<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2000
COMMISSION FILE NO.: 1-11968
SAF T LOK INCORPORATED
(exact name of registrant as specified in its charter)
FLORIDA 65-0142837
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION)
1101 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
(Address of principal executive offices)
(561) 478-5625
(Registrant's telephone number, including area code)
Indicate by check mark whether the Company: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE
Class
16,465,346
Outstanding at November 14, 2000
<PAGE>
<TABLE>
<CAPTION>
SAF T LOK INCORPORATED.
INDEX FOR FORM 10-QSB
<S> <C>
PART I FINANCIAL INFORMATION...........................................................................................1
Item 1. Financial Statements...........................................................................................1
Saf T Lok Incorporated and Subsidiaries Consolidated Balance Sheets as of
September 30, 2000 and 1999 (Unaudited)................................................................................1
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Operations for the Three
Quarters Ended September 30, 2000 and 1999 (Unaudited).................................................................2
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (Unaudited)...................................................................3
Saf T Lok Incorporated and Subsidiaries Notes To Consolidated Financial Statements for the
Quarters Ending September 30, 2000 and 1999 (Unaudited)................................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................6
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION.............................................................6
Results of Operations..................................................................................................6
Three Months and Nine Months Ended September 30, 2000 Compared to Three Months and Nine
Months Ended September 30, 1999........................................................................................6
Revenues...............................................................................................................6
Expenses ..............................................................................................................6
Liquidity and Sources of Capital.......................................................................................8
Contemplated Strategic Alliances.......................................................................................9
Qualifications.........................................................................................................9
Sale of Debentures.....................................................................................................9
Anticipated Material Expenses..........................................................................................9
Capital Resources and Expenditures.....................................................................................9
PART II OTHER INFORMATION............................................................................................9
Item 1. Legal Proceedings..............................................................................................9
Item 2. Changes in Securities and Use of Proceeds.....................................................................10
Common Stock..........................................................................................................10
6% Convertible Debentures.............................................................................................10
Item 3. Defaults Upon Senior Securities...............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders...........................................................11
Item 5. Other Information.............................................................................................11
Item 6. Exhibits and Reports on Form 8-K..............................................................................11
Current Reports On Form 8-K...........................................................................................11
PART III SIGNATURES...................................................................................................11
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash in bank $ 148,077 $ 69,466
Accounts receivable 70,655 55,875
Note receivable 21,325 21,262
Inventories 2,308,573 2,472,515
Prepaid expenses 103,040 159,029
--------------- ---------------
TOTAL CURRENT ASSETS 2,651,670 2,778,147
--------------- ---------------
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,000,454 1,108,115
--------------- ---------------
OTHER ASSETS
Patents (less accumulated amortization) 261,759 279,372
Note receivable, less current portion 109,248 130,177
Other assets 25,190 79,770
--------------- ---------------
TOTAL OTHER ASSETS 396,197 489,319
--------------- ---------------
TOTAL $ 4,048,321 $ 4,375,581
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 205,435 $ 207,028
Accrued expenses 81,835 27,379
--------------- ---------------
TOTAL CURRENT LIABILITIES 287,270 234,407
DEBENTURES PAYABLE 175,000 325,000
--------------- ---------------
TOTAL LIABILITIES 462,270 559,407
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 30,000,000 shares authorized, 16,465,346
and 13,644,212 shares listed and outstanding, in 2000 and 1999, respectively 164,655 136,442
Paid-in capital 29,671,722 25,783,629
Other equity reductions (218,013)
Accumulated deficit (26,250,326) (21,885,884)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 3,586,051 3,816,174
--------------- ---------------
TOTAL $ 4,048,321 $ 4,375,581
=============== ===============
</TABLE>
1
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDING
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------------- ------------------------------------
2000 1999 2000 1999
---------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Sales $ 43,084 $ 14,435 $ 77,615 $ 145,243
Cost of sales 13,599 8,476 29,934 83,233
----------------------------------------- -----------------------------------
Gross profit 29,485 5,959 47,681 62,010
Selling, general and
administrative expenses 604,629 450,629 2,275,167 1,329,623
Stock, options and warrants issued for
compensation and services (136,100) 211,409 566,441 1,001,913
Depreciation and amortization 78,093 76,323 230,489 226,922
Other income 8,729 11,747 26,202 33,631
----------------------------------------- -----------------------------------
NET LOSS $ (508,408) $ (720,655) $ (2,998,214) $(2,462,817)
========================================= ===================================
LOSS PER COMMON SHARE $ (0.03) $ (0.05) $ (0.19) $ (0.18)
========================================= ===================================
Weighted average number of
common shares outstanding 16,206,758 13,532,451 15,481,483 13,680,391
========================================= ===================================
</TABLE>
2
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (2,998,214) $ (2,462,817)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization 230,489 226,922
Non cash compensation to directors and officers
and former employees 524,941 747,991
Non cash consulting fees (93,500)
Issuance of stock for services 135,000 221,618
Issuance of stock for compensation 91,575
Issuance of stock for interest paid upon conversion of debentures 32,598 937
Interest expense for beneficial conversion of debentures 218,750
Issuance of stock for settlement of accounts payable 183,009
Write-off of obsolete inventory 20,466
Changes in assets and liabilities:
Decrease in accounts receivable 19,729 3,722
Decrease in other assets 721
Increase in prepaid expenses (44,488) (2,162)
Increase in inventories (6,874) (114,533)
Decrease in accounts payable (141,844) (163,339)
Decrease in accrued liabilities (36,071) (255,731)
------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES (1,956,009) (1,705,096)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on note receivable 17,712 15,148
Stock issued for payment of equipment (132,400)
Payments for purchase of equipment (15,223) (52,593)
------------------ ------------------
NET CASH USED BY INVESTING ACTIVITIES (129,911) (37,445)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debentures 875,000 400,000
Issuance of stock for fees related to debentures 232,696
Issuance of stock upon exercise of options 96,900 244,100
Decrease (increase) in deferred interest 33,820 (70,754)
Issuance of stock upon exercise of warrants, net of related costs 1,305,000
Purchase of warrants (500,000)
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,238,416 1,378,346
------------------ ------------------
NET DECREASE IN CASH AND EQUIVALENTS (847,504) (364,195)
</TABLE>
3
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
Cash and equivalents at beginning of year 995,581 433,661
------------------ -----------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 148,077 $ 69,466
================== =================
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash payments for interest $ 171,631 $ 61,344
================== =================
</TABLE>
SAF T LOK INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 & 1999
(UNAUDITED)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The unaudited financial information furnished herein reflects all adjustments,
which, in the opinion of management are necessary to fairly state the Company's
financial position, the changes in its financial position and the results of its
operations for the periods presented. This report on Form 10QSB should be read
in conjunction with the Company's financial statements and notes thereto
included on Form 10KSB for the year ended December 31, 1999. The Company
presumes that users of the interim financial information herein have read or
have access to the audited financial statements for the preceding year and that
the adequacy of additional disclosure needed for a fair presentation may be
determined in that context. Accordingly, footnote disclosure, which would
substantially duplicate the disclosure contained in the Company's financial
statements for the year ended December 31, 1999, has been omitted. The results
of operations for the nine month period ended September 30, 2000 are not
necessarily indicative of results for the entire year ending December 31, 2000.
Certain items in the September 30, 1999 financial statements have been
reclassified for comparative purposes. These reclassifications have no effect on
the 1999 net loss or shareholders equity.
NOTE 2 - INVENTORIES
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
Inventories are comprised of the following as of September 30, 2000 and 1999:
<S> <C> <C>
Finished goods $ 360,451 $ 430,064
Raw materials 1,926,351 1,992,451
Supplies 21,771 50,000
------------------ -----------------
TOTAL $2,308,573 $2,472,515
================== =================
NOTE 3 - PREPAID EXPENSES
2000 1999
------------------ -----------------
Prepaid expense is comprised of the following as of September 30, 2000 and 1999:
Deposits on tooling $ 15,457 $ 36,357
Prepaid insurance 78,709 6,380
Prepaid rent 8,874 16,916
Deferred interest, current portion 89,376
Prepaid legal 5,000
Prepaid consulting 5,000
------------------ -----------------
TOTAL $ 103,040 $ 159,029
================== =================
</TABLE>
4
<PAGE>
SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
Property and equipment is comprised of the following as of September 30, 2000
and 1999:
<S> <C> <C>
Equipment $ 225,577 $ 404,697
Furniture and fixtures 25,694 55,713
Tools and die 1,709,054 1,530,764
Leasehold improvements 13,189 24,762
------------------ -----------------
TOTAL $ 1,973,514 $2,015,936
Less accumulated depreciation 973,060 907,821
------------------ -----------------
TOTAL $1,000,454 $1,108,115
================== =================
</TABLE>
NOTE 5 - SHAREHOLDERS' EQUITY
In August 2000, $750,000 of Debentures and $12,476 of accrued interest were
converted into 775,765 shares of the Company's common stock.
As of September 30, 2000, 100,000 options issued to two consultants that were
repriced in 1999, were revalued from $119,400 to $50,900 using the Black-Scholes
pricing model, with a corresponding reduction in stock options issued for
compensation and services of $68,500 during the quarter.
As of September 30, 2000, 100,000 options issued to two consultants that were
repriced in 2000, were revalued from $120,200 to $52,600 using the Black-Scholes
pricing model, with a corresponding reduction in stock options issued for
compensation and services of $67,600 during the quarter.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, possible delisting from the Nasdaq Small Cap Board, the Company's
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").
RESULTS OF OPERATIONS.
The Company, through its subsidiary, Saf T Lok Corporation, a Florida
corporation, ("STL"), designs, develops, manufactures and distributes patented
and proprietary safety locks for handguns. There are two designs, the Saf T
Lok-Registered Trademark- Grip Lock, which fits many types of standard handguns,
and the Saf T Lok-Registered Trademark- Magazine Lock, which fits many types of
handguns using ammunition magazines. The Company currently conducts its own
distribution, through retail stores, the internet and direct sale to law
enforcement authorities. In the third quarter of 2000, most of the Company's
sales revenues were derived from sales to the law enforcement community,
although additional markets, methods of distribution and third party
distributors continue to be developed.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES.
The Company's total sales for the quarter ending September 30, 2000 were
$43,084, compared to $14,435 in the quarter ending September 30, 1999. Sales for
the quarter ending September 30, 2000 were approximately 90% law enforcement and
10% retail while sales for the quarter ending September 30, 1999 consisted of
approximately 25% law enforcement, 50% initial stocking orders to distributors
for resale to law enforcement agencies or personnel and 25% retail. Orders from
law enforcement agencies tend to be large and sporadic, often in the range of
$5,000 to $10,000 each and generally make up the majority of sales for a given
period. Therefore, period revenues can be greatly influenced by when one or more
law enforcement orders may be shipped. For the quarter ended September 30, 1999
even though there were six law enforcement shipments and two law enforcement
distributor shipments they averaged approximately $1,450 each, including one for
approximately $7,100. For the quarter ending September 30, 2000 there were three
sizeable law enforcement orders averaging approximately $14,300 each with the
largest being approximately $23,400. Other factors that can influence sales,
although normally to a much lesser extent, are the extent of opening stocking
orders to new distributors and retail sales through the internet. Sales through
all three channels of distribution show no predictable pattern.
Gross profit for the quarter ending September 30, 2000 was $29,485, or 68% of
sales, while the quarter ending September 30, 1999 showed a gross profit of
$5,959 or 41% of sales. Gross profit margin percentages for the quarter ending
September 30, 2000 were higher than the quarter ending September 30, 1999 mainly
because of disproportionately higher freight and labor costs from shipments of
promotional samples falling into the quarter ending September 30, 1999.
The Company continues to focus its marketing efforts towards law enforcement by
attendance at the major national and regional law enforcement trade shows. Shows
attended during the quarter ending September 30, 2000 were the National
Sheriff's Association, the National Organization of Black Law Enforcement
Executives and the Florida Sheriff's Association. While the Company is gaining
credibility as a result of favorable reviews by current Saf T Lok lock users,
the law enforcement purchasing decision continues to be drawn out as tight
budgets are stretched by competing demands on those funds.
Total revenues were higher in the quarter ending September 30, 2000, because
more sales to law enforcement agencies were completed than in the same period
last year. New law enforcement customers added in the quarter ending September
30, 2000 were the Washington, DC Metropolitan Transit Police and the Redwood
City, California Police Department. Federal, state and local police and other
law enforcement agencies purchase, collectively, more than 500,000 police guns a
year. In addition to some sales through gun dealers and gun shops, the Company
sells directly to retail customers, usually at list price.
Nevertheless, 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,
the Company notes that nearly all gun manufacturers include a trigger lock when
shipping handguns to customers. These trigger locks are not Company products and
may negatively impact the market for the Grip Lock and the Magazine Lock, since
gun owners may not choose to supplement the included safety equipment. Finally,
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.
EXPENSES.
Total expenses for the three months ending September 30, 2000 were $546,622
as compared to total expenses of $738,361 for the three months ending
September 30, 1999. The decrease of approximately $191,739 is mostly
attributable to the items described in the selling, general and
administrative and the stock and option expense sections below.
6
<PAGE>
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.
The selling, general and administrative portion of the expenses for the
quarter ending September 30, 2000 were $604,629 as compared to $450,629 for
the quarter ending September 30, 1999, an increase of $154,000.
The major reasons for the difference between the two quarters are:
- Interest expenses for the quarter ending September 30, 2000 were
$129,872 as compared to $35,349 for the quarter ending
September 30, 1999. The interest expense for the current quarter
relates to the prorated amortization of commissions and interest
of the debentures issued in the quarter ending December 31, 1999
and the quarter ending June 30, 2000. Interest expenses for the
quarter ending September 30, 1999 relate to the prorated
amortization of commissions and interest of the debentures issued
in the quarter ending September 30, 1999.
- The Company's legal costs in the patent and general cost
categories were lower in the quarter ending September 30, 2000
but were offset by increased legal expenses due to the Securities
and Exchange Commission's (SEC's) investigation (see "Other
Information - Legal Proceedings") and legal costs associated with
activities in the merger and acquisition area (see "Contemplated
Strategic Alliances"). Overall, for the quarter ending September
30, 2000 legal costs increased by approximately $76,252 over the
same period in 1999.
- Salaries and payroll taxes for the quarter ending September 30,
2000 were lower by approximately $22,422 than the same period
last year as employee payroll was reduced to match the decline
in the level of sales.
STOCK AND OPTIONS EXPENSES.
The Company's expenses related to the issuance of common stock and the
issuance and exercise of stock options related to current and former
employees and consultants was a credit of $136,100 in the quarter ending
September 30, 2000, as compared to an expense of $211,409 over the same
period in 1999. This credit for the quarter ending September 30, 2000, as
compared to an expense for the same period one year earlier, occurred
because of the Black-Scholes valuation of the repriced options to
consultants. The Black-Scholes valuation is performed each quarter and the
calculation is influenced by the current market value of the stock. Since
the market value is lower the resulting calculation was a credit.
Net loss for the quarter ending September 30, 2000 was $(508,408) or
$(0.03) per share as compared to a loss of $(720,655) or $(0.05) per share
for the quarter ending September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
The Company's total sales for the nine months ending September 20, 2000
were $77,615, compared to $145,243 for the nine months ending September 30,
1999. Purchases by law enforcement authorities made up the majority of the
sales in both periods. Orders from law enforcement agencies tend to be
large and sporadic, often in the range of $5,000 to $10,000 each and
generally make up the majority of sales for a given period. Therefore,
period revenues can be greatly influenced by when one or more law
enforcement orders may be shipped. Other factors that can influence sales,
although normally to a much lesser extent, are the extent of opening
stocking orders to new distributors and retail sales through the internet.
Sales through all three channels of distribution show no predictable
pattern.
Gross profit for the nine months ending September 30, 2000 was $47,681, or
61% of sales, while the nine months ending September 30, 1999 showed a
gross profit of $62,010, with a 43% margin. Gross profit margin percentages
for the nine months ending September 30, 2000 were higher than the nine
months ending September 30, 1999 mainly because of higher price discounting
in the nine months ending September 30, 1999. The Company's initial
marketing strategy for the nine months ending September 30, 1999 included
offering discounts as an enticement to convince new law enforcement
customers to make the decision to purchase the Company's newly introduced
magazine locks.[CAPTION]
EXPENSES.
Total expenses for the nine months ending September 30, 2000 were
$3,072,097 as compared to total expenses of $2,558,458 for the nine months
ending September 30, 1999. The difference of $513,639 is mostly
attributable to the items described in the selling, general and
administrative and the stock and option expense sections below.
7
<PAGE>
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.
The selling, general and administrative portion of the expenses for the
nine months ending September 30, 2000 were $2,275,167 as compared to
$1,329,623 for the nine months ending September 30, 1999, an increase of
$945,544.
The major reasons for the difference in the two periods are:
- In the nine months ending September 30, 1999 the Company realized an
unusual one-time credit of $165,000 as a result of the reversal of
commissions that were due to a consultant before termination of the
Distribution Agreement with United Safety Action Inc.
- In the nine months ending September 30, 2000, professional fees of
$250,000 were paid to the investment banking firm of Friedman,
Billings, Ramsey & Co., Inc. (See "Contemplated Strategic Alliances").
- Interest expenses and the conversion discount feature from the sale of
convertible debentures and the conversion of debentures in the nine
months ending September 30, 2000 were $648,568 as compared to interest
expenses of $35,887 for the nine months ending September 30, 1999.
- Expenses due to the Company's defense of the now concluded class
action securities suit were lower but were offset by increases in
legal expenses due to the Securities and Exchange Commission's (SEC's)
investigation, the suit brought by the Winner Company (see "Other
Information - Legal Proceedings"), and legal fees related to merger
and acquisition activities. Overall, legal costs for nine months
ending September 30, 2000 increased by approximately $59,622 over the
same period in 1999.
- Research and development expenses for the nine months ending September
30, 2000 were lower by approximately $25,744 than the same period last
year due mainly to the timing of activities related to the completion
of new models of the magazine lock.
- Consultant, Professional and Accounting fees for the nine months
ending September 30, 2000 were lower by approximately $45,585 than in
the same period in 1999 as less of these services were required.
- Marketing expenses during the nine months ending September 30, 2000
were lower by approximately $84,448 over the same period in 1999
partly because of higher expenses for the nine months ending September
30, 1999 of approximately $40,381 in complimentary samples and
promotional items as the Company heavily promoted the new magazine
lock models and an additional $54,110 for marketing and public
relations consultants. There were offsetting higher expenses for
shows, advertising and literature of approximately $10,042 for the
nine months ending September 30, 2000.
STOCK AND OPTIONS EXPENSES.
The Company's expenses related to the issuance of common stock and the
issuance and exercise of stock options related to current and former
employees and consultants for the nine months ending September 30, 2000
were approximately $399,262 lower than in the nine months ending September
30, 1999. The nine months ending September 30, 2000 received credits as a
return of previous expenses primarily because of the Black-Scholes
valuation of the repriced options to consultants and the amortization of
deferred compensation as the result of a previous grant of stock options.
The Black-Scholes valuation is performed each quarter and the calculation
is influenced by the current market value of the stock. Since the market
value for the nine months ending September 30, 2000 is lower than the same
period last year the resulting calculation was lower resulting in a credit,
which more than offset the charge for amortization of the options over
their lifetime.
Net loss for the nine months ending September 30, 2000 was $(2,998,214) or
$(0.19) per share as compared to a loss of $(2,462,817) or $(0.18) per share for
the nine months ending September 30, 1999.
LIQUIDITY AND SOURCES OF CAPITAL.
The Company concluded the quarter ending September 30, 2000 with a cash balance
of $148,077 and accounts receivable of $70,655, against current liabilities of
$287,270. For the quarter ending September 30, 1999, the Company had a cash
balance of $69,466 and accounts receivable of $55,875 against current
liabilities of $234,407. This improvement in the Company's finances is due to
the influx of $786,250, net after commissions and expenses, received from the
sale of the 6% convertible debentures in the quarter ending June 30, 2000.
8
<PAGE>
The major portion of current liabilities for the period ending September 30,
2000 include accounts payable of $205,435, accrued salaries and taxes of $23,325
and liability insurance of $55,885 and deferred interest of $2,625 due on the
$175,000 outstanding portion of the Company's convertible debentures. The major
portions of current liabilities for the period ending September 30, 1999 include
accounts payable of $208,194, and accrued salaries and taxes of $27,379. As part
of the Company's efforts to conserve cash, the salaries of all officers and
managers are being accrued beginning with September 2000.
As of September 30, 2000, options to purchase approximately 2.7 million shares
of common stock remained unexercised and unexpired. If all such options were
exercised, the Company would receive proceeds of approximately $3.5 million.
However, most unexercised options have exercise prices near to or in excess of
the current market price of the Company's shares. In addition, 214,725 warrants
were outstanding as of September 30, 2000, which would provide approximately
$85,031 in proceeds to the Company if all were exercised.
The Company's inventory at the close of the quarter ending September 30, 2000
was valued at $2,308,573, compared to the quarter ending September 30, 1999
value of $2,472,515.
The Company reviews the carrying value of property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted future cash
flows are less than the carrying value, an impairment loss is recognized equal
to an amount by which the carrying value exceeds the fair value of assets.
CONTEMPLATED STRATEGIC ALLIANCES.
As Company sales have not yet reached a level sufficient to sustain operations,
the Company is seeking a strategic alliance to provide either an immediate
revenue stream or the marketing expertise to help increase sales revenues to a
self-sustaining, profitable level, or both. To effectuate this plan, the Company
has engaged the investment banking firm of Friedman, Billings, Ramsey & Co.,
Inc. , for a period of one year, for advice about potential mergers,
acquisitions and similar business combinations. The Company is having continued
discussions with potential candidates but, to date, has not come to agreement
with any parties and there can be no assurances that any transactions will
result.
QUALIFICATIONS.
Notwithstanding the Company's intended plan to seek strategic partnerships, if
sales revenues do not increase sufficiently by the fourth quarter of 2000, and
no alliances are forged, the Company will need to obtain additional working
capital. Reflecting this, a going concern qualification was included in the
report of the independent auditors reviewing the Company in connection with
filing of its Annual Report on Form 10-KSB for 1999, filed with the SEC. The
underlying causes resulting in the auditor's "going concern" qualification have
continued through the third quarter of 2000.
ANTICIPATED MATERIAL EXPENSES.
During the third quarter of 2000, the Company incurred unusual material
expenses, separate from its ordinary operating expenses, of $99,075 related to
the search for a strategic business combination. While the Company does not
anticipate any unusual material expenses from its ordinary operating mode,
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. No other substantial capital expenditures are
anticipated during the fiscal year.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please see the Company's report on Form 10QSB for the quarter ended March 31,
2000.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
COMMON STOCK.
In August 2000 the Company issued 65,408 shares of Common Stock to one debenture
holder upon conversion of the final portion of the two-year convertible
debentures sold between October 27, 1999 and December 30, 1999 pursuant to
Section 4 (2) of the Securities Act of 1933 as amended.
In August 2000 the Company issued 710,357 shares of Common Stock to one
debenture holder upon conversion of a portion of the two-year convertible
debentures sold May 26, 2000 pursuant to Section 4 (2) of the Securities Act of
1933 as amended.
None of the above referenced issuances of the Company's shares involved a public
offering by the Company of such stock.
6% CONVERTIBLE DEBENTURES.
All of the 775,765 shares of common stock issued by the Company in the quarter
ending September 30, 2000 were prompted by the conversion of the 6% convertible
debentures ("Debentures") sold in the quarters ending December 31, 1999 and June
30, 2000. A total of $175,000 of 6% convertible debentures, sold on May 26, 2000
remains outstanding. If held to maturity and converted to shares of common
stock, the Company would be required to issue a maximum of 175,000 shares for
the principle and 21,000 shares for interest at the floor conversion price of
$1.00 per share.
DESCRIPTION OF DEBENTURES.
The Company's Debentures that were sold between October 27, 1999 and December
30, 1999 and were converted in the quarter ending September 30, 2000 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 in 2001.
The debenture holders have the right to convert the debentures within 90 days of
closing or the effective date of the registration, whichever occurs first. Upon
conversion, and at the holder's option, the outstanding principal amount of the
debentures, and any accrued but unpaid interest thereon may be converted into
common stock at a 25% discount from market price, subject to a minimum
conversion price of $.70 per share and a maximum conversion price of $2.00 per
share. The Company has the option of paying the accrued interest in cash or
shares of common stock. At maturity, the Debenture holder has the option of
receiving cash or shares of common stock for the principal value of the
Debenture. The Debenture certificates bear restrictive legends addressing the
transferability of the Debentures and the underlying common stock.
The Company's Debentures that were sold on May 26, 2000 and were converted in
the quarter ending September 30, 2000 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 May 26, 2002. Upon conversion, and at the holder's option,
the outstanding principal amount of the debentures, and any accrued but unpaid
interest thereon may be converted into common stock at a 20% discount from
market price, subject to a minimum conversion price of $1.00 per share and a
maximum conversion price of $2.00 per share. The debenture holders have the
right to convert the debentures within 90 days of closing or the effective date
of the registration, whichever occurs first. The Company has the option of
paying the accrued interest in cash or shares of common stock. At maturity, the
Debenture holder has the option of receiving cash or shares of common stock for
the principal value of the Debenture. The Company has an obligation to file a
registration statement covering the common stock issuable upon conversion of the
debentures and the compensatory shares within 90 days of the closing of the
sale. The Debenture certificates bear restrictive legends addressing the
transferability of the Debentures and the underlying common stock.
CONVERSION BY HOLDERS.
Holders of the Company's Debentures converted an aggregate of $750,000 worth of
these Debentures for 762,746 shares of the Company's common stock in the quarter
ending September 30, 2000. An additional interest payment of 13,019 shares was
also issued to the converting Debenture holders.
The registration statement covering 65,408 shares of the common stock issued
upon conversion of the debentures and the compensatory shares became effective
in the quarter ending March 31, 2000.
The registration statement covering 710,357 shares of the common stock issuable
upon conversion of the debentures and the compensatory shares has been filed but
has not yet become effective.
COMMISSIONS.
The Debentures sold during the quarter ending June 30, 2000 were through J.P.
Carey Securities, Inc., ("Carey"). In connection with the sales, Carey and its
business partners, were issued an aggregate of 43,750 shares of common stock.
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").
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ending September 30, 2000, no matters were submitted to a
vote of security holders through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION.
On November 3, 2000 the Company received notification from The Nasdaq Stock
Market that the Company's common stock has failed to maintain a minimum bid
price of $1.00 over the last thirty consecutive trading days as required for
continued listing on The Nasdaq SmallCap Market as set forth in Marketplace Rule
4310(c)(4) (the "Rule"). The Company will be provided 90 calendar days, or until
February 1, 2001 to regain compliance with this Rule. (The 90-day period relates
exclusively to the bid price deficiency. The Company may be delisted during the
90 day period for failure to maintain compliance with any other listing
requirement which occurs during this period.) If at any time before February 1,
2000, the bid price of the Company's common stock is at least $1.00 for a
minimum of ten consecutive trading days, Nasdaq Staff (the "Staff") will
determine if the Company complies with the Rule. However, if the Company is
unable to demonstrate compliance with the Rule on or before February 1, 2001,
its common stock will be delisted at the opening of business on February 5,
2001.
The Company may appeal the Staff's determination to a Nasdaq Listing
Qualifications Panel (the "Panel"), pursuant to the procedures set forth in the
Nasdaq Marketplace Rule 4800 Series. A hearing request will stay the delisting
of the Company's securities pending the Panel's decision. The request for a
hearing must be received by the Nasdaq Listing Qualifications Hearings
Department by the close of business on February 1, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit No. Description of Exhibit
----------- ----------------------
27.1 Financial Data Schedule, Filed herewith
CURRENT REPORTS ON FORM 8-K.
There were no reports filed on Form 8-K during the quarter ending September 30,
2000.
PART III SIGNATURES.
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAF T LOK INCORPORATED
Date: November 14, 2000 by:
/s/ Franklin W. Brooks
---------------------------------
Franklin W. Brooks, Chairman,
President, Chief Executive officer
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