiate some parts of the Distribution Agreement with United
Safety Action, Inc.
Prepaid expenses as of September 30, 1998 were $5,540,090 consisting primarily
of the value of 1,000,000 shares of common stock issued to United Safety Action,
Inc. in connection with the Distribution Agreement. The 1,000,000 shares 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 15
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.
Notes payable for the first three-quarters of 1998 were $0 as the note to
Franklin Brooks, to which the Company's patents were pledged, was paid off in
the second quarter of 1998.
There have been several recent developments within the gun industry that gives
the Company cause for optimism. In the well publicized Dix vs. Beretta lawsuit
in California, in which a boy was accidentally killed with a Beretta handgun,
the plaintiff's assertion is that the handgun manufacturer had not used state-of
the-art technology to make the gun as safe as it could have been. According to
Dennis Henigan, legal director for The Center to Prevent Handgun Violence in
Washington, this may mark the first jury trial to test gun manufacturers'
accountability for failing to "child proof" guns. David Kairys, a Temple
University law professor comments, "But there's no doubt that courts,
legislatures and the population generally is moving toward understanding
responsibility of gun manufacturers as being a lot like that of tobacco and
asbestos "manufacturers"."
The City of New Orleans, Louisiana, filed a similar suit on October 30, 1998
against 15 gun manufacturers seeking to recover the damage to the City from the
gun industry's sale of guns that are not "personalized" to incorporate safety
designs to prevent their use by children and other unauthorized users.
According to other news sources many other municipalities and governmental
entities are expected to also file similar suits in the near future.
The Company believes that Saf T Lok/TM/ gunlocks are the most practical product
available to satisfy these complaints and that successful actions in these cases
will heighten interest in the Company's products.
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.
4
<PAGE>
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, Mr. Brooks and
Mr. Gardner. Certain deductibles, the magnitude of which is currently unknown,
may apply, but the Company, at this time, does not anticipate an adverse
material effect. An extension has been granted until November 21, 1998 for the
plaintiffs' attorneys in the Yud and Slomovics (below) cases to combine the
suits and for the judge to appoint legal counsel. Further extensions may be
requested by either party.
On August 14, 1998, the law firm of Boose, Casey, Ciklin, Lubitz, Martens,
McBane & O'Connell filed a civil complaint against the Company seeking to
collect payment on alleged balances due for legal services. The parties have
arrived at an agreement and on October 28, 1998 the complaint was dismissed.
On August 27, 1998, Marvin Slomovics 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. Certain deductibles, the magnitude of which is currently unknown,
may apply, but the Company, at this time, does not anticipate an adverse
material effect. An extension has been granted until November 21, 1998 for the
plaintiffs' attorneys in the Yud and Slomovics cases to combine the suits and
for the judge to appoint legal counsel. Further extensions may be requested by
either party.
5
<PAGE>
On October 13, 1998, John L. Gardner filed a suit for damages alleging breach of
his employment agreement, breach of his stock option agreements and libel. The
Company requested and was granted an extension until November 23, 1998 to co-
ordinate defense actions with its insurance companies.
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 other 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.
In July 1998, 333,334 shares of common stock were issued due to the exercise of
warrants at $2.00 per share pursuant to Regulation S.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission Of Matters To A Vote Of Security Holders.
The Annual Meeting of Shareholders was held on September 25, 1998. The
stockholders approved the election of the five directors named in the proxy
statement as follows: Franklin W. Brooks 10,702,745 for, 107,506 abstain;
Jeffrey W. Brooks 10,698,045 for, 112,206 abstain; Dennis W. DeConcini
10,704,945 for, 105,306 abstain; William M. Schmidt 10,703,131 for, 107,120
abstain; James V. Stanton 10,704,931 for, 105,320 abstain.
Item 5. Other Information
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.
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
6
<PAGE>
warrants. However, applying the new valuation to the first quarter of 1998 did
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: November 13, 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
F-1
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1997
---------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $1,320,800 $452,308
Accounts Receivable (less allowance
for doubtful accounts of $14,510 and
$13,310 respectively) 487,023 5,889
Notes Receivable, current portion 6,440 -
Inventories 2,117,921 457,950
Prepaid Expenses 5,540,090 43,584
Deferred Compensation, current portion 111,822 -
---------- --------
Total Current Assets $9,584,096 959,731
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION $1,433,327 $1,092,730
OTHER ASSETS
Patents (less accumulated amortization
of $96,264 and $53,000 respectively) $ 326,513 $349,147
Notes Receivable, less current portion 162,545 183,029
Deferred Compensation, less current portion 633,131 -
Other Assets 9,261 975
---------- --------
Total Other Assets $1,131,450 $533,151
TOTAL ASSETS $12,148,873 $2,585,612
</TABLE>
F-2
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 1998 AND 1997
-----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Notes Payable, current
portion $ 0 $ 80,649
Accounts Payable 577,330 558,366
Accrued Compensation 111,822 -
Total Current Liabilities $ 689,152 $ 603,954
LONG TERM LIABILITIES
- ---------------------
Notes Payable, less
current portion $ 0 $ 37,996
Notes Payable-Debentures 0 430,000
Accrued Compensation,
less current portion 633,131 -
------------ -----------
Total Long term Liabilities $ 633,131 $ 463,564
TOTAL LIABILITIES $ 1,322,283 $ 1,102,579
SHAREHOLDERS' EQUITY
Common Stock, $.01 par
value,
20,000,000 shares
authorized, 13,609,957
and 6,972,647 shares
issued and
outstanding, in 1998
and 1997 respectively,
of which 1500 shares
were held in treasury. $ 136,099 $ 69,726
Capital in Excess of Par 26,537,375 10,239,164
Accumulated Deficit (15,846,884) (8,825,857)
TOTAL SHAREHOLDERS' EQUITY $ 10,826,590 $ 1,483,033
TOTAL LIABILITIES & EQUITY $ 12,148,873 $ 2,585,612
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 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 2,000,000 20,000 3,979,998 3,999,998
Issuance of common stock in
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 (2,490,211) (2,490,211)
BALANCE SEPTEMBER 30, 1998 13,609,957 136,099 26,537,375 (15,846,884) 10,826,590
</TABLE>
F-4
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
F/K/A RGB COMPUTER & VIDEO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AS OF SEPTEMBER 1998 AND 1997
-----------------------------
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30 Ended September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUE
Revenue $472,333 $5,010 $1,705,793 $38,531
Cost of Sales 636,825 2,005 1,378,828 21,210
--------- ------ -------- -------
Gross Profit $(164,492) $3,005 $326,965 $17,321
EXPENSES
- --------
Selling, General and Administrative
before expenses relating to
Capital Raising $632,940 $273,645 $1,249,338 634,476
Depreciation 52,599 29,962 156,483 116,635
-------- ------- ---------- -------
NET (LOSS) before
Capital Raising $ (850,031) $(300,602) $(1,078,855) $(733,790)
(LOSS) PER COMMON SHARE
before Capital Raising (.06) (.04) (.08) (.12)
Expenses relating to
Capital Raising $ 537,181 - $ 1,411,335 -
NET LOSS $(1,387,212) $(300,602) $(2,490,190) $(733,790)
(LOSS) PER COMMON SHARE (.10) (.04) (.20) (.12)
Weighted Average number of common
shares outstanding 13,609,957 9,972,647 12,429,394 6,136,393
</TABLE>
F-5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $(1,387,212) $(733,790)
NET (LOSS) (1,387,212) (733,790)
----------- ---------
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 156,483 116,635
Change in assets and liabilities:
Decrease (increase) in accounts receivable (482,137) 4,530
(Decrease) increase in allowance for bad debts - 2,504
Increase in prepaid expenses (6,729,889) (22,473)
Decrease in prepaid expenses 1,210,998 -
Increase in inventories (1,770,239) 8,730
Decrease in deferred compensation 335,460 -
(Decrease) increase in accounts payable 78,583 (278,036)
Increase in accrued liabilities 1,100,000 -
(Decrease) in accrued liabilities (900,102) -
Increase (Decrease) in Prepayments (1,100,000) -
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 (4,484,265) (879,166)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in current portion of note receivable 14,508 16,813
Payments for the purchase of equipment (420,681) (177,859)
(Increase) decrease in Other Assets (7,111) -
(Decrease) in notes payable (121,760) -
NET CASH PROVIDED BY INVESTING ACTIVITIES (535,044) (161,046)
----------- ---------
</TABLE>
F-6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 1,405,000
Principal payments on borrowings/capital leases - (1,436)
Issuance of stock upon exercise of warrants 3,999,999 -
Issuance of stock upon exercise of options 413,700 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,913,699 1,403,564
---------- ----------
Net increase (decrease) in cash and equivalents (105,610) 363,352
Cash and equivalents at beginning of year 1,426,410 88,956
---------- ----------
Cash and equivalents at end of period $1,320,800 $ 452,308
========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest $ 4,420 $ 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 nine-month period ended
September 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 September 30,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Cash in banks $1,320,800 $452,308
========== ========
</TABLE>
NOTE 3 - INVENTORIES
Inventories are comprised of the following as of September 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Finished Goods $ 317,637 $199,813
Raw Materials 1,750,284 182,597
Supplies 50,000 75,540
---------- --------
TOTAL $2,117,921 $457,950
========== ========
</TABLE>
F-8
<PAGE>
NOTE 4 - PREPAID EXPENSES
Prepaid expense is comprised of the following as of September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Agreement and Warrant expenses 2,076,705 -
Prepaid marketing and advertising 3,336,589 -
Deposit on patent costs 93,000 -
Prepaid show expenses 0 23,767
Prepaid insurance 32,796 2,876
Prepaid other 1,000 16,941
---------- -------
TOTAL $5,540,090 $43,584
========== =======
</TABLE>
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.
F-9
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of September 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Equipment $ 439,407 $ 374,260
Furniture and fixtures 51,578 52,997
Tools and die 1,551,778 1,046,481
Software 39,359 37,214
Leasehold improvements 11,436 11,436
---------- ----------
TOTAL 2,093,558 1,522,388
Less accumulated depreciation 660,231 429,658
---------- ----------
TOTAL 1,433,327 1,092,730
========== ==========
</TABLE>
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following as
of September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accounts payable $577,330 $558,366
Accrued compensation-current 111,822 -
Prepayments - -
-------- --------
TOTAL $689,152 $558,366
======== ========
</TABLE>
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
F-10
<PAGE>
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.
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.
In July 1998, three offshore investors exercised 333,334 warrants. The
exercise price of these warrants was $2.00.
NOTE 8 - SUBSEQUENT EVENTS
In October a form RW, for the withdrawal of the Form S-1, was filed with
the SEC.
F-11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000902056
<NAME> SAF T LOK INCORPORATED
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,320,800
<SECURITIES> 0
<RECEIVABLES> 501,533
<ALLOWANCES> 14,510
<INVENTORY> 2,117,921
<CURRENT-ASSETS> 9,584,096
<PP&E> 2,093,558
<DEPRECIATION> 660,231
<TOTAL-ASSETS> 12,148,873
<CURRENT-LIABILITIES> 689,152
<BONDS> 0
0
0
<COMMON> 136,099
<OTHER-SE> 26,537,375
<TOTAL-LIABILITY-AND-EQUITY> 12,148,873
<SALES> 1,705,793
<TOTAL-REVENUES> 1,705,793
<CGS> 1,378,828
<TOTAL-COSTS> 1,378,828
<OTHER-EXPENSES> 2,660,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,490,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,490,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,490,190)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
