U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-13463
SAC TECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1741861
--------------------- --------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1285 CORPORATE CENTER DRIVE, SUITE # 175, EAGAN, MN 55121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(651) 687-0414
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No___
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of August 8, 2001: 10,706,967.
SAC TECHNOLOGIES, INC., DBA BIO-KEY INTERNATIONAL
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 2000 and June 30, 2001.............3
Statements of operations for the three months ended
June 30, 2000 and 2001, six months ended June 30
2000 and 2001, and January 7, 1993 (date of
inception) through June 30, 2001.................................4
Statements of cash flows for the six months ended June 30,
2000 and 2001, and January 7, 1993 (date of inception)
through June 30, 2001............................................5
Notes to interim financial statements................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
PART II. OTHER INFORMATION
Item 1 - Legal proceedings.............................................14
Item 2 - Changes in Securities and Use of Proceeds.....................14
Item 3 - Defaults Upon Senior Securities...............................14
Item 4 - Submission of Matters to a Vote of Security Holders...........15
Item 5 - Other Events..................................................15
Item 6 - Exhibits and Reports on Form 8-K..............................16
2
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
BALANCE SHEETS
December 31, June, 30,
2000 2001
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 48,830 $ 66,384
Accounts receivable 9,118 1,350
Prepaid expenses 21,745 33,601
------------ ------------
Total current assets 79,693 101,335
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation 31,942 15,971
OTHER ASSETS 50,595 40,080
------------ ------------
$ 162,230 $ 157,386
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes Payable $ 1,400,000 $ 2,250,000
Convertible Debentures 598,455 508,000
Accounts payable 328,398 340,618
Accrued liabilities 1,121,689 1,492,488
------------ ------------
Total current liabilities 3,448,542 4,591,106
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - authorized, 5,000,000 shares
of $ .01 par value: 50,000 designated as
Series A 9% Convertible (liquidation
preference of $100 per share); issued and
outstanding, 19,875 199 199
Common stock - authorized, 20,000,000 shares
of $.01 par value; issued and outstanding,
9,966,724 and 10,706,967 shares, respectively 99,667 107,069
Additional contributed capital 13,133,600 13,339,518
Deficit accumulated during the development stage (16,519,778) (17,880,506)
------------ ------------
(3,286,312) (4,433,720)
------------ ------------
$ 162,230 $ 157,386
============ ============
See accompanying notes to interim financial statements.
3
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
January 7,
1993 (date
of inception)
Three months Six months through
ended June 30, ended June 30, June 30,
----------------------------- ----------------------------- ------------
2000 2001 2000 2001 2001
------------ ------------ ------------ ------------ ------------
Revenues
Product sales $ -- $ -- $ -- $ -- $ 577,384
Licensing fees -- -- -- -- 100,000
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- -- -- -- 429,885
------------ ------------ ------------ ------------ ------------
-- -- -- -- 1,391,775
Costs and other expenses
Cost of product sales -- -- -- -- 1,736,895
Cost of technical support
and other services -- -- -- -- 237,317
Selling, general
and administrative 500,545 380,152 875,848 794,578 10,907,247
Research, development
and engineering 405,572 175,473 570,367 454,841 5,313,033
------------ ------------ ------------ ------------ ------------
906,117 555,625 1,446,215 1,249,419 18,194,492
------------ ------------ ------------ ------------ ------------
Operating loss (906,117) (555,625) (1,446,215) (1,249,419) (16,802,717)
Other income (expense)
Interest income and other 54 7 (767) (5,829) 503,307
Interest expense (42,375) (57,375) (60,371) (105,480) (1,116,999)
------------ ------------ ------------ ------------ ------------
(42,321) (57,368) (61,138) (111,309) (613,692)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (948,438) $ (612,993) $ (1,507,353) $ (1,360,728) $(17,416,409)
============ ============ ============ ============ ============
Loss applicable to
Common shareholders
Net loss $ (948,438) $ (612,993) $ (1,507,353) $ (1,360,728) $(17,416,409)
Series A convertible preferred
stock dividend
and accretion (74,042) (89,438) (215,042) (89,438) (738,263)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
stockholders $ (1,022,480) $ (702,431) $ (1,722,395) $ (1,450,166) $(18,154,672)
============ ============ ============ ============ ============
Basic and diluted loss
Per common share $ (.10) $ (.06) $ (16) $ (.13) $ (2.66)
Series A convertible preferred
Stock dividend and accretion (.01) (.01) (.02) (.01) (.11)
------------ ------------ ------------ ------------ ------------
Loss per
Common share $ (.11) $ (.07) $ (.18) $ (.14) $ (2.77)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 9,561,880 10,398,801 9,424,192 10,340,442 6,555,521
============ ============ ============ ============ ============
See accompanying notes to interim financial statements
4
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
January 7,
1993 (date
of inception)
Six Months through
ended June 30, June 30,
---------------------------- ------------
2000 2001 2001
------------ ------------ ------------
Increase (Decrease) in Cash
and Cash Equivalents
Cash flows from operating activities
Net loss $ (1,507,353) $ (1,360,728) $(17,416,409)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 23,657 15,971 226,942
Amortization
Unearned compensation 56,145 -- 181,809
The intrinsic value of the
beneficial conversion feature
of the convertible debenture -- -- 561,701
Deferred financing costs -- 21,069 447,466
Allowance for doubtful receivables -- -- --
Write-down of inventory -- -- 916,015
Write-down of deferred
financing costs -- -- 132,977
Gain on sale of
Inter-Con/PC stock -- -- (190,000)
Revenues realized due to offset
of billings against a stock purchase -- -- (170,174)
Acquired research and development -- -- 117,000
Options and warrants issued for
services and other 389,065 13,320 1,343,554
Other -- -- 34,684
Change in assets and liabilities:
Accounts receivable 7,187 7,768 (1,350)
Inventories -- -- (916,015)
Prepaid expenses 10,146 (11,856) (33,601)
Accounts payable (128,141) 12,220 340,618
Accrued Liabilities 230,493 470,799 1,603,448
------------ ------------ ------------
588,552 529,291 4,595,074
------------ ------------ ------------
Net cash used in operations (918,801) (831,437) (12,821,335)
Cash flows from investing activities
Capital expenditures -- -- (242,913)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Other 4,226 (1,009) (40,080)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 4,226 (1,009) (92,993)
Cash flows from
financing activities
Net proceeds under
short-term borrowing
agreements 450,000 850,000 2,483,000
Issuance of convertible
bridge note -- -- 175,000
Issuance of convertible
debenture -- -- 1,775,000
Issuance of warrants and
convertible debentures discount -- -- 830,000
Deferred financing costs -- -- (312,977)
Exercise of stock options -- -- 190,799
Sales of common stock -- -- 7,093,832
Sale of preferred stock and assigned
value of warrant 433,519 -- 884,058
Redemption of common stock -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 883,519 850,000 12,980,712
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (31,056) 17,554 66,384
Cash and cash equivalents,
at beginning of period 101,152 48,830 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 70,096 $ 66,384 $ 66,384
============ ============ ============
See accompanying notes to interim financial statements.
5
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and June 30, 2001 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by SAC Technologies, Inc., dba BIO-Key International (the
"Company") in accordance with accounting principles generally accepted
in the United States, pursuant to the rules and regulations of the
Securities and Exchange Commission. Pursuant to such rules and
regulations, certain financial information and footnote disclosures
normally included in the financial statements have been condensed or
omitted.
In the opinion of management, the accompanying unaudited interim
financial statements contain all necessary adjustments, consisting only
of those of a recurring nature, and disclosures to present fairly the
financial position and the results of its operations and cash flows for
the periods presented. It is suggested that these interim financial
statements are read in conjunction with the financial statements and
the related notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2000.
2. Liquidity and Capital Resource Matters
Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate
revenues. The Company has limited sales to date, and has accumulated
losses since inception of $17,416,409 of which $612,993 was incurred
during the quarter ended June 30, 2001. The Company believes operating
losses will continue for the foreseeable future.
Between March 31, 2000 and August 10, 2001 the Company has obtained a
series of unsecured short term loans from the Shaar Fund Ltd, an
international investment fund (the "Fund"), in the aggregate principal
amount of $2,535,000. The loans bear interest at the rate of 10% per
annum and are due on the earlier of December 31, 2001, or the Company
completing a private equity financing resulting in gross proceeds of at
least $5,000,000.
As of the date of this filing, the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the third quarter of 2001. The Company is seeking to obtain
additional financing through the issuance of debt or equity securities
of the Company on a negotiated private placement basis with
institutional and accredited investors. As of the date of this filing,
the Company has not reached any definitive agreement with any such
investor regarding the specific terms of an investment in the Company.
No assurance can be given that any form of additional financing will be
available on terms acceptable to the Company, that adequate financing
will be obtained to meet its needs, or that such financing would not be
dilutive to existing stockholders. Management believes it will need
$4,000,000 to $6,000,000 to execute its business plan and support its
operations through the next twelve months.
3. Loss Per Common Share
Basic loss per share is calculated by dividing the net loss
attributable to common stockholders by the number of weighted average
common shares outstanding. Diluted earnings per share are calculated by
dividing the net loss attributable to common stockholders by the
weighted average common shares, and when dilutive, by including
options, warrants and convertible securities outstanding using the
treasury stock method. There was no difference between basic and
diluted loss per share for all periods presented, because the impact of
including options, warrants and convertible securities would be
antidilutive.
6
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and June 30, 2001 (Unaudited)
4. Prepaid Expenses
Insurance $ 15,545 $ 28,214
Rent 5,790 5,387
Other 410 --
----------- -----------
$ 21,745 $ 33,601
=========== ===========
5. Other Assets
December 31, June 30,
2000 2001
---- ----
Deferred financing costs, less
accumulated amortization $ 11,524 $ --
Security deposits 16,123 15,566
Patents pending 22,948 24,514
----------- -----------
$ 50,595 $ 40,080
=========== ===========
6. Accrued Liabilities
December 31, June 30,
2000 2001
---- ----
Compensation $ 85,680 $ 85,680
Interest 256,071 261,552
Shaar Fund Penalty 763,625 1,121,375
Other 16,313 23,881
----------- -----------
$ 1,121,689 $ 1,492,488
=========== ===========
7. Convertible Debentures
In 1998, the Company issued convertible debentures (the "Debenture")
with a face value of $2,500,000 and a stated interest rate of 5% to the Fund. As
of June 30, 2001, the outstanding principal amount under the Debenture was
$508,000 which was due and payable on June 30, 2001. The Company's failure to
make such payment together with all accrued and unpaid interest constituted an
event of default under the Debenture. The entire principal amount and all
accrued and unpaid interest is immediately due and payable and bears interest at
the default rate of 9% per annum. As of the date of this filing, the Fund has
not demanded repayment of this amount. As of June 30, 2001 the total amount of
unpaid principal and interest due under the Debenture is approximately $620,000.
7
SAC Technologies, Inc., dba BIO-Key International
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 2000, and June 30, 2001 (Unaudited)
8. Stockholders Equity
The following summarizes option and warrant activity since December 31,
2000:
Number of Shares
---------------------------------------------------------------------------------------------
1996 1999 Non-
Plan Plan Plan Warrants Total
--------- --------- --------- --------- ---------
Balance, December 31, 2000 114,380 616,669 1,481,000 1,515,966 3,728,015
Granted -- -- 90,000 26,250 116,250
Exercised -- -- -- -- --
Cancelled -- -- -- -- --
--------- --------- --------- --------- ---------
Balance, June 30, 2001 114,380 616,669 1,571,000 1,542,216 3,844,265
--------- --------- --------- --------- ---------
Available for future grants,
June 30, 2001 542,620 1,383,331 -- -- 1,925,951
========= ========= ========= ========= =========
Series A Convertible Preferred Stock
On March 17, 2000 the Company completed a private placement of $675,000
face amount of its Series A Convertible Preferred Stock and a 5-year
warrant to purchase 67,500 shares of Common Stock exercisable at $1.196
per share to the Fund. The Company received net proceeds of $185,000
after giving effect to a 33% discount ($225,000) to the face amount of
the preferred stock, offering costs of $15,000 and the repayment of
$250,000 in notes outstanding to the Fund. On July 9, 1999, the Company
issued $1,312,500 face amount of its Series A Convertible Preferred
Stock realizing gross proceeds of $875,000.
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in
kind through the issuance of additional shares of Company common stock.
As of June 30, 2001, dividends in arrears totaled approximately
$312,000. The preferred shares are immediately convertible into shares
of common stock at a conversion price equal to the lesser of (a) $1.10
or (b) a 22% discount to the average closing bid prices of the
Company's common stock during the five trading day period prior to
conversion. The preferred shares are redeemable, in whole or in part,
at the option of the Company at 100% of face value ($100 per share).
In connection with these financings, the Company was obligated to file
a registration statement with the SEC covering the resale of the shares
of common stock issuable upon conversion of the preferred shares or the
exercise of the warrant issued to the Fund. As of the date of this
filing the Company has not filed the registration statement, has
accrued a penalty of $1,121,375 related thereto, and the Fund has not
demanded payment of these amounts.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may
contain certain forward-looking statements. When used in this Report or
in such statements, the words "estimate," "project," "intends,"
"expects," "believes" and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which
may affect the Company's future operating results and financial
position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties that could cause the Company's
actual results and financial position to differ materially from those
included within the forward-looking statements. These factors include,
but are not limited to, the Company's ability to successfully develop
its technology to meet or exceed user specifications and to obtain
additional financing as well as those risks described in detail in the
Company's Annual Report on Form 10-KSB under the caption "RISK
FACTORS." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the results of any
revision to these forward-looking statements to reflect events or
circumstances after the date made or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company is in the business of developing and marketing proprietary
biometric technology and software solutions. Biometric technology, the
science of analyzing specific human characteristics which are unique to
each individual in order to identify a specific person from a broader
population, is an emerging technology. Examples of the unique
biological characteristics that can be used to identify an individual
include fingerprints, iris patterns, hand geometry, voice recognition
and facial structure. Fingerprint analysis is an accurate and reliable
method to distinguish one individual from another and is viewed as less
intrusive than many other biometric identification methods. As a
result, fingerprint analysis has gained the most widespread use for
biometric identification. Biometric technology represents a novel
approach to identity verification which has only been used in limited
applications and has not gained widespread acceptance in any commercial
or consumer markets.
The Company's proprietary biometric technology scans a person's
fingerprint and identifies a person typically within a few seconds
without the use of a password, key card, personal identification number
(PIN) or other identifying data. The Company believes that its
fingerprint identification technology will have a broad range of
possible applications relating to information security and access
control, including:
* Securing Internet sites and Web pages
* Securing access to corporate intranets and extranets
* General access control, i.e., facility access control
9
Over the past 18 months, recognizing the growth in electronic commerce,
corporate intranets and ethernets and related security concerns, the
Company has been actively positioning its technology for the licensing
of a Web based biometric authentication software solution to companies
which rely on the Internet to distribute contents, goods or software,
and to corporations to control access to corporate intranets, extranets
or specific applications. This integrated solution will involve the
licensing of client and server based software to provide for reliable
and cost effective user authentication in connection with the
processing of e-commerce transactions or securing access to private
networks. This solution is also intended to be available to secure
e-commerce and other general purpose Web site applications. During the
past year, the Company has completed the development of enhanced
software to provide an effective interface between client and
server-based software. The Company's current business plan, which
continues to evolve, consists of a threefold strategy of (i) continued
development of technology; (ii) marketing its technologies through
licensing agreements with OEMs and private labelers addressing
industry-specific applications; and (iii) the development and licensing
of a Web-based biometric authentication software solution to e-commerce
and Internet content companies to secure Web based transactions and to
corporations to secure private networks.
Although the Company has developed significant identification
technology and readers, neither has gained any meaningful commercial
acceptance and the Company has only generated minimal revenue since
inception. The Company does not intend to distribute readers, but
rather intends to license its core technology. The Company's business
model, particularly the Web authentication initiative, represents a
unique approach to Internet security. As of the date of this Report,
the Web authentication initiative has not been adopted by any company
conducting business over the Internet and there can be no assurance
that there will be a demand for such a solution or that the Company
will have the financial or other resources necessary to successfully
market such a software solution.
The Company believes its existing cash will only last through the mid
third quarter 2001. Due to these and other uncertainties, the Company's
independent auditors have included an explanatory paragraph in their
opinion for the year ended December 31, 2000 as to the substantial
doubt about the Company's ability to continue as a going concern. The
Company's long-term viability and growth will depend upon the
successful commercialization of its technologies and its ability to
obtain adequate financing, among other matters, as to which there can
be no assurance.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 2000
Revenues
The Company is a development stage corporation. Accordingly, the
Company does not have significant sales revenue and generated no
revenue during the three and six month periods ended June 30, 2000 and
June 30, 2001. The Company continues to deploy substantially all human
and capital resources to executing its new business plan targeted at
Internet, intranet and electronic commerce security. As a result the
Company's limited resources were used to refine its technology to
develop the applications needed to execute against the Company's
revised business plan.
10
Costs and Other Expenses
The Company did not generate any revenue during the six month periods
ended June 30, 2001 and 2000 and, therefore, did not incur any cost of
sales.
Selling, general and administrative expenses decreased $120,393 to
$380,152 during the three months ended June 30, 2001 as compared to
$500,545 for the corresponding period in 2000. Of the decrease, $57,375
was due to a decrease of a non-cash accrual of penalties incurred for
failing to file a registration statement for the Company's Series A
Convertible Preferred Stock, $14,826 was due to a reduction in general
and administrative operating costs, $17,388 was due to a reduction in
salaries and wages for administrative personnel, and $195,120 was due
to a reduction in professional services costs. These were offset by an
increase of $39,272 in selling costs as the Company focused on
marketing its web based biometric authentication software solution and
the reversal of a $124,944 non-cash accrual of deferred financing costs
in the three months ended June 30, 2000 without a like transaction in
2001.
Selling, general and administrative expenses decreased $81,270 to
$794,578 during the six months ended June 30, 2001 as compared to
$875,848 for the corresponding period in 2000. Of the decrease, $56,009
was due to a decrease in salaries and wages for administrative
personnel and $281,781 was due to a reduction in professional services
costs. These were offset by increases of $30,126 in general operating
costs, $104,894 in selling costs as the Company focused on marketing
its web based biometric authentication software solution and $121,500
for non-cash accrual of penalties incurred for failing to file a
registration statement for the Company's Series A Convertible Preferred
Stock.
Research, development, and engineering expenses decreased $230,099 to
$175,473 during the three months ended June 30, 2001 as compared to
$405,572 for the corresponding period in 2000. Of the decrease, $23,337
was due a reduction in general development costs, and $207,600 was due
to an decrease in software sub-contracting costs. These reductions are
the result of the Company substantially completing the development of
Web-Key, its web-based biometric authentication solution.
Research, development, and engineering expenses decreased $115,526 to
$454,841 during the six months ended June 30 2001 as compared to
$570,367 for the corresponding period in 2000. Of the decrease, $68,643
was due to a reduction in general development costs and $69,900 was due
to a decrease in software sub-contracting costs. These were offset by
an increase of $23,018 for additional development supervisory
personnel.
Other income and (expense) increased $15,047 to $57,368 during the
three months ended June 30, 2001 as compared to $42,321 for the
corresponding period in 2000 due primarily to the interest costs
associated with the increase in short term notes payable to the Fund.
Other income and (expense) increased $50,171 to $111,309 during the six
months ended June 30, 2001 as compared to $61,138 for the corresponding
period in 2000 due primarily to the interest costs associated with the
increase in short term notes payable to the Fund.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended June
30, 2001 was $831,437 compared to $918,801 during the six months ended
June 30, 2000. The primary use of cash for both years was to fund the
net loss. Net cash used in investing activities for the six months
ended June 30, 2001 was $1,009 compared to net cash provided by
investing activities of $4,226 for the same period in 2000. Net cash
provided by financing activities during the six months ended June 30,
2001 was $850,000 compared to $883,519 in the same period in 2000 and
consisted of net short term borrowing activities of $850,000 in 2001.
Working capital deficit increased $1,120,922 during the six months
ended June 30, 2001 to $4,489,771 as compared to $3,368,849 as of
December 31, 2000.
The Company's capital needs have been principally met through proceeds
from the sale of debt and equity securities.
The Company does not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an
international investment fund and principal stockholder of the Company
(the "Fund") $2,500,000 of 5% Convertible Debenture due June 30, 2001
(the "Convertible Debenture"). The Convertible Debenture is convertible
into shares of the Company's Common Stock at a conversion price equal
to the lesser of (i) $7.15; or (ii) the average closing bid price of
the Company's Common Stock for a five-day period ending the day prior
to the notice of conversion multiplied by a discount factor of 22%.
Interest is payable quarterly in arrears, and at the option of the
Company, is payable in-kind through the issuance of additional shares
of the Company's Common Stock at the conversion price. As of the date
of this filing, $1,992,000 principal amount and $100,000 of accrued
interest due under the Convertible Debenture has been converted into an
aggregate of 3,170,000 shares of Common Stock. The Convertible
Debenture contains certain anti dilution and conversion price
adjustment provisions if certain events occur.
The outstanding principal amount under the Convertible Debenture is
$508,000 which was due and payable on June 30, 2001. The Company's
failure to make such payment together with all accrued and unpaid
interest constituted an event of default under the Convertible
Debenture. The entire principal amount and all accrued and unpaid
interest is immediately due and payable and bears interest at the
default rate of 9% per annum. As of the date of this filing, the Fund
has not demanded repayment of this amount.
On July 9, 1999 the Company completed a private placement of 13,125
shares of its Series A Convertible Preferred Stock and 5-year warrants
to purchase 131,250 shares of Common Stock exercisable at $1.196 per
share to the Fund. The Company realized net proceeds of $700,539 from
the sale of these securities after giving effect to the repayment of
$100,000 note payable to the Fund. On March 17, 2000 the Company
completed a private placement of 6,750 shares of its Series A
Convertible Preferred Stock and 5-year warrants to purchase 67,500
shares of common stock with the Fund. The Company realized net proceeds
of $183,519 after giving effect to the repayment of $250,000 of notes
payable to the Fund.
12
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in
kind through the issuance of additional shares of Company common stock.
The preferred shares are immediately convertible into shares of common
stock at a conversion price equal to the lesser of (a) $1.10 or (b) a
22% discount to the average closing bid prices of the Company's common
stock during the five trading day period prior to conversion. The
preferred shares are redeemable, in whole or in part, at the option of
the Company at 100% of face value ($100 per share). The Company is
obligated to file a registration statement with the Securities and
Exchange Commission covering the resale of the shares of common stock
issuable upon conversion of the preferred shares or exercise of the
warrants. As of the date of this filing, the Company has not filed the
registration statement, has accrued penalties of $1,121,375 payable to
the Fund and will continue to accrue a penalty until such a
registration statement is filed. The Fund has not demanded payment of
these amounts. As of June 30, 2001 cumulative undeclared dividends were
approximately $312,000.
Between March 31, 2000 and August 10, 2001, the Company has obtained a
series of unsecured short term loans from the Fund in the aggregate
principal amount of $2,535,000. The loans bear interest at the rate of
10% per annum and are due on the earlier of December 31, 2001 or the
Company completing a private equity financing resulting in gross
proceeds of at least $5,000,000. There can be no assurance that the
Fund will continue to provide any additional loans to the Company.
As of the date of this filing the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the third quarter of 2001. Management is seeking to obtain
additional financing through the issuance of additional debt or equity
securities of the Company on a negotiated private placement basis to
institutional and accredited investors. In this regard, the Company has
been engaged in discussions with certain investors, however, as of the
date of this filing, the Company has not reached any definitive
agreement with any such investor regarding the specific terms of an
investment in the Company. Given the number of shares of common stock
reserved for issuance upon conversion or exercise, as applicable, of
outstanding options, warrants, preferred stock and the Convertible
Debenture, in order to raise the necessary funds through the issuance
of equity securities or securities convertible into equity securities,
the Company will likely be required to amend its Articles of
Incorporation to authorize the issuance of additional shares of common
stock. This will result in increased costs associated with calling and
convening a shareholder meeting and could delay the timing of any
financing. No assurance can be given that any form of additional
financing will be available on terms acceptable to the Company, that
adequate financing will be obtained to meet its needs, or that such
financing would not be dilutive to existing stockholders. Management
believes it will need $4,000,000 to $6,000,000 to execute its business
plan and support operations through the next 12 months.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
1. On April 23, 2001, the Company issued warrants to purchase 26,250
shares of common stock at an exercise price equal to $.33 per
share, the closing market price of the Company's common stock on the
dates of grant, to Paul Noenning in consideration of services
rendered as an independent consultant. The options were issued in a
private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder without payment of underwriting discounts or
commissions to any person.
2. On July 1, 2001, the Company issued options to purchase 400,000
shares of common common stock at an exercise price of $.20 per
share, the closing market price of the Company's common stock on the
date of grant, to Jeffry R. Brown in consideration of his serving as
the Chief Executive Officer of the Company. Options to purchase
200,000 shares vested on the date of grant and the remainder vest in
equal monthly installments during the one (1) year period commencing
on the date of grant. The options terminate on the earlier of seven
(7) years from the date of grant or 90 days after the termination of
Mr. Brown's employment, unless such termination is for cause, in
which case, the options expire on the date of such termination. The
options were issued in a private placement transaction exempt from
the registration requirements of the Securitits Act of 1933, as
amended, pursuant to Section 4(2) thereunder without payment of
underwriting discounts of commissions to any person.
3. On August 1, 2001, the Company issued options to purchase an
aggregate of 400,000 shares of common stock at an exercise price of
$0.20 per share to H. Donald Rosacker in connection with his being
retained to serve as the President of the Company. Options to
purchase 60,000 shares vest upon Mr. Rosacker completing ninety (90)
days of employment with the Company (the "Initial Vesting Date") and
the remainder vest in equal monthly installments during the three
(3) year period commencing on the Initial Vesting Date. The options
terminate on the earlier of seven (7) years from the date of grant
or ninety (90) days after the termination of Mr. Rosacker's
employment, unless such termination is for cause, in which case, the
options expire on the date of such termination. The options were
issued in a private placement transaction exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereunder without payment of underwriting
discounts or commissions to any person.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of the date of this filing, the Company has cumulative undeclared
dividends on its Series A 9% Convertible Preferred Stock in the amount
of approximately $312,000.
On June 30, 2001, the outstanding principal amount ($508,000) and all
accrued and unpaid interest under the Convertible Debenture was due and
payable. The outstanding principal amount and accrued and unpaid
interest continue to accrue interest at the default rate of 9% per
annum. As of the date of this filing, the total amount due and payable
under the Convertible Debenture is approximately $627,000.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER EVENTS
Appointment of Directors and Officers. Benedict A. Wittig, the
Secretary, Director of Systems Software, a Director and co-founder of
the Company, passed away on August 5, 2001. To fill the resulting
vacancy on the Board, H. Donald Rosacker II was appointed to serve as a
director of the Company. Gary Wendt, the Chief Financial Officer and a
Director of the Company, was appointed to serve as the Secretary of the
Company effective August 1, 2001.
On August 1, 2001, the Company retained H. Donald Rosacker II, 40, to
serve as the President of the Company. Between 1994 and 2000, Mr.
Rosacker served as the President and Chief Executive Officer of
Tekmerchant.com/FlowersandGifts.com, a Minneapolis, Minnesota based
e-commerce company, where he managed the restructure of that company
from a business-to-consumer Internet company to a business-to-business
technology development company. Between 1992 and 1994, Mr. Rosacker
served as President of Mantech Corporation, a Minneapolis, Minnesota
based software developer where he managed the launch of advanced
technology applications for the manufacturing industry. Mr. Rosacker
has in excess of 15 years of financial and marketing management
experience in start-up and emerging growth companies. Mr. Rosacker
earned a Bachelors degree in Computer Science from the University of
Minnesota in 1983.
On August 1, 2001, the Company entered into a one (1) year employment
agreement (the "Employment Agreement") with Mr. Rosacker to serve as
the President of the Company at an annual base salary of $108,000 and a
bonus of up to 50% of such base salary payable at the discretion of the
Board of Directors. The Employment Agreement automatically renews for
an additional one year term unless written notice of termination is
received at least one (1) month prior to the date it would otherwise
terminate. The Employment Agreement contains standard and customary
confidentiality, non-solicitation and "work made for hire" provisions
as well as a covenant not to compete which prohibits Mr. Rosacker from
doing business with any current or prospective customer of the Company
or engaging in a business competitive with that of the Company during
the term of his employment and for the one (1) year period thereafter.
The Employment Agreement may be terminated by the Company at any time
with or without cause. In the event Mr. Rosacker is terminated without
cause after completing nine (9) months of employment with the Company,
Mr. Rosacker shall continue to be paid his then current base salary for
a period of nine (9) months following the date of such termination. Mr.
Rosacker may terminate the Employment Agreement if his current salary
or benefits are reduced by more than 30%, in which event, Mr. Rosacker
shall continue to be paid his then current base salary for a period of
two (2) months following the date of such termination.
15
In connection with his employment, the Company issued options to Mr.
Rosacker to purchase an aggregate of 400,000 shares of common stock at
an exercise price of $0.20 per share of which 300,000 were issued under
the Company's 1999 Stock Option Plan. The material terms of the options
are described under Item 2 above.
Resignation of Chief Executive Officer. Effective July 1, 2001, Barry
Wendt resigned his position as the Chief Executive Officer of the
Company. In connection with his resignation, the Company and Barry
Wendt entered into a consulting agreement (the "Agreement") pursuant to
which Mr. Wendt will serve as a technical advisor to the Company for a
term of seven (7) months. Under the Agreement, Barry Wendt will provide
at least 24 hours of technology advisory services to the Company per
week in consideration of aggregate consulting fees of $63,000,
participation, at Barry Wendt's expense, in any and all health benefit
plans available to employees of the Company and reimbursement of
out-of-pocket expenses.
The Agreement contains standard and customary confidentiality,
non-solicitation and "work made for hire" provisions as well as a
covenant not to compete which prohibits Barry Wendt from doing business
with any current or prospective customer of the Company or engaging in
a business competitive with that of the Company during the term of the
Agreement and for the one (1) year period thereafter. In the event that
the Company terminates the Agreement prior to the expiration of the
initial term, the Company must make a payment to Barry Wendt of between
$32,500 and $65,000, depending on the date of termination, and Barry
Wendt's obligations under the covenant not to compete will terminate.
Unless either party provides written notice of non-renewal at least two
(2) months prior to the date which the Agreement would otherwise
terminate, the Agreement will be renewed automatically for successive
two (2) month periods. Barry Wendt continues to serve as the Chairman
of the Board of Directors of the Company.
In connection with Barry Wendt's resignation, Jeffry R. Brown was
appointed to serve as the CEO of the Company. In consideration of Mr.
Brown assuming the position of CEO, the Company issued options to Mr.
Brown to purchase an additional 400,000 shares of common stock at an
exercise price of $0.20 per share, the closing market price of the
Company's Common Stock on the date of grant. The material terms of the
options are described under Item 2 above.
On May 16, 2001, Bruce Nordin terminated his consulting arrangement
with the Company.
ITEM 6. EXHIBITS
(a) Exhibits
10.28 Consulting Agreement dated July 1, 2001 by and
between the Registrant and Barry M. Wendt.
10.29 Option to purchase 400,000 Shares of Common Stock
issued to Jeffry R. Brown.
10.30 Employment Agreement dated August 1, 2001 by and
between the Registrant and H. Donald Rosacker.
(b) Reports on Form 8-K
None.
16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 14, 2001 SAC Technologies, Inc.
/s/ Jeffry R. Brown
----------------------------------------
Jeffry R. Brown, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.28 Consulting Agreement dated July 1, 2001 by and
between the Registrant and Barry M. Wendt.
10.29 Option to purchase 400,000 Shares of Common Stock
issued to Jeffry R. Brown.
10.30 Employment Agreement dated August 1, 2001 by and
between the Registrant and H. Donald Rosacker.
18