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Technology Stocks : Preference Technologies

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To: jjs64 who wrote (449)4/21/2003 6:44:38 PM
From: StockDung   of 460
February 27, 1998 Saf T Lok, Inc. (Nasdaq: LOCK)
Feb. 26, 1998 close: $3.66

Shooting Blanks

by Lynn N. Duke, staff writer

This is one lock you don't want to pick.

A Florida company, which until recently was scarcely known outside its own boardroom, has received lots of publicity lately, both good and bad.

The Stock Detective's been following along, convinced it was onto the scent of another Stinky Stock in Saf T Lok, Inc. (Nasdaq: LOCK).

The good news - an announcement last fall at the White House that the country's largest gun manufacturers would voluntarily supply locking devices on all new guns by the end of 1998 - sent Saf T Lok's stock price soaring. It was trading around 30 cents the day of the announcement, hit a high of $5.75 the next day on trading of 32.2 million shares - 10 times what was in the float. It is now trading for about $4.

The bad news, for speculators at least, is that Saf T Lok's claim to fame is probably short-lived and its investors misguided. It is unlikely that gun manufacturers will choose Saf T Lok's product for inclusion at the factory. Instead they are opting for locks at a fraction of the price.

Even Saf T Lok has its doubts, as evidenced in documents recently filed with the U.S. Securities and Exchange Commission: "The Company has based its belief on the existence of a large market for tis gun locking devices on anecdotal evidence, without a broad based market study. There can be no assurances that a market will develop so as to provide sufficient revenues for the Company to make a profit."

Saf T Lok, based in South Florida, has been making gunlocks for less than two years. Before that it was a video company, with almost the same cast of officers - the same officers who started dumping stock at a frenetic pace once the White House announcement hit the Street. Chairman Frank Brooks sold 179,000 shares of stock since October, more than all of the shares he'd sold in the previous 10 months combined.

And president John Gardner dumped 200,000 shares in the two weeks following the White House announcement, although he - like Saf T Lok's other officers - still owns a large block of company stock. Those other officers sold stock in October, too: Jeffrey Brooks, secretary/treasurer, 50,000 shares; Eugene Horanoff, chairman, 47,000 shares; William Schmidt, vice president, 34,300 shares.

A spokesman for the company's PR firm said the officers had every right to cash in their shares, since many had gone without a formal salary for more than a year and figured it was time for a cash infusion.

"The company was gathering itself and they'd taken only stock as compensation," said Kurt Divich, with Las Vegas-based Marketing Direct Concepts, Saf T Lok's public relations firm.

But the company's future is tenuous because, in the big picture, there doesn't appear to be a market for its wares.

The Second Amendment and the NRA

Saf T Lok's success is predicated on two things: an explosive market for gunlocks and the market's acceptance of its product. Neither seems likely, since a surge in demand most likely would come only if gunlocks were mandated by law. Even then, Saf T Lok would be competing against products selling for a fraction of its $80 to $90 price tag.

And such legislation seems a long shot, at any level, for new guns. A bill in California that would require trigger locks with the sale of every new gun has struggled. And legislation pending before the New York City Council would require trigger locks also on new guns. Extending such laws to guns already in homes is unlikely, experts agree. But the retrofit market is where the big numbers are.

There are about 230 million guns and 70 million gun owners in the United States, according to the National Rifle Association. The NRA opposes all gunlock legislation on the grounds that it cramps the Second Amendment to the U.S. Constitution. Tapping into that market would be lucrative indeed, considering new gun sales dipped recently. Handgun sales fell 31 percent to $667.8 million in 1996 compared to 1995, according to the National Sporting Goods Association, an industry trade group. Rifle sales were down 19 percent.

In an SEC filing early last year, Saf T Lok indicated it was banking on at least part of that market for its success. Perhaps an absurd amount.

"The Company's market includes both new and previously manufactured guns (the "retrofit market"). One-time sales could exceed $3 billion if all these guns are equipped with the Company's pro- ducts. These figures exclude longarms and foreign sales, both potentially significant markets. STL's initial market is the gun owner who bought or is planning to buy a gun for home defense/ self-protection and law enforcement at all levels," the company's April 1997 10K reads in part.

Exactly how much of that market Saf T Lok needs to capture to be successful is not clear. Queries on that topic were referred to Gardner, who did not return phone calls.

"Honey, don't forget to brush your teeth and lock the gun"

Gun makers with lock programs already in place have opted for the cheaper locks, which add a few bucks to the initial price of a gun. Gun owners who want to add a lock on their own are likely to go the same route.

"For some person who has maybe just one firearm, they might consider the additional expense of the higher priced lock," said Jack Adkins, director of operations for the American Shooting Sports Council. "But lower income folks, who live in a high crime area and buy a less expensive handgun for self-protection, I doubt seriously they're going to pay $80 to $90 for the more expensive lock."

Owners of multiple handguns often lock them either in a safe or cabinet specifically designed for guns, Adkins said.

One of Saf T Lok's claims of superiority is that it can be used on a loaded gun, unlike trigger locks, which lend themselves to accidents during opening. But there are gun safes for single guns, which open with a few keystrokes. And some researchers claim the gun can still be fired with a Saf T Lok installed.

Another disadvantage of Saf T Lok's design is that it is model specific, so it can't be transferred from, say, a Smith & Wesson 45 to a Glock semiautomatic, unlike cheaper trigger locks, which are easily transferable.

And even those aren't disappearing off dealers' shelves.

"I do not get the impression that there's a huge pent-up demand for trigger locks," said Jim Wright, a professor of sociology at Tulane University in New Orleans. Wright has written extensively on gun safety issues. "And it would be a strange duck who would forego the ease and expense of a trigger lock" for a Saf T Lok.

"At $80 to $90 bucks a throw, there are not a lot of Joe Six-pack gun owners who are going to give it a second look," Wright said.

Retailers familiar with Saf-T-Lok's products give it mixed reviews. Although it has received some solid backing, others claim the lock is easily jimmied. But even those who like the technology, question whether there's a market to support Saf T Lok and its investors.

"I don't think legislation is going to be the saving grace of this company," said Mike Caruso, manager of the Palm Beach Shooting Center in Palm Beach, Fla. "I think a lot of people want to keep things the way they are right now and take their chances. And how would the government enforce it?"

Back from the brink, Saf T Lok shares its new found wealth

Saf T Lok's financial good fortune last fall couldn't have come at a better time. The company that now has a market cap of about $40 million was on the verge of being delisted from the Nasdaq SmallCap Market last fall. A hasty Reg S filing in November allowed the company to sell more than $2 million worth of stock to three offshore investors. This restored the company's asset and stockholder equity levels to the minimum required for listing.

But the potential for dilution of shares is quite high. Saf T Lok now has about 10 million shares outstanding. In October, there were 3.2 million shares in the float. The company's investor relations officer was unable this week to provide current information. The number of shares outstanding is almost twice the 5.6 million shares that were outstanding a year ago. If outstanding warrants and options are exercised, the number of shares outstanding would increase by 7.4 million, or 74 percent, according to documents filed with the SEC.

Where Saf T Lok committed the proceeds of the Reg S was curious. Instead of pumping the funds into R&D or manufacturing, it agreed to pay $1 million - or one-third of the proceeds - to "consultants." According to documents filed with SEC, Saf T Lok will pay A.B. & Associates, Inc., management consulting firm, $250,000 and Marketing Direct Concepts, Divich's employer, $375,000. Marketing Direct Concepts will receive an additional $375,000 if at least $1.5 million in stock warrants are exercised, the document said. A third firm, State Street Securities, which handled the Reg S, is also getting a chunk of the proceeds. State Street Securities is no relation to the prominent Boston-based State Street Corp. In addition to $60,000 in legal fees, State Street Securities received $337,500, or 13.5 percent of the sales price of the common stock. And the company will "receive a 13.5 percent fee of the sales price of the stock underlying the warrants if the warrants are exercised," according to an 8K filed with the SEC last November.

This from a company which for the first nine months of 1997 reported $17,321 in sales and losses totaling $733,800.

It is not clear what relationship there is between State Street Securities and Marketing Direct Concepts. Like questions about the company's target market share, they were referred to Gardner.

There are other figures that don't add up as well. For example, although their product retails for almost 10 times the competition, Saf T Lok is predicting a 67 percent gross margin. Wouldn't it be more prudent for a fledgling organization to shave its margins, cut its prices and maybe capture more of the market?

Saf T Lok recently announced an agreement with United Safety Action, a New York distribution company. United Safety has committed to buying $20 million worth of Saf T Lok products in the next two years, but there's no evidence of a penalty if United does not fulfill that order.

United has also signed on for a $5 million ad campaign in a "variety of national media" that they hope will make Saf T Lok a "household name." Five million dollars? For a company with no brand recognition or track record? Consider this: In 1996, the last year for which figures are available, the biggest advertising machine in the U.S. was Coca-Cola, which probably has brand recognition on Mars. That company spent $131 million to get its message out, according to Advertising Age. And that was just for its classic cola. Add in other soft drinks, and that figure almost doubles.

Frank Brooks, the man who invented Saf T Lok, may have done so with good intentions. But the company's current tack of glowing predictions and inflated stock prices miss the mark and could lock investors into a losing game.

-The Stock Detective

Also see: Stock Detective Roundup for periodic updates to this and other Stinky Stock features.
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