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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Mark One:
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1998
[_] 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
(Name of small business issuer in its charter)
FLORIDA 65-0142837
(State or other Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
Telephone No. (561) 478-5625
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common STOCK,
$0.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes X No___
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B if not contained in the form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The Company's revenues for its fiscal year ended December 31, 1998 were
$1,652,469
The aggregate market value of the Company's voting stock held by non-affiliates
was approximately $17,946,202 based upon the average bid and asked prices of
such stock on March 31, 1999 as reported on the NASDAQ SmallCap Market.
On March 31, 1999 there were 13,749,957 shares of the registrant's common stock
outstanding.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of material fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable at this time, it can give no assurance that such expectations
will prove to have been correct. Actual results could differ materially based
upon a number of factors including, but not limited to, risks detailed in the
Company's Securities and Exchange Commission filings.
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
GENERAL
Saf T Lok Incorporated (the "Company") through its subsidiary Saf T Lock,
Corporation, designs, develops, manufactures and distributes patented and
proprietary safety locks for guns.
ORGANIZATION, INITIAL PUBLIC OFFERING, AND MERGER
The Company was incorporated in Florida in July 1989 under the name of RGB Sales
and Marketing, Inc. In October, 1989, the Company commenced business and
operated a retail store that sold Amiga computers and produced a series of
tutorial programs used with software written for the Amiga platform. The
Company completed an initial public offering of its Common Stock on June 23,
1993. In total, the Company sold 1,340,000 shares of its Common Stock at an
offering price to the public of $7.00 per share.
On February 13, 1996 the Company acquired Saf T Lok Corporation, a Florida
corporation ("STL"), through a merger, and changed its name to Saf T Lok
Incorporated. This acquisition marked the end of the Company's involvement in
the video editing business and the commencement of the Company's involvement in
the gun lock business.
STL had been organized in 1989 by Franklin W. Brooks to develop a proprietary
gun locking device. From 1989 until February 1996, STL, as a privately held
company, was a development stage company focused on developing the Saf T Lok(R)
gun lock and did not have revenues.
THE GUN LOCK BUSINESS
GENERAL
The business of the Company is to design, develop, manufacture, and market
proprietary combination gun locks to reduce the possibility of unauthorized use
of firearms, including unintentional discharge by children and assailants. The
Company's two product variations, the Grip Lock and the Magazine Lock are easily
installed, removed and operated by consumers.
As a development stage entity, STL was engaged in product and market research
and development from its incorporation in 1989 until its merger with the
Company. STL dedicated six years to confirming the initial Saf T Lok(R) Grip
Lock concept and then developing and refining a prototype product that it could
use to demonstrate the appearance and functionality of its product to consumers
and retailers. Conceived in late 1996, the first Magazine lock prototype was
developed and produced in 1997. After several refinements, production and
shipments of the first Magazine Locks commenced in June 1998.
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Product development of the Saf T Lok(R) gun locks included handgun dealer and
customer comments and suggestions concerning product design, appearance,
operation, and use. After intensive assessment of component composition,
manufacturing costs, and projected retail pricing, the Company believed that the
Saf T Lok(R) would meet a serious need in the marketplace.
THE INITIAL PRODUCT - THE SAF T LOK(R) GRIP LOCK
The Saf T Lok(R) Grip Lock is a mechanical combination lock that attaches to a
handgun. When unlocked, it does not hamper or interfere with the use of the
gun. When the Saf T Lok(R) Grip Lock is engaged, it locks the "safety" in the
"no fire" position, blocking the normal operation of the gun and preventing the
gun from being fired. Guns without safeties are locked using the basic Saf T
Lok(R) Grip Lock to block operation of other internal gun components. There are
no keys, batteries or other gadgets to lose or fail. The body of the lock is
positioned under and concealed by the gun grip. The combination mechanism is
located at the top of the grip, where it is easily accessible. Installation of
the Saf T Lok(R) Grip Lock requires no modification to the gun for which it is
designed. It is mounted on a plate placed under the gun's grip. The lock is
installed by removal of the grip, insertion of the mounting plate and
replacement of the original grip with custom rubber grips supplied with the Grip
Lock. When locked, the Grip Lock engages an interlock on the mounting plate and
cannot be removed without special tools or damage, even if the grips are
removed.
To lock the gun, the operator needs only move the safety slide backward with one
finger while moving the reset slide forward with another finger. The need for
this simultaneous action eliminates the possibility of accidental locking. The
gun may be in a loaded condition when the operator locks the gun.
To unlock the gun, the operator enters the combination by depressing each of
three individually programmed buttons the correct number of times, in any order,
which can be undertaken without the need to look at the gun or the lock. The
lock can be released in about three seconds while holding the gun in the firing
position.
Although each lock comes with a preset combination, the user may change the
combination. The Company markets combination changing kits separate from the
lock and mounting hardware.
The Grip Lock is designed to ensure reliable operation and long lock life under
firing conditions. The casing is designed to prevent sand and dirt infiltration.
The lock mechanism's nickel plated zinc alloy composition makes it highly
corrosion resistant. The design and layout of the mechanical parts shunt forces
from firing recoil and mishandling to the lock casing, diminishing the potential
for small parts breakage. The Grip Lock has been mechanically cycled through
36,525 openings and closings without failure or indication of wear. This is the
equivalent of one use per day for 100 years. It was subjected to the firing of
5000 rounds while mounted on a .45 caliber semi-automatic pistol without
problem. The Grip Lock has also passed numerous tests for impact resistance and
immersion in corrosive liquids and dirt.
THE SECOND PRODUCT - THE MAGAZINE LOCK
Historically, handguns have been made with a metal frame, which requires an
expensive multi-step machining process. In the late 1980's an Austrian gun
manufacturer revolutionized the field by introducing plastic frame, semi-
automatic pistols. The plastic frame guns are lighter and can accommodate
higher capacity cartridge magazines. Law enforcement agencies worldwide
embraced the new design, which reportedly now accounts for over 60% of the
police handgun market in the U.S. Virtually all gun manufacturers soon
thereafter entered the field of polymer frame pistols, resulting in the redesign
of traditional pistols to accommodate high capacity magazines through
enlargement of gun handles.
One piece molded plastic gun handles have no grips or screw holes to which the
Grip Lock mounting plate can be attached. Mr. Brooks consequently proceeded to
invent a magazine mounted Saf T Lok(R) as the Company's second product.
The Magazine Lock is a precision miniaturized, all mechanical, combination lock
that functions the same as the Grip Lock. It has two buttons that function in
both directions, yielding 10,000 combinations. The Magazine Lock is housed in
the bottom of the magazine, occupying the space of four to six cartridges
depending on the caliber. Otherwise, the magazine functions the same in feeding
cartridges as a magazine without the lock. The user installs the Magazine Lock
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merely by inserting the Saf T Lok(R) magazine into the gun. A lever runs from
the lock, up the side of the magazine. When the lock is in the locked position,
the lever will engage the trigger bar or another part of the firing mechanism,
and either pull it away from the sear mechanism or block its movement as
necessary and appropriate. A second lever locks over the trigger bar or frame
preventing the magazine from being removed.
When the four-digit combination is entered with the lock buttons and the manual
safety is turned, the lock snaps open allowing the levers to be disengaged. The
gun can then be fired or the magazine removed.
Magazine Lock shipments commenced in June 1998 with four Glock models followed
shortly thereafter with two more Glock models and two Beretta models. Three
popular Sig Sauer pistol models are expected to be available for shipping in
April 1999 to be followed by four Smith & Wesson models.
THE MARKET
Many reported injuries and deaths from the accidental discharge of firearms
involve guns purchased for protection and stored loaded at home. According to
statistics provided by the American Firearms Industry on its website, half of
all U.S. households have at least one gun. According to a 1998 survey by the
Center to Prevent Handgun Violence, it has been estimated that nearly 1.2
million latch key children have access to loaded and unloaded guns. A May 1997
study sponsored by the National Institute of Justice showed that 55% of all
handgun owners keep their guns loaded and that 34% of handgun owners keep their
handguns loaded and unlocked. According to unpublished data from the Vital
Statistics System, one child is killed and at least thirteen more are injured in
unintentional shootings each day in the U. S. Furthermore, police officers and
military personnel as well as individual gun owners are at risk of being shot by
their own weapons grabbed by assailants.
The American Firearms Industry, a trade association, estimates that there are
60-65 million handguns in the United States and that there are 30-35 million
handgun owners in the United States. According to Bureau Of Alcohol, Tobacco
and Firearms and Department of Commerce data as reported by the American
Firearms Industry, for the years 1992-1996, an average of 2,816,000 new handguns
were sold annually in the United States.
The market for the Company's products consists of both new and previously
manufactured handguns in the United States (the "retrofit market"). The most
recent National Directory of Law Enforcement Agencies indicate that there are
over 13,500 police and sheriffs departments in the United States, representing
over 615,000 sworn officers. It is estimated there are an additional 225,000 or
more officers in federal, state and private agencies. This Law Enforcement
segment of the market is estimated to have over 1,000,000 handguns in use, and
to purchase over 250,000 new handguns yearly. These handguns are generally
stored in the home ready for immediate use when these law enforcement officers
are off duty.
The Consumer segment of the market consists of non-law enforcement handgun
owners who bought or are planning to buy guns for home defense and self -
protection. Each year, on average, they purchase 2,566,000 handguns to add to
the 60 to 65 million that have previously been purchased. Consumers purchasing
handguns must do so from federally licensed dealers, thus the consumers must be
served through the approximately 12,000 licensed firearms dealers in the U.S.
The market is being driven toward greater use of gun safety products by a
combination of forces: Presidential mandate, growing public concern for gun
safety, a number of lawsuits against gun manufacturers and gun users, and
increasing state and local legislation and regulatory activity.
President Clinton, in his February 1997 State of the Union Address, urged
passage of child safety lock legislation. Following that, in March 1997
President Clinton directed all federal agencies to equip their handguns with
child safety locks. Those agencies complied using a variety of then available
products, mostly trigger locks and padlocks. The Company believes that a number
of federal agencies are actively evaluating Saf T Lok(R) gun locks. See ----
"Product Distribution".
The Company believes that federal agencies' use of gun locks - whether it be
the Company's products or trigger locks
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and padlocks - will establish that safety locks on guns (even if limited to off
duty use) makes guns safer without compromising the effectiveness of the gun for
law enforcement purposes. The Company further believes that state and local law
enforcement agencies, in turn, will commence use of gun locks, either through
voluntary actions, legislative mandate or by financial losses associated with
lawsuits against them. In a landmark case, the City of Chicago, Illinois was
recently assessed damages of $1.575 million for negligent storage of a firearm
by an off duty police officer.
A number of law enforcement agencies such as the cities of Boston,
Massachusetts, Orland Park, Illinois and Key Biscayne, Florida as well as The
Harvard University Police & Security Department and the Cumberland County North
Carolina Sheriff's Dept. have evaluated and purchased Saf T Lok(R) locks for
mandatory use by their entire departments.
The Company has identified its target market as the "self protection" gun
market, which almost exclusively consists of handguns. These guns are used
predominately for household protection or personal carry self-protection,
including law enforcement. The Company believes that the greatest demand for Saf
T Lok(R) gun locks will come from this market, and that this market is willing
to pay the price for a lock with the benefits conveyed by Saf T Lok(R). Those
who don't want their gun loaded and instantly available will probably opt for
less expensive devices. Excluded from this market category are large caliber
hunting guns and small caliber target guns that either by their larger size or
lack of adequate power are not usually used for self-protection. The Company's
market does not include the cheaper, small caliber, "Saturday Night Special"
category of handguns, as the Company's products might well cost more than the
gun itself.
Upon completion of the Saf T Lok(R) models for the Sig Sauer and Smith &
Wesson brands, together with the models the Company has already begun marketing,
the Company's Grip Locks and Magazine Locks will fit almost 40% or over 900,000
of the new handguns sold each year and, with respect to the retrofit market,
almost 30% or over 19,000,000 of the handguns ever sold in the United States.
Within the Company's target market, Saf T Lok(R) gun locks will then fit
approximately 66% of the new handguns sold each year and 76% of the guns in the
retrofit market.
MANUFACTURING
The Company minimizes overhead by subcontracting the component manufacturing of
the gun lock parts to specialists: die manufacturers cast the lock components, a
grip manufacturer injection molds gun grips to house the Grip Lock components.
The Magazine Lock tube and levers are currently being manufactured by a well-
known magazine manufacturer. The Company assembles the gunlocks in-house. After
quality assurance testing, packaging, and handling, the Saf T Lok(R) is ready
for distribution. The Company has demonstrated its capability to assemble and
ship over 5,000 locks per week and has the ability to ramp up production to
approximately 10,000 units per week if needed.
Parts are die cast in zinc alloy, then nickel-plated for additional strength and
lubricity. The lock housing is cast with channels to hold the individual
components. Assembly requires the lock parts to be inserted in the housing in a
particular order such that the lock cannot be improperly assembled.
The lock and its parts are designed so that they could easily be integrated into
the handgun design and manufacturing process if desired by the handgun
manufacturer.
The Company believes that an ample supply of the raw materials used in the
manufacture of its products is available from numerous sources at reasonable
prices.
PRODUCT DISTRIBUTION
In 1996, the Company began marketing the Grip Lock. The Company advertised in
certain gun magazines in order to create demand from end users. The Company
believed that this demand would "pull" the Saf T Lok(R) gun locks through the
gun dealers and that gun dealers would then actively promote the sale of Saf T
Lok(R) gun locks. While the Company signed up more than 1,350 gun dealers and
locksmiths in the United States, sales were disappointing, primarily because (i)
the law enforcement market was rapidly switching from revolvers to semi-
automatic models for which the Company had not yet developed locks; and (ii) the
Company lacked the resources for a sustained advertising campaign.
Seeing a need for a different type of lock to appeal to law enforcement, Frank
Brooks invented the Magazine Lock. All resources were devoted to development of
the Magazine Lock, delaying any further promotional efforts until the product
line was completed. Nearing completion of the Magazine Lock and lacking
adequate funds to develop the consumer market the Company split its marketing
effort into two portions, the retail consumer
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market and the law enforcement market. In early 1998 the Company entered a
three-year distribution agreement with United Safety Action ("USA")with respect
to consumer marketing. (See ----"Distribution Agreement")
In June 1998, Saf T Lok(R) became the only gun locking device endorsed by the
FRATERNAL ORDER OF POLICE (FOP), the most prominent police labor organization in
the country with over 272,000 members.
The Company pays an annual licensing fee of $25,000 for a listing in the FOP
catalog.
Saf T Lok(R) has been endorsed as "one of the most important advancements this
century in firearm safety" by the SAFE AND VAULT TECHNICIANS ASSOCIATION, the
premier organization for security professionals.
Recent independent evaluation by the INSTITUTE FOR POLICE RESEARCH, a branch of
the International Union of Police Associations, AFL-CIO, concluded with a strong
recommendation for Saf T Lok(R) as well as a comment on trigger locks that they
"found to be of very little value".
Prior to purchasing Saf T Lok(R) gun locks for off-duty use by its officers, the
Boston Police Department had the devices field evaluated by seventy-seven of
their officers with 97% rating the lock easy to use.
Through sales to prominent law enforcement agencies, the Company intends to seek
other endorsements in order to create market awareness and market acceptance for
both the Grip Lock and the Magazine Lock.
In March of 1999, the U.S. General Services Administration (GSA), the purchasing
arm of the Federal government, awarded the Company a five-year contract for the
Company's products. The contract with the GSA's Federal Supply Service runs
from March 1, 1999 through February 29, 2004. The contract allows Federal law
enforcement and other agencies in all fifty states, Washington D.C., Puerto Rico
and the Virgin Islands to procure Saf T Lok (R) gun locks. Federal agencies
will be able to order Saf T Lok(R) handgun safety locks electronically on the
Internet through GSA Advantage, a menu-driven database system. The contract,
however, does not require the government to purchase any of the Company's
products.
The Company is also conducting a lobbying effort at the federal level in order
to inform legislators involved in gun control and safety legislation of current
gun safety issues.
The initial marketing strategy for the Magazine Lock is to focus on law
enforcement agencies at the federal, state and local levels for multi-unit
sales. The Company believes, based on trade association meetings it has
attended, that the law enforcement agencies are interested in purchasing large
quantities of the Magazine Lock to equip their officers. However, the Company
realizes that substantial purchases by such organizations often have a long
purchase cycle where the decision to purchase must first be made, the budget for
the purchase must then be approved and funds must be allocated for this purpose.
This purchasing process can take one year or more depending on the budgeting
cycle for these organizations.
The Company has signed up several independent sales representatives and law
enforcement equipment distributors to solicit the law enforcement agencies. In
some cases, the Company will use employees to directly solicit these agencies.
The Company intends to expand its use of distributors and sales representatives.
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Law Enforcement sales are proceeding in the right direction albeit slowly, as
one would expect when selling to governmental bodies. The retail market is has
not yet developed its potential, with the political atmosphere compounded by
legal and legislative conflict. Six cities, New Orleans, Chicago, Miami,
Atlanta, Cleveland and Bridgeport, CT., have already filed suit against the gun
manufacturers for producing unsafe weapons or for irresponsible sales tactics.
More are likely to follow. The gun manufacturers and the National Rifle
Association have taken a strong stand in opposition to any form of gunlock
legislation, equating the issue with the highly emotional issue of gun control
and confiscation. Saf T Lok(R) has been featured in several prominent TV and
newspaper articles as having the best answer to handgun safety but suffering
constant snubs from the gun manufacturers who claim that no technology exists to
reasonably make guns safer. Saf T Lok(R) was called to testify for the plaintiff
in a trial in California against Beretta. Even though Saf T Lok(R) did not
testify and Beretta prevailed, Saf T Lok(R) has been thrust into the role of the
enemy by the gun manufacturers. This is not likely to cause the gun
manufacturers to warmly embrace Saf T Lok(R). Thus, the picture is too cloudy to
predict with any degree of certainty what will happen to retail sales in 1999.
The only safe course it to presume that retail sales will
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develop slowly until legislative efforts and public pressure force the gun
manufacturers to act more responsibly about gun safety.
Nevertheless, the Law Enforcement segment of the gunlock market is believed to
be large enough to have the potential for the Company to achieve a sustainable
level of sales. The Company will continue to aggressively pursue this market
segment and use it as a springboard to attack the retail market.
In the retail market, the suggested selling price of the Grip Lock is $69.95 and
the Magazine Lock is $89.95. The Company believes the average price of a new
handgun is approximately $300 to $400. Thus, the purchaser of a new handgun has
to be seriously motivated about gun safety in order to add about 25% to the
price of the handgun. Likewise, the person who has owned a handgun for several
years must make a serious economic decision to add a Saf T Lok(R) gun lock to
his handgun in order to provide the type of safety protection offered by the Saf
T Lok(R). Thus, it could be several years before consumer sales of the Grip Lock
or the Magazine Lock develop to any significant degree.
DISTRIBUTION AGREEMENT
On February 10, 1998, the Company accepted a purchase order from an independent
wholesaler, D&W Enterprises, Inc. ("D&W") for the purchase of $6,000,000 of the
Company's gun locks and received a $1,000,000 advance payment on the purchase
order. The wholesaler is a well-established business, but has no prior
experience selling gun locking devices. The terms of the purchase order
provided that $1,000,000 worth of gunlocks were to be shipped within 120 days of
the purchase order. Upon the delivery of the first $1,000,000 of gunlocks under
the purchase order, the Company was to receive another advance payment of
$1,000,000 for the next $1,000,000 worth of gunlocks with deliveries to take
place at the rate of approximately $625,000 per month. Thereafter, deliveries
of gunlocks were to be on a net 30-day payment basis. After a total of
$2,000,000 worth of gunlocks would have been shipped, the balance of the
purchase order was to be shipped on an as needed basis at the rate of
approximately $625,000 per month.
On February 11, 1998, the Company entered into a distribution agreement (the
"Distribution Agreement") with a newly formed distribution company, referred to
as USA and not affiliated with the Company, for the sale and purchase of
$20,000,000 of the Company's Grip Locks and Magazine Locks over a period of
three years from the date of the Distribution Agreement. Deliveries for the
first $7,000,000 of this order were specified to take place throughout the first
year (the "Initial Order"). Following fulfillment of the obligations under the
Initial Order of the Distribution Agreement, USA could terminate the agreement,
without cause, and cancel any orders pending that have not been shipped upon 90
days prior written notice. The purchase order from the wholesaler described
above satisfies and takes the place of $6,000,000 of the Initial Order under the
Distribution Agreement. Subsequent to the Company's fulfillment of the Initial
Order, USA could provide releasing orders to the Company for the purchase and
delivery of the remaining $13,000,000 of gun locks pursuant to the Distribution
Agreement.
The Distribution Agreement provides that, while the Distribution Agreement is in
effect, USA has the exclusive right to sell the Company's products throughout
the world to wholesalers, retailers and end users except for law enforcement
agencies, governmental entities, military organizations and original equipment
manufacturers ("OEM"s) (such as gun manufacturers).
USA was obligated to create and place certain types of advertising pursuant to
an advertising plan to be approved by the Company for a total of $5,000,000 over
the first two years. In connection with the Distribution Agreement the Company
has delivered to USA 1,000,000 shares of its common stock which the Company
valued at $3,781,000 based on a fair market valuation at the close of business
on the day prior to the issuance. USA has pledged this stock to the Company as
security for the USA's obligation to place the advertising. As USA meets its
obligation to place advertising, the Distribution Agreement calls for the
Company to release pledged shares to USA at the rate of one share for each $5.00
of advertising placed by USA. It is USA's obligation to pay for this
advertising.
In connection with the Distribution Agreement, on February 11, 1998, the Company
entered into an agreement with Atom Corp. ("Atom"), Danvers Investment Corp.
("Danvers") and Amexcorp Limited ("Amexcorp"), which were the designees of the
parties who introduced the Company to USA and D&W, granting the three companies
stock purchase
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warrants for a 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 USA.
In addition, and in connection with the Distribution Agreement, on February 11,
1998, the Company entered into a commission agreement with Empire Consulting
Limited, Inc. ("Empire") for helping the Company structure the transaction with
USA. This commission agreement provides for Empire to receive a 15% commission
from the sale of the products in accordance with the Distribution Agreement and
a 15% fee upon the exercise of the stock purchase warrants described above.
USA did not satisfy its obligations with respect to the initial order and has
not commenced placing the required advertising. The Company is currently
negotiating with USA to terminate the distribution agreement, cancel the
1,000,000 shares of common stock of the Company issued to USA, and cancel the
Empire Consulting Agreement and warrants agreements entered with Atom, Danvers
and Amexcorp. There can be no assurance, however, that these negotiations will
result in a final agreement acceptable to the Company, in which event the
Company will consider initiating litigation against USA for breach of the
Distribution Agreement.
COMPETITION
The Company's products compete with lock boxes, trigger locks, cable locks, ring
locks and smart locks. Many of these products are more widely known and less
expensive than the Company's products.
Trigger Locks / Cable Locks
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Because they were the first widely available commercial gunlock, trigger locks
are most commonly known to consumers. The first trigger lock was marketed by
Master Lock Company and contains a built-in key lock. Some more recently offered
versions of locking devices use combination padlocks or combination built-in
locks. These combination locks are actuated by turning three wheels with numbers
visible on the edge of the wheel. When the numbers are properly lined up the
lock can be opened. Turning the wheels can be difficult and proper alignment is
difficult to accomplish quickly or in the dark. Others contain an electronic
lock, which is always subject to inopportune battery or electronics failure.
Another very inexpensive trigger lock has no lock at all but clamps on the
trigger guard by turning a simple security nut.
All trigger locks have the common failing that they cannot be opened quickly and
are not recommended for use on a loaded weapon. To use the gun the key must
first be located (or the combination entered) and the gun must then be loaded
before firing, consuming precious time when the gun is needed most quickly.
Securing a keyed lock from a child is difficult since a key that is hidden where
it can easily be found when needed, weeks or months later, may be easy for the
curious child to find. Conversely, locks that are not easy and convenient to
use often fall into disuse.
Similar drawbacks are also inherent in cable locks, plug rod locks and hammer
locks that all use similar locking mechanisms.
Magnetic Ring Locks
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These devices are contained in the frame of the handgun under the grip and have
a lever or levers that block the firing action of the gun. The gun remains
locked until a properly oriented magnet, usually contained in a ring worn on the
user's finger, is put near the magnet in the locking mechanism. The opposing or
attracting forces of the two magnets cause the locking lever to move out of the
way, allowing the gun to be fired. The passive locking concept is a desirable
feature of this type lock. However, these devices require modification to the
gun and must be installed by a gunsmith at an approximate cost of $350 to $400
per gun. The gun owner is required to wear a rather unattractive magnet ring at
all times in which he may want to use his gun. Also, because the ring magnet
must be properly aligned with the magnet in the gun for the device to work, fit
can be difficult because of the wide difference in the sizes of people's hands.
These devices are currently available only for a limited number of handgun
models and, while having been available for a number of years, have not gained
any significant market share.
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Box Locks
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Box locks and gun safes are effective security devices in limiting access to
guns. However, they have a number of drawbacks, not the least of which is price.
The most inexpensive models retail for about the same price as Saf T Lok(R) gun
locks. Various makes and models have key locks, combination locks or electronic
locks, all of which have the same inherent shortcomings as they do when used on
other types of gun security devices. Gun boxes can be problematic because of
their size and general unattractiveness to fit in with household decor. This
often results in the gun not being near the point of use.
"Smart Locks"
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These are electronic locks that "read" a coded device worn by the user, similar
to a proximity reading device found in some security door locks. They are very
expensive and questions have been raised related to their ruggedness and
reliability. To the best of the Company's knowledge they are not yet
commercially available and will have to overcome a number of drawbacks before
being accepted for use by most gun owners. While these devices may have some
applications of a very limited scope the Company does not consider these devices
to be a competitive threat, especially for the retrofit market.
There has been some publicity concerning gun locks that can validate the
authorized user by reading his fingerprints. The Company has investigated this
technology and has found that, to the best of its knowledge, it can not yet be
adapted to meet the specific needs of handgun use.
The Company believes that the advantages of its products over competing products
are that Saf T Lok(R) can be used on a loaded gun, can be disengaged within
seconds, can be operated by touch, even in the dark, and needs no keys or
electronics.
For home protection Saf T Lok(R) provides the gun owner with instant
accessibility to the gun. This is the distinct advantage that Saf T Lok(R) has
over other devices such as the trigger lock. The person who keeps a gun for
home protection needs to be able to use the device; he does not want to be
looking for keys, loading a gun or dealing with dead batteries while confronting
an intruder. The Saf T Lok(R) eliminates such delays. The operator just has to
use the combination to disengage the lock.
The advantages afforded the civilian gun owner in the use of the Saf T Lok(R)
also apply to each law enforcement officer who uses a gun. With the Saf T
Lok(R) installed on his weapon, the officer can feel better about keeping his
loaded, but locked, gun in the home while he is off duty. The concern every
officer has about the gun falling into the hands of the wrong person, whether a
child or a suspect, can be alleviated with use of the Saf T Lok(R).
Retail prices of gun locks run from the $5-$20 range for low-end items such as
trigger locks to several hundreds of dollars for gun boxes to thousands of
dollars for the sophisticated high-tech models not available to the general
public. The Saf T Lok(R) is moderately priced at $69.95 for the Grip lock and
$89.95 for the Magazine lock.
While the Company will aggressively protect its products from infringement, it
may be possible for others to copy the patented features of the Company's
products or the functions they serve. The Company expects that competitors will
attempt to develop comparable products, possibly reducing the Company's sales or
profit margins or both. The Company's business strategy emphasizes increasing
consumer awareness of its products as well as enhancing brand name recognition.
The plan is to first gain credibility through sales to law enforcement agencies
and then capitalize on that credibility to obtain favorable exposure through the
news media, influencing both political and public pressure to make the
availability and use of guns safer. Competitors such as Master Lock Company,
maker of a trigger lock, are larger, better capitalized companies with existing
distribution channels.
The Company's products will also compete at the retail store level for shelf
space, advertising space, and promotional displays.
GOVERNMENTAL REGULATION
9
<PAGE>
Although the sale and use of handguns is heavily regulated, the Company and its
products are not subject to specific governmental regulation at the federal or
state levels. In the event federal or state legislatures mandate the use of gun
locks, demand for the Company's products may increase.
EMPLOYEES
Including its executive officers, the Company had fourteen full time employees
as of December 31, 1998. None of the Company's employees are covered by a
collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company owns eight U.S. patents granting broad protection for both the Grip
Lock and the Magazine Lock. The patents are also protected in 21 European
countries. These patents cover locks for revolvers, long arms and semi-
automatic pistols and extend coverage to externally mounted locks which act on a
gun's external safety mechanism to block operation and the incorporation of a
lock into a gun's grip assembly, into a magazine, and the use of an adapter
plate to mount a lock. Franklin W. Brooks, the inventor, has assigned the
patents to the Company.
Patents were obtained or applied for sequentially during the development period
of the lock. The attributes and function of the whole locking system for a gun
utilize coverage from all patents. Together the issued and pending patents
cover a variety of ways of locking a variety of firearms. The issued patents,
dated January 29, 1991 through July 20, 1998 are: 4,987,693; 5,229,532:
5,335,521; 5,090,148; 5,140,776; 5,408,777; 5,457,907; 5,782,029. As a
continuation of U.S. Patent # 5,782,029 the Company has filed patent application
numbers SN 09/188,587 and SN 09/237,218 pertaining to a firearm safety mechanism
having a self-contained locking mechanism incorporated into the magazine of a
semi-automatic pistol which inhibits use of the firearm when a locking mechanism
disarms the firing mechanism as well as locking the magazine in position so as
to prevent unauthorized replacement. The firearm can be locked against
unauthorized use and unlocked by an authorized user without resort to external
accessories.
The Company's patent numbers are permanently molded into the Grip Lock adapter
plates and lock housings and are being permanently affixed to a visible part of
the Magazine Lock in order to give warning to potential infringers.
On January 20, 1998 the Company received Registration Number 2,131,422 from the
United States Patent Office for its logo "Saf T Lok(R)".
In May 1998 the Company received trademark registration for the terms
"Personalized Handgun" (TM) and "Personalized Firearm" (TM).
The Company has applied for trademark protection of its logo "Lock for
Life(TM)".
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 1998 and 1997, the Company spent
$29,946 and $311,895 respectively for research and development with respect to
its gun lock products.
FINANCIAL INFORMATION. The information with respect to the Company's revenues,
operating profit or loss and assets attributable to the Company's business is
contained within the Financial Statements set forth on pages F-1 to F-32
herein.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 12,000 square feet of office, assembly and
warehouse space in West Palm Beach, Florida, at an annual rental of $87,000.
The lease term is through July 2003. In September 1998 the assembly and
10
<PAGE>
warehousing operations were moved into this facility and in January 1999 the
corporate offices were consolidated into this facility. The Company believes
such facility is adequate to meet its foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS
In December 1996 Lisa Broderick Fogel and her husband Bruce Fogel sued the
Company and Mr. Franklin W. Brooks in the Circuit Court for Martin County,
Florida for defamation and loss of consortium arising out of Mrs. Fogel's brief
tenure in November 1996 as President of the Company. The plaintiff's attorneys
have filed a Motion to Amend the Complaint to include punitive damages. This
motion has not yet been heard but it is expected the judge will allow the
Plaintiff to amend the Complaint to include a claim for punitive damages. The
case has been set for trial beginning May 3, 1999. The Reliance Insurance
Company is providing for the defense of the Company and Mr. Brooks and counsel
has advised that the insurance coverage should be sufficient to satisfy any
verdict which may be rendered in this case.
On July 24, 1998, Joseph Yud filed, in the United States District Court,
Southern District of Florida, a class action civil complaint against the
Company, Franklin Brooks and John Gardner. On August 27, 1998, Marvin Slomovics
filed, in the United States District Court, Southern District of Florida, a
class action civil complaint against the Company, Franklin Brooks and John
Gardner. On October 20, 1998, Neal M. Peters filed, in the United States
District Court, Southern District of Florida, a class action civil complaint
against the Company, Franklin Brooks and John Gardner. The three suits, each
denominated as a class action, allege violations of the federal securities laws
and, more specifically, that the Company and its officers made
misrepresentations, or failed to disclose material information between May 26,
1998 and June 12, 1998 concerning a development agreement allegedly entered into
with Semiconductor Laser International Corporation and a highly favorable
research report issued by Woodward Trading Company. The Company has, consistent
with its Articles of Incorporation and Florida law, provided indemnification to
Messrs. Brooks and Gardner. Although insurance coverage exists for defense costs
and any eventual liability, the coverage is limited to $1,000,000 and is subject
to a retention of $250,000. The lawsuits have been consolidated and the
plaintiffs, who have applied to the Court to certify the matter as a class
action, have indicated they intend to file a new complaint shortly. The Company
is unable to say that any particular outcome is either probable or remote.
On October 13, 1998, John L. Gardner, the former President and Chief Executive
Officer of the Company filed, in the Circuit Court for Martin County, Florida, a
lawsuit against the Company and Franklin Brooks. The lawsuit challenges Mr.
Gardner's termination under the terms of his Employment Agreement and the
Company's decision to block Mr. Gardner's attempt to exercise stock options and
sell stock in the Company. The suit also alleges that Mr. Gardner is entitled to
salary and all of his vested and unvested options and also claims that Mr.
Gardner was libeled. The matter is still in the pleading stages and the Company
has asserted numerous counterclaims against Mr. Gardner in its Answer. The
Company has no insurance coverage in this matter for either the Company or Mr.
Brooks. At this preliminary stage in the litigation, the Company is unable to
say whether any particular outcome is either probable or remote.
On May 29, 1998 the Company received notice of an "informal inquiry" from the
Division of Enforcement of the Securities and Exchange Commission ("SEC")
concerning activities between January 1, 1996 and May 29, 1998. The Company
complied with the SEC's requests to produce documents. On February 18, 1999
Franklin W. Brooks, chairman of the Company's Board of Directors, testified
before the SEC pursuant to a subpoena. At that time the SEC made available to
the Company its formal Order Directing Private Investigation and Designating
Officers to Take Testimony dated September 22, 1998, file no. HO-3451 (the
"Order"). The Order revealed that members of the SEC's staff have reported
information to the Commission that, in the staff's view, tend to show that
during the period from at least January 1, 1996 and continuing thereafter, the
Company, its present or former officers, directors or employees or others may
have violated Federal Securities Laws. At this juncture, it is too early to
speculate what the outcome of this investigation or the potential impact on the
Company will be. The Company has not been requested to make a "Wells" submission
and no action or litigation has been instituted. The extent of any insurance
coverage under the Company's policies has not yet been determined.
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
11
<PAGE>
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 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.
No other matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. COMMON EQUITY
The Company's Common Stock, par value of $0.01 per share, is traded on the
Nasdaq Small Cap Market. As of March 15, 1999 there were approximately 400
holders of record of the Company's Common Stock. The Company believes there are
approximately 9,000 beneficial owners of its Common Stock. Although there are
no restrictions on the Company's ability to pay dividends to date, the Company
has not declared any cash dividends on any class of security nor does it
anticipate doing so in the foreseeable future. The Company intends to retain
its earnings, if any, to finance the expansion of its business and for general
corporate purposes.
The high and low closing sales prices per share for the Company's Common Stock
for each full quarter for the 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Period High Closing Sales Price Low Closing Sales Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter 1997 5.625 2.125
- -------------------------------------------------------------------------------------------------
Second Quarter 1997 4.625 2.031
- -------------------------------------------------------------------------------------------------
Third Quarter 1997 2.031 0.375
- -------------------------------------------------------------------------------------------------
Fourth Quarter 1997 4.563 0.406
- -------------------------------------------------------------------------------------------------
First Quarter 1998 5.531 1.750
- -------------------------------------------------------------------------------------------------
Second Quarter 1998 6.000 2.250
- -------------------------------------------------------------------------------------------------
Third Quarter 1998 3.844 1.313
- -------------------------------------------------------------------------------------------------
Fourth Quarter 1998 1.781 0.875
- -------------------------------------------------------------------------------------------------
First Quarter 1999 2.750 1.000
- -------------------------------------------------------------------------------------------------
</TABLE>
On February 16, 1999 the Company sold 12,500 shares of unregistered Common Stock
to a marketing firm for services rendered in assisting with the creation of a
business plan and to seek additional funding. This sale was exempted from
registration under (S)4(2) of the Exchange Act.
On February 16, 1999 the Company sold 12,500 shares of unregistered Common Stock
to a consultant for services rendered in assisting with the creation of a
business plan and to seek additional funding. This sale was exempted from
registration under (S)4(2) of the Exchange Act.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Results of Operation
- --------------------
Revenues
- --------
Loss for 1998 was ($6,066,394), or ($.48) per share, on sales revenues of
$1,652,469 as compared to a loss for 1997 of ($5,264,606) or ($.76) per share on
sales revenues of $40,594. Sales revenues for 1998 were derived almost entirely
from three customers: D&W purchases of $1,009,680, USA purchases of $577,115 and
the City of Boston Police Department purchases of $ 58,422 for a total of
$1,645,217. Other revenue for 1998 of $144,184 was derived mainly from short
term investment of cash on hand as was other revenue of $70,305 for 1997. The
reason for the disproportionate reduction in the ratio of per share loss to
actual loss was due to the increase in average shares outstanding from 6,920,820
shares in 1997 to 12,619,241 in 1998. Gross margins dropped from approximately
39% in 1997 to approximately 13% in 1998 mainly due to the influence of the
large volume of lower priced sales through the Distribution Agreement.
Sales efforts directed towards the Law Enforcement community began to pay off in
the last quarter of 1998, with the sale of locks in December 1998 to the Boston,
Massachusetts Police Department to equip 2,247 police officers with magazine
locks to secure their guns while at home off duty. It must, however, be
recognized that sales to police and sheriff's departments and other law
enforcement agencies have a long sales cycle. Of course, there are no assurances
that the Company will continue to receive substantial orders from any law
enforcement agencies.
After delivering a total of approximately $1,586,000 in locks to D&W and USA the
Company had to stop shipments and production of any more locks under the
Distribution Agreement because USA had fallen approximately $477,000 in arrears
on payments. The Company had to take immediate steps to reduce operating costs
as it now found itself in a very low cash position. The majority of the
workforce, both hourly and salaried, was reduced and all officers resumed
deferring salaries at the end of October 1998. Wages for the remainder of the
salaried employees were deferred beginning January 1999. Other expenses were
curtailed maintaining only those activities necessary to keep the Company in
operation. Average monthly operating expenses for 1998 were approximately
$200,000 per month, not including (i) non-recurring legal fees, roughly
estimated to approach a total of $360,000, for 1998 and 1999 combined, related
to defense of lawsuits and (ii) capital expenditures of approximately $368,000
for 1998. At the current reduced rate, cash needed to sustain operations in the
short run is approximately $50,000 per month. This does not include exceptional
legal and accounting fees or other expenses and accounts payable which have not
been paid to date.
Major Expenses
- --------------
The comparison of major expense categories between 1998 and 1997 is set forth
below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Category 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C>
Consulting Fees, Marketing Fees and Commissions $3,006,310 $2,595,576
-----------------------------------------------------------------------------------------
Salaries and Wages $1,069,915 $1,009,871
-----------------------------------------------------------------------------------------
Advertising and Sales Promotion $ 149,695 $ 241,536
-----------------------------------------------------------------------------------------
Legal, Accounting and Professional Fees $ 542,717 $ 254,501
-----------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $ 502,680 $ 14,510
-----------------------------------------------------------------------------------------
Product Development (R & D) $ 29,946 $ 311,895
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
-----------------------------------------------------------------------------------------
<S> <C> <C>
Other $1,148,057 $ 922,948
-----------------------------------------------------------------------------------------
Total $6,434,156 $5,350,837
-----------------------------------------------------------------------------------------
</TABLE>
Of those expenses in the category of Consulting Fees, Marketing Fees and
Commissions, $2,810,667 out of the total of $3,006,310 are related to the 1998
portion of consultant fees, commissions and expenses for fund raising efforts
begun in late 1997 and culminating in early 1998 in the Distribution Agreement,
as described earlier. In 1997, all of the expenses were essentially related to
consultant fees, commissions and expenses for fund raising efforts. Of the
remainder for 1998, approximately $80,000 was the 1998 portion of an agreement
with a marketing consulting firm entered into in 1997 and approximately $115,000
was due to the Black-Sholes evaluation of stock options granted in 1998 to four
consultants.
Total charges for Salaries and Wages in 1998 were slightly higher than 1997.
However, in 1998 the portion of this category related to stock options issued to
executive officers and key employees decreased from approximately $630,000 in
1997 to approximately $341,000 in 1998. The portion related to actual salaries
increased from approximately $367,000 in 1997 to approximately $729,000 in 1998.
In 1997 officers and executive employees waived a large portion of their
salaries while that was not the case for 1998. However, in 1998 officers and
executive employees postponed receiving a total of approximately $117,000 in
salaries, due from both the beginning months and the end of 1998. The deferred
salaries have been accrued. Salary expenditures also increased in 1998 due to
additional hiring needed to handle increased sales and manufacturing activity.
Advertising and Sales Promotion expenses dropped approximately $92,000 from 1997
to 1998. This was as a result of the Company concentrating its efforts on the
Law Enforcement market where less advertising took place. The Company stepped up
trade show activities spending approximately $92,000 on that in 1998.
Legal, Accounting and Professional expenses for 1998 increased by approximately
$288,000 over 1997. This was due to increased need for legal counsel for
financing activities, the Securities and Exchange Commission investigation and
the class action lawsuits. These higher than normal costs are expected to
continue in 1999.
Allowance for Doubtful Accounts increased by approximately $488,000, of which
approximately $477,000 is money owed by USA.
Product Development (R & D) costs decreased from $311,895 in 1997 to $29,946 in
1998 because the development costs for the magazine lock were, for the most
part, completed in 1997.
The major miscellaneous expenses in the Other category compare 1998 vs. 1997
respectively as follows:
$49,000 vs. $6,000 in travel expenses due mainly to increased financing and
legal activities,
$44,000 vs. $7,000 in office supplies to set up and operate the assembly
facility and expand the sales staff,
$105,000 vs. $8,000 in payroll taxes due to forgiveness of executive salaries in
1997 and the increase of up to 70 hourly employees at various times in 1998,
$300,000 vs. $234,000 in depreciation because of the increase in capital
equipment in 1998,
$86,000 vs. $48,000 in insurance costs due to increases in liability coverage
and health, workers' comp and unemployment insurance for additional employees,
and
$55,000 vs. $23,000 in communications costs mainly from the set up and operation
of the assembly facility.
Year 2000 Compliance. The Company has analyzed Year 2000 issues with its
computer and software advisors and has assessed the impact of Year 2000 issues
on the Company's operations. The Company is in the process of obtaining and
reviewing manufacturers documentation of 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. The Company believes that all of its non-information
systems are Year 2000 The Company believes that there are currently no other
material Year 2000 issues to be disclosed.
14
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Results of Operation
- --------------------
Revenues
- --------
The Company continued developing its products in 1997 with revenues of only
$40,594 as compared to $57,349 in 1996. These 1996 revenues resulted from sales
to gun dealers as their initial stocking purchases. During 1997, the Company
concluded that its strategy of selling its gun locking devices through gun
dealers was not producing results. Therefore, the Company reduced its sales
activity through gun dealers and began to explore new ways of marketing the gun
locking devices.
There were no other material revenues for 1996.
Major Expenses
- --------------
As 1996 came to a close, the Company had a need for additional capital in order
to fund its continuing product development efforts, purchase tooling for its
Magazine Lock and other models of the Grip Lock and to support its operations
while a new marketing strategy was implemented. Because of a cash shortage, the
Company substantially reduced its advertising expenditures during the early part
of 1997, focusing its activities on product development and capital raising.
The Company engaged a number of consultants to coordinate its efforts at the
Federal and State levels of government for legislation involving mandatory
requirements for gun locking devices. Most of these consultants were
compensated by way of stock options.
In April 1997, the Company employed Mr. John Gardner and appointed him president
and chief executive officer. In connection with his employment, Mr. Gardner was
granted a stock option for 600,000 shares with an exercise price of $2.50 per
share, subsequently repriced at $0.50 per share.
Because of the Company's need for capital, officers of the Company waived some
or all compensation during 1997. In August 1997, the Company granted stock
options to the executive officers and key employees for working with the Company
under very trying circumstances. The grant of these stock options created an
expense to be recognized as compensation by the Company in the amount of
approximately $643,000 and deferred compensation in the amount of approximately
$447,000.
The comparison of major expense categories between 1997 and 1996 is set forth
below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Category 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C>
Consulting Fees $2,595,576 $ 5,893
-----------------------------------------------------------------------------------------
Salaries and Wages $1,009,871 $715,662
-----------------------------------------------------------------------------------------
Advertising and Sales Promotion $ 241,536 $735,093
-----------------------------------------------------------------------------------------
Legal, Accounting and Professional Fees $ 254,501 $507,338
-----------------------------------------------------------------------------------------
</TABLE>
Consulting fees increased dramatically from approximately $6,000 to
approximately $2,600,000. Of the $2,600,000 in 1997, approximately $1,800,000
is a result of accounting charges for stock options issued to consultants,
approximately $405,000 has been accounted for as a consulting fee for the
placement of certain of the Regulation S securities, a warrant issued to the
placement agent in connection with a Regulation S placement was valued at
approximately $260,000 and approximately $142,000 is the portion of the
consulting agreement and public relations firm agreement allocated to 1997.
15
<PAGE>
Salaries and wages increased from approximately $716,000 to $1,010,000. However,
in 1997, $643,000 of the increase was the accounting charge for stock options
issued to executive officers and key employees.
Advertising and sales promotion declined substantially from approximately
$735,000 to $242,000, reflecting the focus on product development and capital
raising during 1997, instead of marketing. Research and development expenses
increased from approximately $174,000 to approximately $312,000, reflecting the
continued product development for the Magazine Lock and additional models of the
Grip Lock. Legal, accounting and professional fees declined from approximately
$507,000 in 1996 to approximately $244,000 in 1997. In 1996, substantial legal
and accounting fees were incurred in connection with the merger of Saf T Lock,
Inc. and RGB Sales and Marketing, Inc. Substantial legal fees were incurred in
1997 in connection with the Regulation S offerings, the delisting procedure, and
the engagement of law firms in connection with lobbying efforts.
As a result of the continued lack of significant sales in 1997 and the increase
in expenditures relating, in large part, to the raising of capital as detailed
above, 1997 losses from continuing operations rose to ($5,264,606) or ($.76) per
share as opposed to a loss of ($2,841,716) or ($.54) per share for 1996.
Liquidity
- ---------
On November 12, 1997, the Company closed the transaction with the three foreign
investors with respect to 1,250,000 shares of common stock and two-year stock
purchase warrants for 1,666,666 shares exercisable at $2.00 per share and stock
purchase warrants for 416,667 shares exercisable at $3.00 per share. The
remaining shares and warrants were held in escrow until January 20, 1998, when
the Company closed the transaction with the three foreign investors with respect
to the remaining 250,000 shares of common stock and two-year stock purchase
warrants for 333,334 shares exercisable at $2.00 per share and two-year stock
purchase warrants for 83,333 shares exercisable at $3.00 per share.
The net proceeds of the sale of 1,500,000 shares on November 12, 1997, after
deducting contract payments for a public relations firm, a business consultant,
the placement agent's fee and the legal fees for the placement agent, were
$1,910,000. The public relations firm contract required the Company to pay
$375,000 at the time of this closing with a subsequent $375,000 to be paid upon
the exercise of stock purchase warrants for at least $1,000,000. The consulting
firm contract required the Company to pay $250,000 at the time of closing. Both
of these contracts provide for services over the course of one year. The
Company is accounting for these contracts as an operating expense over the
course of the contracts. The expense recognized in 1998 for these contracts was
a total of approximately $858,000. In early 1998, the Company restructured the
agreements with the public relations firm, expanding the scope of the services
to be provided and, in lieu of paying an additional $375,000 to the financial
consulting firm in the future, delivered 25,000 shares of unregistered common
stock, caused three stockholders to assign stock purchase warrants for 300,000
shares exercisable at $3.00 per share and agreed to pay $10,000 per month for
twelve months. When stock purchase warrants are exercised for more than
$1,000,000, the Company will pay $375,000 to the three stockholders who assigned
the stock purchase warrants, or their assigns.
At the end of 1997, the Company had approximately $1,426,000 in cash balances.
As the Company entered 1998, the Company was in the process of negotiating a
large commitment from a distributor, USA, and expecting the closing of the
remaining portion of the Regulation S offering (that had an initial closing in
December 1997) for $500,000. In early February 1998, the Company closed on the
$500,000 portion of the Regulation S offering and in February 1998, the Company
entered into a distribution agreement with United Safety Action, Inc. and
received a $6,000,000 purchase order from a wholesaler. The Company received a
$1,000,000 deposit under the $6,000,000 purchase order from a wholesaler and a
deposit of $100,000 from USA. In May, June and July 1998 the holders of warrants
for 2,000,000 shares of Company stock at $2.00 per share, obtained in the
Regulation S offering, exercised those warrants, netting the Company
approximately $3,011,000. The Company also received approximately $413,000 from
the exercise of options by employees and consultants and another approximately
$144,000 in interest for a total of approximately $6,595,000 with which in the
Company's opinion, was adequate to provide liquidity for the Company to operate
in 1998 and beyond. In addition, the rate of shipments called for under the
purchase order from the wholesaler should have permitted the Company to operate
beyond the break-even point on a monthly basis for most of 1998, without
considering the receipt of other potential orders. The Company did not believe
that it would have a need for any additional working capital financing during
the three-year term of the Distribution Agreement. Expenditures of funds in 1998
were approximately: $1,429,000 in cost of goods sold, $2,324,000 in
16
<PAGE>
operating expenses, $368,000 in capital expenses, $249,000 in reduction of
liabilities and payables and $2,010,000 in increased inventories. In order to
meet its commitments to USA, the Company had to quickly increase its production
rate, starting with the procurement of parts from which to assemble the locks.
With a three to four month lead-time on parts the Company had to place parts
orders well in advance of the production schedule. The Company also committed to
purchasing high volumes of parts to avail itself of the inherent cost savings.
In May 1998, a new Vice-President of Marketing, Stephen Eccher, was hired and
shortly thereafter three sales representatives were engaged to spearhead the Law
Enforcement effort. When production was abruptly curtailed, as explained in a
previous section, the Company had excess inventory of approximately $2,010,000.
In addition, almost another $ 490,000 was immobilized in receivables from USA,
tying up approximately $2,500,000 in cash much needed for Law Enforcement
marketing efforts and general operation of the Company. See "Business -
Distribution Agreement".
The Company's auditors have issued their report, included in the Company's
financial statements, which contains a going concern qualification largely as a
result of the Company's net losses, the lack of USA's performance under the
Distribution Agreement, the Company's current cash situation and the Company's
recent levels of sales.
The Company ended 1998 with cash balances of approximately $434,000, not enough
to sustain it as a going concern for 1999 unless it could substantially and
rapidly increase sales to convert inventory into cash and sustain sufficient
cash inflow to support operating expenses. Because of the long lead times
associated with sales to governmental agencies, this would be an unreasonable
expectation.
The Company needs to raise additional capital so it began the process of
searching for additional funding. With the unresolved legal actions against the
Company it is more difficult to find investors. An outside firm was engaged in
January 1999 to prepare a business plan and use their contacts to supplement the
Company's efforts to find funding. The outside firm agreed to take payment in
stock of the Company. Upon completion of the business plan in February 1999 they
were issued 25,000 shares of stock and will earn another 25,000 shares of stock
if they procure financing on terms acceptable to the Company.
In February 1999 the Company identified an investment banker with whom it has
entered into negotiations to obtain additional capital. With the anticipated
infusion of funds and some sales revenue for 1999 the Company believes it can
continue operations and its Law Enforcement marketing program through 1999.
On March 1, 1999 the Company concluded its months long negotiations with the U.
S. General Services Administration, the purchasing arm of the Federal
government, obtaining a five-year contract easing the way for Federal and some
State agencies to purchase Saf T Lok(R)s at the negotiated terms and discounted
prices.
Product Liability
- -----------------
The Company has experienced no product liability claims to date and does not
anticipate any. The Company maintains total product liability insurance of
$3,000,000.
Anticipated Major Expenses
- --------------------------
In 1999 the Company estimates that it will incur non-recurring legal expenses of
approximately $300,000 in connection with defense of the class action securities
lawsuit, the SEC investigation, and the lawsuit from its former CEO, John
Gardner. Some of these costs may be recoverable.
Capital Resources and Expenditures
- ----------------------------------
The Company expects to invest approximately $100,000 in tooling to complete the
planned magazine lock model variations during 1999. The Company commenced its
own assembly operations, which consists primarily of assembling parts produced
by subcontractors, in March, 1998 and foresees no significant expenditures for
additional assembly tooling in 1999. The Company does not believe that it will
have a need to make any other consequential additional capital expenditures in
1999.
17
<PAGE>
Outlook
- -------
The Company is currently facing a number of significant problems including
difficulty in funding its working capital requirements, ongoing litigation
(including litigation involving two of its past presidents) and an ongoing SEC
investigation. See "Legal Proceedings" and "-Liquidity". In addition, the
Company's distributors have not met their obligations under the Distribution
Agreement with respect to the quantities of the Company's products to be sold
and the amount of advertising to be conducted. As a result, the Company is
currently negotiating the termination of the Distribution Agreement. See
"Business-Distribution Agreement". With respect to the Company's marketing
activities, in March 1999 the Company entered into a five year contract with the
U.S. General Services Administration pursuant to which Federal agencies (and
some State agencies) can purchase the Company's products on the basis of
previously negotiated terms and discount prices. The Company has also commenced
sales to certain law enforcement agencies and has received endorsements from a
number of organizations, including the Fraternal Order of Police, the Safe and
Vault Technicians Association, and the Institute For Police Research. See
"Business - Product Distribution". To date, the cities of New Orleans, Chicago,
Miami, Atlanta, Cleveland and Bridgeport have filed suit against gun
manufacturers for producing unsafe weapons or irresponsible sales tactics. The
Company has also received positive publicity on TV and in a number of newspaper
articles. In addition, the Company is continuing its search for additional debt
and equity funding but no assurance can be given that such funding will be
obtained on terms acceptable to the Company. On balance, the Company is
optimistic that the combination of the publicity and endorsements the Company
and its products have received, the national focus on handgun safety and recent
significant sales to law enforcement agencies will permit the Company, either
through equity or debt financing or increased revenues through operations to
meet its current challenges.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
Financial Statements set forth on pages F-1 to F-32 herein.
ITEM 9. CHANGES IN ACCOUNTANTS
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Name Principal Occupation or Employment Age Director Since
During the Past Five Years
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin W. Brooks Chairman of the Board of Directors 64 1996
since 1996; President and Chief
Executive Officer of the Company since
June 1998; President of the Company
from November 1996 to April 1997;
founded Saf T Lok Corporation in 1989;
Director of Palm Beach Business
Services, Inc.; Mr. Brooks is the
father of Mr. Jeffrey W. Brooks
- -----------------------------------------------------------------------------------------------------------
Jeffrey W. Brooks Director of the Company since 1996; 38 1996
Vice President, Secretary and
Treasurer of the Company since
November 1996; Manager of Research &
Development since 1989; President of
Palm Beach Business Services; Mr.
Brooks is the son of Mr. Franklin W.
Brooks
- -----------------------------------------------------------------------------------------------------------
William M. Schmidt Director since 1996; employee and Vice 56 1996
President of the Company since 1995;
Vice President and General Manager of
Ilco Unican Inc., Simplex Safelock
Division from 1993 to 1995; General
Manager of the Automobile Occupant
Restraint Systems Division of Takata
from 1990 to 1993
- -----------------------------------------------------------------------------------------------------------
Dennis W. DeConcini Director since October 1997; Partner 62 1997
with Parry , Romani & DeConcini, Inc.
since 1995; U.S. Senator for the State
of Arizona from 1977 to 1995
- -----------------------------------------------------------------------------------------------------------
James V. Stanton Director since October 1997; attorney 67 1997
and registered lobbyist with Stanton
and Associates (law firm) since 1988;
Executive Vice President of Delaware
North Company, a concession food
distribution company, from 1981 to
1988; U.S. Congressman for the 20th
Congressional District of Ohio from
1971 to 1977
- --------------------------------------------------------------------------------------------------
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance.
In 1998, the following officers and directors of the Company failed to file the
following forms on a timely basis; Mr. Franklin Brooks filed one late report
covering one transaction; Mr. Jeffrey Brooks filed one late report covering four
transactions.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table describes the compensation earned by the Named Officers
(where the Named Officers are all those individuals serving as the Company's
Chief Executive Officer or in a similar capacity, and all those executive
officers who were compensated $100,000 or more during the fiscal year) for the
fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
- ---------------------------------------------------------------------------------------------------------
salary bonus other annual Securities Underlying
Name Year ($) ($) compensation ($) Options
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $41,667 $0 $0
John L. Gardner 1997 (3) $51,167 $0 $0 (6) 472,000
(1) 1996 $0 $0 $0
- ---------------------------------------------------------------------------------------------------------
1998 (8) $54,165 $0 $0
Franklin W. Brooks 1997 (4) $0 $0 $0 (7) 1,000,000
(2) 1996 $54,167 $0 (5)$6,200
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Gardner held the positions of President and Chief Executive Officer of
the Company from April 1997 to June 1998.
(2) Mr. F.W. Brooks assumed the position of Chairman of the Board of Directors
in February 1996, served as Chief Executive Officer of the Company from
November 1996 to April 1997, and assumed the positions of President and
Chief Executive Officer in June 1998.
(3) Does not include salary waived by Mr. Gardner which was not accrued in the
amount of $16,666.
(4) Does not include salary waived by Mr. F. W. Brooks which was not accrued in
the amount of $29,167.
(5) Represents non-cash compensation in the form of premiums for $1,000,000 in
life insurance on the life of Mr. F. W. Brooks for the benefit of his wife.
The life insurance policy has since been canceled.
(6) Mr. Gardner was issued a stock option for 600,000 shares of common stock in
connection with his employment agreement in April 1997, of which 128,000
shares have been exercised. This stock option was repriced during 1997.
Mr. Gardner was also issued additional stock options for 72,000 shares of
common stock, which has been fully exercised. During 1997, Mr. Gardner was
also issued an option for 450,000 shares of common stock, which had not
vested at the time of the termination of his employment. Mr. Gardner's
unexercised options are currently subject to litigation for which the
Company cannot speculate on the potential outcome.
(7) Mr. F. W. Brooks was issued a stock option for 1,000,000 shares of common
stock in December 1997.
(8) Includes accrued salary of $16,667 which has not been paid.
OPTION/SAR GRANTS TABLE
No stock options were granted to the Named Officers during the fiscal year ended
December 31, 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides information regarding those stock options exercised
by Named Offices during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Shares Number of Shares Underlying Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options at
on Realized Year-End Year-End (1)
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John L. Gardner * * 472,000 0 $250,726 $0.00
- ------------------------------------------------------------------------------------------------------------
Franklin W. Brooks * * 500,000 500,000 $ 0.00 $0.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
* Neither Franklin Brooks or John Gardner exercised any stock options during
the fiscal year ended December 31, 1998.
(1) Value based on the difference between the last reported sale of the
Company's Common Stock on the Nasdaq SmallCap Market of $1.0312 per share on
December 31, 1998, and the exercise price of the options.
COMPENSATION OF DIRECTORS
The Company granted stock options in the amount of 250,000 shares of Common
Stock, exercisable at $2.00 per share, on October 23, 1997, to each of Mr.
Dennis W. DeConcini and Mr. James W. Stanton in connection with their
appointment as directors of the Company.
The Company's 1993 Stock Option Plan (the "Plan") provides for the grant of an
option for 5,000 shares of Common Stock to each Director who is not otherwise
employed (i) upon the adoption of the Plan, (ii) upon that Director's election
to the Board of Directors, and (iii) upon election to the Board of Directors
after all previously granted options have vested. These options are to be
granted at fair market value, vest at a rate of 2,500 on June 1 and December 1
after the date of the grant, and are exercisable for 10 years from the date of
grant. Accordingly, the following Directors of the Company were granted the
following stock options pursuant to the Plan during the fiscal year ended
December 31, 1998:
- --------------------------------------------------------------------------------
Name of Director Shares Underlying Options Granted
- --------------------------------------------------------------------------------
Dennis W. DeConcini 5,000 at $1.500 per share, of which 2,500 vested on
December 1, 1998 and of which 2,500 will vest June 1,
1999, provided he is still a director on that date.
- --------------------------------------------------------------------------------
James V. Stanton 5,000 at $1.500 per share, of which 2,500 vested on
December 1, 1998 and of which 2,500 will vest June 1,
1999, provided he is still a director on that date.
- --------------------------------------------------------------------------------
The Company has not paid any other compensation to any person for serving as a
director of the Company. The Company does not intend to compensate non-employee
directors for serving as directors, except pursuant to the 1993 Stock Option
Plan as set forth above, and except to reimburse them for expenses incurred in
connection with their service as directors. Directors who are employees of the
Company receive no compensation for serving as directors.
Employment and Consulting Agreements
On April 16, 1997 the Company entered into a two-year Employment Agreement with
Mr. John L. Gardner at an initial annual base salary of $100,000 per year. In
connection with entering into the Employment Agreement, Mr. Gardner was granted
a stock option for 600,000 shares at an exercise price of $2.50 per share, which
was repriced to $0.50 per share and reissued as of September 19, 1997. During
1997, Mr. Gardner waived a portion of his annual base salary for the months of
July to November, was granted a stock option for 72,000 shares at an exercise
price of $0.10 per share in August 1997, and was granted a stock option for
450,000 shares at an exercise price of $2.00 per share in December 1997. On
June 11, 1998, the Company terminated Mr. Gardner's employment as the Company's
President and Chief Executive Officer.
On May 20, 1998 the Company entered into a one-year Employment Agreement with
Mr. Stephen S. Eccher to assume the position of Vice President of Marketing.
Compensation consists of a base salary of $60,000 per year and a sliding scale
commission between one and three percent of law enforcement sales. Mr. Eccher
was also granted a stock option for 10,000 shares at an exercise price of $3.89
per share. The option vests 50% after the first six months of employment and the
remaining 50% after one year of employment. On December 11, 1998 Mr. Eccher was
granted a stock option for 50,000 shares of stock at $1.09 per share. This
option vests on June 1, 1999 provided Mr. Eccher is still in the employ of the
Company and provided that Mr. Eccher forfeits the option for 10,000 shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
21
<PAGE>
The following table sets forth certain information known to the Company
regarding the beneficial ownership of shares of Common Stock as of March 31,
1999, unless otherwise noted below, by (i) each person known by the Company to
be the owner of more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's Directors, (iii) each of the Named Officers, and (iv) all
executive officers and directors as a group. Unless otherwise indicated, each
person has sole investment and voting power with respect to all shares shown as
beneficially owned.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class (6)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin W. Brooks (a) (1) 1,365,512 9.93%
- ----------------------------------------------------------------------------------------------------
United Safety Action, Inc. (b) (2) 1,000,000 7.27%
- ----------------------------------------------------------------------------------------------------
Hamdan Diamond Corporation (c) (3) 1,000,000 7.27%
- ----------------------------------------------------------------------------------------------------
Dennis W. DeConcini (d) (4) 260,000 1.89%
- ----------------------------------------------------------------------------------------------------
James V. Stanton (e) (4) 260,000 1.89%
- ----------------------------------------------------------------------------------------------------
William M. Schmidt (a) (5) 319,596 2.32%
- ----------------------------------------------------------------------------------------------------
Jeffrey W. Brooks (a) (5) 313,066 2.28%
- ----------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group
(5 people) 2,518,174 18.31%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Address is 1101 Northpoint Parkway, West Palm Beach, Florida 33407.
(b) Address is c/o Edward H. Burnbaum, Lynch Rowin Novack Burnbaum & Crystal,
P.C., 300 East 42nd Street, New York, New York 10017.
(c) Address is 5030 Anchor Way, Callows Bay Christiansted, St. Croix 00820-
4521. See Footnote (3).
(d) Address is 233 Constitution Avenue, N.E., Washington, D.C. 20002.
(e) Address is 1310 19th Street, N.W., Suite LL, Washington, D.C. 20036.
(1) Of these shares, 365,512 are held jointly by Mr. Brooks and his wife.
Includes option to purchase 1,000,000 shares of Common Stock for $2.00 per
share granted in December 1997, of which 500,000 are vested.
(2) Shares are being held by the Company pursuant to a Stock Pledge Agreement
and will be released only under certain performance criteria by United
Safety Action, Inc. (see Business-Distribution Agreement)
(3) As reported by Hamdan Diamond Corporation on Schedule 13-D dated October
27, 1997.
(4) Includes an option granted in October 1997 to purchase 250,000 shares of
Common Stock for $2.00 per share of which 166,668 shares have vested. Also
includes options pursuant to the 1993 Stock Option Plan to purchase 5,000
shares of Common Stock for $3.250 per share, all of which have vested, and
options pursuant to the 1993 Stock Option Plan to purchase 5,000 shares of
Common Stock for $1.500 per share, 2,500 of which have vested.
(5) Includes an option, granted December 11, 1998, to purchase 150,000 shares
of Common Stock for $1.09 per share, all of which are vested.
(6) Based on approximately 13,749,957shares of Common Stock outstanding as of
March 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company employs Mr. Franklin W. Brooks as its Chairman of the Board of
Directors and his son, Mr. Jeffrey W. Brooks, as its Vice President, Secretary
and Treasurer. The Company believes that the compensation paid to these
individuals is no greater and no more beneficial than unrelated persons would
receive and is fair to the Company.
Mr. Brooks loaned a total of $125,000 to Saf T Lok Corporation during the time
between 1989 and the merger with RGB Computer & Video, Inc. in January of 1996.
On January 29, 1997, the Board of Directors approved the granting of a security
interest in the Company's intellectual property to Mr. Brooks as security for
the repayment of
22
<PAGE>
the $125,000. As of December 31, 1997, the Company owed Mr. Brooks a total of
$114,213, plus accrued interest. On June 4, 1998, the Company repaid this loan
to Mr. Brooks in full and he has released his security interest in the
intellectual properties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements:
The Financial Statements and Schedules listed below are located after the
signature page and begin on page F-1.
- --------------------------------------------------------------------------------
Description Page
- --------------------------------------------------------------------------------
Auditors' Report F-2
- --------------------------------------------------------------------------------
Balance Sheets F-3 - F-4
- --------------------------------------------------------------------------------
Statements of Changes in Shareholders' Equity F-5 - F-6
- --------------------------------------------------------------------------------
Statements of Operations F-7
- --------------------------------------------------------------------------------
Statements of Cash Flows F-8 - F-9
- --------------------------------------------------------------------------------
Notes to Financial Statements F-10 - F-32
- --------------------------------------------------------------------------------
<TABLE>
Exhibits:
- ------------------------------------------------------------------------------------
Exhibit
Number Description of Exhibit
- ------------------------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation (incorporated herein by reference to the
Company's Form S-1 filed February 17, 1998)
- ------------------------------------------------------------------------------------
3.2 Bylaws (incorporated herein by reference to the Company's Form 10-KSB
filed April 16, 1998)
- ------------------------------------------------------------------------------------
4.1 Instruments defining the rights of Security Holders, including Indentures
(contained in Article IV of Exhibit 3.1)
- ------------------------------------------------------------------------------------
23.1 Consent of Goldberg & Company, P.A.
- ------------------------------------------------------------------------------------
24.1 Power of Attorney (see page 25)
- ------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- ------------------------------------------------------------------------------------
99.1 Letter from West Marketing Industries dated June 3, 1997
- ------------------------------------------------------------------------------------
99.2 Agreement between the Company and West Marketing Industries dated June 3,
1997.
- ------------------------------------------------------------------------------------
</TABLE>
Current Reports on Form 8-K during the fourth quarter of 1998:
Form 8-K/A filed November 20, 1998 amending the 8-K originally filed April 18,
1997 reporting the employment of John Gardner. The amendment included an
exhibit of the employment agreement between the Company and John Gardner.
Form 8-K/A filed December 16, 1998 amending the 8-K originally filed March 13,
1998 reporting the Distribution Agreement. The original filing did not include
most favorable pricing to the distributor under a request for confidential
treatment. The confidential treatment request has been withdrawn, therefore
this amendment includes that pricing information.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of West Palm Beach, State of
Florida, on April 15, 1999
SAF T LOK INCORPORATED
By: /s/ Franklin W. Brooks By: /s/ William M. Schmidt,
---------------------------- --------------------------
Franklin W. Brooks, President, William M. Schmidt Chief Financial
Officer,
Chief Executive Officer Principal Accounting Officer
24
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Saf T Lok Incorporated, a Florida
corporation, do hereby constitute and appoint Franklin W. Brooks the lawful
attorney and agent, with power and authority to do any and all acts and things
and to execute any and all instruments which said attorney and agent determine
may be necessary or advisable or required to enable said corporation to comply
with the Securities Act, and any rules or regulations or requirements of the
Securities and Exchange Commission in connection with this report on Form 10-K.
Without limiting the generality of the foregoing power and authority, the powers
granted include the power and authority to sign the names of the undersigned
officers and directors in the capacities indicated below to this report, to any
and all amendments, to this report, and to any and all instruments or documents
filed as part of or in conjunction with this report or amendments thereof, and
each of the undersigned hereby ratifies and confirms all that said attorney and
agent shall do or cause to be done by virtue hereof. This Power of Attorney may
be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated.
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Franklin W. Brooks Chairman of the Board of Directors, President and April 15, 1999
- -----------------------
Franklin W. Brooks Chief Executive Officer
/s/ Jeffrey W. Brooks Director, Vice President, Secretary and Treasurer April 15, 1999
- -----------------------
Jeffrey W. Brooks
/s/ Dennis W. DeConcini Director April 15, 1999
- -----------------------
Dennis W. DeConcini
/s/ James V. Stanton Director April 15, 1999
- -----------------------
James V. Stanton
/s/ William M. Schmidt Director, Chief Financial Officer, Principal April 15, 1999
- -----------------------
William M. Schmidt Accounting Officer
</TABLE>
25
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
I N D E X
Page
----
AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY F-5 - F-6
CONSOLIDATED STATEMENTS OF OPERATIONS F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Saf T Lok Incorporated
We have audited the consolidated balance sheets of Saf T Lok Incorporated and
subsidiaries as of December 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Saf T Lok
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Saf T Lok
Incorporated will continue as a going concern. As discussed in Note 2 to the
financial statements, under existing circumstances, there is substantial doubt
about the ability of Saf T Lok Incorporated to continue as a going concern at
December 31, 1998. Management's plans in regard to that matter also are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
GOLDBERG & COMPANY, P.A.
F-2
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
West Palm Beach, Florida
March 24, 1999
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
A S S E T S
-----------
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 433,661 $ 1,426,410
Accounts receivable ( less allowance
for doubtful accounts of $502,680
and $14,510, respectively) 59,596 4,888
Note receivable 18,303 20,948
Inventories 2,357,982 347,682
Prepaid expenses 156,867 981,194
----------- ------------
TOTAL CURRENT ASSETS 3,026,409 2,781,122
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,250,737 1,142,129
OTHER ASSETS
Patents, (less accumulated amortization
of $111,697 and $69,264 respectively) 311,080 353,513
Note receivable, less current portion 148,285 162,545
Other assets 9,736 2,150
----------- ------------
TOTAL OTHER ASSETS 469,101 518,208
----------- ------------
T O T A L $ 4,746,247 $ 4,441,459
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
L I A B I L I T I E S A N D S H A R E H O L D E R S ' E Q U I T Y
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable $ -- $ 60,677
Accounts payable 371,533 498,747
Accrued expenses 281,944 421,641
------------ ------------
TOTAL CURRENT LIABILITIES 653,477 981,065
------------ ------------
LONG-TERM LIABILITIES
Notes payable, less current portion -- 61,081
------------ ------------
TOTAL LIABILITIES 653,477 1,042,146
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value,
20,000,000 shares authorized, 13,609,957
and 9,987,077 shares issued and
outstanding, in 1998 and 1997, respectively 136,099 99,870
Paid-in-capital 27,634,567 17,736,532
Other equity reductions (4,254,829) (1,080,416)
Accumulated deficit (19,423,067) (13,356,673)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,092,770 3,399,313
------------ ------------
T O T A L $ 4,746,247 $ 4,441,459
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK OTHER
------------------------- PAID-IN EQUITY
SHARES AMOUNT CAPITAL REDUCTIONS DEFICIT TOTAL
----------- ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 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
Deferred compensation 1,421,500 (1,421,500) -
Stock options granted to
officers, directors and
consultants 2,411,010 2,411,010
Amortization of deferred
compensation 341,084 341,084
Net loss (5,264,606) (5,264,606)
---------- ----------- ----------- ----------- ------------ -----------
BALANCE - DECEMBER 31, 1997 9,987,077 $ 99,870 $17,736,532 $(1,080,416) $(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
a director/employee upon
exercise of stock options 108,000 1,080 9,720 10,800
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(CONTINUED)
<TABLE>
<CAPTION>
OTHER
COMMON STOCK PAID-IN EQUITY
--------------------------
SHARES AMOUNT CAPITAL REDUCTIONS DEFICIT TOTAL
----------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
an employee upon
exercise of stock options 29,000 290 2,610 2,900
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 3,365,998 3,385,998
Issuance of common stock in
connection with distributor
agreement 1,000,000 10,000 3,771,000 3,781,000
Unearned advertising
expense (3,781,000) (3,781,000)
Issuance to landlord for
payment of rent 50,880 509 50,371 50,880
Issuance of warrants in
connection with
distributor agreement 1,884,000 1,884,000
Forfeiture of deferred
compensation (265,500) 265,500 -
Amortization of deferred
compensation 341,087 341,087
Issuance of stock
options to
consultants 115,436 115,436
Net Loss (6,066,394) (6,066,394)
---------- ------------ ----------- ------------ ------------ -----------
BALANCE - DECEMBER 31, 1998 13,609,957 $ 136,099 $27,634,567 $(4,254,829) $(19,423,067) $ 4,092,770
========== ============ =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Sales $ 1,652,469 $ 40,594
Cost of Sales 1,428,891 24,668
------------ ------------
Gross Profit 223,578 15,926
Selling, general and
administrative expenses 3,536,833 2,276,018
Stock and options issued for compensation
and commissions 2,596,769 2,840,830
Depreciation 300,554 233,989
Other income 144,184 70,305
------------ ------------
NET LOSS $ (6,066,394) $ (5,264,606)
============ ============
LOSS PER COMMON SHARE $ (.48) $ (.76)
============ ============
Weighted average number of common
shares outstanding 12,619,241 6,920,820
============ ============
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1996
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,066,394) $(5,264,606)
----------- -----------
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 300,554 233,989
Provision for losses on accounts receivable 488,170 (8,490)
Non cash compensation to directors and officers 341,084 958,437
Warrants issued as commission payment 1,884,000 -
Issuance of stock for rent 4,240 -
Issuance of stock for marketing 68,750 -
Write-off of obsolete inventory 194,117 121,848
Granting of options to consultants 115,435 1,793,657
Automobile transferred pursuant to consulting agreement - 32,500
Issuance of stock in settlement of accounts payable - 197,348
Issuance of stock for advertising services - 175,000
Issuance of stock pursuant to severance agreement 78,750
Loss on disposal of property and equipment - 372
Issuance of stock in repayment of shareholder loans - 200,000
Interest expense recognized on convertible debentures - 302,143
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (542,880) 14,023
(Increase) in other assets (7,586) -
(Increase) in prepaid expenses (126,031) (968,894)
Decrease in prepaid expenses 950,357 8,808
(Increase) in inventories (2,204,416) (2,849)
(Decrease) in accounts payable (127,616) (215,468)
(Decrease) increase in accrued liabilities (183,903) 375,000
Increase (decrease) in accrued wages payable 91,250 (122,187)
Increase in accrued rent payable - 46,640
----------- -----------
Total Adjustments 1,245,525 3,220,627
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,820,869) (2,043,979)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in note receivable 16,905 16,349
Payments for the purchase of equipment (366,726) (435,698)
(Increase) in other assets - (1,175)
Capitalization of patent costs - (20,630)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (349,821) (441,154)
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500,000 3,050,000
Proceeds from exercise of warrants - net of costs 3,386,000 -
Issuance of stock upon exercise of options 413,700 71,200
Decrease in note payable (121,759) (9,766)
Principal payments on borrowings/capital leases - (1,393)
Proceeds from sale of convertible debentures - 705,000
Increase in note payable to shareholder - 7,546
----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,177,941 3,822,587
----------- -------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (992,749) 1,337,454
Cash and equivalents at beginning of year 1,426,410 88,956
----------- -------------
CASH AND EQUIVALENTS AT END OF YEAR $ 433,661 $ 1,426,410
=========== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest $ 4,637 $ 22,098
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist
in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management
who are responsible for their integrity and objectivity. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates. These accounting policies conform to generally accepted
accounting principles and have been applied in the preparation of the
financial statements.
A) ORGANIZATION AND OPERATIONS
Saf T Lok Incorporated and Subsidiaries (the "Company") was
incorporated in Florida in July 1989 under the name of RGB Sales and
Marketing, Inc. ("RGB"). The Company completed an initial public
offering of its common stock on June 23, 1993. On February 13, 1996
RGB acquired the Saf T Lok Corporation ("STL"), a Florida
corporation, by merger and RGB changed its name to Saf T Lok
Incorporated. This acquisition ended the Company's involvement in
the video editing business and began its involvement in the gun lock
business. The business of the Company is to design, develop,
manufacture and market proprietary combination gun locks to prevent
the unauthorized use of fire arms, including unintentional discharge
by children and assailants.
B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Saf T
Lok Incorporated and its wholly owned subsidiaries, Saf T Lok,
Corporation and RGB Video, Inc., which is inactive. All significant
inter company accounts and transactions have been eliminated in
consolidation.
C) CONCENTRATIONS OF RISK
The Company has concentrated its credit risk for cash and cash
equivalents by maintaining deposits in financial institutions within
the geographic region of Jupiter, Florida which may at times exceed
amounts covered by insurance provided by the U. S. Federal Deposit
Insurance Corporation (FDIC). The maximum loss that could have
resulted from that risk was approximately $267,160 and $1,326,000 at
the end of 1998 and 1997, respectively, for the excess of the
deposit liabilities reported by the
F-10
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C) CONCENTRATIONS OF RISK (CONTINUED)
banks over the amounts that would have been covered by federal
insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit
risk to cash and cash equivalents.
The Company is dependent upon certain vendors for the manufacture of
significant components of its Saf T Lok(R) and Magazine Lock
systems. If these vendors were to become unwilling or unable to
continue to manufacture these components, in required volumes, the
Company would have to identify and qualify acceptable alternative
vendors. The inability to develop alternate sources, if required,
could result in delays or reductions in product shipments.
The Company does business and extends credit based on evaluation of
a customer's financial condition generally without requiring
collateral. Exposure to losses on receivables is expected to vary by
customer due to the financial condition of each customer. The
Company monitors exposure to credit losses and maintains allowances
for anticipated losses considered necessary under the circumstances.
D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and accounts
payable approximates fair value because of the short maturity of
those instruments. The fair value of loans receivable does not
differ materially from the carrying value recorded in the
accompanying balance sheet. Rates currently available to the
Company for debt with similar terms and remaining maturities are
used to estimate fair value of existing long-term debt.
E) CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company
considers all investments with a maturity of three months or less
to be cash equivalents.
F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for
renewals and betterments which materially extend the useful lives
of the assets or increase their productivity are capitalized.
Expenditures for maintenance and repairs are charged to cost or
expensed as incurred. Depreciation has been computed using the
straight-line method over the estimated useful lives of the assets.
When items of property or equipment are sold or retired, the
related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in the results of
operations. The estimated useful lives are as follows:
F-11
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F) PROPERTY AND EQUIPMENT (CONTINUED)
Item Estimated Useful Life
---------------------- ---------------------
Furniture and fixtures 7 - 10 years
Equipment 5 - 10 years
Leasehold improvements 5 - 7 years
Software 5 years
Tools and dies 7 years
G) INVENTORIES
Inventories, which are primarily composed of raw materials,
supplies and finished goods, are stated at the lower of cost or
market, with cost determined on a first-in, first-out basis.
Inventory costs for finished goods include material, labor, and
production overhead.
H) INTANGIBLE ASSETS
The Company has capitalized certain legal costs incurred relating
to acquiring trademarks and patents of Saf T Lok(R) and the
Company's products. These costs are capitalized and amortized over
a period of fifteen years.
I) ADVERTISING
Advertising costs are charged to expense as incurred. Advertising
costs incurred for the years ended December 31, 1998 and 1997 were
not material.
J) INCOME TAXES
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
K) REVENUE RECOGNITION
The Company recognizes revenue when products are sold and shipped.
F-12
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L) LOSS PER COMMON SHARE
Loss per common share amounts are calculated based on the weighted
average number of shares outstanding during each period presented.
M) RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been
reclassified to conform to the 1998 financial statement
presentation. Such reclassifications had no effect on the 1997 net
loss or shareholders equity.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been presented in
accordance with generally accepted accounting principles, which
assume the continuity of the Company as a going concern. As reflected
in the accompanying financial statements, the Company has incurred
net losses of $6,066,394 in 1998 and $5,264,606 in 1997 and has
substantially funded its working capital needs by the sale of common
stock and warrants.
In 1998, the Company raised $4,913,700 of equity financing at a cost
of $2,498,000. During 1998 the Company purchased additional inventory
of approximately $2,882,000 to meet the anticipated obligation under
the Distribution Agreement referred to in Note 10(B). The lack of
performance by the Distributor has been outlined in Note 10(B). The
proposed termination of this Agreement leaves the Company with most of
its funds, which are required for operations, invested in inventories
with no significant prospects for sales.
The Company's continued ability to operate as a going concern is
dependent on its ability to raise additional capital and achieve a
successful level of sales. The Company is attempting to obtain the
financing necessary to fund operations. However, there can be no
assurance that the financing will be satisfactorily concluded in time
to provide the Company the working capital it needs to continue
operations. The aforementioned circumstances raise substantial doubt
as to the Company's ability to continue as a going concern at December
31, 1998.
F-13
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - NOTES RECEIVABLE
The Company previously had a promissory note due from Opal Technologies
("Opal"). The note had an original interest rate of eight percent and
an annual interest rate of eighteen percent after the note becomes due.
However, no interest had been accrued due to the fact that it seemed
doubtful that the interest would be received. Although the Company
continued to aggressively try to collect on the note receivable from
Opal, the ability to collect seemed doubtful. Therefore, the note was
written off as a bad debt in 1995. In 1996, the Company located the
principals of Opal and renegotiated the note receivable calling for
total payments of $248,000 including interest over a five year period.
The Company recognizes income as payments are received.
Pursuant to a settlement agreement dated September 27, 1995, Pride
Integrated Services, Inc. agreed to pay the Company $310,000, which
included interest over a ten year period with the payments beginning in
October 1995. The settlement resulted from a suit filed by the Company
against Pride Integrated Services, Inc. in October 1993, alleging
copyright infringement and misappropriation of trade secrets. The note
receivable was discounted as required by Accounting Principle Bulletin
No. 21 using an 8% imputed interest rate. The balance of the note
receivable, net of discount, is $166,588 and $183,493 as of December
31, 1998 and 1997, respectively.
NOTE 4 - INVENTORIES
Inventories are comprised of the following as of December 31, 1998 and
1997:
1998 1997
---------- ----------
Finished Goods $ 324,937 $ 62,855
Raw Materials 2,006,188 200,869
Supplies 26,857 83,958
---------- ----------
TOTAL $2,357,982 $347,682
========== ==========
During 1998 and 1997 respectively, $194,117 and 133,207 of inventory
produced in the development of the Saf T Lok(R) was considered impaired
due to technical advancements in the further development of the
products and was written-off as obsolete.
NOTE 5 - PREPAID EXPENSES
Prepaid expense is comprised of the following as of December 31, 1998
and 1997:
1998 1997
---------- -----------
Deposit on patent costs $ 64,438 $ 24,438
Prepaid insurance 56,072 6,399
Deposits - tooling 35,357 -
Public relations agreement - 660,000
Financial consulting agreement - 197,917
F-14
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - PREPAID EXPENSES (CONTINUED)
1998 1997
---------- ----------
Prepaid marketing - 80,208
Prepaid show expenses - 11,720
Prepaid other - 512
---------- ----------
TOTAL $ 156,867 $ 981,194
========== ==========
The Company was required to enter into a Financial Public Relations
Agreement valued at $750,000 in November 1997, in connection with the
sale of 1,500,000 shares of common stock and stock purchase warrants
for 2,500,000 shares of common stock. The term of this agreement was
one year (Note 10-C). Expense of $660,000 and $90,000 was recognized in
1998 and 1997, respectively.
In 1997, the Company also entered into a Financial Consulting Agreement
in the amount of $250,000 in connection with the above mentioned equity
transaction. The term of this agreement was one year (Note 10-C).
Expense of $197,917 and $52,083 was recognized in 1998 and 1997,
respectively.
In 1997, the Company entered into a Marketing Agreement for which stock
valued at $175,000 was issued for services to be rendered over one year
(Note 10-C). Expense of $80,208 and $94,792 was recognized in 1998 and
1997, respectively.
A payment for international patent costs was made to the Company's
patent attorney for services to be provided in 1998 and 1999. The
related patents have not yet been issued.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of December 31,
1998 and 1997:
1998 1997
---------- ----------
Equipment $ 436,932 $ 374,259
Furniture and fixtures 52,625 52,625
Tools and die 1,500,492 1,196,594
Software 39,359 37,963
Leasehold improvements 11,436 11,436
---------- ----------
TOTAL 2,040,844 1,672,877
Less accumulated depreciation 790,107 530,748
---------- ----------
TOTAL $1,250,737 $1,142,129
========== ==========
F-15
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - NOTE PAYABLE
1998 1997
--------- --------
Note Payable - shareholder, collateralized
by patents, payable in monthly
installments of $3,738 including
interest at 7%, due March 1999 and
paid in full in June 1998 - $121,758
--------- --------
Total Long-Term Debt 121,758
Current Portion - 60,677
--------- --------
Long-Term Debt, Less
Current Portion $ - $ 61,081
========= ========
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following
as of December 31, 1998 and 1997:
1998 1997
-------- --------
Accounts payable $371,533 $498,747
Accrued expenses 281,944 421,641
-------- --------
TOTAL $653,477 $920,388
======== ========
NOTE 9 - INCOME TAXES
The components of the provision (benefit) for income taxes for the
years ended December 31, 1998 and 1997 are comprised of the following:
1998 1997
------ ------
Current:
Federal $ - $ -
State -
-
------ ------
- -
------ ------
Deferred:
Federal $ - $ -
State - -
------ ------
- -
====== ======
F-16
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - INCOME TAXES (CONTINUED)
The following table reconciles the income tax provision (benefit) at
the U.S. Statutory rate to that in the financial statement is as:
1998 1997
----------- -----------
Benefit computed at 37% $ 4,632,000 $ 3,433,000
Less valuation allowance (4,632,000) (3,433,000)
----------- -----------
Income tax benefit $ - $ -
=========== ===========
The net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes are reflected in deferred
income taxes. Significant components of the Company's deferred tax
asset as of December 31, 1998 is as follows:
1998
------------
Benefit of net operating loss carryforwards $ 4,632,000
Less valuation allowance (4,632,000)
------------
Net deferred tax asset $ -
============
As of December 31, 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$12,520,000 which are available to offset future federal taxable
income, if any, through 2018. These carryforwards are on a consolidated
return basis for the members of the consolidated group and, accordingly
the loss carryforwards may have certain separate income tax return
limitations.
As of December 31, 1998, sufficient uncertainty exists regarding the
realization of the full amount of these operating loss carryforwards,
and accordingly, a valuation allowance of $4,632,000 has been
established.
The valuation allowance for deferred tax assets as of December 31, 1998
and 1997 was $4,632,000 and $3,433,000, respectively.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. Due to the
fact that such change in ownership has occurred, the Company is subject
to this limitation and the utilization of its tax benefit carryforwards
will be restricted in the future. In the event of subsequent changes in
the ownership of the Company, the tax benefits may be further
restricted.
F-17
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
A) OPERATING LEASES
In February 1996, the Company entered into a three year lease for
its office facility. The Company is required to pay $144,000 over
the three year period. The agreement also provides for a renewal
option for three years beginning February 1, 1999 at a base rent
totaling $166,830. The future minimum rental payments required
under this operating lease through January 1999 is $4,452. The
total rent expense charged to operations was $99,263 and $54,468
for the years ending December 31, 1998 and 1997, respectively. The
Company moved to new facilities in December 1998 and did not renew
this lease.
The Company entered into a new five year lease for its office and
manufacturing facility commencing August 1, 1998. The Company is
required to pay $424,132 in rent over the five year lease term,
which includes $22,500 of annual operating expenses. The operating
expenses are subject to adjustment based upon actual costs
incurred.
The future minimum lease payments required under this operating
lease are as follows:
Year Amount
---- ------
1999 $ 86,641
2000 89,848
2001 93,215
2002 96,751
2003 57,677
---------
$ 424,132
=========
B) MAJOR CUSTOMER AND POSSIBLE LOSS THEREOF
On February 10, 1998 the Company accepted a purchase order from an
independent wholesaler for the purchase of $6,000,000 of the
Company's gun locks and received a $1,000,000 advance payment. The
wholesaler was a well established business. The Company fulfilled
its commitment to deliver $1,000,000 of gun locks to the wholesaler
in the first 120 days. Thereafter, the wholesaler purchased $9,680
of product from the Company for which payment has not been
received. No further orders were placed by the wholesaler in 1998.
On February 11, 1998, the Company entered into a three year
Distribution Agreement with a newly organized company (" the
Distributor"), with no direct experience, for the purchase of
$20,000,000 of the Company's product over a period of three years.
F-18
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
B) MAJOR CUSTOMER AND POSSIBLE LOSS THEREOF (CONTINUED)
The agreement provided that the first $6,000,000 of the
wholesaler's order discussed above, would be credited to the
distributor's obligation to fulfill the requirements of its
$7,000,000 initial order. Neither the wholesaler nor the
distributor have fulfilled their commitment according to the
agreement. During 1998, the distributor purchased $477,115 of the
Company's product for which it has not been paid. The Company has
not achieved sales targets as originally set forth in the
distribution agreement. These customers represented approximately
95% of the Company's sales in 1998. This has negatively impacted
the Company's operations.
Under the terms of the Distribution Agreement, the distributor was
obligated to create and place certain types of advertising for a
total of $5,000,000 over a two year period. The Company delivered
1,000,000 shares of its common stock valued at $3,781,000 to the
distributor, which was to be earned by the distributor at the rate
of one share of stock for each five dollars of advertising placed.
The distributor pledged the stock to the Company as security for
the distributor's obligation to place the advertising.
In addition to and in connection with the Distribution Agreement,
the company entered into an agreement with three companies,
designated by the parties who were instrumental in assisting the
Company in finding the wholesaler and the distributor. The three
companies were granted in the aggregate, 2,000,000 warrants of
the Company's stock at an exercise price of five dollars per share.
(NOTE 11-G)
The Company also entered into a commission agreement with a
consulting company which helped the Company structure the agreement
with the distributor. This agreement provides that the consulting
company receive a 15% commission from the sale of the products in
accordance with the Distribution Agreement, and a 15% fee upon the
exercise of the 2,000,000 five dollar warrants mentioned above. To
date the warrants have not been exercised and a liability has been
accrued to provide for the 15% commission on the sale of product.
The Company is presently in negotiations with the Distributor to
terminate the Distribution Agreement and all of the related
commission and consulting agreements.
C) CONSULTING AGREEMENTS
In June 1997, the Company entered into a one year marketing
agreement which was intended to create a strategic and tactical
marketing plan. The cost of these services was $175,000, which was
paid for in stock, plus $2,500 per month for one year.
F-19
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
C) CONSULTING AGREEMENTS (CONTINUED)
On October 17, 1997 the Company entered into a one year Financial
Consulting Agreement, at a fee of $250,000, with a consultant who
was to provide a wide variety of services related to the
management, operations and financing of the Company. The agreement
stated that the consultant was currently working with potential
buyers for the Company's products and would use his best efforts to
find additional buyers. The $250,000 fee was paid in November 1997.
On October 24, 1997 the Company entered into a one year Financial
Public Relations Agreement, subsequently changed to a Product
Recognition Campaign, with a marketing firm. The Financial Public
Relations agreement would not take effect until the Regulation S
offering was completed to three offshore companies for 1,500,000
shares and 2,500,000 warrants in November 1997 and January 1998.
The marketing firm was to receive compensation of $750,000 plus
25,000 unregistered shares of the Company's common stock valued at
$68,750. The first $375,000 was paid in November 1997, and the
final $375,000 was paid in 1998. The 25,000 shares of stock were
issued in March 1998. On January 1, 1998, the Company entered into
an additional, one year, Product Recognition Campaign Agreement
with the marketing firm, for a fee of $10,000 per month, which was
designed to expose the Company and its product line to the general
public and news media services. This contract was canceled in June
1998.
D) EMPLOYMENT AGREEMENTS
In April 1997 the Company entered into a two year employment
agreement with it's President, which provided in part for base
compensation of $100,000 and discretionary pay incentives based upon
the Company's performance. The President's employment was terminated
in June 1998. (See Note 13)
In May 1998 the Company entered into a one year employment agreement
with it's Vice President of Marketing which provides in part for a
base salary of $60,000 and various discretionary pay incentives
based upon the Company's performance.
F-20
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY
A) THE 1993 STOCK PLAN
In March 1993, the Company established a stock option plan to
enhance the ability of the Company to attract and retain qualified
employees, consultants, officers and directors by creating
incentives and rewards for their contributions to the success of
the Company. An aggregate of 500,000 shares of common stock may be
issued in the plan.
The plan provides opportunities to purchase stock in the Company
pursuant to options granted which qualify as incentive stock
options (ISO's) under Section 422(b) of the Internal Revenue Code
of 1986 and also for those which do not qualify as ISO's (non-
qualified) options.
The plan provides for an automatic grant of non-qualified options
for 5,000 shares, vesting semiannually, for one year, to each non-
employee director provided that the director is still serving as a
director on the vesting date. In accordance with this provision,
two directors were granted 10,000 options in 1998 and 10,000
options in 1997 at exercise prices of $1.50 and $3.25 per share,
respectively.
The exercise price of all qualified options granted under the plan
must be at least equal to the fair market value of the shares of
common stock on the date of the grant. The exercise price for any
participant in the qualified plan possessing more than 10% of the
voting power of the Company's outstanding common stock must equal
at least 110% of the fair market value on the grant date. As of
December 31, 1998 and 1997, no shares have been issued under the
qualified plan.
During 1998 the Company granted 75,000 qualified stock options to
seven employees at a market price of $1.09 per share. One employee
was granted 10,000 non-qualified options at a market price
of $3.89.
B) OTHER INDIVIDUAL NON-QUALIFIED STOCK PLANS
The Company also grants non-qualified options to its employees,
consultants, officer's and directors through the use of
individually tailored stock option agreements.
In 1998, the Company granted 300,000 options to officers, 275,000
options to employees, and 115,000 options to consultants, each at a
market price of $1.09.
F-21
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
C) SUMMARY OF STOCK PLANS
The Company has elected to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in
accounting for its employee stock options. Compensation costs to
employees of $341,083 and $642,725 have been recognized related to
stock options when the exercise price was below the fair market
value of the stock at the date of grant, for the years 1998 and
1997, respectively. If the Company had elected to account for its
stock options under the fair value method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss
and loss per common share would have been reduced to the pro forma
amounts indicated below:
1998 1997
------------ -------------
Net (Loss):
As reported $ (6,066,394) $ (5,264,606)
Pro forma $ (7,499,470) $ (6,614,730)
Basic EPS:
As reported $ (.48) $ (.76)
Pro forma $ (.59) $ (.96)
Diluted EPS:
As reported $ (.48) $ (.76)
Pro forma $ (.59) $ (.96)
The fair value of each option is estimated on the date of grant
using a Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1998 and 1997,
respectively:
1998 1997
------- ------
Dividend yield - -
Expected volatility 103% 232%
Risk-free interest rate 5.16% 5.90%
Expected life of stock option 7 years 4 years
The dividend yield reflects the assumption that the current
dividend payout will continue to be zero. The expected life of the
options is based on an estimate, and is not necessarily indicative
of exercise patterns that may occur. The weighted average fair
value per option was $1.04 and $3.35 for options granted during
1998 and 1997, respectively. A summary of the status of the
Company's stock option plans as of December 31, and changes during
each of the years then ended, is as follows:
F-22
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
C) SUMMARY OF STOCK PLANS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 4,356,137 $ 2.06 1,852,500 $ 2.21
Granted 785,000 1.09 3,853,637 1.81
Exercised (297,000) 1.39 (200,000) .36
Forfeited/Expired (1,256,500) 2.17 (1,150,000) 2.07
---------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 3,587,637 1.55 4,356,137 2.06
---------------------------------------------------------------------------------------------------------------------
Options exercisable
at end of year 2,145,971 1.77 2,222,804 1.87
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .10 - .50 587,000 5.7 $ .42 587,000 $ .42
.51 - 1.50 775,000 10.0 1.10 5,000 1.50
2.00 - 2.50 2,152,500 3.5 2.15 1,485,834 2.21
3.00 - 4.99 61,137 4.6 3.40 56,137 3.37
5.00 - 7.00 12,000 4.5 5.83 12,000 5.83
- -------------------------------------------------------------------------------------------------------------------------------
.10 - 7.00 3,587,637 5.2 1.55 2,145,971 1.77
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 there were 75,000 qualified stock options and 118,500 non
qualified stock options outstanding under the 1993 Stock Plan. There were
587,000 individual non-qualified stock options (registered through an S-8 filed
in 1997) and 2,807,137 individual non-qualified stock options (unregistered)
outstanding at the end of December 31, 1998.
At December 31, 1997 there were 415,000 non-qualified stock options outstanding
under the 1993 Stock Plan. There were 724,000 individual non-qualified stock
options (registered through an S-8 filed in 1997) and 3,267,137 individual non-
qualified stock options (unregistered) outstanding at the end of December 31,
1997.
F-23
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES
On August 1, 1997 the Company executed the first of three
Offshore Subscription Agreements offering to sell up to
$2,000,000 aggregate principal amount of its convertible
debentures in minimum denominations of $1,000. The offer and sale
of the debentures was effected in accordance with and in reliance
on the provisions of Regulation S promulgated under the
Securities Act of 1933, as amended (the "Act"). The debentures
had a term of five years with 8% interest per annum, payable with
the Company's common stock at the time of conversion.
Conversion rights began with the 41st day after issuance of the
debentures into shares of the Company's common stock at a
conversion price of 70% of the average closing bid price of the
Company's common stock during the last five days prior to the
effective date of the conversion. Further, beginning 90 days
after the issuance of the debentures, holders of an aggregate of
at least 25% of the outstanding principal amount of the
debentures, or of at least 30% of the shares of common stock into
which the debentures were convertible, were entitled to a one
time demand registration right for such common stock at the
expense of the Company and would also have unlimited piggyback
registration rights for a period of three years after such
issuance.
Cash proceeds received from the sale of debentures in 1997
totaled $705,000. The 30% discount of $302,143 was recorded as
interest expense in 1997 and increases the capital related to the
conversion to 2,147,247 common shares of stock.
In May 1997 the Company issued 30,000 shares of common stock to
two employees in connection with an employment severance
agreement.
Effective March 31, 1997 the Company issued 76,509 shares of
common stock to the Chairman of the Board in exchange for the
cancellation of a $150,000 loan made to the Company in the first
quarter of 1997.
In April 1997 the Company issued 25,503 shares of common stock to
the Chairman of the Board in exchange for the cancellation of a
$50,000 loan made to the Company in April 1997.
In April 1997 the company issued 75,903 shares of common stock at
$2.60 per share to a lock assembly contractor as payment for
assembly services and tooling charges and stock registration
costs.
In September 1997 the Company issued 93,583 shares of common
stock in payment of ongoing marketing and advertising services.
The value of this service contract is $175,000.
F-24
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES (CONTINUED)
In April 1997 the Company sold 115,385 shares of common stock to
a single offshore investor. The aggregate sum paid in cash for
the shares was $150,000. There was no underwriter in connection
with this sale and no discounts or commission were paid in
connection with the sale.
In May 1997 the Company sold 163,846 shares of common stock to
two offshore investors. The aggregate sum paid in cash for the
shares was $200,000. There was no underwriter in connection with
this sale and no discounts or commissions were paid in connection
with the sale.
In June 1997 the Company sold 153,846 shares of common stock to a
single offshore investor. The aggregate sum paid in cash for the
shares was $200,000. There was no underwriter in connection with
this sale and no discounts or commissions were paid in connection
with the sale.
In November 1997 the Company sold 1,250,000 shares of common
stock and 2,083,333 stock purchase warrants to three offshore
investors. The warrants grant the right to purchase 2,083,333
shares of the Company's common stock; 1,666,666 shares at an
exercise price of $2.00 per share and 416,667 at an exercise
price of $3.00 per share. The warrants expire in two years. The
aggregate sum paid in cash for the shares and stock purchase
warrants was $2,500,000. During 1998 the $2.00 warrants were
exercised (NOTE 11-G). The balance of the stock and proceeds from
the sale were held in escrow until January 1998.
In connection with the placement of this sale of common stock and
stock purchase warrants, an agent was paid a fee of 13.5% of the
sales price of the common stock sold to the investors and $60,000
for legal fees. The placement agent will receive a fee of 13.5%
of the sales price of the stock underlying the warrants when the
warrants are exercised.
In October 1997 the Company's president exercised 200,000
options, of which 72,000 were granted with an option price of
$0.10 and 128,000 were granted with an option price of $0.50.
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 aggregate sum
paid in cash for the shares and stock purchase warrants was
$500,000. The warrants grant the right to purchase 333,334 shares
at an exercise price of $2.00 per share and 83,333 shares at an
exercise price of $3.00 per share. The warrants expire in two
years.
During 1998, two consultants exercised options to purchase
160,000 shares of the Company's common stock at $2.50 per share.
F-25
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES (CONTINUED)
In March 1998, one employee/director exercised options to
purchase 108,000 shares of the Company's common stock at $.10 per
share.
In March 1998, one employee exercised options to purchase 29,000
shares of the Company's common stock at $.10 per share.
In March 1998, the Company issued 25,000 shares of common stock
valued at $2.75 per share to a Financial Public Relations firm
in connection with services rendered pursuant to a marketing
agreement.
In May and July 1998, the Company issued a total of 2,000,000
shares of stock in connection with the exercise of $2.00 warrants
by three offshore investors.
Pursuant to the February 11, 1998 Distribution Agreement (Note
10), 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. The company places a value on the services to be rendered
of $3,781,000 using the latest trade price of the stock on the
day before the agreement was signed.
In June 1998, the Company issued 50,880 shares of stock in
satisfaction of rent due to a landlord. The amount of the payable
to the landlord at December 31, 1997 was $46,640. January 1998
rent of $4,240 was paid as part of this transaction.
E) PAID IN CAPITAL
Non-employee consultants were granted 400,000 options in January
1997 at an exercise price of $2.50 which was $.50 per share lower
than the fair market value at the date of grant. The value of
these options was computed using the Black-Scholes option pricing
model which resulted in the recognition of consulting expense and
paid in capital of $882,956 in 1997.
Non-employee consultants were granted 412,500 options in April
1997 at an exercise price of $2.50 which was $1.00 per share
lower than the fair market value at the date of grant. The value
of these options was computed using the Black-Scholes option
pricing model which resulted in the recognition of consulting
expense and paid in capital of $910,701.
In August 1997 two officers and two board members were granted
324,000 stock options with an exercise price of $0.10 which was
$0.93 per share lower than the fair market value at the date of
grant. Compensation expense of $301,644 was recorded
F-26
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
E) PAID IN CAPITAL (CONTINUED)
for the below market value difference in accordance with APB
Opinion #25. This amount was also recorded as paid in capital.
In 1997 Company officers and board members waived salary amounts
which had been accrued for the year 1996. As a result, $122,184
has been classified to paid in capital.
In 1997 officers and board members waived $193,525 of salary
which has been reflected as compensation and paid in capital.
F) DEFERRED COMPENSATION
In October 1997 two new board members were granted 500,000 stock
options with an exercise price of $2.00 which was $1.25 per share
lower than the fair market value at the date of grant. The
options vested one third in the year of grant and will be fully
vested over a three year period. In 1998 and 1997, compensation
expense of $208,333 per year was recorded for the vested portion
of the below market difference in accordance with APB Opinion
#25. This amount was also recorded as amortized deferred
compensation. The entire non vested portion of compensation has
been recorded as deferred compensation (a contra-equity account),
in the year of grant. For purposes of FASB #123 disclosure, the
fair value of the 500,000 options using the Black-Scholes option
pricing model is $1,598,941. This fair value has been ratably
recognized over the vesting period for disclosure purposes.
In December 1997 the Chairman of the Board was granted 1,000,000
stock options at an exercise price of $2.00 which was $.5310 per
share lower than the fair market value of the stock at the date
of grant. The options vest over a four year period beginning in
1997, provided the Chairman continuously serves as a member of
the Board of Directors and that the patented inventions continue
to be assigned to the Company. In 1998 and 1997, compensation
expense of $132,750 per year was recorded for the vested portion
of the below market value difference in accordance with APB
Opinion #25. This amount was also recorded as amortized deferred
compensation. The entire non vested portion of compensation has
been recorded as deferred compensation (a contra-equity account),
in the year of grant. For purposes of FASB #123 disclosure, the
fair value of the 1,000,000 options using the Black-Scholes
option pricing model is $2,490,318. This fair value has been
ratably recognized over the vesting period for disclosure
purposes.
F-27
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
In December 1997 the President was granted 450,000 stock options
at an exercise price of $2.00 which was $.5310 per share lower
than the fair market value of the stock at the date of grant.
Options for 150,000 shares vest on December 31, 1998 and options
for 300,000 shares vest on December 31, 2001, provided the
President is continuously in employment with the Company as of
each vesting date. The 300,000 options may vest earlier based
upon performance levels established by the Board of Directors. If
the net after tax profits for 1999 exceed $1,000,000 or
$1,500,000 then 50,000 shares or 100,000 shares will vest,
respectively. If the net after tax profits for the year 2000
exceed $1,500,000 or $2,000,000 then 100,000 shares or 150,000
shares will vest, respectively. The entire non vested portion of
the below market value difference has been recorded as deferred
compensation (a contra equity account), in the year of grant. For
purposes of FASB #123 disclosure, the fair value of the 450,000
options using the Black-Scholes option pricing model is
$1,245,159. In April 1998, the president's employment with the
company terminated. The previously recorded deferred compensation
of $265,500 relative to APB Opinion # 25 has been reversed in
1998 as these options have been forfeited.
G) WARRANTS
Prior to 1996, the Company issued warrants to Barington Capital
Group, L.P., the Company's underwriter in its initial public
offering, to purchase 120,000 shares of the Company's common
stock at an exercise price of $11.20. These warrants expired in
1998.
On August 1, 1997 the Company executed the first of three
Offshore Subscription Agreements offering to sell up to
$2,000,000 aggregate principal amount of its convertible
debentures in minimum denominations of $1,000. In connection with
the placement of this sale, the Company paid a cash commission of
10% of the offering price, a 3% non-accountable expense
allowance, stock purchase warrants for shares of common stock
equal to 10% of the aggregate number of shares received by the
holder's of the debentures (214,725 warrants) at an exercise
price equal to 120% of the conversion price per share calculated
for each instance in which the conversion of a debenture took
place. The average exercise price for each warrant is $.396. The
fair market value of the warrants calculated using the Black-
Scholes option pricing model is $293,961.
In November 1997 the Company issued 2,083,333 stock purchase
warrants to three offshore investors in connection with the
purchase of 1,250,000 shares of common stock. The warrants grant
the right to purchase 2,083,333 shares of the Company's common
stock; 1,666,666 shares at an exercise price of $2.00 per share
and 416,667 at an exercise price of $3.00 per share. The warrants
expire in two years. The two dollars warrants referred to herein,
were all exercised in 1998.
F-28
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
G) WARRANTS (CONTINUED)
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 two dollar warrants referred to herein,
were all exercised in 1998.
In connection with the exercise of the 2,000,000 two dollar
warrants, a 13.5% fee was paid to the original placement agent of
$540,000. A fee of $375,000 was paid to partially satisfy the
remaining balance of the $750,000 Financial Public Relations
agreement which was a required obligation of the Company upon
sale of the original 1,250,000 shares. After legal fees of
$74,000 were deducted, the net proceeds were $3,011,000.
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 value of these 2,000,000
warrants was computed using the Black-Scholes option pricing
model which resulted in the recognition of $1,884,000 of
commission expense in 1998.
A summary of the status of the Company's warrant activity
is as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 2,418,058 $ 2.49 120,000 $ 11.20
Granted 2,416,667 4.52 2,298,058 2.03
Exercised (2,000,000) 2.00 -- --
Forfeited/Expired (120,000) 11.20 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 2,714,725 4.27 2,418,058 2.49
- ----------------------------------------------------------------------------------------------------------------------------
Warrants
exercisable
end of year 2,714,725 4.27 2,418,058 2.49
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SHAREHOLDERS' EQUITY (CONTINUED)
F) WARRANTS (CONTINUED)
The following table summarizes information about the warrants
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .40 or less 214,725 3.5 $ .396 214,725 $ .396
2.00 -2.99 - - - - -
3.00 -4.99 500,000 1.0 3.00 500,000 3.00
5.00 - 2,000,000 4.2 5.00 2,000,000 5.00
------------------------------------------------------------------------------------------------------------------------------
.40 -5.00 2,714,725 3.57 4.27 2,714,725 4.27
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12 - EARNINGS (LOSS) PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share," effective for the year ended December
31, 1997. SFAS No. 128 requires the presentation of basic and diluted
earnings per common share ("EPS") in the statement of operations.
Under the new requirements, basic EPS is computed using the average
actual shares outstanding during the period. Diluted EPS, which is
basic EPS adjusted for the dilutive effect of stock options and other
securities that may be converted into common shares, is not presented
as the effects would be antidilutive. The following is a
reconciliation of the numerators and denominators of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Numerator:
Net (Loss) $ (6,066,394) $ (5,264,606)
Numerator for basic EPS (6,066,394) (5,264,606)
Effect of dilutive securities: - -
--------------- ---------------
Numerator for diluted EPS $ (6,066,394) $ (5,264,606)
--------------- ---------------
Denominator:
Denominator for basic EPS
weighted-average shares 12,619,241 6,920,820
Effect of dilutive securities:
Stock Options - -
Warrants - -
Potentially dilutive common shares - -
--------------- ---------------
Denominator for diluted EPS 12,619,241 6,920,820
--------------- ---------------
Basic EPS $ (.48) $ (.76)
--------------- ---------------
Diluted EPS $ (.48) $ (.76)
--------------- ---------------
</TABLE>
F-30
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - LITIGATION
The Company and the current Chairman of the Board are being sued by a
former Chief Executive Officer, who was hired and terminated in 1996.
The basis of the suit is for libel and slander arising from her
appointment and termination. The Company is being represented by its
Insurance Company. The case is in its final stages and the Company
does not anticipate a material effect on the financial statements.
The Company has been named as a defendant, along with the current
President and Chief Executive Officer and the former President and
Chief Executive Officer, in three lawsuits commenced in the United
States District Court for the Southern District of Florida between
June and August 1998. The three suits, each denominated as a class
action, allege violations of the federal securities laws and, more
specifically, that the Company and its officers made
misrepresentations, or failed to disclose material information between
May 26, 1998 and June 12, 1998 concerning a development agreement
allegedly entered into with Semiconductor Laser International
Corporation and a highly favorable research report issued by Woodward
Trading Company. The Company has, consistent with its Articles of
Incorporation and Florida law, provided indemnification to it's
officers. Although insurance coverage exists for defense costs and any
eventual liability, the coverage is limited and is subject to a
retention of $250,000. The lawsuits have been consolidated and the
plaintiffs, who have applied to the Court to certify the matter as a
class action, have indicated they intend to file a new complaint
shortly. At this very preliminary stage of the proceedings, legal
counsel is unable to say that any particular outcome is either
probable or remote.
The former President and Chief Executive Officer of the Company
commenced an action in the Florida State Court in October 1998 against
the Company and its current President and Chief Executive Officer. The
lawsuit challenges the former President's termination under the terms
of his Employment Agreement and the Company's decision to block his
attempt to exercise options and sell stock in the Company while in the
possession of material non-public information. It also alleges that
he, the former President, is entitled to salary and all of his vested
and nonvested options through the remainder of his employment period.
He also claims he was libeled. This matter is still in the pleading
stages and the Company intends to assert numerous counterclaims
against the former President in it's response. At this preliminary
stage in the litigation, legal counsel is unable to say that any
particular outcome is either probable or remote.
On May 29, 1998, the Company was informed that the Securities and
Exchange Commission's Division of Enforcement (the "SEC") had begun an
informal investigation into whether the Company had violated relevant
laws, rules or regulations with regard to its publicly traded
securities, and requested that the Company voluntarily produce
documents for the period beginning January 1, 1996 through present.
The Company has complied with the SEC's initial and subsequent
requests to produce documents, choosing not to claim privilege or
withhold any requested information in its possession. On February 18,
1999, the President and Chief Executive Officer testified before the
SEC pursuant to a subpoena. At that time, the SEC made available to
the Company its formal Order Directing Private Investigation and
Designating Officers to Take Testimony.
F-31
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - LITIGATION (CONTINUED)
Legal counsel has indicated that it is too early to speculate what
the outcome of this investigation or the potential impact on the
Company will be. No action or litigation has been instituted.
NOTE 14 - SUBSEQUENT EVENTS
On January 5, 1999, one officer/employee and one employee, exercised
115,000 ten cent stock options. The gross proceeds to the Company was
$11,500.
On January 18, 1999 two officers/employees and one employee forfeited
all present and future claims to 30,000 options granted to them in
1996 at an exercise price of $3.06 per share.
On January 29, 1999 the Company filed a Registration Statement on Form
S-8 with the Securities and Exchange Commission, registering 2,802,000
previously granted, non-qualified stock options of directors,
officer's, consultants and employees.
On February 16, 1999, pursuant to an agreement ratified by the board
of directors on January 20, 1999, the Company issued 25,000 shares of
it's common stock to two marketing consultants to begin the creation
of a business plan and to commence a search to secure financing. An
additional 25,000 shares will be issued to the marketing consultants
upon receipt by the Company of a bonafide $2,000,000 equity financing
agreement. Once funds are received, the marketing consultants will
receive 5% of the gross proceeds as a commission and the Company will
approve an expenditure to continue with a marketing plan in the amount
of $250,000 of which 20% will be paid in cash over a twelve month
period, and 80% in the form of the Company's common stock.
F-32
<PAGE>
Exhibit 23.1
(Letterhead of Goldberg & Company Appears Here)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Saf T Lok Incorporated
1101 Northpoint Parkway
West Palm Beach, Fl 33407
Dear Sirs:
We hereby consent to the use in the Form 10-KSB Annual Report of Saf T Lok
Incorporated for the years ended December 31, 1997 and 1998, our reports dated
April 2, 1998 and March 24, 1999, relating to the financial statements of Saf T
Lok Incorporated which appear in such Form 10-KSB and are incorporated by
reference into the Company's registration statement on Form S-8, SEC file
#333-71393.
Goldberg & Company, P.A.
Certified Public Accountants
West Palm Beach, Florida
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<PAGE>
Exhibit 99.1
(West Marketing Industries, Inc. Letterhead Appears Here)
June 3, 1997
John L. Gardner, President
Saf T Lok Incorporated
18245 S. E. Federal Highway
Tequesta, FL 33469
Dear John:
Saf T Lok is clearly at a crossroads as you and I clearly agree.
Your addition has brought both management and capital to the company.
Independently you and I have both proposed a series of discrete marketing tests
designed to make Saf T Lok a revenue and non-developmental company.
You three thrusts into Orlando, Tampa and Palm Beach are admirable and represent
an excellent first approach, but with all due respect require greater levels of
marketing specificty and implementation as we have agreed.
I am writing this letter to you and my partners jointly since there is a very
short time fuse on the period required to take Saf t Lok into a significant
revenue stream area.
The following requirements exist for Saf T Lok. After I enumerate the
requirements, I will, in the final pages of this letter share with you how they
become affordable by our company receiving the bulk of its fees in investment
lettered stock, subject of course to the approval of my partners and your
company.
Your requirements include:
I THE CREATION OF A STRATEGIC AND TACTICAL MARKETING PLAN.
No company can launch a significant marketing program without building a
detailed architectural blueprint. A Strategic and tactical marketing plan
is a complex program which normally takes 100 to 200 man-hours and most
mid-size companies will pay between and $20,000 and $25,000 for such a
document. (I have written Citibank's and U.S. Tobacco's plans at many
times that amount.) Here is how we will go about creating Saf T Lok's
strategic and tactical marketing plan:
A Only two in one hundred U.S. businesses have a true strategic and tactical
marketing plan. Many companies have a business plan but lack the strategic
and tactical marketing plan. Other companies have a semblance of a
marketing plan - a few pages - a few notes -a few outlines, even a few
phrases jotted down on the back of an envelope. But this does not
constitute a strategic and tactical marketing plan.
B A strategic and tactical marketing plan is a one hundred hour project at
minimum. It is for this reason that not even the smartest executive, who
have extensive experience in the
<PAGE>
writing of a strategic and tactical marketing plan, do not do it at their
own company and often, therefore, the shoemaker's son goes unshod.
I have written Strategic and Tactical Marketing Plans for Citibank, such as
the original Bank Without Walls direct marketing program, which took one
thousand man hours of time. I have written U.S. Tobacco's strategic and
tactical marketing plan and last year they earned a quarter of a billion
dollars. I was involved in the launch of Clinique, which has become one of
America's most profitable cosmetic companies and a part of Estee Lauder.
Strategic and tactical marketing plans are a blueprint for the future and,
like building a house which in general is much less complicated than
building a company, without an architectural blueprint the house is bound
to not turn out the way that you desire.
C To write a strategic and tactical marketing plan, we need to interview a
cross selection of your:
1. Customers
2. Prospective Customers
3. Employees
4. Vendors
D Only by gaining a knowledge of your company and its position in the
industry can we write a true strategic and tactical marketing plan.
E The outline for your strategic and tactical marketing plan will vary
dependent upon what we learn at Saf T Lok. But, as an example, some of the
chapters might include:
1. Executive Summary
2. Market Position of Saf T Lok
3. Specific Marketing to be Exploited
4. Incremental Channels of Distribution to be Marketed to
5. Nature of Competitive Analysis
6. Specific Marketing Tactics to be Employed
7. Resources Required for the Marketing Plan
8. Specific Budgets for Implementation of the Marketing Plan
9. Risk Factors Impacting Upon the Marketing Plan
10. Contingency Plans of the Marketing Plan
11. Industry Trends and Economic Trends Impacting on the Marketing
Plan
12. Specific Detail Implementation Game Plan of First Year Tactics
13. A Compendium of Appropriate Exhibits and Reference Information
14. Redevelopment and Redeployment of the Company Mission Statement
(based upon
revised or newly created strategic and tactical marketing plan).
15. Other Considerations for the Marketing Plan for Saf T Lok
F Our marketing plans tend to be created in specific stages, which include:
1. The evaluation stage of management's input and the input from vendors,
competitors, customers, prospects and employees.
2. The conceptual stage in which strategies and tactics are discussed and
agreed to.
3. The written draft stage where the initial draft is presented in
considerable detail
<PAGE>
4. The edit phase, where the draft is finalized and completed.
5. The implementation stage where the plan goes from concept and
paper into reality.
6. The modification stage, based upon what is learned in the initial
implementation activities.
A strategic and tactical marketing plan will be written by a senior
member of my staff in consort with me. As you know, I have written
seven best selling books and have advised one-eighth of the Fortune
500 companies.
G The creation of a strategic and tactical marketing plan tends to be a
three month project, from handshake to completion. I have seen major
companies take six to eight months to complete a strategic and
tactical marketing plan. Under compelling time pressures and with
flexible budgets, we have created strategic and tactical marketing
plans for major companies in four to five weeks, although this is
certainly not my desire or favorite project.
H A true strategic and tactical marketing plan can dramatically change
your company's future and increase profits by hundreds of thousands of
dollars and sometimes millions of dollars. We believe that we are the
leading company in America focusing in on the writing of strategic and
tactical marketing plans and have a wealth of experience in every
significant industry classification.
It is our experience that a strategic and tactical marketing plan
cannot be written by a busy Vice President of Sales and Marketing or
President as the number of man hours cannot efficiently be squeezed
out of a fully productive executive's working day. In addition, unless
one has written at least twenty or thirty strategic and tactical
marketing plans, it is unlikely that he or she has the breadth of
experience to understand all of the considerations and all of the
uniqueness required in the writing of such a plan. The typical VP of
marketing or President of a company may have written a plan two or
three times, and wrote one a few years ago, but truly in that case be
current in the market place or heavily experienced.
In one case, one of our clients we believe is as sophisticated and
possibly more sophisticated in sales and marketing. He is a famous
executive written up in all the leading magazines. He, however, chose
us to write his strategic and tactical marketing plan based on time
extension requirements. He just did not have 200 man hours to devote
over a period of two months, which would have caused him to neglect
his dramatically growing and successful business.
We want to become a part of your team and, invariably, we find that
the creation of a strategic and tactical marketing plan serves as a
basis for a long-term relationship as we become a knowledgeable and
integral part of your business. There's no requirement that our
writing of a strategic and tactical marketing plan makes us a long
term player at your company, it just always seems to develop that way,
based upon the success of the plan.
II. PUBLIC RELATIONS
You have made some soirees into public relations not always with the
best of results. You have paid a `C' level public relations agency
more than $5000 a month. If it has taught us anything it is that this
is a very `PR-able' subject. I believe that we can launch considerable
public relations on a national, regional and local level. Here is how
we will go about creating a powerful public relations program for Saf
T Lok.
<PAGE>
A. We will study your company's operations to better understand your
goals, objectives, strengths, opportunities, weaknesses, competitive
positioning and image
B. We will create the theme for an appropriate story or stories which
will be presented in what is called a "pitch" letter.
C. A pitch letter represents, in essence, a personal letter written to
all the appropriate editors or newspapers, magazines and, where
appropriate, broadcast managers of TV and radio stations. It, in
essence, tells them that we have an idea for a story, we think it is
perfect for your particular media and we would like to talk to you.
D. You, of course, will approve our letter, our underlying goals and
objectives, and our theme.
E. Publicity/public relations then tends to be 50-% inspiration and 50%
perspiration. We need to get on the phone and contact each and every
significant editor, publisher, or broadcast manager and negotiate a
story, an interview, a speaking engagement, or your participation in a
particular story they are already doing in which they fell you can
become a significant resource.
F. Our goal is to make you a resource to media that are appropriate for
you, so that when they are thinking about stories about your industry,
they contact Saf T Lok.
G. Sometimes, dependant upon the campaign, we will also issue press
releases. AS you know, a press release is a one or two page
distillation of a newsworthy story, normally written under our
letterhead instead of yours, and released to all the appropriate
media. Our goal is to follow-up on that press release much in the same
fashion that one follows-up on a pitch letter. The greatest single
failing in public relations/publicity is merely mailing out a press
release and hoping that it will be picked up. This invariably is not
the case.
H. We will assist you in setting up relations with a publicity clipping
service who, for a nominal amount each month, searches thousands of
newspapers and magazines looking for mentions of your company name. We
will then show you how to create a press book, which can be integrated
into your sales activities and allows you to measure the efficiency of
publicity/public relations.
I. It is important to point out that publicity/public relations
invariably takes several months from the planning stage, release of
press releases and pitch letters, negotiation stage, implementation
stage, and then is dependent upon the particular publishing or
broadcast schedule of the media. It is a lot like building a house. No
matter how good a builder you are, if you are building a quality
house, you will spend several months pouring the foundation, framing
out the house, finishing it, etc.
J. We have many other ideas on how you can use publicity/public relations
to enhance your company's image. As you know, I have written a number
of best selling books. It is not as complicated as one thinks to
become an author, and we have considerable relationships with all the
major publishing companies. I believe it is possible that we could
have some outside third party assist you in collaboratively writing a
book that would give you industry recognition, as well as substantial
income strength. Authors have no difficulty in gaining radio and TV
interviews, newspaper and magazine write-ups.
<PAGE>
Today's median advance versus a book tends to be $25,000 to
$50,000 for a qualified new author and this self-funding type of
publicity/public relations is one of the most overlooked
opportunities in publicity. You need not be a professional
writer, as there is an army of co-authors happy to work in
conjunction with you and share your royalties and fees.
K. We may also want to conduct some limited market research about
your industry and trends at your industry in Saf T Lok and
release that data to your media. You will be given a side bar
mention and be considered as a significant resource on new trends
and developments in your industry.
L. Studies indicate that most consumers and businesses are building
a barrier to advertisements. If you run a full page ad in the
Wall Street Journal and spend $87,000, that has certain level of
value, benefit and opportunity.
One the other hand, if the Wall Street Journal runs a story on
you, that is ten times more credible and invariably is a fraction
of the cost.
M. Finally, as part of your publicity and public relations program,
we would like to examine your image in every target group and
make recommendations for enhancement of that image. Those target
groups would include:
1. Your customers
2. Your prospective customers
3. Your vendors and prospective vendors
4. Your employees and prospective employees
5. Government regulators, functionaries and administrators
As I am sure you appreciate, the way in which people perceive you
impacts dramatically upon their decision to do business with you,
support you, or confront you.
III DIRECT RESPONSE MARKETING
Your current distribution channel of locksmiths are weak salespeople
who sell what is requested and do a diminimus amount of missionary
selling.
To that extent we must find methods of pulling demand for Saf T Lok
through the channel.
Than demand can be realized through lowcost direct response
advertising including but not limited to:
A. Direct response ads in USA Today, where we for example can buy
all of northern Flordia for less than $600 for a quarter page ad.
By selling the lock direct we will also create overflow demands
in the distribution channel.
B. We can use the same approach in co-op advertising much as we are
doing for the gentleman in Orlando but the ad will have a retail
as opposed to a direct response focus.
C. We will utilize the same approach to a number of dealers in a
single market area.
D. We can utilize direct mail and the answering service owend by
your chairman to create a program where in essence we spend a
dollar and $1.25 is returned to us on a regular basis.
<PAGE>
Direct mail is an extremely complex science. Here is how we will
develop multiple direct mail programs for you.
1). There are more than 41,000 list sources available in the U.S. who
will rent you their database. Which might be appropriate for you
to mail to.
As an example, John, one company makes more than 23 million phone
calls per year to the 7 million U.S. businesses to determine the
nature of the company's operation, the name of the chief
executive officer, sales volume, number of employees, and detail
about the operating business. This phone verified database
takes, as its raw material, the Yellow pages and enhances that
data with information that we regard to be normally 88% to 92%
accurate.
Another vendor utilizes credit reports and maintains almost one
thousand offices throughout the world gathering that data, and
translates it into direct mail lists available at a fraction of
the cost of credit reports. This company is 90% to 94% accurate
in its data.
Clearly, we believe that no company is 100% accurate in its
database, but each company provides a starting point.
Lists are available in every imaginable category including
specific lists of business or individuals who have proven their
responsiveness to direct mail. Fifty percent of all executives
and individuals in the U.S. respond to direct mail offers.
The challenge in direct mail is figuring out which 50% do and
-------------------------------------------------------------
which 50% don't. The use of an intelligent, response-driven
---------------
database helps you to achieve that objective.
2) We will write the copy for a powerful direct mail campaign.
In general, we avoid mass mailings and junk mailings as
executives and sophisticated people like yourself have built a
barrier to junk mail.
People today divide their mail into bills, checks, junk mail and
correspondence. The successful trick of direct mail is to be
included in the correspondence pile.
In general, we recommend personalized, laser-printed letters that
call the prospect by name, speak about his company by name,
utilize a personalized signature, and are printed on expensive
stationery. We also recommend brief letters, because of the
limited time available to all of us in today's business community
and because brief letters trigger the fact that the prospect was
chosen individually, and long letters scream that I am nothing
more than an advertisement.
We have developed proprietary simulated Federal Express formats
and we also often recommend what is called dimensional direct
mail. This is a case in which we utilize some physical dimension
outside of a flat letter to gain the attention of an individual.
AS an example, for a leading utility we sent a gold-plated
screwdriver to the CEO's of all its key customers, talking about
the importance of including our client in all planning for new
<PAGE>
construction. When one receives a gold-plated screwdriver, you
don't forget the mailing and you tend to respond.
There are creative approaches in direct mail that work
effectively in 95% of the cases and have not been overused. As
an example, we have found it effective to send a letter from my
daughter, which is hand crayoned, to companies like Saf T Lok.
The letter says:
Dear Mr. Gardner:
My Daddy is the best marketing expert in the whole world.
I sure hope you use my Daddy's nice company.
Alexa West
Steven West's daughter
Any executive worth his salt, with a fraction of humanity, gets a
kick out of this letter and it elicits an extremely high level of
response.
3) Copywriting is a high art science in direct mail. As you may
know, high-powered professional copywriters often charge as much
as $10,000 just to write an effective sales letter. And, a
successful sales letter which generates hundreds of thousands of
dollars or millions of dollars worth of business is cheap, if it
can change the complexion of your business.
4) We are involved with more than one hundred million mailing pieces
per year, and believe that direct mail is one of our great
strengths. We are proud that we are the primary marketing advisor
to Larry Tucker Inc. Larry is the largest independent cooperative
direct mailer in the U.S., each year mailing more than two
billion offers to one hundred million targeted households. To be
an advisor to Larry Tucker is to be a consultant's consultant.
There is no greater honor, I think, than to provide advice and
direction to someone who is considered to be the oracle of the
direct mail industry.
5) We manage all of our clients' direct mail campaigns. We allow
them to purchase from our wholesale vendors directly, without a
17.65% markup affixed to their costs. As an example, even in
small quantities, we can buy laser printed letters, including
full body personalization, and all letter shop services for just
8 cents a piece plus stationary, postage and list. By buying at
our wholesale prices, you can save considerable costs.
By permitting us to manage the campaign, from concept to
completion, you avoid all the pitfalls of direct mail that busy
or less experienced executives run into. As an example, we will
show you how to manage the postage portion so that it is
minimized. First class postage need not be 29 cents. It can be
reduced as much as one-third by utilizing what is called First
Class Pre-Sort, Destination Code, Bar Code concepts.
Direct mail creates an extremely high quality lead or customer.
Our experience extends itself to direct mail campaigns which
create leads, sell products and build complete businesses through
catalog marketing.
The breadth of our services will include concept development,
copy development, writer's layout, finished copy, project
management, results measurement systems, and the purchasing of
all outside services
<PAGE>
directly from the key vendors. As an example, you may obtain an
extremely high quality list, available on diskette or magnetic
tape, including comprehensive data - not merely a name and
address on the company, for anywhere from 8c to 15c. Because of
our involvement, you can do this in extremely small quantities
and test direct all.
6) Finally, we believe in extensive testing. No direct mail company,
no matter how successful they are, has all the answers and has
them all instantly. Therefore, direct mail is a mathematically
precise science. It is appropriate for a Wharton School person
like myself. We test mailing lists, copy formats, offers, type of
envelope, type of postage. Every detail, when modified, can
dramatically impact upon your results.
It is this expertise that we make available to you to assure the
success of your direct mail campaign.
Over the course of our relationship, we will develop two mail
campaigns for you.
You and I are living proof that direct mail works. If we had not
written to you, we would not have had the pleasure of creating a
relationship.
IV. TELEMARKETING
You must expand the number of truly qualified locksmiths in your
distribution channel and focus on progrmess locksmiths with retail
locations.
To that extent we must create a pilot in-house telemarketing program
designed to sell locks into the locksmith and gun shops, thusly building
our distribution channel.
Here is how we will help you create a telemarketing program.
A. We will write a strategic and tactical plan for your telemarketing
activities based upon the input we receive from you and our
observation of your needs, requirements and operations at Saf T Lok.
B. Our group will create an advertisement to go into the local newspaper,
which will run on Sunday. Each year we run thousands of advertisements
and have developed a state-of-the-art skill to write ads that normally
attract 25 to 50 applicants with just one small one to two inch ad.
Normally, 85% of all of our hiring can be accomplished with just one
small ad, because of the specialized systems that we have developed
(13% will require a second ad and 2% a third ad).
C. We are responsible for screening all of the callers who are applicants
for your telemarketer position. That screening will take place either
physically in your facility, by one of my associates who is highly
trained in telemarketing recruiting, or in our national in-bound 800
telemarketing center where we have dedicated people who do nothing
else other than screen telemarketing applicants.
As you know, we are responsible for hiring and training thousands of
telemarketers each and every year.
D. We will do the bulk of all first interviews at your premises. This
will include an in-depth patterned first interview, where a series of
proven questions are asked each applicant. The interview length, of
course, will vary based upon the
<PAGE>
qualifications of the applicant but, in general, we believe that we
should attempt to conduct not less than six to twelve interviews for
each and every position we intend to fill.
E. All applicants who we believe have potential for consideration on your
part will be given the enclosed proprietary psychological test,
developed by our company and used extensively by our industry. We will
score these tests and upon the completion of the patterned interview,
phone screen and psychological testing, we will establish second
interviews for you to meet all candidates.
Occasionally, we will want to show you a candidate immediately, if you
are available in your building at the time of the interview.
Sometimes this is quite helpful in determining your perception about
who would be a qualified telemarketer for Saf T Lok.
F. Once we have collaboratively made our hiring decision, it will be
subject to an in-depth reference check. As you may know, if you worked
with our executive search division or another leading executive search
company, you would pay approximately 33% of the first year's
compensation, which means the position would cost you $10,000 to
$15,000 to fill per person.
G. We will conduct the in-depth reference check. As you know we maintain
extensive information on a huge number of telemarketing applicants
because of our dominance in this industry. However, we will go beyond
that and literally check references with the same serious intent as if
you were hiring an important sales position, as we believe this is
indeed an important sales position in every sense of the word.
H. Once the hiring decision is complete, you will need to provide the
hires with product knowledge and background about your company.
Normally, during the second week after hire, we will commence
telemarketing training. This training will include a combination of:
1. One-on one role play.
2. Review after each phone call with constructive critique
3. Availability to our library of audio cassettes on professional
telemarketing and selling, in which the telemarketer is requested
to listen to a tape and write a report.
4. Where appropriate, written instruction and critique.
I. To achieve maximum results, we will create a professional
telemarketing script designed to enhance results and maximize
productivity.
The telemarketing script will normally include a basic script, catalog
of objections, and a detailed forms system of MIS system so that you
may flow this data through your operation.
J. We may choose either a manual or computerized reporting system.
Initially, it is normally wise to use a manual system and implement a
computerized system once the telemarketing program is fully polished.
If you elect to purchase a computerized system, we will introduce you
to vendors in this area where you may make a wholesale purchase. Some
of the vendors that we work with
<PAGE>
include TeleMagic and ACT. Professional telemarketing software is not
expensive at all.
K. We will continue to provide training on a weekly basis during the
initial, mission critical period of our relationship. During this
period, you will plan to see us approximately once a week in your
building, training your telemarketer(s) and providing feedback to you
as far as the status of the program.
L. You will plan to hear from us a few additional times each week,
reviewing the telemarketers progress and giving you feedback, and
obtaining your input as well.
M. You will expect that the greatest bulk of our services will be
performed in the first four to six weeks, although the duration of our
relationship to create, recruit, polish and perfect the telemarketing
program tends to be a four month time frame for a small to mid-size
program. Some 90% of our man hours tend to be devoted in the initial
time period.
N. During the course of our relationship, we will perfect and modify the
script or scripts as required. Script writing in telemarketing is very
much of an art science and requires specialized writing skills, that
might not be available to an individual who writes brochures,
advertisements, or TV commercials.
At the completion of our basic program, we will leave you self-sufficient
to manage your own telemarketing operation. We then will put you onto a
maintenance program. When you install such a maintenance program, it will
allow us to reduce our visitations to your premises to just once per month,
much in the same fashion that an outside CPA firm would audit an internal
accounting department just to be certain that they have stayed on track and
have not make any fatal errors in terms of tactics, techniques or
legalities.
There are a number of developments in every industry that require a review
of the legal compliance and our maintenance program focuses heavily in on
system review, people review, legal compliance and, if required, re-
recruiting of additional people.
If, for some reason, your telemarketing program is going to grow
substantially, we would need to extend the scope and fee of our basic
program before we enter into a maintenance phase. Otherwise, the
maintenance program is more than sufficient to assure your continued
success in telemarketing.
V. SALES TRAINING
We must launch a program to reach all of the law enforcement groups in the
U.S. This program will require a combination of telemarketing, driect
mail, and the training of your field sales representatives so that they are
capable of making as forceful and effective presentation as you make to me
on Monday. Here is how we will create a sales training program for your
sales reps.
A. Each year we are responsible for helping in the hiring process for
thousands of key employees, We have learned a number of proprietary
systems and procedures which can dramatically improve the quality of
the search process, while reducing its cost as well.
B. the typical executive search company charges 25% to 33% of the first
year's salary, incentive, bonus and commissions. This means on a
$50,000 position, one would normally pay, as an example, an average
fee to a search company of $15,000. For some companies, this becomes a
prohibitive matter, although we conduct a great number of full fee
searches each and every year.
<PAGE>
C. A more appropriate procedure for mid-size companies like Saf T Lok is
a collaborative executive search.
D. We maintain a very sophisticated database of applicants we have seen
in the past (we often receive thousands of resumes each and every
week). In addition, each year thousands of people attend my seminars
and we add them to our database of potential job applicants.
Receiving thousands of resumes and having thousands of attendees come
to our seminars, we are in a unique position to reach out and find
qualified candidates. Also, by working with hundreds of companies, we
come in contact with huge numbers of effective people who we can
consider for future opportunities. We will not, however, ever solicit
employees from any of our clients under any circumstances.
E. In addition to our database and knowledge of executives throughout the
U.S., we also write unique advertisements which generate a huge number
of qualified applicants. We have added twists to our advertisements
which are controversial yet effective. As an example, we invariably
include the salary level in the headline of the ad. Although you may
not wish to hear this at Saf T Lok, new prospective employees are most
interested in the salary, followed then by the location of the job,
and then the industry and integrity of the company. Using vague
phrases such as very competitive salary is useless.
We also make available alternative response vehicles to our
applicants, which bring out the most aggressive candidates. As an
example, we always provide a fax number for faxing of resumes. In
certain instances, we will even permit phone calls to be received. We
minimize those phone calls by saying: If you are absolutely the
perfect applicant and have credentials and qualifications which
exactly match our requirements, then and only then call us on the
phone.
We get a diminimus number of phone calls, of which half are lunatics
and we take the abuse and time to cull through them, and the other
half become absolutely perfect candidates who just would not respond
to a resume ad. I Have success story after success story of using
this technique. All the incoming calls go into our 800 recruiting
center and are screened by qualified recruiters.
F. Depending upon budget, we will do all phone screening. Most executive
search companies think that by making half a dozen phone calls and
bringing in three applicants and presenting the best one or two
candidates to you that they have done their job. We do not think that
that is the case.
G. We divide our resumes into three categories - definitely not
acceptable -definitely acceptable and maybe. We work the entire
definitely acceptable file. But most companies fail to recognize, who
are not heavily involved in executive searches, that this is a
nighttime job. Our staff must work into the late hours and on weekends
to track down qualified candidates. Any attempt to screen resumes
yourself, and not devote evenings from 6 to 10, Saturdays from 9 to 5
and Sundays from 1 to 5, are destined for failure.
H. Dependant upon budget, we then do the bulk of the first interviews at
your premises. We think that a candidate should see the company he or
she is going to work at, the drive time from his or her home, the
physical work environment, and the general quality of the company.
<PAGE>
I. We then will present to you, for your hiring consideration, those
candidates whom we think are appropriate.
J. Once you have identified the final one or two candidates that you
would like to consider for this position, we propose that you
create a simple work assignment, which in essence is "Please tell
us what you will do for the first 90 days when you are employed
by Saf T Lok Please present that to us either in writing or
verbally and come back for a third and final interview when you
are prepared to make that presentation".
We will assist you in grading this presentation and you will find
an amazing difference in the quality of individuals when they
have to convert from glib interviewing skills to written or
verbal presentation requirements.
K. Finally, where appropriate, we administer our proprietary
psychological test to measure the skills and profile of each
individual. In addition, we will check references and, based upon
information from the applicant, do a unique credit check.
We believe that every applicant you add to your company will help
shape your company's destiny at Saf T Lok and, therefore, we
spend a great deal of time to validate the individual's
credential and business acumen.
L. The net result of this exhaustive process creates a high quality
employee. Because we have developed unique systems, Procedures,
tests and a database, we can conduct this search for a little as
half of what our competitors might charge.
M. In addition, we never cease to be amazed that the custom of our
industry is that they guarantee people for 30 days. At the end of
30 days, the executive search company has no further
responsibility to replace that candidate. We think this is
analogous to guaranteeing a used tire and is inappropriate for a
quality company like Saf T Lok. We, therefore, extend our
guarantees for three to six months and, for good clients, have
been know to replace an executive who leaves even a year after
that process.
VI. EXPORT MARKETING
A huge market exists outside of the U.S. People outside of the U.S.
look at products such as apparel and anything else made in the U.S.,
including gun locks, as being prestigious just because it's
manufactured here. We can launch an export marketing program that will
give us a credit adverse continuing stream of income. Here is how we
would launch that export program together.
A. We must first define the countries that you would like to market
to. We have access to databases of prospects in 178 foreign
countries. That database is selectable by SIC code (nature of
business, number of employees and geographical constraints).
B. We then will create a powerful direct mail letter designed to get
companies to respond to you directly. We write in English and
create the impression in our copy that we have chosen this
company individually and directly.
We have the capacity to write to both major retailers, as well as
distributors. Most export strategies combine a combination of
selling direct to the large chains, as well as creating exclusive
or semi-exclusive distributors in each foreign country.
<PAGE>
If you could imagine the power of having 50 major distributors in
each of the top 50 countries, each ordering on a regular basis
from you with minimum order requirements. and doing so on a
completely credit adverse basis because of the requirement for
LCs.
C. We will take advantage of the opportunities available at the U.S.
Department of Commerce who has extraordinary programs to help
people with their exporting.
We will show you how to contact the commercial attaches in each
of our embassies around the world and have them act as lead
creators and emissaries of goodwill for your products at Saf T
Lok.
D. We will create press releases that go in the foreign media to get
foreign buyers to contact us. We have database of foreign media
in more than 160 foreign countries, including newspapers and
magazines.
E. Where appropriate, you can utilize international telemarketing as
the cost of long distance time to reach Europe and South American
and much of the Orient is now equivalent to the cost of calling
California was ten years ago. Today you can have a five minute
conversation with England and do so for just three dollars.
F. Where appropriate we will set up for you an international 800
number so your customers can call you without paying for the
phone call. Again, a typical prospect can you, speak for four or
five minutes and your cost will average to about three dollars.
It makes the entire world your oyster, so to speak.
G. We will train a member of your staff to become your pro-tempore
export manager. We give him or her direction and help you
penetrate the export market systematically.
H. The export market prospect will respond to you via fax, phone,
and mail. Quite often they will show up on your doorstep to make
purchases. Sometimes they bring embarrassing amounts of cash with
them (in the green form, cash) to effect advantageous purchases.
Once in a while you may find it necessary, if you so desire, to
have a senior member of your management travel to the foreign
market to reinforce relationships.
I. The Department of Commerce will allow us to exhibit at any of
their shows and, in some instances, will exhibit our products for
us at no charge or at a low charge.
J. We also can take advantage of the many specialized export
marketing program which help assure credit. As an example, the
U.S. government has an export shipping guarantee program which in
essence allows them to repay you if the foreign creditor does not
pay.
Other specialized factors like CIT will factor foreign
receivables and pay you all the money the day after you ship,
just charging you a few points as a service charge.
You should be prepared to develop a significant export business
at Saf T Lok. You also should expect that you will need to learn
about the customs and unique procedures in each and every
country. We will try to share that with you over the
<PAGE>
course of our relationship, in order to provide maximum profits over
minimum embarrassment.
The above program, if vended to a mid-size cash paying client over the course of
the year would be $250,000 and $350,000 to our company. I am proposing to my
partners and to Saf T Lok that we develop the following economic program.
1. We receive $175,000 in investment lettered stock of Saf T Lok based on the
conventional discount taken from fee trading stock.
2. The only cash that we receive is a sufficient amount to pay taxes on the
investment lettered stock and that would be spread out at just $2500 per
month over the course of the year without interest or service charge.
3. We would ask Frank, as a gesture of goodwill, to five us 10,000 free
trading shares which we would agree not to sell for a quarter of a year.
4. We would ask for a performance bonus to be solely determined by you. If we
are successful in creating a substantial and profitable revenue stream for
Saf T Lok, we would want you to be generous in that bonus. The amount of
that bonus, however, would be solely up to your reasonable and fair
judgement.
5. You, of course, would be responsible for any out of pocket costs that we
would incur which could include long distance communications, cellular
telephone, Fed Ex, travel, copying, and any outside services purchased by
our company. This amount will be inconsequential.
As you know, we are creating some advertisements for you which we believe will
be necessary for you next week although we will not be in a position to approve
this agreement for two weeks. If the program is approved by both parties,
please treat those advertisements as a gift of a new relationship. If either
one of us cannot go forward with this program as outlined, we will just charge
you the going hourly rate which will not break the bank at SAF T LOCK.
It would be useful if we exchanged some references. The most recent stock
transaction that we have done is with Just Great Coffee in Paramus, New Jersey.
Please check with Bruce Seitz (president) about our capabilities. He can be
reached at 201-742-4461.
Additional Client references of companies of a smaller nature are:
Advanced Fitness Freedom Mortgage
Bill Alter Stan Middleman
Cherry Hill, NJ 08034 Mt, Laurel, NJ 08054
609-427-9524 609-231-9800
SmartServ Online Creative Embroidery
Mel Eisen Steve Diamond
Stamford, CT 06902 Bloomfield, NJ 07003
203-353-5950 201-429-2740
Our financial references are:
Steven Goldstein First Union Bank (WAX)
BankAtlantic Renee Elrod
<PAGE>
Sunrise, FL Weston, FL
954 748-1455 954 462-5276
Premium Federal Savings Strong Funds
Gibbsboro, NJ 08026 Milwaukee, WI
609-346-1100 1-800-368-3863
Newport Discount Brokerage
Boca Raton, FL 33487
561 997-0471:
I look forward to our teleconference on Monday at 4:30. No doubt we will be
talking before.
Kindest regards,
Steven West
/lb
Enclosure
Cc: Frank Brooks, Chairman of Board
<PAGE>
Exhibit 99.2
AGREEMENT
This agreement is entered into this 15th day of June, 1997 between SAF T LOK
INCORPORATED (hereinafter "Saf T Lok") a Florida corporation with its primary
office located at 18245 SE Federal Highway, Tequesta, Florida 33469, and WEST
MARKETING INDUSTRIES (hereinafter "WMI") a Florida corporation with its primary
office located at 1000 West McNab Road, Pompano Beach, Florida 33069.
WHEREAS, Saf T Lok is in the business of marketing gun locks and is in its
developmental and early marketing stages
WHEREAS WMI is in the business of providing marketing services to mid-size and
growing companies
WHEREAS the parties are desirous of WMI providing services to Saf T Lok and Saf
T Lok receiving those services in a program in which WMI will receive the bulk
of its fees in investment lettered stock
NOW the parties do herefore agree:
1. WMI shall provide Saf T Lok with all those services outlined in its letter
of June 3rd (See Exhibit 1 and 2).
2. WMI shall provide additional services to Saf T Lok which in WMI and Saf T
Lok's reasonable judgement are also required to help Saf T Lok achieve its
success, including but not limited to advice and direction on marketing via the
Internet and all forms of development of retail coop and direct response
advertising.
3. For the purposed of this Agreement, invested letter stock shall be valued at
a 25% discount from the average bid and asked price for the ten days preceding
this agreement.
4. The cash portion of this agreement shall be payable on the 15th of each
month, divided into 12 payments without interest or carrying charge commencing
June 15th.
5. Out of pocket expenses shall be billed as incurred.
6. WMI agrees that it will not represent any competitive companies
manufacturing competitive gun products.
With intent to be legally bound, the parties do herefore affix their ands and
seals
Saf T Lok Incorporated
by: /s/ John L. Gardner
-------------------
John G. Gardner, President
West Marketing Industries, Inc.
<PAGE>
by: /s/ Steven West
---------------
Steven West, President
