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- --------------------------------------------------------------------------------
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 MARCH 31, 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
15,565,178
Outstanding at May 17, 2000
- --------------------------------------------------------------------------------
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SAF T LOK INCORPORATED.
INDEX FOR FORM 10-QSB
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION......................................................................................1
Item 1. Financial Statements...................................................................................1
Saf T Lok Incorporated and Subsidiaries Consolidated Balance Sheets as of March 31, 2000
and 1999 (Unaudited).........................................................................................1
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 (Unaudited).............................................................2
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 (Unaudited).............................................................3
Saf T Lok Incorporated and Subsidiaries Notes To Consolidated Financial Statements for the
Quarters Ending March 31, 2000 and 1999 (Unaudited)..........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION...................................................5
Results of Operations........................................................................................6
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999..............................6
Revenues..................................................................................................6
Expenses..................................................................................................6
Liquidity and Sources of Capital..........................................................................7
Contemplated Strategic Alliances..........................................................................8
Qualifications............................................................................................8
Sale of Debentures........................................................................................8
Anticipated Material Expenses.............................................................................8
Capital Resources and Expenditures........................................................................8
PART II OTHER INFORMATION........................................................................................8
Item 1. Legal Proceedings......................................................................................8
Item 2. Changes in Securities and Use of Proceeds..............................................................9
Common Stock.................................................................................................9
6% Convertible Debentures.................................................................................9
Executive and Employee Compensation......................................................................10
Off-Set of Expenses......................................................................................10
Product Liability........................................................................................10
Item 3. Defaults Upon Senior Securities.......................................................................10
Item 4. Submission of Matters to a Vote of Security Holders...................................................10
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..............................................................................................12
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 418,535 $ 44,430
Accounts receivable (less allowance for doubtful accounts
Of $14,510 in 1999) 67,466 82,106
Note receivable 20,491 13,863
Inventories 2,338,373 2,322,708
Prepaid expenses 67,500 160,779
---------------- ---------------
TOTAL CURRENT ASSETS 2,912,365 2,623,886
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,135,548 1,198,814
OTHER ASSETS
Patents (less accumulated amortization of $111,847
and $146,928 respectively) 275,849 310,930
Note receivable, less current portion 120,123 148,285
Other assets 81,677 9,016
---------------- ---------------
TOTAL OTHER ASSETS 477,649 468,231
TOTAL $ 4,525,562 $ 4,290,931
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 37,632 $ 243,951
Note payable 35,441
Accrued expenses 177,019 371,061
---------------- ---------------
TOTAL CURRENT LIABILITIES 214,651 650,453
Convertible Debentures 475,000
---------------- ---------------
TOTAL LIABILITIES 689,651 650,453
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 20,000,000 shares authorized, 15,350,910 and
13,749,957 shares issued and outstanding,
in 2000 and 1999, respectively 153,510 137,500
Paid-in-capital 28,452,863 27,680,603
Other equity reductions (47,469) (4,254,829)
Accumulated deficit (24,722,993) (19,922,796)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 3,835,911 3,640,478
---------------- ---------------
TOTAL $ 4,525,562 $ 4,290,931
================ ===============
</TABLE>
1
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SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------------- -------------------
<S> <C> <C>
Sales $ 23,843 $ 49,416
Cost of Sales 8,031 26,053
----------------- -------------------
Gross Profit 15,812 23,363
Selling, general and administrative expenses 649,577 431,072
Stock and options issued for
compensation and services 773,272 35,938
Depreciation 74,398 65,387
Other income 10,552 9,306
----------------- -------------------
NET LOSS $(1,470,883) $(499,728)
================= ===================
LOSS PER COMMON SHARE $ (0.10) $ (0.03)
================= ===================
Weighted average number of common shares outstanding 14,631,047 13,749,957
================= ===================
</TABLE>
2
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SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,470,883) $(499,728)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization 74,398 65,387
Non cash compensation to directors, officers
and former employees 477,472
Non cash consulting fees 160,800
Issuance of stock for services 135,000 35,938
Issuance of stock for interest paid upon conversion of debentures 11,734
Write off of obsolete inventory 20,496
Issuance of stock for settlement of accounts payable 183,009
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 22,918 (22,486)
Decrease in other assets 721
Increase in prepaid expenses (8,948) (18,451)
(Increase) decrease in inventories (36,701) 49,292
Decrease in accounts payable (309,647) (127,583)
Increase in accrued liabilities 59,113 124,806
------------------- -----------------
Net cash used in operating activities (681,239) (392,104)
------------------- -----------------
Cash flows from investing activities:
Payments received on note receivable 7,671 4,438
Payments for purchase of equipment (8,318) (13,315)
Stock issued for payment of equipment (132,400)
------------------- -----------------
Net cash used by investing activities (133,047) (8,877)
------------------- -----------------
Cash flows from financing activities
Issuance of stock upon exercise of options 86,000 11,750
Increase in deferred interest (22,667)
Issuance of stock for fees related to the debentures 173,907
------------------- -----------------
Net cash provided by financing activities 237,240 11,750
------------------- -----------------
NET (DECREASE) IN CASH AND EQUIVALENTS (577,046) (389,231)
Cash and equivalents at beginning of period 995,581 433,661
------------------- -----------------
Cash and equivalents at end of period $ 418,535 $ 44,430
=================== =================
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash payments for interest $ 69,063 $ 196
=================== =================
</TABLE>
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SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDING MARCH 31, 2000 AND 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 three month period ended March 31, 2000 are not
necessarily indicative of results for the entire year ending December 31, 2000.
Certain items in the March 31, 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>
Inventories are comprised of the following as of 2000 1999
March 31, 2000 and 1999 ---------------- ---------------
<S> <C> <C>
Finished goods $ 324,082 $ 306,206
Raw materials 1,992,170 1,990,448
Supplies 22,121 26,054
---------------- ---------------
TOTAL $ 2,338,373 $ 2,322,708
================ ===============
</TABLE>
NOTE 3 - PREPAID EXPENSES.
<TABLE>
<CAPTION>
Prepaid expense is comprised of the following as of 2000 1999
March 31, 2000 and 1999. ---------------- ---------------
<S> <C> <C>
Deposits on tooling $ 8,956 $ 36,358
Prepaid insurance 46,669 42,054
Prepaid legal 3,292 64,438
Prepaid rent 8,583 17,929
---------------- --------------
TOTAL $ 67,500 $ 160,779
================ ===============
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT.
<TABLE>
<CAPTION>
Property and equipment is comprised of the following as of 2000 1999
March 31, 2000 and 1999 ----------------- ----------------
<S> <C> <C>
Equipment $ 225,047 $ 476,291
Furniture and fixtures 25,694 52,625
Tools and die 1,702,679 1,513,807
Leasehold improvements 13,189 11,436
----------------- ----------------
TOTAL 1,966,609 2,054,159
Less accumulated depreciation 831,061 855,345
----------------- ----------------
TOTAL $ 1,135,548 $1,198,814
================= ================
</TABLE>
4
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NOTE 5 - SHAREHOLDERS' EQUITY.
- - In January 2000, in accordance with the agreements governing the issuance
of the Company's 6% convertible debentures, 132,500 shares of the Company's
common stock valued at 1.3125 per share were issued for fees associated
with the agreements.
- - In January 2000, a consultant was issued 9,872 options in payment of
consulting services in the amount of $14,400.
- - In February 2000, a former officer/employee exercised options to purchase
110,000 shares of the Company's common stock at $ .10 per share.
- - In January 2000, a former employee canceled 5,000 options.
- - In January 2000, a consultant was issued 9,600 options at an exercise price
of $1.50 per share.
- - In February 2000, the Company issued 200,000 shares of common stock for
payment of invoices totaling $183,009.
- - In February 2000, two directors were issued 5,000 options each, at a price
of $2.50 per share.
- - In March 2000, $850,000 of Debentures were converted into 667,322 shares of
the Company's common stock, which included accrued interest of $11,734.
- - In March 2000, two consultants exercised options to purchase 30,000 shares
of the Company's common stock at $2.50 per share.
- - In March 2000, an employee exercised options in a cashless transaction and
was issued 37,895 shares of the Company's common stock.
- - In March 2000, a former officer/employee exercised options in a cashless
transaction and was issued 189,578 shares of the Company's common stock.
- - In March 2000, the 100,000 options issued to two consultants that were
repriced in 1999, were revalued at $213,500 using the Black-Scholes
pricing model, with a corresponding charge to operations of $146,400.
NOTE 6 - SUBSEQUENT EVENTS.
- - In April 2000, the Company issued 204,268 shares of common stock upon the
conversion of debentures.
- - In April 2000, an employee exercised options to purchase 10,000 shares of
the Company's common stock at an exercise price of $1.09 per share.
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,
5
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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 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 first 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES.
The Company's total sales for the quarter ending March 31, 2000 were
$23,843, compared to $49,416 in the first quarter of 1999. Purchases by law
enforcement authorities made up nearly all of the first quarter sales in both
years. The difference between the two quarterly sales revenues is largely a
matter of timing. The Company did not participate in any major gun shows in
the first quarter of 2000, so there were fewer sales opportunities.
Nevertheless, charges for attendance at several shows scheduled for later in
2000 were paid in the first quarter. Gross profits for the first quarter of
2000 were $15,812, or 66% of sales, while the first three months of 1999
showed a gross profit of $23,363, with a 47% margin. Thus, while the amount
sold decreased from last year, the return on each unit sold increased. The
increase in gross profit margin is due to a slight increase in direct retail
sales and a greater portion of total sales at retail, rather than wholesale,
prices this past quarter over the same period last year.
Although total revenues were lower in the first quarter of 2000,
because fewer sales to law enforcement agencies were completed than in the
same period last year, the Company does not believe that this necessarily
represents a downward trend. In the first quarter of 1999, the Company sold
its products to the retail market through a third party distributor at
reduced prices. This distribution contract was terminated last year. In
addition to sales through gun dealers and gun shops, the Company now sells
directly to retail customers, usually at list price, and is actively seeking
to expand such market. In addition, sales to federal, state and local police
and other law enforcement agencies-who purchase, collectively, more than
500,000 police guns a year-are continuing.
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.
In first quarter 2000 versus first quarter 1999, total expenses were
increased by approximately $964,850 for two primary reasons:
- Increased selling, general & administrative expenses due to costs
associated with the Company's 6% convertible debentures, and increased
legal fees; and
- Increased compensation and service expenses related to the issuance of
stock and the issuance and exercise of stock options.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.
The Company's selling, general and administrative expenses increased by
$218,505 because:
6
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- the Company had $208,096 in costs in the first quarter of 2000 relating
to conversion of its 6% convertible debentures (there were no such
costs in the first quarter of 1999 because the debentures were first
issued in the latter half of the year);
- the Company's legal costs associated with European patent and
trademark protection were significantly higher, although the Company
does not anticipate further costs in this regard in the foreseeable
future;
- the Company's legal costs associated with the Securities and Exchange
Commission's (SEC's) investigation increased; and
- the Company increased its legislative lobbying efforts in the
gun-safety arena, to take advantage of the recent upsurge in public
attention to this issue - with corresponding increases in the costs of
the travel, meals and entertainment, from approximately $16,300 in the
first quarter of 1999 to approximately $28,000 during the first three
months of 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 was $773,272 in the first quarter of 2000, an
increase of $737,334 over the same period in 1999. This increase occurred
primarily because:
- a significantly greater number of options were exercised in the first
quarter of 2000 than in the same period one year earlier; and
- a Black-Scholes valuation of the repriced options to consultants
resulted in a charge of $146,400.
COST REDUCING EFFORTS.
In other categories, however, the Company has attempted to reduce
expenses during the past year. For example, the cost of bank charges went down
more than 60%, over 75% of general office expenses were eliminated, and the work
force was decreased by six employees, with corresponding savings to the
Company in salaries, benefits and taxes in the first quarter of 2000 over the
same period last year.
Even though the various expenses incurred in the first quarter of
1999 and 2000 differ, the Company believes that a direct comparison between
quarters may not be the most accurate way of assessing the Company's
financial status, since many expenses, such as professional fees, marketing
costs and taxes, may be charged at different times over the course of a year,
thus skewing a quarterly comparison.
LIQUIDITY AND SOURCES OF CAPITAL.
The Company ended the first quarter of 2000 with a cash balance of
$418,535 and accounts receivable of $67,466, against current liabilities of
$214,651. On the quarter ending March 31, 1999, the Company had a cash balance
of $44,430 and accounts receivable of $82,106 (including an allowance for
doubtful accounts) against then-current liabilities of $650,453. This
improvement in the Company's finances is due to the influx of cash received from
the sale of the 6% convertible debentures in the latter part of 1999 through the
first quarter of 2000.
During the first quarter of 2000, $86,000 was paid to the Company
upon exercise of options by Company employees, former employees and other
individuals. As of March 31, 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. In addition, 214,725 warrants were outstanding as
of March 31, 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 first quarter of 2000 was
valued at $2,338,373, which is largely unchanged from the first quarter of 1999
value of $2,322,708. Liabilities include accounts payable, accrued salaries and
taxes and amounts due on the Company's convertible debentures. These debentures
are valued at $475,000, and make up nearly 69% of liabilities, while accrued
salaries, taxes and expenses amount to $177,019, or over 25%. Accounts payable
at March 31, 2000 were $37,632, a reduction from the previous March 31 high of
$243,951. Part of this reduction reflects the Company's efforts to conserve cash
by reducing accounts payable through issuance of stock and stock options in
payment for goods and services in lieu of cash to many of its creditors.
7
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CONTEMPLATED STRATEGIC ALLIANCES.
As Company sales have not yet reached a level sufficient to sustain
operations, the Company intends to seek 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. ("FB&R") 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.
QUALIFICATIONS.
Notwithstanding the Company's intended plan to seek strategic
partnerships, if sales revenues do not increase sufficiently by mid-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 in the first quarter of 2000.
SALE OF DEBENTURES.
The Company expects to undertake additional sales of its 6% convertible
debentures to raise sufficient capital to continue operations for the remainder
of the year. In this manner, it expects to be able to make up for the expected
shortfall between the cost of operations and sales revenues. SEE "Changes in
Securities and Use of Proceeds-Common Stock-6% Convertible Debentures."
ANTICIPATED MATERIAL EXPENSES.
The Company does not anticipate any unusual material expenses separate
from its ordinary operating expenses and did not incur any during the first
quarter of 2000. 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. No other substantial capital
expenditures are anticipated during the fiscal year.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 suits 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
retail sales distribution arrangements. The Company complied with all document
production requests and Mr. Brooks appeared for subpoenaed testimony on February
18, 1999. At that time the
8
<PAGE>
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.
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. The Company recently filed a motion in
the District Court to dismiss the case without prejudice based on improper
venue, or alternatively, for change of venue to Palm Beach County, Florida.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
COMMON STOCK.
6% CONVERTIBLE DEBENTURES.
Approximately 49% of the common stock issued by the Company in the
first quarter of 2000 was prompted by conversion of the 6% convertible
debentures ("Debentures") sold in the fourth quarter of 1999.
DESCRIPTION OF DEBENTURES.
The Company's Debentures that were converted in the first quarter of
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. 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. In the event that the Debentures are not converted prior to
maturity, 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.
CONVERSION BY HOLDERS.
Holders of the Company's Debentures converted an aggregate of $850,000
worth of these Debentures for 658,656 shares of the Company's common stock in
the first quarter of 2000. An additional interest payment of 8,666 shares was
also issued to the converting Debenture holders.
9
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COMMISSIONS.
The Debentures were sold through J.P. Carey Securities, Inc., ("Carey")
and Alexander Westcott Inc. ("Alexander") during fiscal year 1999. In connection
with the sales, Alexander was issued 37,500 shares of the Company's common stock
in the first quarter of 2000, while Carey and its business partners, were issued
an aggregate of 95,000 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"). The
registration statements covering the common stock issuable upon conversion of
the debentures and the compensatory shares became effective in the third quarter
of 1999 and the first quarter of 2000.
EXECUTIVE AND EMPLOYEE COMPENSATION.
The value of the common stock and options thereon associated with
current and former employee and/or executive compensation was approximately
$612,472. In January 2000, a former employee canceled 5,000 options, while
another former officer/employee exercised options to purchase 110,000 shares of
the Company's common stock at $ .10 per share. These options were originally
granted in connection with legal settlements. In February 2000, pursuant to the
Company's 1993 Stock Option Plan, two directors were issued 5,000 options each,
at a price of $2.50 per share. In March 2000, an employee exercised options in a
cashless transaction and was issued 37,895 shares of the Company's common stock.
OFF-SET OF EXPENSES.
In January 2000, the Company issued 9,872 options to a consultant at an
exercise price of $.01 per share in lieu of cash payment for consulting services
valued at $14,400. The same consultant was issued an additional 9,600 options at
an exercise price of $1.50 per share in connection with the consulting services
provided. These issuances were pursuant to a Section 4(2) exemption.
In February 2000, the Company issued 200,000 shares of unregistered
common stock pursuant to a Section 4(2) Exemption to a vendor to pay off
accumulated charges totaling $183,009 for goods and services. In March 2000, two
consultants exercised options to purchase 30,000 shares of the Company's common
stock at $2.50 per share.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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. At this meeting:
- 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); and
- Company 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.
10
<PAGE>
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
3.1 Articles of Incorporation, as amended (incorporated
herein by reference to the Company's Form S-1 filed
with the SEC on February 17, 1998).
3.2 Articles of Amendment (incorporated by reference to
the Company's Annual Report on Form 10-KSB, as filed
with the SEC on April 14, 2000).
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).
19.1 Definitive Proxy Statement Pursuant To Section 14(A)
of the Securities Exchange Act of 1934, filed with
the SEC on January 3, 2000.
27.1 Financial Data Schedule (filed herewith).
</TABLE>
CURRENT REPORTS ON FORM 8-K.
The Company filed one current report on Form 8-K during the first
quarter of 2000. On April 4, 2000, the Company filed a current report on Form
8-K reporting that it had been served with a civil complaint.
11
<PAGE>
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: May 22, 2000 by:
/s/ Franklin W. Brooks
--------------------------------------
Franklin W. Brooks, Chairman,
President, Chief Executive officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 418,535
<SECURITIES> 0
<RECEIVABLES> 67,466
<ALLOWANCES> 0
<INVENTORY> 2,338,373
<CURRENT-ASSETS> 2,912,365
<PP&E> 1,966,609
<DEPRECIATION> 831,061
<TOTAL-ASSETS> 4,525,562
<CURRENT-LIABILITIES> 214,651
<BONDS> 475,000
0
0
<COMMON> 153,510
<OTHER-SE> 28,405,394
<TOTAL-LIABILITY-AND-EQUITY> 4,525,562
<SALES> 23,843
<TOTAL-REVENUES> 34,395
<CGS> 8,031
<TOTAL-COSTS> 8,031
<OTHER-EXPENSES> 1,497,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208,096
<INCOME-PRETAX> (1,470,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,470,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,470,883)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
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