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UNITED STATES.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
COMMISSION FILE NO. 1-11968
--------------------------
SAF T LOK INCORPORATED
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0142837
(State of Incorporation) (I.R.S. Employer Identification)
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
(address of principal executive offices)
(561) 478-5625
(Company's telephone number, including area code)
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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:
Title of each Class: COMMON STOCK, $0.01 PAR VALUE
Name of each exchange on which registered: THE NASDAQ STOCK MARKET, INC.
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 total revenues for its fiscal year ended December 31,
1999, were $209,173.
The aggregate market value of the Company's voting stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on March 31, 2000 (based upon the average bid and asked prices of such
stock on The Nasdaq Stock Market, Inc. on that date) was approximately
$43,636,000.
On March 31, 2000, there were 15,177,869 shares of the registrant's
common stock outstanding.
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PART I ......................................................................... 1
Item 1. Description of Business ........................................... 1
COMPANY HISTORY ........................................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION: ............... 1
THE SAF T LOK-Registered-Trademark GRIP LOCK .............................. 1
THE SAF T LOK-Registered-Trademark MAGAZINE LOCK .......................... 1
COMPATIBLE FIREARMS........................................................ 2
GUN BRANDS AND MODELS................................................... 2
SAF T LOK-Registered-Trademark CUSTOMERS .................................. 3
LAW ENFORCEMENT USE .................................................... 3
CONSUMER USE ........................................................... 4
GENERAL SERVICES ADMINISTRATION CONTRACT ............................... 4
ENDORSEMENTS .............................................................. 4
METHODS OF DISTRIBUTION .................................................. 4
TERMINATION OF USA DISTRIBUTION AGREEMENT .............................. 5
COMPETITIVE BUSINESS CONDITIONS ........................................... 5
MATERIALS, SUPPLIERS AND MANUFACTURING .................................... 6
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION ........................... 6
GOVERNMENTAL REGULATION AND REGULATORY REQUIREMENTS ....................... 6
RESEARCH AND DEVELOPMENT .................................................. 7
EMPLOYEES ................................................................. 7
PUBLIC AVAILABILITY OF COMPANY INFORMATION ................................ 7
Item 2. Description of Property ............................................ 7
Item 3. Legal Proceedings .................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ................ 8
PART II ........................................................................ 8
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters ............................................................ 8
LISTING AND TRADING PRICES ................................................ 8
ISSUANCE AND SALE OF SECURITIES ........................................... 9
6% CONVERTIBLE DEBENTURES .............................................. 9
COMMON STOCK ........................................................... 9
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 9
REVENUES AND EXPENSES ..................................................... 10
LIQUIDITY AND SOURCES OF CAPITAL .......................................... 12
SALE OF DEBENTURES ..................................................... 12
NON-CASH PAYMENTS AND SALARY DEFERRALS ................................. 12
CONTEMPLATED STRATEGIC PARTNERSHIPS .................................... 12
OTHER FINANCING EFFORTS ................................................ 12
PRODUCT LIABILITY ......................................................... 12
ANTICIPATED MAJOR EXPENSES ................................................ 12
CAPITAL RESOURCES AND EXPENDITURES ........................................ 12
OUTLOOK ................................................................... 12
GUN SAFETY ADVANCES .................................................... 13
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Item 7. Financial Statements and Supplementary Data ........................ 13
Item 8. Changes in Accountants ............................................. 13
PART III ....................................................................... 14
Item 9. Directors and Executive Officers of the Registrant ................. 14
BUSINESS EXPERIENCE ....................................................... 14
SIGNIFICANT EMPLOYEES AND FAMILY RELATIONSHIPS ............................ 14
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ................... 15
Item 10. Executive Compensation ............................................. 15
SUMMARY COMPENSATION TABLE ................................................ 15
OPTION/SAR GRANTS TABLE ................................................... 15
REPORT ON REPRICING OF OPTIONS ............................................ 15
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE ........ 15
COMPENSATION OF DIRECTORS ................................................. 16
EMPLOYMENT AND CONSULTING AGREEMENTS ...................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 17
Item 12. Certain Relationships and Related Transactions .................... 18
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 18
FINANCIAL STATEMENTS: ..................................................... 18
EXHIBITS TO FORM 10KSB: ................................................... 18
CURRENT REPORTS ON FORM 8-K ............................................... 18
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY HISTORY
Saf T Lok Incorporated (the "Company") through its subsidiary, Saf T
Lock Corporation, a Florida corporation, ("STL"), designs, develops,
manufactures and distributes patented and proprietary safety locks for handguns.
STL was organized in 1989 by Franklin W. Brooks to develop a proprietary gun
locking device. Until February 1996, it remained a privately held company
focused on developing the Saf T Lok-Registered-Trademark gun lock, without
revenue. STL was acquired by the Company by merger on February 13, 1996.
The Company was incorporated in Florida in July 1989, under the name of
RGB Sales and Marketing, Inc., and in October commenced operation of a retail
store selling Amiga computers and producing tutorial programs for such
computers. An initial public offering of common stock was held on June 23, 1993,
during which the Company sold a total of 1,340,000 shares of common stock at a
public offering price of $7.00 per share. The acquisition of STL in 1996 marked
the end of the Company's involvement in the video editing business. The Company
is currently focused on the design, development, manufacture, and marketing of
Saf T Lok-Registered-Trademark combination locks which, when integrated into a
handgun, prevent both accidental and unauthorized discharge of the weapon,
including unintentional discharge by children and assailants. Two types of gun
locks, the Grip Lock and the Magazine Lock, are currently produced by the
Company. The Grip Lock was the first product developed by STL, prior to its
acquisition by the Company. The first Magazine lock was conceived in late 1996,
the prototype developed and produced in 1997, and production and shipment
commenced in June 1998.
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, (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
contained 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 that 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 attending litigation and government investigation,
inability to raise additional capital or find strategic partners, leverage and
debt service, governmental regulation, dependence on key personnel, competition,
including competition from other manufacturers of gun locks, costs and risks
attending manufacturing, expansion of operations, market acceptance of the
Company's products, limited public market and liquidity, shares eligible for
future sale, the Company's common stock ("Common Stock") being subject to penny
stock regulation and other risks detailed in the Company's filings with the
United States Securities and Exchange Commission ("SEC" or "Commission").
THE SAF T LOK-Registered-Trademark GRIP LOCK
The Saf T Lok-Registered-Trademark Grip Lock is a mechanical
combination lock that attaches to a handgun. It is easily installed, removed and
operated by a gun owner. When unlocked, it neither hampers nor interferes with
use of the gun. When engaged, it locks the gun into the "no fire" position,
stopping normal operation and preventing it from being fired. The Saf T
Lok-Registered-Trademark Grip Lock does not involve keys or batteries that might
be lost or fail.
The body of the lock is positioned under, and concealed by, the gun's
grip. The combination mechanism is located at the top of the grip, where it is
easily accessible. The Saf T Lok-Registered-Trademark Grip Lock is mounted on a
plate placed under the gun's grip and is installed by removal of the grip,
insertion of the lock's mounting plate and replacement of the original grip with
custom rubber grips sold with the Grip Lock. When locked, the Grip Lock cannot
be removed without special tools or damage to the gun, even if the grips are
removed. The lock engages by moving its safety slide backward with one finger
while pushing the reset button with another finger, a simultaneous action
designed to prevent accidental locking. The Grip Lock may be engaged even if the
gun is loaded. In the firing position, the gun can be unlocked in about three
seconds by depressing each of three individually programmed buttons the correct
number of times, in any order, without looking at the lock or the gun. Each lock
comes with a preset combination, but the Company produces a separately marketed
combination changing kit that allows the gun owner to select a different,
personal, combination.
THE SAF T LOK-Registered-Trademark MAGAZINE LOCK
Like the Grip Lock, the Saf T Lok-Registered-Trademark Magazine Lock is
a precision, miniaturized, all mechanical, combination lock that attaches to the
handgun, is easily installed, removed and operated by a gun owner, and when
unlocked, neither hampers nor
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interferes with the use of the gun. Its has two combination buttons that each
move in two directions, yielding 10,000 possible combinations. The Magazine Lock
replaces the gun's magazine. The locking mechanism, located at the bottom of the
lock/magazine, occupies the space of four to six cartridges, depending on the
caliber. The Magazine Lock is installed by inserting the Saf T
Lok-Registered-Trademark into the gun's magazine receptacle. When locked, a
lever engages the trigger bar or similar part of the gun's firing mechanism, A
second lever locks over the trigger bar or frame to prevent removal of the
magazine. The lock is disengaged by entering a four-digit combination, which can
also be personalized.
COMPATIBLE FIREARMS
The American Firearms Industry, a trade association, estimates that
there are 60-65 million handguns and 30-35 million handgun owners in the United
States. According to the February 2000 COMMERCE IN FIREARMS IN THE UNITED STATES
published by the U.S. Bureau Of Alcohol, Tobacco and Firearms and the Department
of Commerce, an estimated two million new and two million second-hand handguns
are sold in the United States annually.
GUN BRANDS AND MODELS
At this time, Saf T Lok-Registered-Trademark gun locks are available
for the following gun brands and models:
COLT, SPRINGFIELD, AUTO ORDINANCE SINGLE COLUMN, SEMI-AUTOMATIC PISTOLS
1911-A1 & clones* Commander & clones*
Officer, Compact & clones*
(Will not work properly with some replacement or extended safety levers.)
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ROSSI REVOLVERS (will not fit m-877, 677 and lady rossi) GLOCK
Model M-68 Model 17 9 mm
Model M-720 Model 19 9 mm
Model M-88 Model 22/24 40 cal
Model M-851 Model 23 40 cal
Model M-515 Model 26 9 mm
Model M-971
Model M-518 BERETTA
Model M-971-VRC Model 92 9 mm
Model 96 40 cal
RUGER REVOLVERS Model 92 9 mm
SP 101 Model 96 40 cal
SMITH & WESSON K & L FRAME REVOLVERS
Model 10 Model 17
Model 65LS Model 617
Model 686 Plus Model 686 Magnum
Model 13 Model 19
Model 66 Model 686
Model 686 Quad Model 14
Model 64 Model 67
Model 686 Power Port Model 686 Combat
Model 696 Model 15
Model 65 Model 586
TAURUS SIG SAUER
Model 85 Model P226 9mm
Model 605 Model P228 9mm
Model 94 Model P229 9mm
Model 941
SMITH & WESSON J-FRAME REVOLVERS
Model 36 Model 36 LS
Model 37 Model 38
Model 49 Model 60
Model 60LS Model 63
Model 317 Model 442
Model 637 Model 638
Model 640 Model 642
Model 642LS Model 649
Model 651 Model 940
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The Company is currently working to develop new Saf T
Lok-Registered-Trademark gun locks to fit an expanded range of gun models.
SEE "Research and Development."
SAF T LOK-Registered-Trademark CUSTOMERS
The Company believes that the greatest demand for Saf T
Lok-Registered-Trademark gun locks will come from those who use handguns for
guarding their households or for personal protection. This includes both
individual consumers among the general public and professionals in the law
enforcement community. The Company further believes that these individuals
and entities will be willing to pay more for the benefits of Saf T
Lok-Registered-Trademark gun locks, which are considerably more expensive
than simple trigger locks. Saf T Lok-Registered-Trademark gun locks are also
designed to be easily integrated into the handgun design and manufacturing
process, which is another potential market for the Company's products. SEE
"Outlook-Gun Safety Advances." The Company does not plan to produce Saf T
Lok-Registered-Trademark gun locks for the cheaper, small caliber, "Saturday
Night Special" category of handguns, as the locks for these guns might well
cost more than the gun itself.
LAW ENFORCEMENT USE
Saf T Lok-Registered-Trademark gun locks are issued by police and
other law enforcement organizations for use by their officers, for the
off-duty home storage of handguns in daily use. Currently, Saf T
Lok-Registered-Trademark gun locks have been purchased by:
- the Boston Police Department, Boston, Massachusetts;
- the Carbondale Police Department, Carbondale, Colorado;
- the Dothan Police Department, Dothan, Alabama;
- the Elmira Police Department, Elmira, New York;
- the Evans Police Department, Angola, New York;
- the Cambridge Police Department, Cambridge, Massachusetts;
- the Coral Springs Police Department, Coral Springs, Florida;
- the Cumberland County Sheriffs Department, Fayetteville, North
Carolina;
- the Garwood Police Department, Garwood, New Jersey;
- the Glouster Police Department, Glouster, Massachusetts;
- the Grant County Sheriffs Department, Lancaster, Wisconsin;
- the Harnett County Sheriff's Department, Lillington, North
Carolina;
- the Harvard University Police & Security, Cambridge,
Massachusetts;
- the Key Biscayne Police Department, Key Biscayne, Florida;
- the Logan Police Department, Logan, Utah;
- the Los Angeles Unified School District Police, Los Angeles,
California;
- the Macomb Police Department, Macomb, Illinois;
- the Maryland National Capitol Park Police, Silver Springs,
Maryland;
- the Metro Washington Airport Authority, Washington, DC, at Reagan
National and Dulles Airports;
- the Miami Springs Police Department, Miami Springs, Florida;
- the Monroe County Sheriffs Department, Bloomington, Indiana;
- the National Park Service, Brunswick, GA;
- the Navajo Nation Department of Public Safety, Window Rock,
Arizona;
- the Niles Police Department, Niles, Illinois;
- the North Carolina State Highway Patrol, Raleigh, North Carolina;
- the Norwood Police Department, Norwood, Massachusetts;
- the Oaklawn Police Department, Oaklawn, Illinois;
- the Orland Park Police Department, Orland Park, Illinois;
- the Owen County Sheriffs Department, Spencer, Illinois;
- the Palm Beach County Sheriffs Department, West Palm Beach,
Florida;
- the Palmetto Police Department, Palmetto, Florida;
- the Southern Pines Police Department, Southern Pines, North
Carolina;
- the Springfield Police Department, Springfield, New Jersey;
- the Sullivan County Sheriffs Department, Sullivan, Indiana;
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- the U.S. Customs, Washington, DC;
- the U.S. Immigration & Naturalization Service, Altoona,
Pennsylvania;
- the U.S. Marshals, Boston, Massachusetts; and
- the Office of Inspector General, U.S. Nuclear Regulatory
Commission, Washington, DC.
The Company believes that the law enforcement community presents a
substantial market for Saf T Lok-Registered-Trademark gun locks. According to
the Department of Justice, the more than 700 general purpose State and local
law enforcement agencies that employ 100 or more full-time sworn personnel
collectively employ more than 381,000 such personnel. U.S. Housing Secretary,
Andrew Cuomo, who is leading the President's initiative on gun control in
coordination with cities nationwide, estimates that governments at all levels
together buy more than 500,000 police guns annually.
CONSUMER USE
The Consumer segment of Saf T Lok-Registered-Trademark's potential
market consists of non-law enforcement handgun owners who use guns for home
defense and self-protection. It is estimated that these individuals
collectively own more than sixty-five million handguns, and purchase over two
million more each year, from licensed firearms dealers in the United States.
GENERAL SERVICES ADMINISTRATION CONTRACT
In March 1999, the U.S. General Services Administration (GSA), the
purchasing arm of the Federal government, awarded a five-year contract to the
Company for its products (the "GSA Contract"). The contract with the GSA's
Federal Supply Service runs from March 1, 1999, through February 29, 2004. While
the contract does not obligate the federal government to purchase any of the
Company's products, it allows federal law enforcement agencies and other
departments and offices in all fifty states, Washington D.C., Puerto Rico and
the Virgin Islands to procure Saf T Lok-Registered-Trademark gun locks directly
from the Company, or over the Internet from GSA Advantage, on the best
pre-negotiated terms.
ENDORSEMENTS
Saf T Lok-Registered-Trademark gun locks have received the following
endorsements:
- INSTITUTE FOR POLICE RESEARCH. Independent evaluation by the Institute
for Police Research (the "IPR"), a branch of the International Union
of Police Associations, AFL-CIO, concluded with a strong
recommendation about Saf T Lok-Registered-Trademark gun locks. Trigger
locks, conversely, were "found to be of very little value."
- FRATERNAL ORDER OF POLICE. In June 1998, Saf T
Lok-Registered-Trademark became the only gun locking device endorsed
by the Fraternal Order of Police (FOP), one of the most prominent
police labor organization in the country, with over 272,000 members.
The Company pays an annual licensing fee of $25,000 to the FOP.
- SAFE AND VAULT TECHNICIANS ASSOCIATION. Saf T Lok-Registered-Trademark
has been endorsed as "one of the most important advancements this
century in firearm safety" by the Safe and Vault Technicians
Association, a premier organization for security professionals.
- CITY OF BOSTON POLICE DEPARTMENT. 97% of the seventy-seven City of
Boston Police Department officers who field evaluated Saf T
Lok-Registered-Trademark gun locks prior to purchase by that
Department, for off-duty use by its officers, rated the lock easy to
use.
METHODS OF DISTRIBUTION
In 1996, the Company began marketing the Grip Lock by advertising in
gun magazines to attract gun dealers who would then promote the sale of Saf T
Lok-Registered-Trademark gun locks to their customers. While the Company
signed up more than 1,350 gun dealers and locksmiths in the United States,
sales were disappointing, because the law enforcement market was rapidly
switching from revolvers to semi-automatic models that the Company had not
yet developed a lock for, and the Company had insufficient resources for a
sustained advertising campaign.
Resources were therefore devoted to development of the Magazine Lock,
and further promotional efforts delayed 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 market and the law enforcement market. In early 1998 the
Company entered a distribution agreement with United Safety Action, Inc. to
develop the retail consumer market, SEE "Termination of USA Distribution
Agreement," below. This agreement was terminated in 1999 because the Company was
dissatisfied with USA's performance under the contract.
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The Company currently conducts its own distribution, through retail
stores, the Internet and direct sale to law enforcement authorities. In 1999,
most of the Company's sales revenues were derived from sales to twenty-eight
law enforcement agencies. Additional methods of distribution and third party
distributors are currently being explored.
TERMINATION OF USA DISTRIBUTION AGREEMENT
On February 11, 1998, the Company entered into a distribution agreement
(the "Distribution Agreement") with a newly formed distribution company, United
Safety Action, Inc. ("USA) for the sale and purchase of the Company's Grip Locks
and Magazine Locks. Under the Distribution Agreement, USA had the exclusive
right to sell to the retail consumer segment of the market while the Company
focused on marketing to the law enforcement community and gun manufacturers.
USA's performance under the Distribution Agreement proved
unsatisfactory in the view of Company management. It was terminated in May
1999 by agreement of the parties. The amounts owed by USA to the Company were
written off, although the Company was able to credit outstanding commissions
owed. The Company is now free to market to the retail customers itself or
through other third parties.
COMPETITIVE BUSINESS CONDITIONS
The Company's competitors include Master Lock, manufacturer of trigger
locks, numerous manufacturers of safes and lock-boxes, as well as upcoming
developers of "smart gun" technology like Colt's Manufacturing Co. Some or all
of these competitors may be larger, better capitalized companies with a longer
production history and existing distribution channels. The Company's products
compete with lock boxes, trigger locks, cable locks, ring locks and the evolving
smart guns. Many of these products are more widely known and less expensive than
the Company's products. In addition, while the Company believes that there are
no generally available comparable products on the current market at a similar
price, it nevertheless expects competitors to attempt development of similar
products, possibly reducing the Company's sales or profit margins or both.
TRIGGER LOCKS AND CABLE LOCKS. Trigger locks were the first widely
available commercial gun lock, and are consequently most commonly known to
consumers. However, they cannot be unlocked quickly and are not recommended for
use on a loaded weapon. The first trigger lock, which opens with a key, was
marketed by Master Lock Company. More recently, combination padlocks and
combination built-in locks have also been marketed. These locks are opened by
aligning the numbers on three individual wheels. Turning the wheels can be
awkward, and proper alignment difficult to accomplish quickly or in the dark.
Electronic trigger locks, another option, are subject to inopportune battery or
electronic failure.
MAGNETIC RING LOCKS. These are magnetic locking devices attached to the
frame of a handgun under the grip that blocks a gun's firing action. The lock is
released by aligning an external magnet with the magnet inside the gun. The
interaction of the two magnets moves the locking lever, allowing the gun to be
fired. Although these locks have been available for a number of years, they have
not gained significant market share. This may be because the advantages of the
passive locking mechanism are offset by the cost of installation and
difficulties in use. For example, the most well known of these devices requires
modification of the gun itself and installation by a gunsmith, which costs
approximately $250 per gun, although a less expensive model, comparable in price
to Saf T Lok-Registered-Trademark gun locks, may become more widely available.
Notwithstanding the cost, however, magnetic ring locks still have several other
disadvantages. For example, gun operators must wear a rather unattractive magnet
ring any time the gun is used. In addition, since the magnet in the ring must be
properly aligned with the magnet in the gun for the lock to release, proper fit
is important and may be difficult to achieve given the wide variety of hand and
finger sizes.
BOX LOCKS AND GUN SAFES. Both box locks and gun safes effectively limit
access to guns. Although the most inexpensive models retail for about the same
price as Saf T Lok-Registered-Trademark gun locks, most are considerably more
expensive. They are also generally not attractive enough to display in a readily
available place in the home or office. Moreover, since they use either key,
combination or electronics locks, they have some of the same limitations as
trigger locks.
"SMART GUN" TECHNOLOGY. So-called "smart gun technology" which
identifies an authorized gun owner electronically may become a competitive
threat to the Company in the future. One type of "smart gun" has a built-in
electronic lock that "reads" a coded radio signal from a device worn by the
user. At this time, however, such devices are very expensive and not
commercially available. Therefore, the Company does not consider them a
competitive threat at this time, especially in the used gun market.
Another type of smart gun technology, which validates the authorized
user by reading fingerprints, has also been publicized. The Company has looked
into the possible availability of such devices, and to the best of its
knowledge, believes that the required technology cannot yet be adapted to
handgun use. In fact, the major promoter of fingerprint technology, Oxford Micro
Devices, has discontinued further development of fingerprint activated gun
locks.
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The Company believes that Saf T Lok-Registered-Trademark gun locks are
better than competing products because they can be:
- - kept readily available;
- - used on a loaded gun;
- - disengaged within seconds;
- - operated by touch, even in the dark; and
- - opened without keys or electronics.
In addition, retail prices of gun locks run from the $5-$20 range for
low-end trigger locks, several hundred dollars for gun boxes to several thousand
dollars for the sophisticated high-tech models not available to the general
public. The Saf T Lok-Registered-Trademark is moderately priced at $69.95 for
the Grip lock and $89.95 for the Magazine lock. Notwithstanding the foregoing,
however, Saf T Lok-Registered-Trademark gun locks will compete with trigger
locks, gun boxes and smart gun technology at the retail store level for shelf
space, advertising, and promotional displays.
MATERIALS, SUPPLIERS AND MANUFACTURING
Saf T Lok-Registered-Trademark gun locks are made in component parts.
Both the Grip Lock and the Magazine Lock employ locking mechanisms that are die
cast in zinc alloy and nickel-plated. The Grip Lock also includes rubber grips,
and the Magazine Lock a metal and plastic magazine to hold ammunition.
Historically, the Company has found, and continues to believe, that an ample
supply of the raw materials used in the manufacture of its product components
will remain available from numerous sources at reasonable prices.
The manufacturing of Saf T Lok-Registered-Trademark gun lock
components is subcontracted to various specialists. For example, Dynacast and
Meier Tool Engineering are the die manufacturers who cast and stamp the lock
components. Vintage Industries, a grip manufacturer injection molds rubber
gun grips. The Magazine Lock tube and levers are currently being manufactured
by ProMag Industries, Inc., a well-known magazine manufacturer. Plastic
molding is provided by Modern Molding and machining is done by Microtove
Engineering and Netam Industries. The gunlocks are assembled, tested for
quality assurance and packaged for distribution at the Company's West Palm
Beach, Florida location. The Company has demonstrated capacity to assemble
and ship 5,000 locks per week, and can increase to approximately 10,000 units
per week if needed.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company owns twelve U.S. patents on the Saf T
Lok-Registered-Trademark Grip Lock and the Magazine Lock and related
inventions, and has corresponding protections in twenty-one European
countries. The issued patents, dated January 29, 1991 through November 23,
1999, were assigned to the Company by Franklin W. Brooks. The patent numbers
are: 4,987,693; 5,229,532: 5,335,521; 5,090,148; 5,140,766; 5,408,777;
5,457,907; 5,732,497; 5,749,166; 5,782,029; 5,987,796; and 5,974,717. The
Company also filed patent application number SN 09/411,881. Together, the
issued and pending patents cover a variety of ways of locking a variety of
firearms. These patent numbers are prominently displayed on both the Grip
Lock and the Magazine Lock, as part of the Company's efforts to protect its
patents and guard against infringement.
The Company received Registration Number 2,131,422 from the United
States Patent and Trademark Office for its logo "Saf T Lok-Registered-Trademark"
on January 20, 1998. In May 1998 the terms "Personalized Handgun" (TM) and
"Personalized Firearm" (TM) were also registered.
GOVERNMENTAL REGULATION AND REGULATORY REQUIREMENTS
Neither the Company nor Saf T Lok-Registered-Trademark gun locks are
subject to specific governmental regulation or standards, although the sale of
handguns is heavily regulated. Recently, however, several states have considered
types of enhanced gun regulation that impact handgun safety locks.
Both federal and state governments have been reviewing ways to
increase gun safety and minimize gun violence. One way of accomplishing this
is to require gun manufacturers to incorporate safety devices similar to the
Company's products into all handguns sold. The first regulation of this kind
was passed by the Maryland state legislature in early April 2000, and signed
into law by Governor Glendenning on April 11, 2000. More than half a dozen
states are considering similar laws. Although gun manufacturers have
uniformly resisted this kind of legislation in the past, this view is
changing. For example, Smith & Wesson agreed in March of 2000 to include
safety locks with all handguns it sells. They will provide external locks
initially, and internal ones within the next few years.
6
<PAGE>
RESEARCH AND DEVELOPMENT
During 1999, the Company spent a total of approximately $64,145 on
research and development. Tooling revisions and obsolescence of older parts
due to the Company's continuous product upgrading accounted for approximately
$54,000. The remainder was spent on design of new product models and
prototyping new lock designs. New models developed and marketed in 1999, and
targeted for the law enforcement community, fit the Sig Sauer P228 and P229
semi-automatic pistols. Design of gun locks for Glock Models 20 and 21, the
Smith & Wesson 9mm and 40 caliber high capacity semi-automatic pistols, and
the Walther Models P99/S and W SW99 was also commenced. In 1998, the Company
spent approximately $29,946 on research and development, mostly allocated to
design of new product models for Sig and Beretta handguns, and miscellaneous
tooling revisions.
EMPLOYEES
Including its executive officers, as of December 31, 1999, the Company
had nine full time employees. None of the these employees was covered by a
collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PUBLIC AVAILABILITY OF COMPANY INFORMATION
The public may read and copy any materials filed by the Company with
the SEC, at the Commission's Public Reference Room, located at 450 Fifth Street,
N.W., Washington, DC 20549. Information about operation of the Public Reference
Room is available by calling 1-800-SEC-0330. All electronic filings, including
those of the Company, are available on the Commission's website, at
http://www.sec.gov. Additional information about the Company and its products is
also available at http://www.saf-t-lok.com.
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 $98,000.
The lease term is through July 2003. In September 1998 the assembly and
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 Chairman of the Board Franklin W. Brooks in the Circuit
Court for Martin County, Florida, for defamation and loss of consortium
occurring during, and as a consequence of, Ms. Fogel's brief tenure as
President of the Company in November 1996. The case was settled on April 30,
1999. The plaintiff received $50,000 in cash from the Company's insurance
company and a one year stock option on 110,000 shares of Common Stock at an
exercise price of $0.10 per share. The options expire on September 24, 2000.
On October 4, 1999, Ms. Fogel filed a complaint in the Circuit Court for Palm
Beach County, Florida, Case No. CL 99-9579AW alleging the Company's failure
to timely comply with the settlement and requesting damages in excess of
$15,000. The Company intends to defend this action vigorously.
On July 24, 1998, August 27, 1998, and October 20, 1998, three class
action lawsuits were filed against the Company, Mr. Brooks and the Company's
former President and CEO, John Gardner, in the United States District Court
for the Southern District of Florida. The three suits allege violations of
the federal securities laws and, more specifically, that the Company and its
officers made misrepresentations or failed to disclose material information
about a development agreement with Semiconductor Laser International
Corporation and a highly favorable research report issued by Woodward Trading
Company. Settlement of the case was announced in the summer of 1999, and
includes an $850,000 payment to the plaintiffs, paid by the Company's
insurer. The Company will bear all legal costs of the suits directly, and
consistent with its Articles of Incorporation, will indemnify Messieurs
Brooks and Gardner to the fullest extent permitted. Final judgment, including
approval of the settlement, was entered on February 14, 2000, ending the suit
for all but the three individuals who opted out of the plaintiff class. These
individuals are not precluded from bringing individual claims against the
Company, but will not share in the settlement. The Company is unable to
speculate on what, if any, actions these individuals may take in the future.
On May 29, 1998 the Company received notice of an informal inquiry
by the SEC Division of Enforcement concerning activities between January 1,
1996 and May 29, 1998 and focusing on the Company's description of the terms
of the Distribution Agreement, which is described in "Methods of
Distribution--Termination of USA Distribution Agreement." The Company
complied with all document production requests and Mr. Brooks appeared for
subpoenaed testimony on February 18, 1999. At that time the Company received
a copy of the Commission's Order Directing Private Investigation and
Designating Officers to Take Testimony dated September 22, 1998, File No.
HO-3451, citing possible violations of the Federal Securities Laws by Company
management over an extended period. While it is too early to speculate on the
outcome of this investigation, or its potential impact on the Company's
business, the Company has not been asked to respond to the allegations
through a "Wells" submission, nor has any action or litigation been
instituted. The Company's insurance carrier has denied coverage of defense
costs related to this investigation.
7
<PAGE>
On August 17, 1999, the Company was named as defendant in a
declaratory judgment action pending in the United States District Court for
the District of Arizona by Safe-T-Hammer, Inc., Case No. CIV 99-1479-PHX-RGS.
The plaintiff seeks a declaratory judgment that its trademark does not
infringe upon the Saf T Lok-Registered-Trademark trademark, to invalidate the
Saf T Lok-Registered-Trademark trademark, and attorneys fees and costs. The
Company has answered the complaint and is contemplating a counterclaim for
trademark infringement, if the matter cannot be settled.
On March 28, 2000, Winner Holding LLC, Winner Club LLC and James E.
Winner Jr. (collectively, "Winner") filed a complaint against the Company and
Mr. Brooks in the United States District Court for the Western District of
Pennsylvania (Case No. 00-610). The suit arises from discussions between the
parties regarding a possible merger. Winner's complaint purports to allege,
among other things, causes of action for breach of contract, fraud, negligent
misrepresentation and breach of duty to negotiate in good faith, and seeks
compensatory damages in excess of $75,000 for each cause of action. Winner is
also seeking a permanent injunction preventing the Company from being
acquired by another party, as well as punitive damages of at least
$5,000,000. The Company intends to defend the suit vigorously, and believes
that available documentary evidence demonstrates that the Company was not
legally obligated to Winner. The Company has notified its insurance carriers
of the filing of the Winner Complaint to determine whether such carriers will
provide either indemnity or a defense. Pursuant to its Articles of
Incorporation, the Company will provide Mr. Brooks with counsel and indemnify
him in connection with the action to the fullest extent permitted.
Except as discussed above, the Company knows of no other legal
proceedings, pending or threatened, or judgments entered against the Company or
any director or officer of the Company in his or her capacity as such. Moreover,
the Company is not aware of any pending or contemplated proceeding against it by
governmental authorities concerning environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 7, 2000, the Company held its annual meeting of
shareholders. At the annual meeting, a total of 13,092,618 shares were present
in person or by proxy, and:
- - Franklin W. Brooks, Jeffrey W. Brooks, William M. Schmidt, Dennis
W. DeConcini and James V. Stanton were reelected to serve on the
Company's board of directors. The number of votes cast in
connection with the election of directors was 12,982,370 (for),
301,141 (against) and 109,248 (abstain).
- - The Company's shareholders approved an increase in the number of
authorized shares of common stock from 20 million shares to 30
million shares. The number of votes cast in connection with the
amendment was 12,761,039 (for), 1,000 (against) and 30,438
(abstain)
The additional authorized shares will be available for issuance at the
direction of the board of directors, without further shareholder action, for
capital raising purposes, strategic alliances and other purposes deemed by the
board to be in the best interest of the shareholders.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LISTING AND TRADING PRICES
The Company's Common Stock is quoted on the NASDAQ SmallCap Market
under the symbol "LOCK". On April 7, 2000, the closing trade price for the
Company's Common Stock was $2.50. As of March 31, 2000, there were
approximately 419 stockholders of record. The Company believes that there are
approximately 9,000 beneficial owners of its Common Stock.
The Company historically has not paid cash dividends and does not
intend to pay such dividends 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 following table sets forth the range of high and low bid price
quotations obtained from the National Quotation Bureau, LLC for the Common Stock
for the two fiscal years ended December 31, 1998 and 1999 and for the quarter
ended March 31, 2000. These quotes are believed to be representative of
inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.
8
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
YEAR ENDED DECEMBER 31, 1998:
<S> <C> <C>
First Quarter.......................................................................5.1875 2.00
Second Quarter......................................................................5.09375 2.96875
Third Quarter.......................................................................3.375 1.40625
Fourth Quarter......................................................................1.625 .90625
YEAR ENDING DECEMBER 31, 1999:
First Quarter.......................................................................2.375 1.03125
Second Quarter......................................................................3.84375 1.1250
Third Quarter.......................................................................2.50 1.5625
Fourth Quarter......................................................................1.71875 1.03125
YEAR ENDING DECEMBER 31, 2000:
First Quarter.......................................................................3.53125 1.125
</TABLE>
ISSUANCE AND SALE OF SECURITIES
6% CONVERTIBLE DEBENTURES
The Company sold $1,725,000 worth of 6% convertible debentures
("Debentures") in 1999, in three tranches. The first tranche worth $400,000,
was completed in July 1999. The second tranche, worth $375,000, was completed
at the beginning of December 1999. Both of these tranches were sold through
Alexander Westcott & Co., Inc. ("Alexander") to a total of ten accredited
investors. The remaining $950,000 was sold through J.P. Carey Securities,
Inc., ("Carey") to three accredited investors. Alexander received a
commission composed of 40,000 shares of Common Stock, $100,000 in cash and
$30,000 in legal expenses. Carey, with its business partners, Gary J.
Shemano, and Pegasus Capital, Inc., and their attorneys, received aggregate
commissions composed of 95,000 shares of Common Stock, $85,000 in cash, and
legal fees of $10,000. An additional escrow fee of $1,250 was also paid. The
Debentures and compensatory shares were issued in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act (a "Section
4.2 Exemption"). The registration statement covering the Common Stock
issuable upon conversion of the debentures and the compensatory shares became
effective on March 24, 2000.
The Debentures bear interest at the rate of 6% per year, which may
be paid by the Company in cash or by the issuance of Common Stock. The
debentures mature on various dates between October 27, 2001, and December 30,
2001. Upon conversion, and at the holder's option, the outstanding principal
amount of the debentures, and any accrued but unpaid dividends thereon may be
converted into Common Stock at a 25% discount off market price, subject to a
minimum conversion price of $.70 per share and a maximum conversion price of
$2.00 per share. To the extent that the debentures are not converted prior to
their maturity dates, $868,000 of the principal of the Debentures and accrued
interest may be paid in cash, or at the Company's option, by the issuance of
shares of Common Stock. The remaining $950,000 in principal shall convert to
Common Stock, unless cash payment is demanded by the holders, at their
option. The remaining interest on the debentures, amounting to $114,000, is
payable in cash or common stock at the Company's option. The Debenture
certificates bear restrictive legends addressing the transferability of the
debentures and the underlying Common Stock.
COMMON STOCK
During the fourth quarter of 1999, the Company issued an aggregate of
397,261 shares of Common Stock to nine Debenture holders upon conversion of
their Debentures. Since December 31, 1999, an additional 871,670 shares of
Common stock were issued to eight former Debenture holders, upon conversion.
In February 2000, the Company issued 200,000 shares of unregistered
Common Stock pursuant to a Section 4(2) Exemption to Chrisman Chiang, designee
of ProMag Industries, Inc. ("ProMag") to pay off accumulated charges for goods
and services. ProMag and its designee both represented that they were accredited
investors, and were issued stock certificates bearing restrictive legends
addressing non-transferability absent registration under the Securities Act or
the availability of an applicable exemption therefrom.
In May 1999, in connection with cancellation of the USA Distribution
Agreement, the Company cancelled 1 million shares of Common Stock, valued
upon cancellation at approximately $3,771,000 and repurchased 2,000,000
warrants at a $5.00 exercise price per warrant, for a total of $500,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company anticipates that the rising call for heightened gun
safety as a means of slowing increases in gun violence will significantly
affect its financial condition in the future. The President's directive to
federal law enforcement agencies, encouraging them to provide their officers
with gun safety locks, should have a similar positive effect, particularly
because the Company's products have been commended by several important
police organizations. Finally, gun manufacturers, beginning with Smith &
Wesson, are beginning to embrace gun safety locks as a way of improving their
products and minimizing liability, which should similarly broaden the market
for products like those produced by the Company. The events contributing to
this trend are discussed more completely in "Outlook-Gun Safety Advances."
9
<PAGE>
REVENUES AND EXPENSES
The Company's total revenues in 1999 were $209,173, compared to
$1,796,653 in 1998. The two revenue figures represent completely different
marketing and focus between the two years and may not be appropriate for
comparison when evaluating the Company's future prospects. 95% of the sales
revenues generated in 1998 were realized from a single sale to United Safety
Action, Inc. ("USA"), the distributor under the now terminated Distribution
Agreement, and was geared toward the retail market. The Company's profit on
each unit of this sale was minimal, and there were very few sales outside the
retail arena. See "Methods of Distribution-Termination of USA Distribution
Agreement." Sales to USA were, of, course, not repeated in 1999. Instead, the
Company focused its efforts on sales to the law enforcement community, and
$172,077 in revenues were generated. In 1998, the Company sold its products
to a total of five law enforcement organizations, for a total of $67,917 in
revenues. Most of this was a single sale to the City of Boston Police
Department. By contrast, in 1999, $141,670 was raised by sales to twenty-nine
such organizations. Sales to the law enforcement community have been of
similar strength in the first quarter of 2000. Accordingly, management does
not believe that comparison of the two years' revenue figures suggests a
trend.
The following table compares gross profit margin, revenues and losses
between fiscal years 1999 and 1998. Parentheses indicate losses:
<TABLE>
<CAPTION>
CATEGORY 1998 1999
ACTUAL PER SHARE ACTUAL PER SHARE
<S> <C> <C> <C> <C>
Losses............................................ ($6,066,394) ($.48) ($3,829,043) ($.28)
Sales Revenues.................................... $1,652,469 -- $172,077 --
Other Revenues.................................... $144,184 -- $37,096 --
Gross Profit Margin .............................. 13% -- 49% --
</TABLE>
"Other Revenues" were mostly generated by short term investment of cash
on hand.
The following table compares the Company's major expense categories
between 1999 and 1998:
<TABLE>
<CAPTION>
Category 1998 1999
-------- ---- ----
<S> <C> <C>
Consulting Fees, Marketing Fees and Commissions ..................... $ 3,006,310 $ 148,066
Salaries and Wages 1,069,915 963,792
Advertising and Sales Promotion ..................................... 149,695 200,097
Legal, Accounting and Professional Fees 542,717 833,111
Allowance for Doubtful Accounts 502,680 0
Product Development 29,946 64,146
Miscellaneous 1,148,057 1,639,411
</TABLE>
CONSULTING FEES, MARKETING FEES AND COMMISSIONS. In 1999, consulting
fees, marketing fees and commissions were split between expenses relating to
public relations, business plan compilation, potential business alliance
exploration, as well as a charge for repricing the options held by certain
consultants following a Black-Scholes evaluation. SEE "Report on
Repricing of Options" and "Security Ownership of Certain Beneficial Owners
and Management." The Black Scholes related charges were $13,800. In 1998, the
Black-Scholes related charge was $115,436, which was exceeded by the amount
spent on business development, $2,810,667, that culminated in the
Distribution Agreement. SEE "Methods of Distribution-Termination of USA
Distribution Agreement."
SALARIES AND WAGES. Actual wages paid to company employees in 1999
totaled $531,129. This amount was considerably lower than 1998, reflecting the
Company's decreased level of production activity in 1999. The remaining
compensation was allocated between the amounts realized by executive officers
and key employees who exercised options in 1999 ($91,575), and the non-cash
amortization of stock options ($341,088). The portion related to actual wages in
1998 was approximately $729,000, while the remainder was paid to executive
officers and key employees as non-cash stock options.
ADVERTISING AND SALES PROMOTION. Advertising and sales promotion
expenses increased in 1999, reflecting the Company's increased sales efforts
in the law enforcement community.
10
<PAGE>
LEGAL, ACCOUNTING AND PROFESSIONAL FEES. These expenses increased in
1999, reflecting costs involved in responding to the SEC investigation, and
defending and settling the various lawsuits against the company, SEE "Legal
Proceedings." Approximately $100,680 owed to Company counsel, Ruben &
Aronson, LLP, was paid in Common Stock rather than cash.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. In 1998 the Company wrote off nearly
half a million dollars owed to it by United Safety Action, Inc. as one of the
consequences of terminating the Distribution Agreement, SEE page 5 above. The
Company did not need to take an allowance for doubtful accounts in 1999.
PRODUCT DEVELOPMENT COSTS. The Company, responding to the increased
interest in gun locks and gun safety, SEE "Outlook-Gun Safety Advances,"
geared up product development in 1999, much of which was aimed at developing
and refining the Saf T Lok-Registered-Trademark Magazine Lock.
MISCELLANEOUS EXPENSES. The following tables compares major
miscellaneous expenses in 1998 and 1999:
<TABLE>
<CAPTION>
Type of Expense 1998 1999
--------------- ---- ----
<S> <C> <C>
Travel Expenses ......................... $47,000 $47,206
Payroll Taxes ........................... $105,000 $41,900
Depreciation ............................ $300,000 $284,000
Insurance Costs ......................... $83,000 $81,769
Communications Costs .................... $55,000 $46,000
Building Rent ........................... $99,000 $98,000
Interest Expense ........................ $5,000 $569,727
Convertible Debenture Costs ............. $0 $90,939
Settlement Costs ........................ $0 $410,775
Commissions ............................. $0 ($165,000)
</TABLE>
Payroll taxes were significantly lower in 1999 because of workforce
reductions following cancellation of the Distribution Agreement with United
Safety Action, Inc. There were analogous reductions in insurance costs, because
of the reduced need for liability coverage, health insurance, workers'
compensation and unemployment insurance in 1999.
Interest expenses were considerably higher reflecting the interest
paid to Debenture holders ($138,477) and the beneficial conversion feature
($431,250) on the debentures sold in 1999. The Convertible Debenture Costs
measure the value of Common Stock issued in connection with the sale of and
conversion of the Debentures in 1999.
Settlement costs in 1999 included the value of the stock options
awarded Lisa Broderick Fogel in 1999, SEE "Legal Proceedings."
As a positive consequence of terminating the Distribution Agreement,
the Company was able to credit back $165,000 in outstanding commissions due.
The following table compares miscellaneous balance sheet items between
1998 and 1999.
<TABLE>
<CAPTION>
Category 1998 1999
-------- ---- ----
<S> <C> <C>
Cash And Cash Equivalents.................................. $433,661 $995,581
Inventory.................................................. $2,357,982 $2,322,169
Accrued Expenses........................................... $281,944 $117,906
Year End Accounts Payable.................................. $371,533 $347,279
</TABLE>
The Company's cash and cash equivalents were considerably higher in
1999 because of the Debenture sales in the second half of the year. Accrued
expenses decreased in 1999, reflecting the lower level of salaries and payroll
taxes due to the reduced workforce. Accounts payable remained about the same
between the two years. The value of the Company's inventory decreased slightly
from 1999 to 1998, because (i) the cost of certain parts was higher than
previously calculated, (ii) the product assembly process generated a higher
level of scrap than expected, and (iii) ongoing product improvement efforts
resulted in a certain amount of product obsolescence.
11
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company began the fourth quarter of 1999 with a cash balance of
$69,466. With accounts payable of $208,194 and accounts receivable of $55,875
raising additional funds for working capital was imperative.
SALE OF DEBENTURES
In the fourth quarter of 1999, the Company sold a total of $1,325,000
worth of its 6% two-year convertible debentures (the "Debentures"). The
placement agents who brokered these transactions received a total of 135,000
shares of Common Stock as a portion of their commissions for these sales. SEE
"Issuance and Sale of Securities."
NON-CASH PAYMENTS AND SALARY DEFERRALS
Including fourth quarter sales of $26,834, the year end balance was
$995,581 in cash, needed to pay the Company's accumulated accounts payable of
$347,279 and sustain operations in 2000. In January and February 2000, the
Company was able to conserve cash and reduce accounts payable by
approximately $197,000 through the issuance of stock and stock options in
payment for goods and services in lieu of cash. To further conserve cash, all
salaries of Company officers and executives have been deferred since the last
week of August 1999.
CONTEMPLATED STRATEGIC PARTNERSHIPS
Company sales have not yet reached a level sufficient to sustain
operations, and the Company therefore engaged in a series of cash raising
activities, including sale of the Debentures, as described above, in 1999. In
fiscal year 2000, however, the Company intends to seek a strategic partner or
partners to provide an immediate revenue stream and/or the marketing
expertise to help increase sales revenues to a self-sustaining, profitable
level. To effect this plan, the Company has engaged the investment
banking firm of Friedman, Billings, Ramsey & Co., Inc. ("FBR") for a period
of one year. While the Company will look to FB&R for advice about potential
mergers, acquisitions and similar business combinations, there can be no
assurances that any transactions will result.
OTHER FINANCING EFFORTS
Notwithstanding the Company's intended plan to seek strategic
partnerships, if sales revenues do not increase sufficiently by mid-2000, and
no alliances forged, the Company will have to obtain additional working
capital. Reflecting this, a going concern qualification was included in the
report of the independent auditors reviewing the company. A copy of this
report is included with the Company's financial statements which begin on
page F-1, below.
PRODUCT LIABILITY
The Company has experienced no product liability claims to date and
is unaware of any incident that would lead to a product liability action
against the Company. The Company maintains total product liability insurance
of $3,000,000.
ANTICIPATED MAJOR EXPENSES
The Company does not anticipate any unusual major expenses separate
from its ordinary operating expenses. However, should the Company succeed in
forming a strategic business combination it could incur significant costs
related to consummation of such transaction, including increased professional
fees for attorneys, financial advisors, accountants and other consultants.
CAPITAL RESOURCES AND EXPENDITURES
The Company expects to invest approximately $100,000 in tooling on
magazine lock model variations during 2000. The Company does not anticipate any
other substantial capital expenditures during the fiscal year.
OUTLOOK
12
<PAGE>
Handgun safety has become a major focus of concern lately, and the
interest should continue to increase in the next few years. The Company, with
developed products that address this concern, anticipates that it will be in
a position to benefit from this trend-although this, of course, cannot be
guaranteed. In the short term, the Company faces a number of not
insignificant problems, including the need to continually fund its day to day
operating requirements, such as production, wages and research and
development, SEE "Liquidity and Sources of Capital," the ongoing SEC
investigation, SEE Legal Proceedings, and the need to rework its retail sales
capacity following termination of the Distribution Agreement, SEE Methods of
Distribution-Termination of USA Distribution Agreement. On balance, however,
the Company is optimistic that the enhanced national focus on handgun safety,
the increasing use of gun locks by law enforcement agencies, the litigation
aimed at gun manufacturers and corresponding about-face regarding gun safety
locks begun by Smith & Wesson, as well as the gun legislation currently
pending and enacted by states such as Maryland, will create a domino effect
that will bring the Company's products into the spotlight. Some of the more
important recent events in the gun safety arena are discussed below.
GUN SAFETY ADVANCES
Over the past several years, more and more people are focusing on gun
safety concerns. 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 unattended 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% 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 always at risk of being
shot by their own weapons when grabbed by assailants.
PRESIDENTIAL DIRECTIVE. President Clinton, in his February 1997 State
of the Union Address, urged passage of child safety lock legislation. He
thereafter 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. However, the Company has since
delivered evaluation samples of Saf T Lok gun locks to a number of federal
agencies, at their request, resulting in a significant increase in sales to such
agencies, as well as a contract with the General Services Administration, which
makes Saf T Lok-Registered-Trademark gun locks more readily available to federal
employees. SEE "Saf T Lok-Registered-Trademark Law Enforcement USE" and
"Outlook-General Services Administration Contract."
STATE ACTION. To date, lawsuits against gun manufacturers for producing
unsafe weapons or for irresponsible sales tactics are going forward in 28 cities
and states. As reported in the BALTIMORE SUN, Maryland Governor Glendening's
Task Force on Child-Proof Guns countered gun manufacturers' claims that no
reasonable technology exists to make guns safer by recommending that all
handguns for sale to private citizens in Maryland come equipped with a Saf T
Lok-Registered-Trademark or similar device as an interim road to "smart guns"
(See ""Smart Gun"Technology" on page 5 above). The Governor's gun safety
legislation, the centerpiece of his year 2000 legislative agenda, was approved
by the Maryland state legislature in early April 2000. "The bill makes a giant
step toward creating safe communities, not only in Maryland but across the
country," said Glendening, who was joined by President Clinton when he signed
the bill into law on April 11, 2000. The Florida state legislature, among
others, is considering similar action.
SMITH & WESSON'S PLEDGE. In addition, in March 2000, Smith & Wesson
entered into a legal settlement with the Clinton administration in which it
pledged to equip its handguns with safety features on a schedule similar to the
one proposed in the Maryland legislation, and specifically to put built-in locks
in all of its handguns within the next few years.
MILLION MOM MARCH. On Mother's Day in May 2000, upwards of a hundred
thousand people are expected to rally in Washington D.C., along with others
across the country, for heightened gun safety.
The Company believes that as a result of these events, its prospects
are improving, particularly because the Company and its products have already
received positive publicity on TV and in a number of newspaper articles,
including the WASHINGTON POST and the BALTIMORE SUN.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
the Financial Statements beginning on page F-1 herein.
ITEM 8. CHANGES IN ACCOUNTANTS
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position and Office Held
---- --- ------------------------
<S> <C> <C>
Franklin W. Brooks ........................ 65 President,Chief Executive Officer, Chairman of the Board
Jeffrey W. Brooks.......................... 39 Vice President, Secretary, Treasurer, Director
William M. Schmidt......................... 57 Vice President, Director
Dennis W. DeConcini........................ 62 Director
James V. Stanton........................... 67 Director
</TABLE>
BUSINESS EXPERIENCE
FRANKLIN W. BROOKS has been Chairman of the Board of Directors since
1996 and President and Chief Executive Officer of the Company since June
1998. He also served as President of the Company from November 1996 to April
1997;. Mr. Brooks founded Saf T Lok Corporation in 1989, and is the inventor
of the Saf T Lok-Registered-Trademark Grip Lock and Magazine Lock. Mr. Brooks
also serves as Director of Palm Beach Business Services, Inc. and is the
father of Mr. Jeffrey W. Brooks.
JEFFREY W. BROOKS has been a director of the Company since 1996. He
has served as Vice President, Secretary and Treasurer November 1996 and has
been Manager of Research & Development since 1989. Mr. Brooks currently
serves as President of Palm Beach Business Services, Inc. and is the son of
Mr. Franklin W. Brooks
WILLIAM M. SCHMIDT has been a director of the Company since 1996,
and an employee and Vice President since 1995. Prior to joining Saf T
Lok-Registered-Trademark, Mr. Schmidt served as Vice President and General
Manager of the Simplex Safelock Division of Ilco Unican Inc from 1993 to
1995. Prior to that he was General Manager of the Automobile Occupant
Restraint Systems Division of Takata from 1990 to 1993
DENNIS W. DECONCINI has been a director of the Company since October
1997, and also serves on the Company's Compensation Committee. Mr. DeConcini
is a principal of Parry, Romani & DeConcini, Inc., a government relations
consulting firm and a principal of the law firm of DeConcini, McDonald,
Yetwin & Lacy, both since 1995. From 1977 to 1995 Mr. DeConcini represented
the State of Arizona in the United States Senate. He also sits on the
governing boards of several other companies. He has been a director of
Federal Home Loan Corporation, which is a mortgage repurchase and resale
company, since 1995; a director of Schuff Steel Company, a steel fabrication
and erection company, since 1996, a director of Global Health Science, Inc.,
a dietary supplement distribution company, since 1997 and a director of
Natrol, Inc., a dietary supplement distribution company, since January 2000.
JAMES V. STANTON has been a director of the Company since October
1997, and is also a member of the Company's Compensation Committee. Mr.
Stanton has his own law and lobbying firm, Stanton & Associates, in
Washington, D.C. From 1971 to 1978, Mr. Stanton represented the 20th
Congressional District of Ohio in the United States House of Representatives.
While in Congress Mr. Stanton served on the Select Committee on Intelligence,
the Government Operations Committee, and the Public Works and Transportation
Committee. Mr. Stanton has held a wide variety of public service positions,
including service as the youngest City Council President in the history of
Cleveland, Ohio and membership on the Board of Regents of the Catholic
University of America in Washington, D.C. Mr. Stanton is also former
Executive Vice President of Delaware North, a privately held international
company which, during Mr. Stanton's tenure, had annual sales of over $1
billion and became the leading parimutuel wagering company in the United
States, with worldwide operations including horse racing, harness racing, dog
racing, and Jai-Lai. Delaware North also owned the Boston Garden and the
Boston Bruins hockey team. From 1985-1994 Mr. Stanton was a principal and
co-founder of Western Entertainment Corporation, which pioneered one of the
first Native American Gaming operations in the United States. Mr. Stanton
also serves on the boards of CCA Companies Incorporated, and MTR Gaming
Group, Inc.
SIGNIFICANT EMPLOYEES AND FAMILY RELATIONSHIPS
In addition to Franklin and Jeffery Brooks, several other members of
the Brooks family are also employed by the Company. Mrs. Jacqueline Cofer,
his daughter, is Director of Public Relations. His sons-in-law, Donald Glass
and Michael Bretz, are employed as production supervisors.
14
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In 1999, the following officers and directors of the Company failed to
file the following forms on a timely basis:
- Mr. Franklin Brooks filed one late report covering three
transactions involving intra-family gifts of options;
- Mr. James V. Stanton filed one late report covering two
transactions.
ITEM 10. EXECUTIVE COMPENSATION
Franklin W. Brooks is the only Company executive or officer for whom
reporting is required as a "named officer."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
COMPENSATION AWARDS
NAME YEAR SALARY ($) BONUS ($) OTHER ($) SECURITIES UNDERLYING OPTIONS
---- ---- ---------- --------- --------- -----------------------------
<S> <C> <C> <C> <C>
Franklin W. Brooks 1999 $57,052(1) $0 $0 --
1998 $54,165 $0 $0 --
1997 $0 (2) $0 $0 1,000,000(3)
</TABLE>
(1) Includes accrued but unpaid salary of $13,462.
(2) Does not include $29,167 of unaccrued salary waived by Mr.
Brooks.
(3) Stock option for 1,000,000 shares of common stock issued in
December 1997.
OPTION/SAR GRANTS TABLE
No stock options were granted to Mr. Brooks during the fiscal year
ended December 31, 1999.
REPORT ON REPRICING OF OPTIONS
On November 2, 1999, the Board of Directors determined that the
outstanding stock options held by Franklin W. Brooks were no longer serving as
an adequate incentive because of declines in the Company's stock price.
Therefore, the Board of Directors reduced the exercise price of his options to
the then current market price. Members of the Board of Directors at the time of
the repricing were Mr. Brooks, Jeffrey W. Brooks, William M. Schmidt, James V.
Stanton and Dennis W. DeConcini. Members of the Compensation Committee at the
time of the repricing were Mr. Brooks, James Stanton and Dennis DeConcini.(6)
<TABLE>
<CAPTION>
FIVE-YEAR OPTION REPRICINGS
NUMBER OF FORMER NEW
EFFECTIVE UNDERLYING MARKET PRICE EXERCISE EXERCISE REMAINING
NAME DATE SHARES OF STOCK PRICE PRICE OPTIONS TERM
<S> <C> <C> <C> <C> <C> <C>
Franklin W. Brooks................ 1/18/00 1,000,000 $1.19 $2.00 $1.19 2 years
(approx.)
</TABLE>
At the same time, options held by other members of the Board of Directors
were also repriced. SEE "Security Ownership of Certain Beneficial Owners and
Management".
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides information regarding those options
exercised by Mr. Brooks during the fiscal year ended December 31, 1999.
15
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES ($) UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT YEAR-END AT YEAR-END (2)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Franklin W. Brooks (1) (1) 750,000 250,000 $0 $0
</TABLE>
(1) Franklin Brooks did not exercise any stock options during the fiscal
year ended December 31, 1999.
(2) Value based on the difference between the closing price of the
Company's Common Stock on the Nasdaq SmallCap Market of $1.125 per
share on December 31, 1999, and the exercise price of the options. By
action of the Board of Directors on November 2, 1999, the exercise
price has been lowered from $2.00 per share to $1.19 per share.
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. By action of the Board of Directors
on November 2, 1999, the exercise price for these options was lowered from
$2.00 per share to $1.19 per share, the market price at that time.
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 for the fiscal year ended December
31, 1999:
<TABLE>
<CAPTION>
NAME OF DIRECTOR SHARES UNDERLYING OPTIONS GRANTED
<S> <C>
Dennis W. DeConcini 5,000 at $1.250 per share,
2,500 vested on December 1, 1999
2,500 will vest June 1, 2000, if Mr. DeConcini is still a Director.
James V. Stanton 5,000 at $1.250 per share,
2,500 vested on December 1, 1999
2,500 will vest June 1, 2000, if Mr. Stanton is still a Director.
</TABLE>
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 November 15, 1999, the Company entered into a consulting
agreement with Mr. Ralph Nichols for up to three months of his efforts, to
target law enforcement sales efforts and to investigate electronic
technologies as they might become applicable to future gun lock development.
The compensation for these services consisted of a $14,400 cash payment and
options for 9600 shares of the Company's unregistered Common Stock at an
exercise price of $1.50 per share. Upon termination of his contract, Mr.
Nichols opted to receive a stock option of the same value, but in lieu of,
the cash portion of his compensation package. Based on a closing market price
of $1.46875 per share and an exercise price of $.01 per share Mr. Nichols was
granted and an additional option for 9872 shares.
On December 9, 1999, the Company engaged the investment banking firm
of Friedman, Billings, Ramsey & Co., Inc. for a period of one year for advice
with respect to mergers, acquisitions and similar business combinations. As
discussed in "Compatible Firearms -Contemplated Strategic Partnerships," the
Company is seeking a strategic alliance with a business partner that has
greater access to capital and established channels for distribution.
Friedman, Billings, Ramsey & Co. will receive a graduated fee, which may
consist of Common Stock of the Company, when a successful transaction has
been closed. There are currently no specific transactions under consideration
pursuant to the engagement agreement, and there can be
16
<PAGE>
no assurances that any transaction will result.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding the beneficial ownership of shares of Common Stock as of March 31,
2000, 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, (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 &
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS(5)
------------------------------------ ---------- --------
<S> <C> <C>
Franklin W. Brooks ................................................................. 740,512(1) 4.88%
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
Hamdam Diamond Corporation ......................................................... 1,000,000(2) 6.59%
5030 ANCHOR WAY, CALLOWS BAY CHRISTIANSTED, ST. CROIX 00820-4521.(2)
Dennis W. DeConcini................................................................. 265,000(3) 1.75%
233 CONSTITUTION AVENUE, N.E., WASHINGTON, D.C. 20002
James V. Stanton ................................................................... 225,000(3) 1.48%
1747 PENNSYLVANIA AVENUE N.W., SUITE 1050, WASHINGTON, D.C. 20006
William M. Schmidt.................................................................. 221,596(4) 1.46%
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
Jeffrey W. Brooks................................................................... 268,066(4) 1.77%
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
All Directors and Executive Officers as a Group..................................... 1,720,174 11.33%
(5 PEOPLE)
</TABLE>
(1) Mr. Brook's total shares include:
- 115,512 shares held by Mr. Brooks and his wife as tenants in
common.
- An option to purchase 625,000 shares of Common Stock granted
in December 1997, of which 375,000 are vested.
- Options for 375,000 shares assigned to three of Mr. Brooks'
adult children.
- By action of the Board of Directors on November 2, 1999, the
exercise price was lowered from $2.00 per share to $1.19 per
share.
(2) As reported by Hamdam Diamond Corporation on Schedule 13-D dated
October 27, 1997 and by communication to the Company verifying
ownership as of July 29, 1999.
(3) For each of Mr. DeConcini and Mr. Stanton these totals include:
- An option granted in October 1997 to purchase 250,000 shares of
Common Stock for $2.00 per share of which 250,000 shares have
vested.
- By action of the Board of Directors on November 2, 1999, the
exercise price for these options was lowered from $2.00 per
share to $1.19 per share.(9)
- The following options to purchase the enumerated shares, granted
pursuant to the 1993 Stock Option Plan:
- 5,000 shares of Common Stock for $3.250 per share, all of
which have vested;
- 5,000 shares of Common Stock for $1.500 per share, all of
which have vested
- 5,000 shares of Common Stock for $1.250 per share, 2500 of
which have vested and 2500 of which will vest on June 1,
2000, if still a director.
(4) For each of Mr. Schmidt and Mr. J. Brooks, the totals includes options
to purchase 150,000 shares of Common Stock for $1.09 per share.
17
<PAGE>
(5) Based on approximately 15,177,869 shares of Common Stock outstanding
as of March 31, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company employs Mr. Franklin W. Brooks as its Chairman of the Board
of Directors. Mr. Brooks` son, Jeffrey W. Brooks, is employed as Company Vice
President, Secretary and Treasurer. In addition, Jacqueline Cofer, Mr. Brooks'
daughter, is Director of Public Relations, and his sons-in-law, Donald Glass and
Michael Bretz, are employed as production supervisors.
ITEM 13. 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.
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Auditors' Report........................................... F-1
Balance Sheets............................................. F-2 - F-3
Statements of Changes in Shareholders' Equity.............. F-4 - F-5
Statements of Operations................................... F-6
Statements of Cash Flows................................... F-7 - F-8
Notes to Financial Statements.............................. F-9 - F-30
</TABLE>
EXHIBITS TO FORM 10KSB:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
3.1 Articles of Incorporation, as amended (incorporated herein by
reference to Exhibit 3.1 to the Company's Form S-1 filed with
the SEC on February 17, 1998)
3.2 Articles of Amendment
3.3 By-Laws, as amended (incorporated by reference to the
Company's Annual Report on Form 10-KSB, as filed with the SEC
on May 13, 1998)
4.1 Form of 6% Convertible Debenture (incorporated by reference to
the Company's Registration Statement on Form S-3, as filed
with the SEC on August 17, 1999)
10.1 Agency Agreement between the Company and Alexander, Westcott &
Co., Inc. dated April 20, 1999 (incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999, as filed with the SEC)
10.2 Letter Agreement between the Company and Alexander, Westcott &
Co., Inc. dated July 8, 1999 (incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999, as filed with the SEC)
10.3 Letter Agreement between the Company and Alexander, Westcott &
Co., Inc. dated July 8, 1999 (incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999, as filed with the SEC)
10.4 Placement Agency Agreement between the Company and J. P. Carey
Securities, Inc. dated December 30, 1999 (incorporated by
reference to the Company's Current Report on Form 8-K filed
with the SEC on June 4, 1999)
10.5 Form of Securities Purchase Agreement relating to the
Company's Debenture offering through J. P. Carey Securities,
Inc. (incorporated by reference to the Company's Registration
Statement on Form S-3, as filed with the SEC on August 17,
1999)
10.6 Form of Registration Rights Agreement relating to the
Company's Debenture offering through J. P. Carey Securities,
Inc. (incorporated by reference to the Company's Registration
Statement on Form S-3, as filed with the SEC on August 17,
1999)
10.7 Amendment to and Termination of Non-Exclusive Distribution and
Pricing Agreement dated as of May 18, 1999, and delivered May
26, 1999, by and between the Company and USA (incorporated by
reference to the Company's Current Report on Form 8-K filed
with the SEC on June 4, 1999)
10.8 Stock Pledge Termination Agreement dated as of May 18, 1999,
and delivered May 26, 1999, by and between the Company and USA
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on June 4, 1999)
10.9 Termination Agreement dated as of May 18, 1999, and delivered
May 26, 1999, by and between the Company and Empire Consulting
Ltd., Inc. ("Empire") (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
June 4, 1999)
10.10 Mutual Release dated May 18, 1999, and delivered May 26, 1999,
by Danvers Investment Corp, Amexcorp., Ltd., the Company, Mr.
Shalom Weiss and Mr. Geno Weiser (incorporated by reference to
the Company's Current Report on Form 8-K filed with the SEC on
June 4, 1999)
10.11 Mutual Release dated May 18, 1999, and delivered May 26, 1999,
by the Company and Empire (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
June 4, 1999)
23.1 Consent of Goldberg & Co., P.A.
23.2 Consent of Goldberg Wagner Stump & Jacobs, LLP
24.1 Power of Attorney (see page preceding signatures)
27.1 Financial Data Schedule
</TABLE>
CURRENT REPORTS ON FORM 8-K
The Company filed the following current reports on Form 8-K during
the fourth quarter of 1999 and thereafter:
A current report on Form 8-K was filed by the Company on April 4,
2000 reporting that the Company had been served with a civil complaint.
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 14, 2000.
SAF T LOK INCORPORATED
<TABLE>
<S> <C>
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
</TABLE>
18
<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 SEC in connection with this report on Form 10-KSB. 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 14, 2000
- --------------------------
Franklin W. Brooks Chief Executive Officer
/s/ Jeffrey W. Brooks Director, Vice President, Secretary and Treasurer April 14, 2000
- -------------------------
Jeffrey W. Brooks
/s/ Dennis W. Deconcini Director April 14, 2000
- ---------------------------
Dennis W. DeConcini
/s/ James V. Stanton Director April 14, 2000
- ---------------------------
James V. Stanton
/s/ William M. Schmidt Director, Chief Financial Officer, Principal April 14, 2000
- --------------------------- Accounting Officer Chief Accounting Officer
William M. Schmidt
</TABLE>
19
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
I N D E X -
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1999 AND 1998 F-2 - F-3
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 F-4 - F-5
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998 F-6
CONSOLIDATED STATEMENT OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998 F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-30
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Saf T Lok Incorporated
West Palm Beach, FL
We have audited the consolidated balance sheet of Saf T Lok
Incorporated and subsidiaries as of December 31, 1999 and the related
consolidated statement of operations, changes in shareholders' equity and cash
flows for the year 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 audit. The financial statements as of
December 31, 1998, were audited by Goldberg & Company, P.A., who merged with
Goldberg Wagner Stump & Jacobs LLP as of January 1, 2000, and whose report dated
March 24, 1999 expressed a qualified opinion on those statements.
We conducted our audit 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 audit provides 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, 1999 and the consolidated
results of its operations and its cash flows for the year 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, 1999. 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 WAGNER STUMP & JACOBS LLP
West Palm Beach, Florida
March 9, 2000
(except for Note 13, as to which
the date is March 28, 2000)
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
A S S E T S
<TABLE>
<CAPTION>
1999 1998
---------- ----------
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 995,581 $ 433,661
Accounts receivable (less allowance
for doubtful accounts of
$502,680 in 1998) 90,384 59,596
Note receivable 18,150 18,303
Inventories 2,322,169 2,357,982
Prepaid expenses 58,552 156,867
---------- ----------
TOTAL CURRENT ASSETS 3,484,836 3,026,409
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,062,181 1,250,737
OTHER ASSETS
Patents, (less accumulated amortization
of $139,882 and $111,697 respectively) 282,895 311,080
Note receivable, less current portion 130,135 148,285
Other assets 59,010 9,736
---------- ----------
TOTAL OTHER ASSETS 472,040 469,101
---------- ----------
T O T A L $5,019,057 $4,746,247
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
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>
1999 1998
------------ ------------
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 347,279 $ 371,533
Accrued expenses 117,906 281,944
------------ ------------
TOTAL CURRENT LIABILITIES 465,185 653,477
LONG TERM LIABILITIES
Debentures payable 1,325,000 --
------------ ------------
TOTAL LIABILITIES 1,790,185 653,477
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value,
20,000,000 shares authorized, 13,983,615
and 13,609,957 shares issued and
outstanding, in 1999 and 1998, respectively 139,836 136,099
Paid-in-capital 26,473,887 27,634,567
Other equity reductions (132,741) (4,254,829)
Accumulated deficit (23,252,110) (19,423,067)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,228,872 4,092,770
------------ ------------
T O T A L $ 5,019,057 $ 4,746,247
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- EQUITY
SHARES AMOUNT PAID IN REDUCTIONS DEFICIT TOTAL
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 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
2 director/employees upon
exercise of stock options 137,000 1,370 12,330 13,700
Issuance of common stock in
connection with 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
Issuance of common stock to
landlord for payment of rent 50,880 509 50,371 50,880
Issuance of warrants in
connection with distribution
agreement 1,884,000 1,884,000
Unearned advertising expense (3,781,000) (3,781,000)
Forfeit 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
---------- ------------ ------------ ------------ ------------ ------------
Issuance of common stock to
employee and employee/director
upon exercise of stock options 115,000 1,150 10,350 11,500
Issuance of common stock in
payment of marketing
agreement fees 25,000 250 35,688 35,938
Issuance of common stock to
consultants upon exercise of
stock options 100,000 1,000 108,000 109,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 1999
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- EQUITY
SHARES AMOUNT PAID IN REDUCTIONS DEFICIT TOTAL
---------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Return of common stock upon
cancellation of distribution
agreement (1,000,000) (10,000) (3,771,000) (3,781,000)
Cancellation of unearned
advertising expense 3,781,000 3,781,000
Issuance of common stock to
employee and director upon
exercise of stock options 80,000 800 122,800 123,600
Issuance of common stock to
employees upon exercise of
cashless options 29,304 293 91,282 91,575
Amortization of deferred
compensation 341,088 341,088
Stock options granted to former
officer/employee 410,775 410,775
Issuance of common stock in
connection with exercise of
warrants, net of related costs
of $195,000 500,000 5,000 1,300,000 1,305,000
Purchase of outstanding warrants (500,000) (500,000)
Issuance of common stock for
legal services 87,093 871 99,809 100,680
Common stock issued for
commissions and fees in
connection with convertible
debentures 40,000 400 84,600 85,000
Issuance of common stock on
conversion of debentures 397,261 3,873 401,966 405,939
Compensation in connection
with repricing of options 13,800 13,800
Additional capital resulting from
beneficial conversion feature
of debentures 431,250 431,250
Net Loss (3,829,043) (3,829,043)
---------- ------------ ------------ ------------ ------------- ------------
Balance - December 31, 1999 13,983,615 $ 139,836 $ 26,473,887 $ (132,741) $ (23,252,110) $ 3,228,872
---------- ------------ ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------ ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 172,077 $ 1,652,469
Cost of Sales 86,395 1,428,891
------------ ------------
Gross Profit 85,682 223,578
Selling, general and
administrative expenses 2,582,586 3,536,833
Stock, options, and warrants issued for
compensation and services 1,084,795 2,596,769
Depreciation 284,440 300,554
Other Income 37,096 144,184
NET LOSS $ (3,829,043) $ (6,066,394)
------------ ------------
------------ ------------
LOSS PER COMMON SHARE $ (0.28) $ (0.48)
------------ ------------
------------ ------------
Weighted average number of common
shares outstanding 13,715,848 12,619,241
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(3,829,043) $(6,066,394)
----------- -----------
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 284,440 300,554
Non cash compensation to directors, officers
and former employees 751,863 341,084
Non cash consulting fees 13,800 --
Issuance of stock for services 221,618 188,425
Issuance of stock for compensation 91,575 --
Issuance of stock for interest paid upon conversion
debentures 5,939 --
Interest expense resulting from beneficial conversion
feature of debentures 431,250 --
Loss on disposition of assets 21,381 --
Write-off of obsolete inventory 150,746 194,117
Provision for losses on accounts receivable -- 488,170
Issuance of warrants pursuant to distribution agreement -- 1,884,000
Changes in assets and liabilities:
Increase in accounts receivable (30,788) (542,880)
Decrease (increase) in other assets 8,976 (7,586)
Decrease in prepaid expenses 98,315 824,326
Increase in inventories (114,933) (2,204,416)
Decrease in accounts payable (24,254) (127,616)
Decrease in accrued liabilities (164,038) (92,653)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,083,153) (4,820,869)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on note receivable 18,303 16,905
Payments for purchase of equipment (89,080) (366,726)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (70,777) (349,821)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock upon exercise of warrants, net of
related costs 1,305,000 3,386,000
Repurchase of warrants (500,000) --
Issuance of stock upon exercise of options 244,100 413,700
Increase in deferred interest (58,250) --
Issuance of debentures 1,725,000 --
Payment of note payable -- (121,759)
Proceeds from issuance of common stock -- 500,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,715,850 4,177,941
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 561,920 (992,749)
Cash and equivalents at beginning of year 433,661 1,426,410
----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 995,581 $ 433,661
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash payments for interest $ 138,477 $ 4,637
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 PURPOSE
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 West Palm Beach, Florida that 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 $878,000
and $267,000 at the end of 1999 and 1998, respectively, for the
excess of the deposit liabilities reported by the banks over the
amounts that could 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
F-9
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C) CONCENTRATIONS OF RISK (CONTINUED)
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:
<TABLE>
<CAPTION>
ITEM ESTIMATED USEFUL LIFE
---- ---------------------
<S> <C>
Furniture and fixtures 7 - 10 years
Equipment 5 - 10 years
Leasehold improvements 5 - 7 years
Software 5 years
Tools and dies 7 years
</TABLE>
F-10
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G) INVENTORIES
Inventories, which are primarily composed of raw materials,
finished goods and supplies, 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) STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost of stock
options is measured as the excess, if any, of the quoted market
price of the company's stock at the date of the grant over the
option exercise price and is charged to operations over the
vesting period. Income tax benefits attributable to stock options
exercised, if any, are credited to paid-in capital.
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.
L) EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) per common share (EPS) are computed in accordance
with
F-11
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L) EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Basic EPS is computed by dividing consolidated net
earnings (loss) by the weighted average number of common shares
outstanding. Diluted EPS is computed by dividing consolidated net
earnings (loss) by the sum of the weighted average of common
shares outstanding and the weighted average number of potential
common shares outstanding.
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 $3,950,215 in 1999 and $6,066,394 in 1998 and has substantially
funded its working capital needs by the sale of common stock, warrants
and convertible debentures.
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 that was subsequently terminated in 1999
(Note 9(B)). The 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.
In 1999 the Company raised $1,744,100 of equity capital at a cost of
$695,000 from the exercise of options and warrants. Debentures sold
during 1999 with a face value of $400,000 were converted to common
stock and an additional $1,325,000 of convertible debentures was
issued during the last quarter of 1999.
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 find a
suitable merger or acquisition candidate, as described in Note 9(D).
However, there can be no assurance that the search 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, 1999.
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
F-12
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - NOTES RECEIVABLE (CONTINUED)
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 $148,285 and $166,588 as of December 31, 1999 and
1998, respectively.
NOTE 4 - INVENTORIES
Inventories are compromised of the following as of December 31,
1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Finished goods $ 342,967 $ 324,937
Raw materials 1,956,783 2,006,188
Supplies 22,419 26,857
---------- ----------
TOTAL $2,322,169 $2,357,982
---------- ----------
---------- ----------
</TABLE>
During 1999 and 1998 respectively, $150,746 and $194,117 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, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Prepaid insurance $ 39,463 $ 56,072
Deposits - tooling 24,407 36,357
Prepaid legal 7,478 64,438
---------- ----------
TOTAL $ 71,348 $ 156,867
---------- ----------
---------- ----------
</TABLE>
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.
F-13
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Equipment $ 225,047 $ 476,290
Furniture & Fixtures 17,375 52,625
Tools & Dies 1,570,279 1,500,494
Leasehold improvements 13,189 11,436
---------- ----------
TOTAL 1,825,890 2,040,845
---------- ----------
Less accumulated depreciation 763,709 790,108
---------- ----------
TOTAL $1,062,181 $1,250,737
---------- ----------
---------- ----------
</TABLE>
NOTE 7 - INCOME TAXES
The components of the provision (benefit) for income taxes for the
years ended December 31, 1999 and 1998 are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current: $ -- $ --
Federal -- --
State -- --
---------- ----------
-- --
---------- ----------
Deferred:
Federal -- --
State -- --
---------- ----------
TOTAL $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The following table reconciles the income tax provision (benefit) at
the U.S. Statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Benefit computed at 37% $ 5,551,000 $ 4,632,000
Less valuation allowance (5,551,000) (4,632,000)
---------- ----------
Income tax benefit $ -- $ --
---------- ----------
---------- ----------
</TABLE>
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, 1999 is as follows:
F-14
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1999
-----------
<S> <C> <C>
Benefit computed at 37% $ 5,551,000
Less valuation allowance (5,551,000)
-----------------
Net deferred tax asset $ --
-----------
-----------
</TABLE>
As of December 31, 1999, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$15,003,000 that are available to offset future federal taxable
income, if any, through 2019. 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, 1999, sufficient uncertainty exists regarding the
realization of the full amount of these operating loss carryforwards,
and accordingly, a valuation allowance of $5,551,000 has been
established. The valuation allowance for deferred tax assets as of
December 31, 1998 was $4,632,000.
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.
NOTE 8 - DEBENTURES PAYABLE
On April 20, 1999, the Company entered into an Agency Agreement ("AA")
with Alexander, Wescott & Co., Inc. ("AWC") under which AWC would
offer and sell a maximum of $2,000,000 and a minimum of $1,000,000 of
the Company's 6% convertible debentures ("Debentures") by April 30,
1999, unless extended 60 days by AWC. An extension was requested by
AWC and the Company limited solicitation to a maximum of $1,000,000.
On July 8, 1999, the AA was further modified to provide that AWC would
sell $400,000 of Debentures with the balance of $600,000 remaining on
hold at the sole discretion of the Company to cancel the AA prior to
AWC delivering a bona fide subscription agreement. In consideration of
AWC's efforts, the Company prepaid a cash commission of $130,000 upon
the initial $400,000 sale. In addition, the Company issued 40,000
shares of common stock to AWC with the proviso that an additional
60,000 shares of common stock, or prorated amount, would be issued
upon the sale of any portion of the remaining $600,000 of Debentures.
The Debentures mature in two years, unless converted, with interest
payable annually. If, at the Company's election, redemption or
prepayment occurs within 90 days from the date of issuance the
debenture holder is entitled to a ten percent premium. If redemption
or prepayment occurs within 180 days of issuance, the debenture holder
is entitled to a twenty percent premium. The Debenture is convertible
at a twenty five percent discount to the market price at the time of
conversion, with a floor of $.50 and a ceiling of $2.00. Securities
underlying the Debenture were to be registered within ninety days of
the
F-15
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - DEBENTURES PAYABLE (CONTINUED)
closing of the offering. As of November 1, 1999 all of the $400,000
of Debentures were converted into 397,261 shares of common stock of
the Company. Accrued interest of $5,939 was included in the price
of the Debentures upon conversion. Conversion prices ranged from
$1.1875 to $1.75 per common share.
On October 15, 1999, the Company authorized AWC to complete the
sale of the remaining $600,000 of Debentures under the AA. At
December 31, 1999, AWC sold $375,000 of Debentures under the same
terms and conditions except that the floor was raised to $.70 and
the Company had the option of redeeming the Debentures at maturity
and paying interest in cash or with shares of its common stock. At
December 31, 1999, none of the $375,000 of debenture holders had
elected to convert the Debentures.
On December 30, 1999, the Company engaged J.P. Carey Securities,
("JPC") Inc. as placement agent to sell an aggregate principal
amount of not more than $1,500,000 of 6% subordinated convertible
debentures ("Debentures"), which mature on or before December 30,
2001. If, at the Company's election, redemption or prepayment
occurs within the first 90 days from the date of issuance the
debenture holder is entitled to a ten percent premium. If
redemption or prepayment occurs within the second 90 days the
debenture holder is entitled to a twenty percent premium. If
redemption or prepayment occurs any time after 180 days the
debenture holder is entitled to a thirty percent premium. The
Debenture is convertible at a twenty five percent discount to the
closing bid price five trading days immediately preceding the date
of conversion, with a floor of $.70 and a ceiling of $2.00. As of
December 31, 1999, JPC had placed $950,000 of Debentures and
together with Pegasus Capital Inc. received a placement fee of
$85,000. In connection with the placement, the Company paid JPC's
counsel $10,000 and the escrow agent a fee of $1,250. In addition,
JPC and related parties are to receive 95,000 shares of the
Company's common stock as a commission. Under the terms of the
agreement with JPC, the Company must reserve sufficient shares out
of its authorized and unissued common stock for no less than 100%
of the number of shares which would be issuable upon conversion of
all the Debentures.
During the year ended December 31 1999, the Company issued
$1,725,000 of convertible debentures with a beneficial conversion
feature of twenty five percent. In accordance with the Financial
Accounting Standards Board's Emerging Issues Task Force No. 98-5,
the imbedded beneficial conversion feature should be recognized and
measured by allocating a portion of the proceeds equal to the
intrinsic value of that feature to paid-in capital. In addition,
the recorded discount equal to the allocation of proceeds to the
beneficial conversion feature should be recognized as interest
expense over the minimum period from the date of issuance to the
earliest date the debenture holder can convert the debenture.
Accordingly, the Company has recorded paid-in capital and interest
expense of $431,250 related to the beneficial conversion feature of
all debentures issued in 1999.
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
A) OPERATING LEASES
The Company moved to new facilities in December 1998 and entered into
a five year lease
F-16
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
A) OPERATING LEASES (CONTINUED)
for its office and manufacturing facility commencing August 1,
1998. The Company is required to pay $337,491, 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 lease
provides for two five year renewal options.
The future minimum lease payments required under this
operating lease are as follows:
<TABLE>
<CAPTION>
Year Amount
---------- -------------
<S> <C>
2000 89,848
2001 93,215
2002 96,751
2003 57,677
-------------
TOTAL $337,491
-------------
-------------
</TABLE>
The total rent expense charged to operations was $98,129 and
$99,262 for the years ending December 31, 1999 and 1998
respectively.
B) MAJOR CUSTOMER AND LOSS THEREOF
On February 10, 1998 the Company accepted a purchase order from an
independent wholesaler ("the Wholesaler") for the purchase of
$6,000,000 of the Company's gun locks and received a $1,000,000
advance payment. 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 was not 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 up
to $20,000,000 of the Company's product over a period of three
years.
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 or the
Distributor fulfilled their commitment according to the agreement.
During 1998, the Distributor purchased $477,115 of the Company's
product that he did not pay for and it was written off as a bad
debt. These customers represented approximately 95% of the
Company's sales in 1998.
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
F-17
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
B) MAJOR CUSTOMER AND LOSS THEREOF (CONTINUED)
Company as security for the distributor's obligation to place the
advertising.
In addition to the shares of common stock issued pursuant to the
Distribution Agreement, the Company granted to three nominees of
the Distributor, in the aggregate, 2,000,000 warrants of the
Company's stock at an exercise price of five dollars per share.
Also, as required by the distributor, the Company entered into a
commission agreement with a consulting company. This agreement
provided that the consulting company would 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. At December 31,
1998 a liability of $165,000 was accrued to provide for the 15%
commission on sale of the product. This accrual was reversed in
1999 and the commission was not paid.
In May 1999, the Company, the Wholesaler, the Distributor, the
consulting company and related parties mutually agreed to
terminate the existing agreements. The 1,000,000 shares of
common stock issued to the Distributor were returned to the
Company. The Company repurchased the 2,000,000 warrants
exercisable at five dollars a share for $500,000. In
connection with this transaction, related parties exercised
500,000 warrants to purchase the Company's common stock at
three dollars a share.
C) CONSULTING AGREEMENTS
On October 24, 1997, the Company entered into a one year agreement
with a marketing firm. 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
withheld from the proceeds of a sale of common stock in November
1997, and the final $375,000 was withheld from the proceeds of a
subsequent sale of common stock 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 a marketing firm, for a fee of $10,000 per month.
This contract was cancelled in June 1998. All amounts due were
settled with the issuance of the 25,000 shares of the Company's
stock referred to above.
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 was to be issued to the
marketing consultants upon receipt by the Company of a bonafide
$2,000,000 equity
F-18
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
C) CONSULTING AGREEMENTS (CONTINUED)
financing agreement. The financing agreement was never received
and the additional shares were never issued.
On November 15, 1999 the Company entered into a consulting
agreement with Mr. Ralph Nichols for a term of three months
Mr. Nichols is to provide services in the areas of sales,
marketing and product development. By mutual agreement, the term
was shortened to end on January 27, 2000. Mr. Nichol's total
compensation consisted of $14,400 in cash and options for 9,600
shares of the Company's common stock at an exercise price of $1.50
a share. In lieu of the cash, Mr. Nichols agreed to receive an
option for an additional 9,805 shares of the Company's common
stock at the day's closing price of $1.46875, which is exercisable
at $.01 per share
D) STRATEGIC ALLIANCE
On December 9, 1999, the Company entered into an agreement with an
investment banking firm ("IBF") to act as financial advisor and
investment banker in connection with a plan to find a strategic
alliance partner. The IBF will participate in and coordinate
discussions between the Company and a target entity, perform due
diligence investigations and negotiate a letter of intent and/or a
definitive agreement, as requested by the Company. As financial
advisor IBF will also provide a fairness opinion on any
prospective transaction. If IBF is successful in their efforts,
they will be paid a graduated fee starting at six percent on the
first million dollars of fair market value of the transaction and
reducing by one percent for each million dollars thereafter to one
percent on the fair market value of the transaction over five
million dollars. In addition to the fee, they will also be
reimbursed for out-of-pocket costs and attorney fees in connection
with the transaction, whether consummated or not. A non-refundable
$25,000 deposit was paid upon signing of the agreement that will
be credited against the expense reimbursement.
NOTE 10 - 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
F-19
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
A) THE 1993 STOCK PLAN (CONTINUED)
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 at an exercise price of $1.50. No options were
granted in 1999. Two directors were granted 10,000 options at an
exercise price of $1.25 in 2000.
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
the 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, 1999 and 1998 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 which were forfeited in 1999. During 1999 the Company did
not grant any qualified stock options.
B) OTHER INDIVIDUAL NON-QUALIFIED STOCK PLANS
The Company also grants non-qualified options to its employees,
consultants, officers 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.
In 1999, the Company granted 60,000 options to an employee at a
market price of $1.3125 and 110,000 options to a former
employee/officer for $.10 a share.
C) SUMMARY OF STOCK PLANS
The Company has elected to follow APB Option No. 25, "Accounting
for Stock Issued to Employees", and related Interpretations in
accounting for its employee stock options. Compensation costs to
employees of $341,088 and $341,083 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 1999 and
1998, 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:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net (Loss):
As reported $ (3,829,043) $ (6,066,394)
Pro forma $ (4,825,657) $ (7,499,470)
------------ ------------
</TABLE>
F-20
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
C) SUMMARY OF STOCK PLANS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Basic EPS:
As reported $ (.28) $ (.48)
Pro forma $ (.35) $ (.59)
Diluted EPS:
As reported $ (.28) $ (.48)
Pro forma $ (.35) $ (.59)
</TABLE>
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 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Dividend yield -- --
Expected volatility 124% 103%
Risk-free interest rate 5.72% 5.16%
Expected life of stock option 2 years 7 years
</TABLE>
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 $.91 and $1.04 for options granted during
1999 and 1998, respectively. A summary of the status of the stock
option plans as of December 31, and changes during each of the
years then ended, follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------- --------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------------------------- ----------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Outstanding at 3,587,637 $ 1.55 4,356,137 $2.06
beginning of year
Granted 170,000 .53 785,000 1.09
Exercised (324,304) .85 (297,000) 1.39
Forfeited/Expired (279,696) .96 (1,256,500) 2.17
--------------------------- ----------------- ------------------- ---------------- -------------------
Outstanding at
end of year 3,153,637 1.39 3,587,637 1.55
--------------------------- ----------------- ------------------- ---------------- -------------------
Options exercisable
at end of year 2,903,637 1.40 2,145,971 1.77
--------------------------- ----------------- ------------------- ---------------- -------------------
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1999:
F-21
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
C) SUMMARY OF STOCK PLANS (CONTINUED)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -----------------------------------
Range of Weighted Average
Exercise Number Remaining Weighted Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- -------------- --------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$ .10 - .50 360,000 2.41 $ .38 360,000 $ .38
.51 - 1.50 2,110,000 4.80 1.17 1,860,000 1.16
2.00 - 2.50 652,500 2.06 2.50 652,500 2.50
3.00 - 4.99 21,137 6.38 3.69 21,137 3.69
5.00 - 7.00 10,000 5.00 6.00 10,000 6.00
--------------- -------------- --------------------- ----------------- ----------------- -----------------
.10 - 7.00 3,153,637 3.97 1.39 2,903,637 1.40
--------------- -------------- --------------------- ----------------- ----------------- -----------------
</TABLE>
At December 31, 1999 there were 30,000 qualified stock options
and 76,500 non-qualified stock options outstanding under the 1993
stock plan. There were 250,000 individual non-qualified stock
options (registered through an S-8 in 1997) and 2,732,500
individual non-qualified stock options (registered through an
S-8 and an S-3 filed in 1999). There were 64,637 individual
non-qualified stock options (unregistered) outstanding at
December 31, 1999.
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.
D) STOCK ISSUANCES
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.
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 received a fee of 13.5% of the
sales price of the stock underlying the warrants when the warrants
were exercised.
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
F-22
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES (CONTINUED)
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. All of
the warrants were exercised.
During 1998, two consultants exercised options to purchase 160,000
shares of the Company's common stock at $2.50 per share.
In March 1998, two employee/directors 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 a marketing agreement.
In May and July 1998, the Company issued 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 9(B)), the Distributor was obligated to create and place
advertising totaling $5,000,000. The Company issued 1,000,000
shares of its common stock in connection with the Distribution
Agreement which was pledged by the Distributor as security for the
obligation to place the advertising. The Company placed 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 also paid as part of this
transaction.
During January and February 1999, one officer/employee and one
employee, exercised 115,000 ten cent stock options.
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 an S-8 with the Securities
and Exchange Commission, registering 2,802,000 previously granted,
non-qualified stock options of directors, officers, consultants
and employees.
In February 1999, the Company issued 25,000 shares of common stock
to consultants valued at $1.4375 per share in connection with a
marketing agreement.
F-23
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES (CONTINUED)
In April 1999, two consultants and one employee exercised options
to purchase 140,000 shares of the Company's common stock at $1.09
per share.
In April 1999, three employees exercised cashless options and were
issued 29,304 shares of the Company's common stock.
In May 1999, a director exercised options to purchase 40,000
shares of the Company's common stock at $2.00 per share.
In May 1999, three offshore investors exercised warrants to
purchase 500,000 shares of the Company's common stock at $3.00 per
share. In accordance with the agreement $695,000 was withheld from
the proceeds for a 10% placement fee of $150,000, a 3% legal and
an unaccountable fee of $45,000, and the repurchase of 2,000,000
warrants at $.25 per warrant.
In May 1999, the Distribution Agreement (Note 9(B)) was terminated
and one million shares of the Company's common stock was returned
and the related unearned advertising expense of $3,781,000 was
reversed.
In May 1999, a former officer/employee was issued 110,000 ten cent
options that were valued at $410,775 using the Black-Scholes
pricing model, with a corresponding charge to operations.
(Note 12)
In August 1999, in accordance with the Debenture Agreement (Note
8) 40,000 shares of the Company's common stock valued at $2.125
per share was issued for fees associated with the agreement.
In August 1999, 87,093 shares of the Company's common stock valued
at $1.156 per share was issued for legal services.
In September, October and November of 1999, $400,000 of Debentures
were converted into 397,261 shares of the Company's common stock,
which included accrued interest of $5,939.
In September 1999, an employee was issued 60,000 options valued at
$1.3125 in connection with the termination of an employement
arrangement.
On November 2, 1999, 1,500,000 options that were originally issued
to two directors and an officer at a price of $2.00 were repriced
to $1.19 per share. For purposes of FASB #123 disclosure, the
repricing created variable options which were valued at $98,640
using the Black-Scholes pricing model.
On December 16, 1999, 100,000 options that were originally
issued to two consultants at a price of $2.50 were repriced to
$1.31 per share. The repricing created variable options
F-24
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
D) STOCK ISSUANCES (CONTINUED)
which were valued at $13,800 using the Black-Scholes pricing
model, with a corresponding charge to operations.
During 1999 an employee and a consultant forfeited 12,000 options.
In January 2000 the Company issued 37,500 shares of unregistered
common stock to Alexander, Wescott & Co., as a commission on the
sale of $375,000 of convertible debentures. (Note 8)
In January 2000 the Company issued a total of 95,000 shares of
unregistered common stock to J. P. Carey Securities, Inc. and
related parties as a commission on the sale of $950,000 of
two-year convertible subordinated debentures on December 30, 1999.
(Note 8)
In February 2000 the Company issued 200,000 shares of unregistered
common stock to a designee of ProMag Industries, Inc., in payment
of $183,000 of outstanding invoices for goods and services
provided to the Company.
In February 2000 the Company issued 110,000 shares of unregistered
common stock to Lisa Broderick upon exercise of an option granted
in settlement of a lawsuit. (Note 12)
In March 2000 the Company issued a total of 524,281 shares of
common stock to two debenture holders upon conversion of a portion
of the two-year convertible subordinated debentures sold on
December 30, 1999. (Note 8)
In March 2000 the Company issued 189,578 shares of unregistered
common stock to John Gardner upon exercise of an option granted in
settlement of a lawsuit. (Note 12)
In March 2000 the Company issued 37,895 shares of unregistered
common stock to Ralph Nichols upon exercise of options granted to
Mr. Nichols. (Notes 9(C) and 10(A))
E) 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 1999 and 1998, 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.
F-25
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
E) DEFERRED COMPENSATION (CONTINUED)
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 1999 and 1998, 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.
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 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. In April 1998,
the President's employment with the company was terminated. The
previously recorded deferred compensation of $265,500 relative to
APB Opinion #25 was reversed in 1998.
F) WARRANTS
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 two
dollar warrants were all exercised in 1998.
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 two dollar warrants
were all exercised in 1998.
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. 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. The warrants were
F-26
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
F) WARRANTS (CONTINUED)
repurchased by the Company for $500,000 in 1999.
A summary of the status of the Company's warrant activity is
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------- ---------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------------------------- ----------------- ------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 2,714,725 $ 4.27 2,418,058 $ 2.49
Granted -- -- 2,416,667 4.52
Exercised (500,000) 3.00 (2,000,000) 2.00
Forfeited/Expired -- -- (120,000) 11.20
Repurchased (2,000,000) 5.00 -- --
--------------------------- ----------------- ------------------- ----------------- ---------------------
Outstanding at
end of year 214,725 .40 2,714,725 4.27
--------------------------- ----------------- ------------------- ----------------- --------------------
Options exercisable
at end of year 214,725 .40 2,714,725 1.77
--------------------------- ----------------- ------------------- ----------------- ---------------------
</TABLE>
The following table summarizes information about the warrants
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------------------------------------------------------- -----------------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ------------- --------------------- -------------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
$ .40 or less 214,725 2.50 .396 214,725 .396
----------------- ------------- --------------------- -------------------- --------------- -------------------
</TABLE>
NOTE 11 - 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:
F-27
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Net (Loss) $ (3,829,043) $ (6,066,394)
------------ ------------
Numerator for basic EPS (3,829,043) (6,066,394)
Effect of dilutive securities: -
------------ ------------
Numerator for diluted EPS (3,829,043) $ (6,066,394)
------------ ------------
Denominator:
Denominator for basic EPS
weighted-average shares 13,715,848 12,619,241
------------ ------------
Effect of dilutive securities:
Stock Options -- --
Warrants -- --
Potentially dilutive common shares -- --
Denominator for diluted EPS 13,715,848 12,619,241
------------ ------------
Basic EPS $ (.28) $ (.48)
------------ ------------
Diluted EPS $ (.28) $ (.48)
------------ ------------
</TABLE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12 - LITIGATION
The Company and the current Chairman of the Board were 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 was represented by its
Insurance Company. On April 30, 1999 the parties agreed to settle the
case for $50,000 in cash, which was funded by the Company's insurer,
and options for 110,000 shares of the Company's common stock at an
exercise price of ten cents a share. The options expire one year from
September 24, 1999; the date the registration of the underlying stock
became effective. For purposes of FASB #123 disclosure, the fair value
of the 110,000 options using the Black-Scholes pricing model is
$410,775, which has been charged to operations in 1999. On October 4,
1999, the former employee filed a complaint in the Circuit Court for
Palm Beach County, Florida alleging that the Company failed to timely
comply with the settlement and requested damages.
The Company was 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,
alleged 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
F-28
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12 - LITIGATION (CONTINUED)
issued by Woodward Trading Company. On August 9, 1999, the Company
reached agreement with the plaintiff-shareholders to settle all claims
against the Company; its' Chairman and the former President. The terms
of the settlement include payment of $850,000 to the plaintiffs, which
will be fully funded by the Company's insurer. The Company will pay
the legal fees for itself and the former President.
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 challenged 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 alleged 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 claimed he was libeled. A settlement was reached on October
15, 1999, wherein the former President received vested options for
250,000 shares of the Company's stock at fifty cents a share, pursuant
to the existing option agreement, and all other options were
cancelled. In addition, the Company agreed to pay his legal fees in
connection with the SEC investigation and the class action suit, which
was settled in 1999. The Company and the former President signed
mutual releases and the Company agreed to indemnify him from loss in
the aforementioned legal proceeding.
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 (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. 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. The Company's insurance
carrier has denied coverage of costs in defense of this action.
On August 17, 1999, the Company was named as a defendant in a
declaratory judgment action pending in the United States District
Court for the District of Arizona by Saf-T-Hammer, Inc. The plaintiff
is seeking a declaratory judgment that it's trademark does not
infringe upon the Saf-T-Lok(R) trademark, to invalidate the
Saf-T-Lok(R) trademark and attorneys' fees and costs. The Company has
answered the complaint and is contemplating a counterclaim for
trademark infringement, if the matter cannot be settled.
F-29
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13 - SUBSEQUENT EVENT
On March 28, 2000, Winner Holding LLC, Winner Club LLC and James E.
Winner, Jr., (collectively, "Winner") filed a complaint against the
Company and Mr. Brooks in U.S. District Court in Pennsylvania. The
suit arises from discussions between the parties regarding a possible
merger. Winner's complaint purports to allege, among other things,
causes of action for breach of contract, fraud, negligent
misrepresentation and breach of duty to negotiate in good faith, and
seeks compensatory damages in excess of $75,000 for each cause of
action. Winner is also seeking a permanent injunction preventing the
Company from being acquired by another party, as well as punitive
damages of at least $5,000,000. The Company intends to defend the suit
vigorously, and believes that available documentary evidence
demonstrates that the Company was not legally obligated to Winner. The
Company has notified its insurance carriers to determine whether they
will provide either indemnity or a defense. The Company, pursuant to
its articles of incorporation, will provide Mr. Brooks with counsel
and indemnify him in connection with this action.
F-30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX EXHIBIT NO.
<S> <C>
Articles of Incorporation, as amended (incorporated herein by reference to
Exhibit 3.1 to the Company's Form S-1 filed with the SEC on February 17, 1998)............................3.1
Articles of Amendment, filed herewith.....................................................................3.2
By-Laws, as amended (incorporated by reference to the Company's Annual Report on
Form 10-KSB, as filed with the SEC on May 13, 1998).......................................................3.3
Form of 6% Convertible Debenture (incorporated by reference to the Company's
Registration Statement on Form S-3, as filed with the SEC on August 17, 1999).............................4.1
Agency Agreement between the Company and Alexander, Westcott & Co., Inc. dated
April 20, 1999 (incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1999, as filed with the SEC)..................................10.1
Letter Agreement between the Company and Alexander, Westcott & Co., Inc. dated
July 8, 1999 (incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1999, as filed with the SEC).......................................10.2
Letter Agreement between the Company and Alexander, Westcott & Co., Inc. dated
July 8, 1999 (incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1999, as filed with the SEC).......................................10.3
Placement Agency Agreement between the Company and J. P. Carey Securities, Inc.
dated December 30, 1999 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on June 4, 1999)...................................................10.4
Form of Securities Purchase Agreement relating to the Company's Debenture
offering through J. P. Carey Securities, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-3, as filed with the SEC on August 17,
1999)....................................................................................................10.5
Form of Registration Rights Agreement relating to the Company's Debenture
offering through J. P. Carey Securities, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-3, as filed with the SEC on August 17,
1999)....................................................................................................10.6
Amendment to and Termination of Non-Exclusive Distribution and Pricing Agreement
dated as of May 18, 1999, and delivered May 26, 1999, by and between the Company
and USA (incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on June 4, 1999)......................................................................10.7
Stock Pledge Termination Agreement dated as of May 18, 1999, and delivered May
26, 1999, by and between the Company and USA (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on June 4, 1999).................................10.8
Termination Agreement dated as of May 18, 1999, and delivered May 26, 1999, by
and between the Company and Empire Consulting Ltd., Inc. ("Empire")
(incorporated by reference to the Company's Current Report on Form 8-K filed with
the SEC on June 4, 1999).................................................................................10.9
Mutual Release dated May 18, 1999, and delivered May 26, 1999, by Danvers
Investment Corp, Amexcorp., Ltd., the Company, Mr. Shalom Weiss and Mr. Geno
Weiser (incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on June 4, 1999).....................................................................10.10
Mutual Release dated May 18, 1999, and delivered May 26, 1999, by the Company
and Empire (incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on June 4, 1999).................................................................10.11
Consent of Goldberg & Company, P.A. .....................................................................23.1
Consent of Goldberg Wagner Stump & Jacobs LLP............................................................23.2
Power of Attorney, filed herewith, see page preceding signatures.........................................24.1
Financial Data Schedule, filed herewith..................................................................27.1
</TABLE>
<PAGE>
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
SAF T LOK INCORPORATED
Pursuant to Section 607.1006 of the Business Corporation Act of the State of
Florida, the undersigned, being the President of SAF T LOK INCORPORATED, a
Florida corporation (the "Corporation"), a corporation organized and existing
under and by virtue of the Business Corporation Act of the State of Florida
bearing Document #L01153 does hereby certify:
The Board of Directors and majority of the Shareholders approve the
amendment to the Corporation's Articles of Incorporation as follows:
Article IV of the Corporation's Articles of Incorporation as amended
and restated shall be deleted in its entirety and replaced with the following:
ARTICLE IV
CAPITAL STOCK
The maximum number of shares that this Corporation shall be authorized
to issue and have outstanding at any one time shall be thirty million
(30,000,000) shares of Common Stock, par value $.0l per share, all of which
shares shall be issued and fully paid and non-assessable.
1. The foregoing amendment was adopted by Written Consent by the Board
of Directors on November 15, 1999, pursuant to Section 607.0821 of the Florida
Business Corporation Act.
2. An annual meeting of the Shareholders of the Corporation was held on
February 7, 2000, at which the foregoing amendment was submitted to the
Corporation's Shareholders and adopted by holders of a majority of the
outstanding voting power of the Corporation pursuant to Section 607.0701 of the
Florida Business Corporation Act. Therefore, the number of votes cast for the
amendment to the Corporation's Articles of Incorporation was sufficient for
approval.
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Amendment to be
signed in its name by its President and Chief Executive Officer this
4th day of April 2000.
/s/ Franklin W. Brooks
------------------------------------
FRANKLIN W. BROOKS
President and Chief Executive Officer
<PAGE>
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 year ended December 31, 1998, our report dated March 24,
1999, relating to the financial statements of Saf T Lok Incorporated which
appear in such Form 10-KSB.
GOLDBERG & COMPANY, P.A.
West Palm Beach, Florida
April 14, 2000
<PAGE>
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 year ended December 31, 1999, our report dated March 9,
2000 (except for Note 13, as to which the date is March 28, 2000), relating
to the financial statements of Saf T Loc Incorporated which appear in such
Form 10-KSB.
GOLDBERG WAGNER STUMP & JACOBS LLP
West Palm Beach, Florida
April 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 995,581
<SECURITIES> 0
<RECEIVABLES> 90,384
<ALLOWANCES> 0
<INVENTORY> 2,322,169
<CURRENT-ASSETS> 3,484,836
<PP&E> 1,206,739
<DEPRECIATION> 144,558
<TOTAL-ASSETS> 5,019,057
<CURRENT-LIABILITIES> 1,790,185
<BONDS> 1,325,000
0
0
<COMMON> 139,836
<OTHER-SE> 26,341,146
<TOTAL-LIABILITY-AND-EQUITY> 5,019,057
<SALES> 172,077
<TOTAL-REVENUES> 209,173
<CGS> 86,395
<TOTAL-COSTS> 86,395
<OTHER-EXPENSES> 2,012,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 569,727
<INCOME-PRETAX> (3,829,043)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,829,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,829,043)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
