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 JUNE 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
OF INCORPORATION) NUMBER)
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
15,689,581
Outstanding at August 10, 2000
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SAF T LOK INCORPORATED.
INDEX FOR FORM 10-QSB
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<S> <C>
PART I FINANCIAL INFORMATION........................................................................................ 1
Item 1. Financial Statements........................................................................................ 1
Saf T Lok Incorporated and Subsidiaries Consolidated Balance Sheets as of June 30, 2000
and 1999 (Unaudited)................................................................................................ 1
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Operations for the Two
Quarters Ended June 30, 2000 and 1999 (Unaudited)................................................................... 2
Saf T Lok Incorporated and Subsidiaries Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (Unaudited)..................................................................... 3
Saf T Lok Incorporated and Subsidiaries Notes To Consolidated Financial Statements for the
Quarters Ending June 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 Six Months Ended June 30, 2000 Compared to Three Months and Six Months Ended June 30, 1999......... 6
Revenues ........................................................................................................... 6
Expenses ........................................................................................................... 6
Liquidity and Sources of Capital.................................................................................... 9
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........................................................................................... 10
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
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i
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND 1999(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash in bank $ 402,389 $ 269,410
Accounts receivable 45,166 125,318
Note receivable 22,572 22,371
Inventories 2,354,900 2,368,846
Prepaid expenses 62,367 57,731
------------ ------------
TOTAL CURRENT ASSETS 2,887,394 2,843,676
------------ ------------
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,071,501 1,171,373
------------ ------------
OTHER ASSETS
Patents (less accumulated amortization) 268,805 289,942
Note receivable, less current portion 114,740 135,248
Other assets 146,001 9,016
------------ ------------
TOTAL OTHER ASSETS 529,546 434,206
------------ ------------
TOTAL $ 4,488,441 $ 4,449,255
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 67,205 $ 234,759
Accrued expenses 28,155 24,556
------------ ------------
TOTAL CURRENT LIABILITIES 95,360 259,315
DEBENTURES PAYABLE 925,000
------------ ------------
TOTAL LIABILITIES 1,020,360 259,315
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 30,000,000 shares authorized, 15,689,581 and 13,459,261
shares listed and outstanding, in 2000 and 1999, respectively 156,897 134,592
Paid-in-capital 29,053,102 25,523,862
Other equity reductions (303,285)
Accumulated deficit (25,741,918) (21,165,229)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,468,081 4,189,940
------------ ------------
TOTAL $ 4,488,441 $ 4,449,255
============ ============
</TABLE>
1
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SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDING JUNE 30, 2000 AND 1999 (UNAUDITED)
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<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Sales $ 10,687 $ 81,393 $ 34,530 $ 130,809
Cost of sales 8,304 48,704 16,335 74,758
----------- ----------- ----------- -----------
Gross profit 2,383 32,689 18,195 56,051
Selling, general and
administrative expenses 1,020,961 448,195 1,670,538 879,267
Stock, options and warrants issued for
compensation and services (70,731) 754,294 702,541 790,232
Depreciation and amortization 77,998 85,211 152,396 150,598
Other income 6,922 12,578 17,473 21,884
----------- ----------- ----------- -----------
NET LOSS $(1,018,923) $(1,242,433) $(2,489,807) $(1,742,162)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.07) $ (0.09) $ (0.16) $ (0.13)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 15,606,646 13,737,457 15,118,846 13,725,472
=========== =========== =========== ===========
</TABLE>
2
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SAF T LOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
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<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (2,489,807) $ (1,742,162)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 152,396 150,598
Non cash compensation to directors and officers
and former employees 524,941 662,719
Non cash consulting fees 42,600
Issuance of stock for services 135,000 35,938
Issuance of stock for compensation 91,575
Issuance of stock for interest paid upon conversion of
debentures 20,125
Interest expense for beneficial conversion of debentures 218,750
Issuance of stock for settlement of accounts payable 183,009
Write-off of obsolete inventory (6,573)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 45,218 (65,722)
Decrease in other assets 721
(Increase) decrease in prepaid expenses (3,815) 99,136
Increase in inventories (26,158) (10,864)
(Decrease) in accounts payable (280,082) (136,773)
(Decrease) in accrued liabilities (89,751) (257,385)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,574,147) (1,172,219)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on note receivable 10,973 8,965
Stock issued for payment of equipment (132,400)
Payments for purchase of equipment (15,223) (50,097)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (136,650) (41,132)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debentures 875,000
Issuance of stock for fees related to debentures 232,696
Issuance of stock upon exercise of options 96,900 244,100
Increase in deferred interest (86,991)
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 1,117,605 1,049,100
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (593,192) (164,251)
Cash and equivalents at beginning of year 995,581 433,661
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 402,389 $ 269,410
========== ==========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash payments for interest $ 101,103 $ 8,956
========== ==========
</TABLE>
3
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SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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 six month period ended June 30, 2000 are not necessarily
indicative of results for the entire year ending December 31, 2000. Certain
items in the June 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
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<CAPTION>
2000 1999
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<S> <C> <C>
Inventories are comprised of the following as of June 30, 2000 and 1999:
Finished goods $ 360,890 $ 382,118
Raw materials 1,972,172 1,936,728
Supplies 21,838 50,000
---------- ----------
TOTAL $2,354,900 $2,368,846
========== ==========
NOTE 3 - PREPAID EXPENSES
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Prepaid expense is comprised of the following as of June 30, 2000 and 1999:
Deposits on tooling $ 15,457 $ 36,357
Prepaid insurance 36,668 21,374
Prepaid rent 8,583
Prepaid other 1,659
---------- ----------
TOTAL $ 62,367 $ 57,731
========== ==========
</TABLE>
4
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SAF T LOK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE 4 - PROPERTY AND EQUIPMENT
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<CAPTION>
2000 1999
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<S> <C> <C>
Property and equipment are comprised of the following as of June 30, 2000 and
1999:
Equipment $ 225,578 $ 481,228
Furniture and fixtures 25,694 55,423
Tool and die 1,709,053 1,530,764
Leasehold improvements 13,189 23,526
----------- -----------
TOTAL $ 1,973,514 $ 2,090,941
Less accumulated depreciation 902,013 919,568
----------- -----------
TOTAL $ 1,071,501 $ 1,171,373
=========== ===========
</TABLE>
NOTE 5 - SHAREHOLDERS' EQUITY
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.
In April 2000, $350,000 of Debentures and $5,889 of accrued interest were
converted into 204,268 shares of the Company's common stock.
In May 2000, in accordance with the agreements governing the issuance of the
Company's 6% convertible debentures, $88,750 was paid for fees associated with
the agreement.
In June 2000, $75,000 of Debentures and $2,502 of accrued interest were
converted into 80,653 shares of the Company's common stock.
In June 2000, in accordance with the agreements governing the issuance of the
Company's 6% convertible debentures, 43,750 shares of the Company's common stock
valued at $1.34375 per share were issued for fees associated with the agreement.
As of June 30, 2000, 100,000 options issued to two consultants that were
repriced in 1999, were revalued from $213,500 to $119,400 using the
Black-Scholes pricing model, with a corresponding reduction in stock options
issued for compensation and services of $94,100 during the quarter.
During the quarter ending June 30, 2000, 100,000 options that were originally
issued to two consultants on March 3, 1997 at a price of $2.50 were repriced at
$1.25 per share. The repricing created variable options, which decreased in
value by $24,100 using the Black-Scholes pricing model, with a corresponding
reduction in stock options issued for compensation and services.
During the second quarter the Company issued $875,000 of convertible debentures
with a beneficial conversion feature of twenty percent. In accordance with the
Financial Accounting Standards Board's Emerging Issue Task Force No. 98-5, the
imbedded beneficial conversion feature should be recognized and measured
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 $218,750 related to
the beneficial conversion feature of the debentures issued in May 2000.
In June 2000, the Company paid a non-refundable advisory fee of $250,000 to an
investment banking firm in connection with their consulting services and their
attempt to find a strategic alliance partner.
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, 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 second 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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES.
The Company's total sales for the quarter ending June 30, 2000 were $10,687,
compared to $81,393 in the quarter ending June 30, 1999. Purchases by law
enforcement authorities made up nearly all of the sales in both quarters. The
difference between the two quarterly sales revenues is largely a matter of
timing. Gross profits for the quarter ending June 30, 2000 were $2,383, or 22%
of sales, while the quarter ending June 30, 1999 showed a gross profit of
$32,689, with a 40% margin. Gross profit margins for the quarter ending June 30,
2000 were lower than the same quarter of 1999 mainly because of
disproportionately higher credits of $3,339 from past sales falling into this
period with revenues of $14,026.
The Company continues to focus its marketing efforts towards law enforcement by
attendance at the major national and several regional law enforcement trade
shows.
Total revenues were lower in the quarter ending June 30, 2000, because fewer
sales to law enforcement agencies were completed than in the same period last
year. In addition to some sales through gun dealers and gun shops, the Company
sells directly to retail customers, usually at list price, and is actively
seeking to expand such market. Federal, state and local police and other law
enforcement agencies purchase, collectively, more than 500,000 guns a year.
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 June 30, 2000 were
$1,028,228 as compared to total expenses of $1,287,700 for the three
months ending June 30, 1999. The decrease of approximately $259,472 is
mostly attributable to the items described in the selling, general and
administrative and the stock and option expense sections below.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.
The selling, general and administrative portion of the expenses for
the quarter ending June 30, 2000 were $1,020,961 as compared to
$448,195 for the quarter ending June 30, 1999, an increase of
$572,766.
6
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Included in this difference were several unusually large
non-operating expenses in the quarter ending June 30, 2000 and a
large credit in the quarter ending June 30, 1999.
- In the quarter ending June 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.
- Interest expense for the quarter ending June 30, 2000 was
$310,600 as compared to $452 for the quarter ending June 30,
1999. The interest expense for the current quarter relates
to the amortization of commissions and interest and the
conversion discount feature of the debentures issued in the
quarter ending December 31, 1999 and the quarter ending June
30, 2000. There were none of these expenses related to
debentures in the quarter ending June 30, 1999.
- Professional fees of $250,000 were paid in the quarter
ending June 30, 2000 to the investment banking firm of
Friedman, Billings, Ramsey & Co., Inc. (See "Contemplated
Strategic Alliances").
Major differences in the operating portion of the selling, general
and administrative expenses for the two periods are:
- The Company's legal costs associated with patent and
trademark protection were significantly lower in the quarter
ending June 30, 2000 mainly because of the timing of the
filing of new patents in the United States and Europe. Other
legal expenses of a general nature and expenses due to the
Company's defense of the now concluded class action
securities suit were lower but were offset by increased
legal expenses due to the Securities and Exchange
Commission's (SEC's) investigation and the suit brought by
the Winner Company. Overall, for the quarter ending June 30,
2000 legal costs decreased by approximately $70,255 over the
same period in 1999.
- Research and development expenses for the quarter ending
June 30, 2000 were lower by approximately $26,474 than the
same period last year due mainly to the timing of activities
related to the completion of new models of the magazine
lock.
- Workers compensation insurance and payroll taxes for the
quarter ending June 30, 2000 were lower by approximately
$18,325 than the same period last year as there were fewer
assembly employees.
Comparison of the operating portions of the selling, general and
administrative expenses for the quarter ending June 30, 2000 with the
quarter ending June 30, 1999 results in the quarter ending June 30,
2000 actually decreasing by approximately $127,527 due primarily to
the matters described above.
ISSUANCE OF STOCK AND STOCK OPTION 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 approximately $70,731 in the
quarter ending June 30, 2000, as compared to an expense of $754,294
over the same period in 1999. This credit for the quarter ending June
30, 2000 as compared to an expense for the same period one year earlier
occurred 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 quarter ending June 30, 2000 is lower than the
same period last year the resulting calculation was lower resulting in
a credit, which more than offset the amortization charge.
Net loss for the quarter ending June 30, 2000 was $(1,018,923) or
$(0.07) per share as compared to a loss of $(1,242,433) or $(0.09) per
share for the quarter ending June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
The Company's total sales for the six months ending June 30, 2000 were
$34,530, compared to $130,809 for the six months ending June 30, 1999.
Purchases by law enforcement authorities made up nearly all of the
sales in both periods. The difference between the two quarterly sales
revenues is largely a matter of timing. Gross profits for the six
months ending June 30, 2000 were $18,195, or 52% of sales, while the
six months ending June 30, 1999 showed a gross profit of $56,051, with
a 42% margin. Gross profit margins for the six months ending June 30,
2000 were higher than the six months ending June 30, 1999 mainly
because of higher price discounting in the six months ending June 30,
1999.
7
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EXPENSES.
Total expenses for the six months ending June 30, 2000 were $2,525,475
as compared to total expenses of $1,820,097 for six months ending June
30, 1999. The difference of $705,378 is mostly attributable to the
items described in the selling, general and administrative and the
stock and option expense sections below.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.
The selling, general and administrative portion of the expenses for the
six months ending June 30, 2000 were $1,670,538 as compared to $879,267
for the six months ending June 30, 1999, an increase of $791,271.
Included in this difference were several unusually large
non-operating expenses in the quarter ending June 30, 2000 and a
large credit in the quarter ending June 30, 1999.
- In the quarter ending June 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.
- Professional fees of $250,000 were paid in the quarter
ending June 30, 2000 to the investment banking firm of
Friedman, Billings, Ramsey & Co., Inc. (See "Contemplated
Strategic Alliances"). There were no such professional fees
in the six months ending June 30, 1999.
- Interest expense of $518,696 from the sale of convertible
debentures and the conversion of debentures in the six
months ending June 30, 2000 as compared to interest expenses
of only $538 for the six months ending June 30, 1999.
Major differences in the operating portion of the selling, general
and administrative expenses for the two periods are:
- Expenses due to the Company's defense of the now concluded
class action securities suit were lower but were offset by
lesser increases in legal expenses due to the Securities and
Exchange Commission's (SEC's) investigation and the suit
brought by the Winner Company. Overall, legal costs for six
months ending June 30, 2000 decreased by approximately
$16,631 over the same period in 1999.
- Research and development expenses for the six months ending
June 30, 2000 were lower by approximately $32,188 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 six
months ending June 30, 2000 were lower by approximately
$39,626 as less of these services were utilized than in the
same period in 1999.
- Marketing expenses during the six months ending June 30,
2000 were lower by approximately $73,185 over the same
period in 1999. Major expenses of $50,888 in the six months
ending June 30, 1999 were related to the use of marketing
and public relations consultants who were not used in the
six months ending June 30, 2000. The six months ending June
30, 1999 also had higher expenses of approximately $26,808
in complimentary samples as the Company heavily promoted the
new magazine lock models.
Comparison of the six months ending June 30, 2000 with the six months
ending June 30, 1999 results in the six months ending June 30, 2000
operating portion of the selling, general and administrative expenses
actually decreasing by approximately $159,252 due primarily to the
matters described above.
ISSUANCE OF STOCK AND STOCK OPTION 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 six months ending June 30, 2000 was
$87,691 lower than in the six months ending June 30, 1999. This was due
mainly to the credit of approximately $70,731 in the quarter ending June
30, 2000. This credit is explained above in the analysis of the quarter
ending June 30, 2000.
Net loss for the six months ending June 30, 2000 was $(2,489,807) or
$(0.16) per share as compared to a net loss of $(1,742,162) or $(0.13)
per share for the six months ending June 30, 1999.
8
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LIQUIDITY AND SOURCES OF CAPITAL.
The Company concluded the quarter ending June 30, 2000 with a cash balance of
$402,389 and accounts receivable of $45,166, against current liabilities of
$95,360. On the quarter ending June 30, 1999, the Company had a cash balance of
$269,410 and accounts receivable of $125,318 against then-current liabilities of
$259,315. 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.
As of June 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 June 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 June 30, 2000 was
valued at $2,354,900, which is not materially different from the quarter ending
June 30, 1999 value of $2,368,846. Liabilities include accounts payable, accrued
salaries and taxes and amounts due on the Company's convertible debentures.
These debentures are valued at $925,000, and make up nearly 90% of liabilities,
while accrued expenses amount to $28,155, or less than 3%. Accounts payable at
June 30, 2000 were $67,205, a reduction from the previous June 30 high of
$234,759. 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 some of its creditors.
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 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 quarter ending June 30, 2000.
SALE OF DEBENTURES.
In the quarter ending June 30, 2000 the Company sold an additional $875,000 of
its 6% convertible debentures and, if necessary may continue to sell additional
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.
During the quarter ending June 30, 2000, the Company incurred an unusual
material expense, separate from its ordinary operating expenses, of $250,000
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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please see the Company's report on Form 10QSB for the quarter ended March 31,
2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
COMMON STOCK.
In April 2000 the Company issued 331,768 shares of Common Stock to six debenture
holders upon conversion of a 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 May 2000 the Company issued 15,541 shares of Common Stock to one debenture
holder upon conversion of a portion of the two-year convertible debentures sold
between October 27, 1999 and December 1, 1999 pursuant to Section 4 (2) of the
Securities Act of 1933 as amended.
In June 2000 the Company issued a total of 43,750 shares of unregistered Common
Stock to J. P. Carey Securities, Inc. and Pegasus Capital, Inc., as commission
for the sale of two-year convertible debentures pursuant to Section 4 (2) of the
Securities Act of 1933 as amended. Pursuant to the agreement entered into
between the parties, the Company must file for registration of the stock within
90 days following the closing of the debenture sale.
In June 2000 the Company issued 80,653 shares of Common Stock to two debenture
holders upon conversion of a portion of the two-year convertible debentures sold
between October 27, 1999 and December 1, 1999 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.
Approximately 84% of the 511,712 shares of common stock issued by the Company in
the quarter ending June 30, 2000 was prompted by the conversion of the 6%
convertible debentures ("Debentures") sold in the quarter ending December 31,
1999.
DESCRIPTION OF DEBENTURES.
The Company's Debentures that were converted in the quarter ending June 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. 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.
The Company's Debentures that were sold in the quarter ending June 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 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. 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 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 $425,000 worth of
these Debentures for 278,955 shares of the Company's common stock in the quarter
ending June 30, 2000. An additional interest payment of 5,966 shares was also
issued to the converting Debenture holders. The registration statements covering
the common stock issuable upon conversion of the debentures and the compensatory
shares became effective in the quarter ending September 30, 1999 and the quarter
ending March 31, 2000.
COMMISSIONS.
The Debentures sold during the quarter ending June 30, 2000 were sold through
J.P. Carey Securities, Inc., ("Carey"). In connection with the sales, Carey and
its business partner, 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.
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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 June 30, 2000, no matters were submitted to a vote of
security holders through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION.
The Company announced on June 15, 2000 that it had completed a private sale of
two- year convertible debentures to an accredited investor in the principal
amount of $875,000.00 pursuant to Regulation D promulgated under the Securities
Act of 1933 as amended. J.P. Carey Securities, Inc. served as placement agent.
Interest on the principal amount is 6% per year simple interest and is payable
in cash or shares of the Company's common stock. The debentures may be converted
at any time after the earlier of the effective date of the Registration
Statement to be filed by the Company registering the shares underlying the
debentures, or 90 days after the closing of the sale. The conversion price of
the debentures will be equal to 80% of the market price of the Company's Common
Stock upon conversion, with a floor of $1.00 and a ceiling of $2.00 per share,
subject to certain adjustment provisions included in the debentures. The Company
has the right to prepay the debentures prior to maturity, provided that if it
does so within 90 days of issuance, it will pay a premium of 10% of the face
value of the debentures, and if it prepays within the following 90 days, it will
pay a premium of 20% of such value, and if it prepays after such 180 days, it
will pay a premium of 30% of such value.
Net proceeds to the Company were $786,250 after a cash commission of 10%, escrow
fees, and five shares of the Company's common stock for every $100 of principal
raised.
The Company intends to use the proceeds from the sale of the debentures for
general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit No. Description of Exhibit
---------- ----------------------
10.1 Placement Agency Agreement between Saf T Lok Incorporated and
J. P. Carey Securities, Inc. dated May 26, 2000 (1)
10.2 Security Purchase Agreement between Saf T Lok Incorporated
and Cache Capital (USA) L. P. dated May 26, 2000(1)
10.3 Registration Rights Agreement between Saf T Lok Incorporated
and Cache Capital (USA) L. P. dated May 26, 2000(1)
27.1 Financial Data Schedule (1)
-----------------------------
(1) Filed herewith
CURRENT REPORTS ON FORM 8-K.
On April 4, 2000, the Company filed a current report on Form 8-K reporting that
it had been served with a civil complaint.
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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: August 10, 2000 By: /s/ Franklin W. Brooks
---------------------------------
Franklin W. Brooks, Chairman,
President, Chief Executive officer
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