in re saf t lok, inc. securities litigation...

Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

WEST PALM BEACH DIVISION Case No: 02-80252-CIV-RYSKAM1PIVITUNAC

IN RE SAF T LOK, INC. SECURITIES LITIGATION

PLAINTIFF'S CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Lead Plaintiff, Edward Cohen, by and through his undersigned counsel, altgs the3 (7-)

following upon personal knowledge as to those allegations concerning himself andas to ali

other matters, upon the investigation of counsel, which included: (a) review and anlysis of'

public filings made by SafT Lok, Inc. ("SafT Lok", "STL" or the "Company") wit!!

Securities and Exchange Commission (the "SEC"); (b) review and analysis of STL press

releases; (c) contact with factual sources, including interviews with persons who were formerly

employed by STL during the Class Period; (d) review and analysis of auditors' workpapers

produced to plaintiff's counsel by Defendant Goldberg Wagner Stump & Jacobs LLP (the

"Goldberg Firm"); and (e) consultation with a forensic public accountant. Plaintiff believes that

further evidentiary support exists for the allegations set forth below and will be accessible after a

reasonable opportunity to conduct discovery is permitted against the Individual Defendants.

OVERVIEW OF THE ACTION

This is a class action on behalf of all purchasers of the common stock of Saf T

Lok between April 14, 2000 and April 16, 2001, inclusive, (the "Class Period"), seeking to

pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").

2. SafT Lok sold safety locks for handguns.


Defendant Goldberg Wagner Stump & Jacobs LLP and its predecessor Goldberg

& Company, P.A., (the "Goldberg Firm") is the accounting firm which continually served as the

Company's auditor through the Class Period and issued clean audit opinions on the Company's

publicly filed financial statements for the year 1999 despite its knowledge of or conscious

disregard for numerous red flags that Saf T Lok's financial condition was not being accurately

reported.

4. On December 20, 2000, In the Matter of Saf TLok, Inc., Administrative

Proceeding File No. 3-10395, the SEC issued a cease-and-desist order (the "Cease-and-desist

Order") forbidding Saf T Lok from "committing or causing any violation and any future

violation of Sections 10(b) and 13(a) of the Exchange Act and Rules lOb-5, 12b-20, 13a-1l and

13 a- 13 thereunder."

5. Similarly, on January 12, 2001, in the matter of Securities And Exchange

Commission v. Franklin W. Brooks And John L. Gardner, Case no. 00-civ-91 10 (Ryskamp), this

Court entered a Final Judgment (the "Final Judgment") against defendant Franklin W. Brooks,

permanently enjoining him from "making any untrue statement of material fact or omitting to

state a material fact necessary to make the statements made.. .not misleading."

6. Both the SEC Cease-and-desist Order and the Final Judgement issued by this

Court related to various acts of fraud committed by Saf T Lok that, among other things, included

false and misleading statements and omissions by the Company in connection with certain

material third-party contracts, and a research report paid for by the Company, prepared by a

third-party securities analyst, which contained false and misleading sales forecasts that Saf T

Lok's then CEO himself later conceded were "unreasonable".

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7. Having avoided delisting from Nasdaq in 1997 for failing to maintain tangible net

assets of $2,000,000, Saf T Lok and the Individual Defendants were motivated to falsify Saf T

Lok's financial statements thereafter. Saf T Lok and the Individual Defendants were further

motivated to artificially inflate the price of Saf T Lok's stock because the Company was making

efforts to successfully complete an $875,000 debt offering in May 2000. Without having

completed the debt offering, the Company would have had zero cash during the second quarter

of 2000.

This case is about SafT Lok's excessive valuation of unsaleable inventory and

worthless related production-related assets which served to, and did, falsify Saf T Lok's

financial statements during the Class Period. As more fully alleged below, such inventory was

largely unsaleable as a result of a transaction defendants completed prior to the Class Period with

Sholam Weiss, a career criminal now serving 845 years in prison for his conviction of white

collar crimes unrelated to this action.

9. Indeed, the Goldberg Firm had been communicating directly with the SEC during

the Class Period. Despite the SEC's expressly stated position that "significantly enhanced

disclosures are necessary for investors to understand how and why you and your auditors

concluded that inventory is appropriately valued and properly classified," defendants --

through the Goldberg Firm -- played cat and mouse with the SEC, making excuses, flatly

contradicting themselves and staving off the Company's day of reckoning for months before

finally taking proper action.

10. On March 26, 2001, defendants were forced to acknowledge the misclassification

of SafT Lok's inventory, tools, dies and patents when they filed SafT Lok's restated financial

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results with the SEC for the year end 1999, the first quarter of 2000, the second quarter of 2000

and the third quarter of 2000. On April 16, 2001 defendants admitted the worthlessness of

$2,057,659 of the Company's inventory and the worthlessness of $1,114,029 of related other

assets.

11. Nasdaq delisted Saf T Lok on May 15, 2001, for its failure to maintain minimum

tangible assets of $2,000,000.

12. The Company filed for bankruptcy protection under Chapter 7 on May 22, 2002.

Saf T Lok was served the initial complaint in this action prior to the Company's declaration of

bankruptcy.

13. Currently, the price of SafT Lok's stock, once trading in the range of $20.00 per

share near its peak during the Class Period, is trading OTC at $03 per share.

JURISDICTION AND VENUE

14. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).

15. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.

§ § 78j(b) and 78t(a)) and Rule lOb-5 promulgated thereunder (17 C.F.R. § 240.1Ob-5).

16. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged

fraud and/or its effects have occurred within this District; defendant Saf T Lok maintained its

principal place of business in this District throughout the class period. In addition, defendant the

Goldberg Firm maintains its offices in this District.

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17. In connection with the acts and omissions alleged in this complaint, defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including,

but not limited to, the mails, interstate telephone communications, and the facilities of the

national securities markets.

PARTIES

18. Lead Plaintiff, Edward Cohen, purchased STL common stock during the Class

Period, as set forth in the certification attached hereto as Exhibit U, and was damaged thereby.

Plaintiff was appointed lead plaintiff by way of court order dated July 3, 2002.

19. Defendant SafT Lok maintained its principal executive offices in West Palm

Beach. On May 22, 2002, Saf T Lok filed a voluntary petition for bankruptcy protection under

Chapter 7. Because Saf T Lok has filed for bankruptcy, it is subject to an automatic stay of

these proceedings until such time as the stay is lifted.

20. The defendants identified below (the "Individual Defendants"), at all times

relevant to this action, served in the capacities listed below and received substantial

compensation:

Name

Franklin W. Brooks

Jeffrey W. Brooks

William Schmidt

James E. Winner, Jr

Position

Chairman of the Board, Director, President and Chief Executive Officer (until March 19, 200 1)

Director, Vice President, Secretary and Treasurer (until February 6, 2001)

Director and Chief Financial Officer (until February 6, 2001)

Chairman of the Board of Directors, President and Chief Executive Officer (effective February 21, 2001)

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/


John F. Hornbostel, Jr. Secretary and General Counsel (effective February 21, 2001)

21. Defendant Goldberg Wagner Stump & Jacobs LLP and its predecessor Goldberg

& Company, P.A., is an accounting firm located at 2161 Palm Beach Lakes Boulevard, West

Palm Beach, Florida. As detailed herein, the Goldberg Firm continually served as STL's auditor

and issued unqualified opinions for the years ended 2000 and 2001. Harvey B. Goldberg,

C.P.A., was the managing partner of the Goldberg Firm at all material times hereto. Mr.

Goldberg supervised and approved the Goldberg Firm's audit of Saf T Lok's 1999 financial

statements. Mr. Goldberg also corresponded with the SEC on behalf of the Company in

response to several written inquiries made by the SEC in connection with Saf T Lok's financial

statements.

22. The Individual Defendants, as senior officers and/or directors of STL were

controlling persons of the Company. Each exercised their power and influence to cause STL to

engage in the fraudulent practices complained of herein.

23. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of STL common stock, by

disseminating materially false and misleading statements and concealing material adverse facts.

The scheme: (i) deceived the investing public regarding STL 's business, its finances and the

intrinsic value of STL common stock; and (ii) caused plaintiff and other members of the Class to

purchase STL common stock at artificially inflated prices.

PLAINTIFF'S CLASS ACTION ALLEGATIONS

24. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased or

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otherwise acquired STL common stock between April 14, 2000 and April 16, 2001, inclusive

(the "Class Period"), and who were damaged thereby. Excluded from the Class are defendants,

members of the immediate family of each of the Individual Defendants, any subsidiary or

affiliate of STL and the directors, officers and employees of STL or its subsidiaries or affiliates,

or any entity in which any excluded person has a controlling interest, and the legal

representatives, heirs, successors and assigns of any excluded person.

25. The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to plaintiff at this time

and can only be ascertained through appropriate discovery, plaintiff believes that there are

hundreds, if not thousands of members of the Class located throughout the United States. As of

February 1, 2002, there were reportedly more than 20 million shares of STL common stock

outstanding. Throughout the Class Period, STL common stock was actively traded on the

NASDAQ Small Cap Market under the symbol "LOCK". Record owners and other members of

the Class may be identified from records maintained by STL and/or its transfer agents and may

be notified of the pendency of this action by mail, using a form of notice similar to that

customarily used in securities class actions.

26. Plaintiffs claims are typical of the claims of the other members of the Class as all

members of the Class were similarly affected by defendants' wrongful conduct in violation of

federal law that is complained of herein.

27. Plaintiff will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

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28. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

1) whether the federal securities laws were violated by defendants' acts and

omissions as alleged herein;

2) whether defendants participated in and pursued the common course of

conduct complained of herein;

3) whether documents, press releases, and other statements disseminated to

the investing public and the Company's shareholders during the Class Period misrepresented

material facts about the business, finances, financial condition and prospects of STL;

4) whether statements made by defendants to the investing public during the

Class Period misrepresented and/or omitted to disclose material facts about the business,

finances, value, performance and prospects of STL;

5) whether the market price of STL common stock during the Class Period

was artificially inflated due to the material misrepresentations and failures to correct the material

misrepresentations complained of herein; and

6) to what extent the members of the Class have sustained damages and the

proper measure of damages.

29. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually


redress the wrongs done to them. There will be no difficulty in the management of this suit as a

class action.

FACTUAL BACKGROUND

No Safe Harbor Protection For SafT Lok Because The Acts Complained Of Herein Occurred Within 3 Years Of The SEC's Cease-and-desist Order

30. On December 20, 2000, the SEC filed a settled civil complaint in the United

States District Court for the Southern District of Florida against Defendant Franklin W. Brooks

and against John L. Gardner, SafT Lok's former President and CEO (the "SEC

Complaint")(attached hereto as Exhibit A). The SEC Complaint brought five claims of

securities fraud against defendant Franklin W. Brooks and John L. Gardner on the basis of false

and misleading statements made by Saf T Lok in late 1997 and early 1998 concerning

agreements the Company had with various third parties, which among others, included A.B. &

Associates, USA, and State Street Securities.

31. Also on December 20, 2000, the SEC issued a cease-and-desist order against the

company, In the Matter of SafTLok, Inc. (attached hereto as Exhibit B)(the "Cease-and-desist

Order"). The Cease-and-desist Order was based largely on the same misconduct alleged in the

SEC Complaint, as more particularly described below.

32. During the fall of 1997, to avoid being delisted by Nasdaq because of insufficient

assets, Saf T Lok conducted a Regulation S Offering pursuant to which Saf T Lok sold

1,500,000 shares of common stock and stock purchase warrants for 2,500,000 shares of common

stock for a total purchase price of $3 million. The investors in the offering were offshore

entities represented by an individual named Sholam Weiss.

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33. Initially, discussions between Weiss and the Company contemplated pricing the

offering at $1.50 per share -- a discount of approximately 60% from the stock's then trading

price of $3.60. However, in a letter dated October 14, 1997, Nasdaq's Listing Qualifications

Panel warned Saf T Lok that the contemplated 60% discount was "excessive" and that the

proposed offering would be "harmful to the investing public". See Cease-and-Desist Order at 3.

Accordingly, Weiss agreed to increase the offering price from $1.50 to $2 per share.

SafT Lok Made False and Misleading Statements About Agreement With A.B.& Associates

34. Weiss was a career criminal who in November 1999 -- according to the Cease-

and-desist Order -- was sentenced to 845 years in prison and ordered to pay fines and restitution

of $248 million for 78 counts of racketeering, wire fraud, money laundering, and other crimes.

The Cease-and-desist Order further provides that as a condition to the purchase of Saf T Lok's

Regulation S Offering by Weiss's offshore clients, Weiss demanded that Saf T bk enter into a

business consulting contract with an entity called A.B. & Associates ("AB").

35. AB was a shell entity, which according to the Cease-and-desist Order, had been

"created by a longtime acquaintance of Weiss". AB used a commercial mail box facility in

Monsey, New York as its mailing address, had no clients and had never conducted any business.

The Cease-and-desist Order states that "Saf T Lok did not attempt to negotiate any of the

provisions of the purported agreement, but simply accepted all the terms of a contract proposed

by Weiss." See Exhibit B at 4.

36. In both the SEC Complaint as well as the Cease-and-desist Order, the SEC

charged Saf T Lok with failing to disclose material facts concerning its dealings with AB in an

8-K filed with the SEC on November 14, 1997.

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Saf T Lok Made False And Misleading Statements About Agreement With United Safety Action., Inc.

37. The Cease-and-desist Order provides that while negotiating the terms of Saf T

Lok's Regulation S offering on behalf of his purported offshore entities, Weiss proposed to Saf

T Lok management that he would set up a distribution company -- United Safety Action, Inc.

("USA") -- to sell SafT Lok's gun locks. USA was a sham business with no assets, offices or

employees and shared the same mailing address as AB. To that end, Weiss proposed to raise

$10 million to finance USA's operations. Ultimately, however, USA was only able to obtain

$150,000 of financing.

38. Despite USA's inability to obtain sufficient financing, SafT Lok entered into a

distribution agreement with USA on February 12, 1998 pursuant to which USA would sell SafT

Lok's products to retailers exclusively. The agreement provided that USA would purchase up to

$20 million of gun locks over a three year period. However, under the agreement USA would

actually only be required to purchase $1 million of gun locks from SafT Lok. USA was

permitted to terminate the contract after fulfilling the "initial order" of $7 million of gun locks.

The agreement provided that any purchase orders from "any customer" received by Saf T Lok

would count towards USA's "initial order" obligation. One day before entering into the USA

agreement, on February 11, 1998, the Company announced its receipt of a $6 million purchase

order from a third-party wholesaler. As a result, USA's only purchase obligation was $1

million.

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The Market Became Over Saturated With Saf T Lok's Product Because of Company's Transaction With USA

39. Pursuant to its agreement with USA, Saf T Lok shipped to USA inventory with a

carrying value to the Company of approximately $1,357,446 and stockpiled additional inventory

costing millions more in anticipation of further shipments to USA. As shall be alleged in greater

detail below, based upon the level of the Company's 1996 and 1997 sales, the $1,357,446 of

inventory which was shipped to USA represented a stockpile that would take more than twenty

years to sell. A reasonable inference can be made that the Individual Defendants were aware

their own inventory was largely unsaleable because the inventory sold to SafT Lok's exclusive

distributor, USA, would itself take more than twenty years to sell, based on the historical sales of

the Company. The $1,357,446 figure is based on information contained in SafT Lok's 1999

Form 10K, filed with the SEC on April 14, 2000. In it, SafT Lok states that a "[d]istributor

purchased $477,115 of the Company's product that he did not pay for and it was written off as a

bad debt. These customers represented approximately 95% of the company's sales in 1998." A

reasonable inference can be made that the "distributor" referred to was USA. 95% of the

Company's sales in 1998 were purportedly $1,652,469. Cost of sales for 1998 was reported to

be $1,428,891. 95% of $1,428,891 is $1,357,446

40. This $1,357,446 of inventory was sold to USA for approximately $1,569,845'

thereby resulting in the initial recording of a gross profit of approximately $212,399. However,

by year end 1998 this gross profit was effectively transformed into a $264,716 loss, because

USA failed to pay for $477,115 of the merchandise.

'Based on the information alleged in T 40, above, an inference can be made that the amount of product or inventory sold to USA was 95% of $1,652,469 or $1,569,845.

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41. The Cease-and-desist Order and SEC Complaint both accused SafT Lok with

making false and misleading statements in various press releases and SEC filings concerning its

agreement with USA.

SafT Lok Paid Third-Party Research Analyst To Prepare Report On Company For Potential Investors Which Was Found To Have Had False and Misleading Sales Projections For SafT Lok

42. In February 1998, according to the Cease-and-desist Order and the SEC

Complaint, Saf T Lok had paid a securities analyst from State Street Securities, to prepare a

report on the Company -- subsequently distributed to investors in a private placement offering of

SafT Lok stock - which included false and misleading forecasts about the Company's business

prospects. The Cease-and-desist Order explains:

For example, the report projected sales of two million units in 1998 and three million units in 1999, with net sales of $60 million in 1998, and $90 million the following year, figures that Saf T Lok's chairman and CEO later acknowledged were unreasonable.

43. The Cease-and-desist Order ordered Saf T Lok to cease and desist from

"committing or causing any violation and any future violation of Sections 10(b) and 13(a) of the

Exchange Act and Rules lOb-5, 12b-20, 13a-11, and 13a-13 thereunder."

44. Similarly, pursuant to the parties' settlement of the SEC Complaint, Brooks and

Gardner paid civil penalties of $55,000 each. On January 12, 2001, this Court entered a Final

Judgment (attached hereto as Exhibit C) which permanently enjoined Brooks from:

(1) employing any device, scheme or artifice to defraud; (2) making any untrue statement of material fact or omitting to state a

material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) engaging in any act, practice, or course of business which operates or

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would operate as a fraud or deceit upon any person; in violation of Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and Rule lOb-S promulgated thereunder [17 C.F.R. 240.1Ob-5].

45. The Final Judgement was binding "upon BROOKS, his agents, servants,

employees, and attorneys-in-fact."

46. As a result of the Cease-and-desist Order and the Final Judgment, STL's forward-

looking statements, if any, made during the Class Period, are expressly excluded from safe

harbor protection pursuant to Section 21 E of the Securities Exchange Act of 1934 because, as

alleged below, they were made within three years of the Cease-and-desist Order and Final

Judgment prohibiting Saf T Lok from further violations of the anti-fraud provisions of the

Federal securities laws, namely, Section 10(b).

DEFENDANTS KNEW OR RECKLESSLY DISREGARDED THAT SAF T LOK HAD WEAK, DECLINING SALES AND

THAT ITS INVENTORY WAS OVERSTATED

Goldberg Firm's 1999 Year End Audit Reveals "Client JSaf T LokJ Has Relatively Low Level of Sales"

47. As of at least early 2000, the Individual Defendants and the Goldberg Firm knew

or recklessly disregarded that most of SaiTLok's inventory would remain unsold during the

upcoming year. The Goldberg Firm's knowledge was evidenced by an audit planning memo,

prepared by Tiffany Kennedy, entitled "Analytical Procedures" (attached hereto as Exhibit D) 2

which notes that "the client has a relatively low level of sales...." and further evidenced by an

'The Goldberg Firm served plaintiff with requests for documents and propounded interrogatories. Plaintiff responded to this discovery and served document requests on the Goldberg Firm which produced the documents referred to in this Complaint.

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"Audit Planning Questionnaire" (attached hereto as Exhibit E), prepared by Tiffany Kennedy on

2/19/00, which provides as follows:

Due to political agendas the sales of Saf T Lok gun locks (SIC?) have not been significant. There are several law enforcement agencies that are using the gun lock. Until there is legislation requiring this type of gun lock as opposed to a much cheaper trigger lock, or a gun manufacturer that puts this lock on their guns, sales will probably be minimal. [Answer to question no. 7] (Emphasis added)

48. In a memo dated 1/14/00 (attached hereto as Exhibit F) , also prepared by

Kennedy, the Goldberg Firm stated:

Due to the lack of sales in 1999 there is significant amount of inventory that is in unopened boxes. However, this does not indicate obsolescence. If sales increase in 2000 these parts can be used to produce gunlocks.

SafTLok has had very few sales; therefore there has been a small amount shipped or received since the end of the year. (Emphasis added)

49. Again, in a memo dated 3/8/00 prepared by Teri L. Hackwith, a note handwritten

by Harvey B. Goldberg (of the Goldberg Firm), states: "there is no significant sales and 1999

production was limited." (Emphasis added) (Attached hereto as Exhibit G).

Individual Defendants Were Motivated to Commit Securities Fraud To Successfully Complete Private Offering In May 2000

50. Starved for cash, in May 2000 Saf T Lok conducted a Regulation D private

placement, pursuant to which it sold $875,000 worth of 6% convertible debentures. Had Saf T

Lok not successfully completed this private placement, the Company's total cash as of June 30,

2000 would have been minus $383,861 instead of the $402,389 which was reported.

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SEC Begins Ongoing Dialogue With The Company Concerning SafT Lok's Accounting

51. On September 21, 2000, Steven C. Duvall, SEC Assistant Director,

sent a letter to defendant Franklin W. Brooks (attached hereto as Exhibit H) concerning the

Company's S-3 Registration Statement for the sale of 1,457,947 shares of common stock. This

letter raised questions concerning, among other things, accounting and disclosure issues

regarding the Company's Form 10-K for the fiscal year ended December 31, 1999 and filed on

April 14, 2000, Form 10-Q for the period ended March 31, 2000 filed on May 22, 2000 and

Form 10-Q for the period ended June 30, 2000, filed on August 10, 2000. It stated:

In view of the downward sales trend and low turnover rate, revise the notes to the financial statements and MD&A to include analysis demonstrating to a reader why inventory is properly stated at the lower of cost or market value and is properly classified as a current asset at each balance sheet date. Refer to Chapters 3 and 4 of ARB 43.

In view of the downward sales trend, revise the notes to the financial statements and MD&A to include analysis demonstrating to a reader how you determined that long-lived assets, including property and equipment and patents, are recoverable at each balance sheet date. Refer to paragraph 6 of SFAS 121. (Emphasis added)

52. On October 19, 2000, Harvey B. Goldberg sent a letter to Amy Kate O'Brien of

the SEC addressing the above noted comments raised in the September 21, 2000 letter to the

Company. (Attached hereto as Exhibit I). The letter was cc'd to defendant Franklin W. Brooks.

Goldberg admitted that the Company's efforts to date to improve sales of its gun locks were

insufficient to conclude that sufficient cash flows would be generated in the future to support the

value of the assets in question. (Exhibit I at p. 2) Goldberg's reason for concluding that the

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Company's assets were not impaired was based on the Company's discussions with "the CFO of

the Parent of a major U.S. gun manufacturer to acquire their Subsidiary" and that, in connection

with this acquisition, on July 13, 2000 the Company obtained a 120,000,000 proposed financing

offer from a first tier collateral based lender." (Exhibit I at 2-4) In addition, it proposed certain

disclosures in response to the above quoted comments in the September 21, 2000 Steven Duvall

letter. (Exhibit I at 4).

53. Goldberg's suggestion that SafT Lok's assets were not impaired because the

Company was in discussions to acquire a "major U.S. gun manufacturer" was reckless and

ignored obvious red flags. In reality, the Company was not involved in serious acquisition

discussions and did not have the resources to complete the $20,000,000 acquisition. Saf T Lok

only had an expression of interest from GE Capital in possible future collateral-based lending.

In a letter dated July 13, 2000 from GE Capital, which Goldberg referred to in its letter to the

SEC (See Exhibit I at 3) SafT Lok was explicitly warned: "Please understand that this letter is

simply an indication of interest and does not constitute a commitment or undertaking to provide

financing." (Attached hereto as Exhibit J) (Emphasis added).

54. In addition, even if the Company was contemplating purchasing the gun

manufacturer, that gun manufacturer had no use for the Company's gun locks so the inventory

would not be sold through in any event. Some six months prior, on March 28, 2000, the Palm

Beach Daily Business Review, published an article entitled "Shooting Blanks; Despite gun-

safety, Saf-T-Lok still can 'tfind the right combination; Tragic shootings trigger briefspikes in

the stock of Saf-TLok, but the company isnt [sic] likely to cash in on the gun-safety movement."

The article states that:

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Smith & Wesson hasnt [sic] expressed any interested [sic] in doing business with Saf-T-Lok. The company already has a partner-- MasterLock, which is providing external, key-operated locks. And the manufacturer intends to develop its own internal locking mechanism in-house. (Emphasis added)

Smith & Wesson was the gun manufacturer the Goldberg Firm was referring to in its

correspondence with the SEC. See Exhibit J. In the article, a spokesman, Ken Jorgensen, for

Smith & Wesson was reported to have said:

his company's research-and-development staff have looked at Saf-T-Lok 's products, but we determined that the locks dont [sic] provide what we need. For example, Jorgensen says, the gun maker worries that Saf-T-Lok's combination lock system isnt [sic] fool proof enough and that an unintended user can try enough combinations to eventually figure out how to fire the gun. (Emphasis added)

55. On November 3, 2000, Steven C. Duvall of the SEC sent a letter to

defendant Franklin W. Brooks in response to Goldberg's October 19, 2000 letter on the

Company's proposed S-3 Registration Statement. (Attached hereto as Exhibit K) This letter

stated in relevant part:

Your proposed disclosure fails to address the real issue. Why have sales continued to deteriorate during the last 21 months? Why have the number of sizable law enforcement shipments continued to deteriorate during the periods presented? Why has the average sales +volume of law enforcement shipments continued to deteriorate during the periods presented? . . . Based on your historical operating results during the past 21 months, we believe that significantly enhanced disclosures are necessary for investors to understand how and why you and your auditors concluded that inventory is appropriately valued and properly classified at each balance sheet date. As we previously requested, revise the notes to your financial statements and MD&A to disclose how you and your auditors determined that inventory is appropriately stated at the lower of cost or market value and is properly classified as a current asset at each balance sheet date pursuant to Chapter 3 and 4 of ARB 43.. Based on your historical operating results during the past 21 months, we believe that significantly enhanced disclosures are necessary for investors to understand how and why you and your auditors concluded that long-lived assets are not impaired at each balance sheet date. As we previously requested, revise the notes to your financial statements and MD&A to disclose how you and your auditors determined that long-lived assets, including property, equipment and patents, are recoverable at each balance sheet date pursuant to paragraph 6


of SFAS 121. . Based on the letter from your auditors regarding your pending acquisition of a gun manufacturer, it appears to us that the pending acquisition is probable and that historical and pro forma financial statements are required by items 310(c) and 310(d) of Regulation S-B

In a letter from your auditors, they identified certain factors they took into account to determine that your inventory and long-lived assets were recoverable at each balance sheet date. Based on the factors they identified, it remains unclear to us how those factors support their conclusions.., they identified certain pending state legislation, however it's not clear to us how they can determine the expected impact of such legislation on future sales. Finally, we note that they identified your discussions to acquire a gun manufacturer. In light of this pending transaction, clarify:

(1) the current status of and the probability of completing the pending acquisition;

(2) the unresolved issues associated with the pending acquisition;

(3) the reasons why negotiations for the pending acquisition have continued for over 10 months, and;

(4) how and why the pending acquisition ensures the recoverability of your assets. (It's not clear to us how and why you and your auditors concluded that after the pending acquisition there will be a market for weapons sold with your locks since it appears that no such market currently exists.)

We also note that you and your auditors believe that any disclosures regarding the pending acquisition would be detrimental to shareholders. We do not concur with that conclusion. We believe that if the recoverability ofyour assets is dependent on a pending acquisition, you are required to fully disclose and discuss that fact. (Emphasis added)

56. The November 3, 2000 letter from Steven C. Duvall was followed by telephone

conferences between representatives of the Company and representatives of the SEC. These

telephone conferences culminated in a November 15, 2000 letter from Steven C. Duvall to

defendant Franklin W. Brooks (attached hereto as Exhibit L) which stated, in relevant part:

_19-


I. ... Based on our comments and on subsequent phone conferences, please provide the following additional information in order to support the assertions in your proposed disclosures:

(1) the cash flow analysis and assumptions you used to determine that inventory and long-lived assets are recoverable;

(2) the reasons why the assumptions you used, including those related to the operation of a gun manufacturer that you have not yet acquired, are reasonable and supportable as required by paragraph 9 of SFAS 121;

(3) the reasons why you concluded that the proposed acquisition of the gun manufacturer is not probable, such that historical and pro forma financial statements for the pending acquisition are not required in Form S-3;

(4) the current status and probability of completing the acquisition of the gun manufacturer, including the remaining unresolved issues and the reasons why negotiations have continued for over 10 months; and

(5) the identity of the gun manufacturer you are seeking to acquire and any financial information that they have provided to you. (Emphasis added)

The Goldberg Firm Tells The SEC That The Company's Contemplated Purchase of Gun Manufacturer Was Not "Currently Probable"

57. On December 1, 2000, Harvey B. Goldberg sent a response to Amy Kate O'Brien

(attached hereto as Exhibit M), which was cc'd to defendant Franklin W. Brooks. The letter

stated:

a. In response to the SEC's request for data regarding the Company's cash flow analysis and assumptions which it used to determine that inventory and long-lived assets are recoverable, Goldberg stated that "a formal cash flow analysis was not prepared."

b. In response to the SEC's inquiry regarding why the assumptions used, including those related to the operation of a gun manufacturer that has not

-20-


yet been acquired, are reasonable and supportable as required by paragraph 9 of SFAS 121, Goldberg stated that defendants believed "there was no impairment loss to be realized as long as there was a reasonable expectation that the acquisition could be successfully completed."

In response to the SEC's inquiry regarding the current status and probability of completing the acquisition of the gun manufacturer, Goldberg stated that "STL understands that they ISTLI are only one of a number of [acquisition] candidates; most of which, if not all, are certainly more substantial entities than STL. This suggests that the probability of a transaction between the...GM and STL is not currently probable."

(Emphasis added).

58. Significantly, Goldberg's December 1, 2000 letter stated:

At December 31, 1999, and at March 28, 2000, discussions had not progressed to the point where STL had more than a reasonable expectation that the deal could be made. Through the first three quarters of 2000 there still was not a probability, but only an expectation, that the GM [gun manufacturer] would be acquired... the probability of a transaction between the... GM and STL is not currently probable. (Emphasis added)

59. On December 19, 2000, Steven C. Duvall sent a letter to defendant Brooks

(attached hereto as Exhibit N) which stated, in relevant part:

You have not provided us compelling information to support your conclusion as to the classification of inventory. We continue to believe that your classification of all inventory as current assets, at 12131199 and subsequent balance sheet dates is not appropriate and does not comply with Chapter 3 0fARB 43. In determining the appropriate classification of inventory, you considered sales projections that assumed you acquired an existing gun manufacturer, Based on the information you have provided, it does not appear to us that it is appropriate for you to conclude that this acquisition is "reasonably expected" to be consummated and, if consummated, that all ofyour inventory is "reasonably expected" to be sold within one year of each balance sheet date. Revise your financial statements to appropriately classify inventory at each balance sheet date... In addition, revise MID&A and the notes to the financial statements to disclose how and why you determined that inventory is appropriately stated at the lower of cost or market value at each balance sheet date pursuant to Chapter 4 of ARB 43.

*****

-21 -


We continue to believe that you were required by GAAP to prepare undiscounted cash flow analyses to determine the recoverability ofyour long-lived assets. As previously requested, prepare such an analysis at 12/31/99 and subsequent balance sheet dates, as required by paragraph 6 of SFAS 121 and, if applicable, record any impairments required by paragraph 7 of SFAS 121. Cash flow analyses should be based on assumptions that are reasonable and supportable and should be based on information that existed at the time financial statements were originally issued.... (Emphasis added)

60. According to an undated memo produced by the Goldberg Firm from "TNK" to

"HBG", Harvey B. Goldberg was hospitalized at the time the above-referenced December 20,

2000 was received by Brooks. As a result, the SEC did not press for immediate action by the

Company.

SEC Tells SafT Lok "Your Classification of All Inventory In Current Assets ... Is Inappropriate"

61. On February 26, 2001, defendant Franklin W. Brooks received a letter from the

James Rosenberg, SEC Senior Assistant Chief Accountant (attached hereto as Exhibit 0), which

stated:

We considered all of the information you provided to us

We continue to believe that your classification of all inventory in current assets at 12131199, and at subsequent balance sheet dates, is inappropriate and should be revised. We believe that at each balance sheet date you should only classify, in current assets, the amount of inventory you reasonably forecast to sell within the next twelve months. We therefore believe that you should revise your financial statements to reclassify a substantial majority ofyour inventory to non-current assets at 12131199 and at each subsequent balance sheet date. However, we have determined that we will rely on management and the independent auditor in their assessments of the ultimate net realizable value of inventory and the recoverability of long-lived assets. (Emphasis added)

-22-


Saf T Lok Files Restated Financial Statements For1999 And The First, Second And Third Quarters of 2000

62. On March 26, 2001, the Company filed an amended 1999 Form l0-KSB and an

amended first quarter, second quarter and third quarter 2000 Form l0-QSB. The documents, all

signed by defendant John F. Hornbostel, and the financial statements contained therein, were

revised to disclose the fact that:

a. for the year end 1999 $2,225,000 of the Company's inventory was non current because such inventory could not be sold through by year end 2000;

b. for the first quarter of 2000, $2,240,000 of the Company's inventory was non current, because such inventory could not be sold through by March 31,2001 -5

C. for the second quarter 2000, $2,260,000 of the Company's inventory was non current, because such inventory could not be sold through by June 30, 2001.

d. for the third quarter 2000, $2,210,000 of the Company's inventory was non current, because such inventory could not be sold through by September 30, 2001.

63. On March 26, 2001, upon the release of SafT Lok's partial disclosure, the price

of the Company's stock dropped from $ 4.0625 to $3.75 per share and continued to drop further

in the days that followed.

64. Saf T Lok's failure to write down the value of its inventory in its restated

financial statements for 1999 and the first three quarters of 2000 was false and misleading

because at that time the Individual Defendants, as well as the Goldberg Firm, knew that such

inventory -- based on the Company's historical and expected future sales performance -- could

never be sold through and was consequently. Thus, the Individual Defendants and the Goldberg

-23-


Firm did not reflect "the ultimate net realizable value of inventory and the recoverability of long-

lived assets" as directed by the SEC.

Defendant Hornbostel Cautioned By SafT Lok's Auditor That Value of Company's Inventory Appeared "Minimal"

65. On April 4, 2001, in a letter to defendant John F. Hombostel, Harvey B.

Goldberg expressed his frustration over the Company's evident inability to sell through its

inventory, questioning its "real value". In it, he states:

As indicated in my letter of March 19, 2001, I was looking for something to 'hang my hat on' with respect to the company's plans for selling or liquidating the inventory. Although there were intentions to complete the work-in-process inventory, the balance of the plans was somewhat nebulous. I fully understand that you need more time to make arrangements for the sale of the inventory. However, there was no game plan or agenda developed to address the situation.

What is the real value of the inventories, tools and dies and patents at December 31, 2000? In the absence of evidence to the contrary, it appears their value is minimal. How long will it take to sell 90,000 locks when the company only sold 1,915 locks in 2000?

(Emphasis added)(Exhibit P)

Defendant Schmidt Tells Defendant Hornb ostel Value of Inventory Will "Revert to Salvage Value

66. That same day, April 4, 2001, defendant William Schmidt -- the Company's CFO

until February 6, 2001 -- emphasized in a letter to defendant John F. Hornbostel that the

Company's sales were dwindling and that consequently its inventory would ultimately revert to

its "salvage value":

-24-


"It doesn't take a rocket scientist to see that sales have been on a downward trend This trend is probably relative to the decrease in sales efforts due to insufficiency of funds. The majority of the yearly sales for these years have been to law enforcement agencies. Their decision making cycle in deciding to purchase a product such as Saf T Lok is estimated to be from one to three years. Thus, orders will continue to come in, although at a declining rate, after sales efforts have declined. Conversely, orders would not be expected to grow rapidly once the sales efforts are stepped up.

* ** * *

So, absent any increases in sales efforts, my WAG is that sales will do well to hit $50,000 this year and would probably decline to $15,000 to $20,000 the following year and next to nothing after that.

The value of the inventory will then revert to salvage value...."

*****

(Exhibit Q)(Emphasis added).

67. Because the limited market for the Company's specialty products was saturated,

during 1999 and 2000 the Company's manufacturing facility had been idled while its excess

inventory could not be sold. On April 16, 2001, in Saf T Lok's Form I 0-KSB for the year end

2000, as signed by defendants James E. Winner and John F. Hombostel, the truth was belatedly

disclosed. In Saf T Lok's 2000 10-K, the Company recognized charges to earnings aggregating

$3,171,688 as follows:

a. A $1,114,029 asset impairment loss in recognition of the worthlessness of the Company's tools, dies and patents.

b. A $2,057,659 inventory valuation loss in recognition of the non-salability of the Company's excess inventory.

68. On April 16, 2001, the price of the Company's stock dropped even lower, falling

to $3 per share, in recognition of the fact that (i) the write-off of these worthless assets had been

improperly deferred throughout the Class period in order to prevent the Company's total assets

- 25 -


from falling below $2 million, an action which could trigger delisting from the Nasdaq

SmailCap Market; and in recognition of the fact that (ii) only three weeks earlier, the Company

had represented (in the amended 1999 Form 10-KSB) that:

In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of ("SFAS 121") the Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. Management believes that property and equipment, including patents, used to manufacture the SafT Lok should generate sufficient cash flows to recover their carrying value.

69. On May 15, 2001 in SafT Lok's form lO-QSB for the first quarter of 2001, the

Company indicated that it had received notification from NASDAQ that the Company was not in

compliance with NASDAQ's tangible asset requirement, as set forth in rule 4310 (c)(2)(B) and

noted that on April 26, 2001, Saf T Lok had completed a one-for-ten reverse stock split of its

common stock.'

70. The Company's securities were delisted on May 15, 2001 and are currently traded

on the OTC Bulletin Board at approximately $.03 per share.

71. On May 22, 2002, Saf T Lok filed for bankruptcy under Chapter 7 of the United

States Bankruptcy Code.

INDIVIDUAL DEFENDANTS' FALSE AND MISLEADING STATEMENTS

72. On April 14, 2000, the Company filed its 1999 Form 10-KSB with the SEC. This

document was signed by defendants Franklin W. Brooks, Jeffrey W. Brooks and William

3A11 of STL's stock prices which are alleged herein -- except for its current trading price of approximately .03 per share -- are noted on a pre-split basis.

-26-


Schmidt. The 1999 Form I O-KSB stated the following with regard to the USA Distribution

Agreement:

On February II, 1998, the Company entered into a distribution agreement (the "Distribution Agreement") with a newly formed distribution company, United Safety Action, Inc. ("USA) for the sale and purchase of the Company's Grip Locks and Magazine Locks. Under the Distribution Agreement, USA had the exclusive right to sell to the retail consumer segment of the market while the Company focused on marketing to the law enforcement community and gun manufacturers.

USA's performance under the Distribution Agreement proved unsatisfactory in the view of Company management. It was terminated in May 1999 by agreement of the parties. The amounts owed by USA to the Company were written off, although the Company was able to credit outstanding commissions owed. The Company is now free to market to the retail customers itself or through other third parties.

The Company's total revenues in 1999 were $209,173, compared to $1,796,653 in 1998. The two revenue figures represent completely different marketing and focus between the two years and may not be appropriate for comparison when evaluating the Company's future prospects. 95% of the sales revenues generated in 1998 were realized from a single sale to United Safety Action, Inc. ("USA"), the distributor under the now terminated Distribution Agreement, and was geared toward the retail market. The Company's profit on each unit of this sale was minimal, and there were very few sales outside the retail arena. . . Sales to USA were, of, course, not repeated in 1999. Instead, the Company focused its efforts on sales to the law enforcement community, and $172,077 in revenues were generated. In 1998, the Company sold its products to a total of five law enforcement organizations, for a total of $67,917 in revenues.

Most of this was a single sale to the City of Boston Police Department. By contrast, in 1999, $141,670 was raised by sales to twenty-nine such organizations. Sales to the law enforcement community have been of similar strength in the first quarter of 2000. Accordingly, management does not believe that comparison of the two years' revenue figures suggests a trend.

73. The 1999 Form 10-KSB reflected a December 31, 1999 inventory balance of

$2,322,169, after a write-off of obsolete inventory of $150,746, as follows:

-27-


Finished goods

$ 342,967 Raw materials

1,956,783 Supplies 22,419

Total

$ 2,322,169

74. Discussing the Company's inventory, the 1999 Form I O-KSB stated:

The value of the Company's inventory decreased slightly from 1999 to 1998, because (i) the cost of certain parts was higher than previously calculated, (ii) the product assembly process generated a higher level of scrap than expected, and (iii) ongoing product improvement efforts resulted in a certain amount of product obsolescence.

Inventories.. .are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventory costs for finished goods include material, labor, and production overhead.

During 1998 the Company purchased additional inventory of approximately $2,882,000 to meet the anticipated obligation under the Distribution Agreement that was subsequently terminated in 1999 (Note 9(B)). The termination of this Agreement leaves the Company with most of its funds, which are required for operations, invested in inventories with no significant prospects for sales.

75. The 1999 Form 10-KSB, and the audited financial statements therein, were

materially false and misleading because:

a. They failed to disclose that a catalog retailer that obtained Company products from USA at a sharply reduced price was selling these products at extremely low prices.

b. The Company's inventories were not stated at the lower of cost or market as represented.

d. The useful lives of tools and dies was zero, not seven years as represented.

e. The useful life of patents was zero, not fifteen years as represented.

f. Reported earnings, assets and shareholders' equity were overstated by no less than $3.2 million due to the Company's failure to write off the carrying value of worthless inventory, tools, dies and patents.

MWE


g. But for the fraudulent non-GAAP accounting, the Company's net tangible assets would have been below $2 million, thereby triggering a likely delisting from the Nasdaq SmaliCap Market.

76. The falsity of the 1999 Form 10-KSB and audited financials is shown by the

following. On April 14, 2000, at the time SafT Lok filed the Company's 1999 Form lO-K, they

knew or recklessly disregarded that Saf T Lok's reported inventory of $2,322,169 as a valuable

asset on the Company's balance sheet would never be completely sold through and thus should

have been written down. The knowledge of Defendants and the Goldberg Firm is evidenced by:

a. the audit planning memo, prepared by Tiffany Kennedy of the Goldberg Firm, entitled "Analytical Procedures" which states, "the client has a relatively low level of sales;" (Emphasis added)(Exhibit D)

b. the audit planning questionnaire, prepared on 2/19/00 by Tiffany Kennedy, and approved by Harvey Goldberg on 3/20/00 which states that "...sales will probably remain minimal" (see Exhibit E, response to item no. 7); " ... the client's growth has been minimal..." (see id., response to item no. 8); " ...in comparison to others that manufacture any kind of gun lock SafTLok's sales are low." (Emphasis added)(see id.);

C. the memo dated 1/14/00, prepared by Tiffany Kennedy, titled, "Inventory Observation" which states, "Due to the lack of sales in 1999 there is significant amount of inventory that is in unopened boxes. However this does not indicate obselesence [sic]. If sales increase in 2000 these parts can be used to produce gunlocks. SafTLok has had very few sales.; Therefore there has been a small amount shipped or received since the end of the yew." (Emphasis added) (Exhibit F);

d. the memo dated 3/8/00 (for year end 1999), containing the handwritten note by Harvey Goldberg that ". _there is no significant sales and 1999 production was limited." (Emphasis added)(Exhibit G); and

e. the fact that the Company's total cost of sales for the first quarter of 2000 were reported to be only $8,031 respectively. See SafT Lok's Form I 0-QSB for period end March 31, 2000, filed May 22, 2000. Annualizing this figure for the rest of 2000 -- as defendant William Schmidt does in his April 4, 2001 memo to defendant John Hornbostel to calculate total sales to law enforcement for the remainder of 2001 -- the Company's total cost of sales (sold inventory) could reasonably be estimated to be only $32,124 of the total $

-29-


2,322,169 of inventory. Indeed, as alleged in T 78 below, the Company had only sold approximately $15,665 worth of its inventory since the first quarter of 1999.

77. On May 22, 2000, the Company filed its first quarter 2000 Form 10-QSB with the

SEC. This document was signed by Franklin W. Brooks. The financial statements which were

contained within the first quarter 2000 Form I 0-QSB reflected a March 31, 2000 inventory

balance of $2,338,373 as follows:

Finished goods


1,992,170 Supplies

22,121

Total

$ 2,338,373

78. Discussing the Company's inventory, the first quarter 2000 Form 10-QSB stated:

The Company's inventory at the close of the first quarter of 2000 was valued at $2,338,373, which is largely unchanged from the first quarter of 1999 value of $2,322,708.

Accordingly, the Company had only sold through $15,665 of its inventory in the preceding 12

months.

79. Additionally, the first quarter 2000 Form 10-QSB incorporated, by reference, the

materially false and misleading statements which were contained in the 1999 Form I 0-KSB by

stating:

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 1OQSB should be read in conjunction with the Company's financial statements and notes thereto included on Form I OKSB for the year ended December 31, 1999....

80. The first quarter 2000 Form I 0-QSB, and the financial statements therein, were

materially false and misleading for the reasons set forth in ¶ 175-76 above. In addition, these

-30-


financial statements did not, as fraudulently represented, "fairly state the Company's financial

position, and the results of its operations" because ((AICPA Professional Standards Volume 1,

U.S. Auditing Standards, Section 411) the:

a. Accounting principles selected and applied did not have general acceptance.

b. Accounting principles were not appropriate in the circumstances.

C. Financial statements, including the related notes, were not informative of matters that affected their use, understanding, and interpretation.

d. Financial statements did not reflect the underlying events and transactions in a manner that presented the financial position and the results of operations within a range of acceptable limits that were reasonable and practicable to attain in financial statements.

81. On May 22, 2000 at the time the Company filed SafT Lok's first quarter 10-Q,

defendant Franklin W. Brooks knew or recklessly disregarded that Saf T Lok's reported

inventory of $2,338,373 as a valuable asset on the Company's balance sheet would never be

completely sold through and thus should have been written down. The facts evidencing such

knowledge are more specifically alleged in ¶ 76 above.

82. On August 10, 2000, the Company filed its second quarter 2000 Form 10-QSB

with the SEC. This document, which was signed by defendant Franklin W. Brooks, reflected

representations and disclosures which were substantially identical to those contained in the first

quarter 2000 Form 10-QSB as discussed in ¶ ¶ 77-78 above. In addition, the financial

statements which were contained within the second quarter 2000 Form 10-QSB reflected a June

30, 2000 inventory balance of $2,354,900 as follows:

Finished goods $ 360,890 Raw materials 1,972,172 Supplies 21.838

-31-


Total

$ 2,354,900

83. The second quarter 2000 Form l0-QSB, and the financial statements therein,

were materially false and misleading for the reasons set forth in ¶ 175-76 above.

84. On August 10, 2000, at the time Saf T Lok filed the Company's second quarter

2000 Form 10-QSB, defendant Franklin W. Brooks knew or recklessly disregarded that Saf T

Lok's reported inventory of $ 2,354,900 as a valuable asset on the Company's balance sheet

would never be completely sold through and thus should have been written down. The facts

evidencing such knowledge are more specifically alleged in ¶ 76 above.

85. On November 14, 2000, the Company filed its third quarter 2000 Form lO-QSB

with the SEC. This document, which was signed by defendant Franklin W. Brooks, reflected

representations and disclosures which were substantially identical to those contained in the first

quarter 2000 Form 10-QSB as discussed in 1177-78 above. In addition, the financial

statements which were contained within the third quarter 2000 Form 1 0-QSB reflected a

September 30, 2000 inventory balance of $2,308,573 as follows:

Finished goods


1,926,351 Supplies

21,771 Total

$2,308,573

86. The third quarter 2000 Form 10-QSB, and the financial statements therein, were

materially false and misleading for the reasons set forth in 1175-76 above.

87. On November 14, 2000, at the time SafT Lok filed the Company's third quarter

2000 Form I 0-QSB, defendant Franklin W. Brooks knew or recklessly disregarded that Saf T

Lok's reported inventory of $2,308,573 as a valuable asset on the Company's balance sheet

-32-


would never be completely sold through and thus should have been written down. The facts

evidencing his knowledge are more specifically alleged in T 76 above.

88. Defendant Franklin W. Brooks' knowledge or reckless disregard for the reality of

the Company's unsaleable inventory is further evidenced by the flurry of correspondence he

received from the SEC, beginning on September 21, 2000 with the SEC's written comments to

the Company's proposed Form S-3 for its upcoming public offering. The letter communicates

the following request for additional information from Saf T Lok regarding its inventory:

In view of the downward sales trend and low turnover rate, revise the notes to the financial statements and MD&A to include an analysis demonstrating to a reader why inventory is appropriately stated at the lower of cost or market value and is properly classified as a current asset at each balance sheet. Refer to Chapters 3 and 4 of ARB 43. (Exhibit H , item 54.)(Emphasis added).

The SEC further states:

In view of the downward sales trend, revise the notes to the financial statements and MD&A to include an analysis demonstrating to a reader how you determined that long-lived assets, including property and equipment and patents, are recoverable at each balance sheet date. Refer to paragraph 6 of SFAS 121. (Exhibit H, item 55.)(Emphasis added).

89. On October 19, 2000, the Goldberg Firm responded to the SEC's September 21,

2000 inquiry with purported reasons why no write down of either Saf T Lok's inventory or its

related equipment used to manufacture the inventories was taken. (Exhibit I). The Goldberg

Firm's response was cc'd to defendant Franklin Brooks. One of the reasons offered by the

Goldberg Firm was that Saf T Lok was then engaged in discussions to "either acquire a

profitable company or be acquired." Id. at 2, item 4. The Goldberg Firm further stated that the

gun manufacturer Saf T Lok was contemplating purchasing " ...has annual sales in excess of one

hundred million dollars." "Their product line would easily absorb the inventory on hand."

- 33 -


90. The Goldberg Firm knew its explanation offered to the SEC was false and

misleading. The Company lacked the financial ability to purchase the gun manufacturer and

thus required financing from a third-party lender. As of the time of the October 19, 2000 letter,

the Goldberg Firm knew that Saf T Lok did not have any firm loan commitments which it

required in order to consummate the acquisition. Indeed, on July 12, 2000 GE Capital

Commercial Finance, Inc. ("GE Capital") sent a letter to defendant Franklin Brooks explicitly

warning that the "...letter is simply an indication of interest and does not constitute a

commitment or undertaking to provide financing." (Exhibit J, at 1.)

91. Further, as alleged in 1 54 above, the gun manufacturer -- Smith & Wesson -- had

no need for the Company's product. Smith & Wesson's research-and-development staff

reportedly already evaluated the Company's locks and decided that they were not suitable for

Smith & Wesson. Further, Smith & Wesson was already obtaining its gun locks from another

manufacturer in any event -- MasterLock.

92. Thus, even if the Company was able to afford to purchase Smith & Wesson,

which it was not, and even if the Company was able to obtain sufficient financing, which it was

not, the Company was not going to be able to sell through its inventory of gun locks with Smith

& Wesson guns.

93. On November 3, 2000, Steven C. Duvall of the SEC sent another letter to

defendant Franklin Brooks. This letter states that the Goldberg Firm's proposed disclosures for

the S-3

* ** * *

"fail[] to address the real issues: Why have sales continued to deteriorate during the last Z! months? Why have the number of sizeable law enforcement

-34-


shipments continued to deteriorate during the periods presented? Why has the average sales volume of law enforcement shipments continued to deteriorate during the periods presented?

Your proposed disclosures do not address our comment. Based on your historical operating results during the past 21 months, we believe that significantly enhanced disclosures are necessary for investors to understand how and why you and your auditors concluded that inventory is appropriately valued and properly classified at each balance sheet data

(Emphasis added)(Exhibit K)

94. In addition, the third quarter 2000 Form I 0-QSB was materially

false and misleading because it stated that:

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where un-discounted future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.

95. On March 26, 2001, the Company filed an amended 1999 Form l0-KSB, an

amended first quarter 2000 Form 10-QSB, an amended second quarter 2000 Form l0-QSB and

an amended third quarter 2000 Form I 0-QSB with the SEC. All of these filings were signed by

defendant John F. Hornbostel, Jr.

96. The audited financial statements which appeared within the amended 1999 Form

I 0-KSB contained the following note:

In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of("SFAS 121") the Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where un-discounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. Management believes that property and

- 35 -


equipment, including patents, used to manufacture the Saf T Lok should generate sufficient cash flows to recover their carrying value.

97. The amended 1999 Form 10-KS B and the audited financial statements contained

therein were materially false and misleading for the reasons set forth in 75-76, 88-93 and

because there was no reasonable basis for stating that: "Management believes that property and

equipment, including patents, used to manufacture the Saf T Lok should generate sufficient cash

flows to recover their carrying value." In addition, the financial statements which were

contained within the amended 1999 Form 10-KSB did not fairly state the Company's financial

position, the changes in its financial position and the results of its operations.

98. The financial statements which appeared within the amended first quarter 2000

Form 1 0-QSB, the amended second quarter 2000 Form 1 0-QSB and the amended third quarter

2000 Form 1 0-QSB each represented that the financial statements contained therein "fairly state

the Company's financial position, the changes in its financial position and the results of its

operations for the periods presented." In addition, each contained a note which stated that the

financial statements contained therein had been "restated to record inventory, which is not

expected to be sold within the current operating cycle of one year, as a non-current asset."

Furthermore, each incorporated, by reference, the statement that:

a. "Inventories ... are stated at the lower of cost or market."

b. "Management believes that property and equipment, including patents, used to manufacture the Saf T Lok should generate sufficient cash flows to recover their carrying value."

99. The amended first quarter 2000 Form lO-QSB, the amended second quarter 2000

Form I0-QSB and the amended third quarter 2000 Form lO-QSB were materially false and

misleading for the reasons set forth in 11 75-76, 88-93 above.

-36-


100. In addition, the amended third quarter 2000 Form I 0-QSB was materially false

and misleading because it stated the following, which was not true:

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.

101. Despite the fact that the amended 1999 Form 10-KSB, the amended first quarter

2000 Form l0-QSB, the amended second quarter 2000 Form 10-QSB and the amended third

quarter 2000 Form 10-QSB classified SafT Lok's inventory as "non-current", the documents

remained false and misleading.

102. As alleged in 76,88-93 above, by March 26, 2001, defendant John F.

Hornbostel and the Goldberg Firm knew or recklessly disregarded a number of red flags which

indicated SafT Lok's unsaleable inventory was worthless.

103. In addition to those reasons set forth in ¶j 76,88-93 above, the SEC sent another

letter to defendant Franklin Brooks on November 15, 2000. The letter requests that additional

information be disclosed in SafT Lok's S-3, namely:

(1) the cash flow analyses and assumptions you used to determine that inventory and long-lived assets are recoverable;


(3) the reasons why you concluded that the proposed acquisition of the gun manufacturer is not probable, such that historical and pro forma financial statements for the pending acquisition are not required in the Form S-3;

-37-



(5) the identity of the gun manufacturer you are seeking to acquire and any financial information that they have provided to you.

(Emphasis added)(Exhibit L).

104. On December 1, 2000, the Goldberg Firm responded to the SEC's November 15,

2000 inquiries. (Exhibit M). That letter explains that defendants believed the Company's

inventory was recoverable, and that its long-lived assets were recoverable, based in part on the

Company's "expectation that they could conclude this acquisition [of the gun manufacturer]

within the current year based on discussions with the Parent." Id. at 3. The Goldberg Firm

either knew or recklessly disregarded that the Company's "expectation" that Saf T Lok could

complete the acquisition within that year was not reasonable as alleged in ¶j 90-91 above.

105. Further, while the Goldberg Firm explained that the inventory was recoverable

because of defendants' "expectation" that Saf T Lok would acquire the gun manufacturer --

which in turn would absorb the inventory -- it nevertheless also claimed that the Company was

not required to disclose the requested historical and pro forma financial statements for the

pending acquisition because it was too uncertain. The letter states

"[a]t December 31, 1999 and at March 28, 2000, discussions had not progressed to the point where STL had more than a reasonable expectation that the deal could be made. Through the first three quarters of 2000 there still was not a probability, but only an expectation, that the GM would be acquired.

(Emphasis added)(Exhibit M at 4).


106. In response to the Goldberg Firm's December 1, 2000 letter, Steven Duvall of the

SEC wrote another follow-up letter to defendant Franklin W. Brooks on December 19, 2000.

The letter, in relevant part, states:

1. You have not provided us compelling information to support your conclusion as to the classification of inventory. We continue to believe that your classification of all inventory in current assets, at 12/31/99 and subsequent balance sheet dates, is not appropriate and does not comply with Chapter 3 of ARB 43. In determining the appropriate classification of inventory, you considered sales projections that assumed you acquired an existing gun manufacturer. Based on the information you have provided, it does not appear to us that it is appropriate for you to conclude that this acquisition is "reasonably expected" to be consummated and, if consummated, that all your inventory is "reasonably expected" to be sold within one year of each balance sheet date. Revise your financial statements to appropriately classify inventory at each balance sheet date....

2. We continue to believe that you were required by GAAP to prepare undiscoun ted cash flow analyses to determine the recoverability ofyour long-lived assets. As previously requested, prepare such analyses, 12131199 and subsequent balance sheet dates, as required by paragraph 6 of SEAS 121 and if applicable, record any impairments required by paragraph 7 of SFAS 121.

(Emphasis added)(Exhibit N).

107. On February 26, 2001, James Rosenberg of the SEC sent another letter to

defendant Franklin W. Brooks. The letter once again reiterated the SEC's position that: "[w]e

continue to believe that your classification of all inventory in current assets at 12/31/99, and at

subsequent balance sheet dates, is inappropriate and should be revised." (Exhibit 0)

108. On April 4, 2001, defendant Goldberg Firm sent a letter to defendant John F.

Hornbostel, in which Harvey Goldberg admits he was "looking for something to hang my hat

on' with respect to the company's plans for selling or liquidating the inventory." In stating this,

Mr. Goldberg tacitly admits that he has no basis upon which to believe Saf T Lok can sell its

inventory. He further states:

-39-


We have discussed the predicament about the inventory several times in conversations on the telephone. Unfortunately, I am no further along today towards understanding the company's intentions, relating to the inventory, after reading the minutes of your board meeting.

What is the real value of the inventories, tools and dies and patents at December 31, 2000? In the absence of evidence to the contrary, it appears their value is minimal. Unless I can be convinced to the contrary, I am proposing to write down this inventory to 10% of its value, write off the tools & dies as impaired and write off the patents as impaired. The result would be a charge to operations of approximately $2,800,000 in 2000.

(Emphasis added)(Exhibit P)

109. Again on April 4, 2001, defendant John F. Hornbostel received a memo from

defendant William Schmidt, the CFO of SafT Lok until February 6, 2001. (Exhibit Q) Attached

to the letter is a chart defendant Schmidt prepared which illustrates the sharp decline of Saf T

Lok's sales from $172,000 in 1999 to estimated sales in 2001 of $56,000. Id. at 2. The

estimated sales in 2001 were arrived at by annualizing the Company's first quarter sales by 4

quarters. Id. at 1. Defendant Schmidt states:

It doesn't take a rocket scientist to see that sales have been on a downward trend. This trend is probably relative to the decrease is [sic] sales efforts due to insufficiency of funds....

*****

So, absent any increases in sales efforts, my WAG is that sales will do well to hit $50,000 this year and would probably decline to $15,000 to $20,000 the following year and next to nothing after that

The value of the inventory will then revert to its salvage value

(Emphasis added).


110. Based on the facts alleged above, a strong inference can be made that these

defendants knew or, at a minimum, recklessly disregarded that the the inventory reported in Saf

T Lok's amended 1999 Form 10-KSB, amended first quarter 2000 Form lO-QSB, amended

second quarter 2000 Form 10-QSB and amended third quarter 2000 Form 10-QSB was

worthless and thus required to be written off

THE GOLDBERG FIRM WILLFULLY BLINDED ITSELF OR RECKLESSLY DISREGARDED RED FLAGS ABOUT SAF T LOK'S

TRUE FINANCIAL CONDITION, VIOLATING GAAP AND GAAS

The 1999 Audit Opinion

Ill. On or about March 9, 2000 (except for Note 13, as to which the date was March

28, 2000), the Goldberg Firm issued its unqualified report on Saf T Lok's 1999 consolidated

financial statements of the Company. This report, which was included in the Company's Form

1 0-KSB for the year ended December 31, 1999 as filed with the SEC on April 14, 2000, with the

consent of the Goldberg Firm, contained an opinion which stated:

We have audited the consolidated balance sheet of Saf T Lok Incorporated and subsidiaries as of December 31, 1999 and the related consolidated statement of operations, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements as of December 31, 1998, were audited by Goldberg & Company, P.A., who merged with Goldberg Wagner Stump & Jacobs LLP as of January 1, 2000, and whose report dated March 24, 1999 expressed a qualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

-41-


In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saf T Lok Incorporated and subsidiaries as of December 31, 1999 and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Saf T Lok Incorporated will continue as a going concern. As discussed in Note 2 to the financial statements, under existing circumstances, there is substantial doubt about the ability of Saf T Lok Incorporated to continue as a going concern at December 31, 1999. Management's plans in regard to that matter also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

112. The Goldberg Firm's unqualified auditor's opinion on the Company's 1999

financial statements was materially false and misleading because these financial statements were

not presented in accordance with (Generally Accepted Accounting Principles ("GAAP"), nor

were they audited in accordance with Generally Accepted Auditing Standards ("GAAS")

113. GAAS, as set forth in the Codification Of Statements On Auditing Standards

("AU"), in AU Section 411, describes "The Meaning of Present Fairly in Conformity With

Generally Accepted Accounting Principles in the Auditor's Report." It states:

The auditor's opinion that financial statements present fairly an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles should be based on his judgment as to whether (a) the accounting principles selected and applied have general acceptance; (b) the accounting principles are appropriate in the circumstances; (c) the financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation...; (d) the information presented in the financial statements is classified and summarized in a reasonable manner, that is, neither too detailed nor too condensed...; and (e) the financial statements reflect the underlying events and transactions in a manner that presents the financial position, results of operations, and cash flows stated within a range of acceptable limits, that is, limits that are reasonable and practicable to attain in financial statements.

-42-


114. The financial statements which were contained within the 1999 Form I 0-KSB

and which were distributed to the investing public during the Class Period were not presented

"fairly.. .in conformity with generally accepted accounting principles" because, the:

a. accounting principles selected and applied in the preparation of the Company's 1999 financial statements did not have general acceptance;

b. accounting principles which pervasively impacted the Company's 1999 financial statements were not appropriate in the circumstances;

Company's 1999 financial statements, including the related notes, were not informative of matters that affected their use, understanding, and interpretation; and

d. Company's 1999 financial statements did not reflect the underlying events and transactions in a manner that presented the financial position and the results of operations within a range of acceptable limits that were reasonable and practicable to attain in financial statements.

115. GAAP (Accounting Research Bulletin No. 43, Chapter 3A) defines current assets

as "circulating or working assets" and it discusses the significance of working capital as follows:

The working capital of a borrower has always been of prime interest to grantors of credit; and bond indentures, credit agreements, and preferred stock agreements commonly contain provisions restricting corporate actions which would effect a reduction or impairment of working capital... Working capital, sometimes called net working capital, is represented by the excess of current assets over current liabilities and identifies the relatively liquid portion of total enterprise capital which constitutes a margin or buffer for meeting obligations within the ordinary operating cycle of the business.

116. As subsequently revealed through an SEC-forced restatement of the Company's

financial statements, on March 26, 2001, the Company improperly presented non-current and

worthless (inventory) assets as current assets. This resulted in a material misrepresentation of

the Company's working capital and materially impacted the investment community's perception

of the viability of the Company.

-43-


117. Beginning at the year end 1999, and continuing through the Class Period, the

Goldberg Firm willfully blinded itself, or at a minimum, recklessly disregarded a number of red

flags that should have alerted itself to the fact that Saf T Lok's financial statements were false

and misleading:

the audit planning memo, prepared by Tiffany Kennedy of the Goldberg Firm at the year end 1999, alleged in ¶ 76a, above acknowledged that "the client has a relatively low level of sales...;" (Exhibit D)

the "Audit Planning Questionnaire", more specifically alleged in ¶ 76b above, also prepared by Kennedy, further acknowledged that "...sales of the Saf T Lok gun lock have not been significant land that] I U]ntil there is legislation requiring this type of gun lock as opposed to a much cheaper trigger lock, or a gun manufacturer that puts this lock on their guns, sales will probably remain minimal;" (Exhibit E)(Emphasis Added)

the 3/8/00 workpaper, more specifically alleged in ¶ 76d above, prepared by Ten L Hackwith contains a handwritten note by Harvey B. Goldberg which states: "...there is no significant sales and 1999 production was limited." (Exhibit G)(Emphasis added)

118. The working papers contained in the eight bankers' boxes of documents produced

to plaintiff by the Goldberg Firm's evidence the fact that it had reviewed the Company's Trial

Balance, Transaction Register, Accounts Receivable Detail Report, Accounts Receivable Open

Invoice Report, Order Entry Sales Analysis Report, Stock Status Report, Warehouse Stock

Report, On Hand Detail Report, Component Use Report, Invoices (i.e. invoice 6306 issued to

Joseph DeLuca, invoice 6307 issued to Senator Dave Sullivan, invoice 6308 issued to the NC

Bureau Of Investigation, and invoice 6308 issued to the Nat'l Park service/FLETC) and had

participated in ongoing discussion with the Company's management throughout the duration of

its 1999 audit.

-44-


119. As alleged in ¶ 76e above, the fact that the Company's total cost of sales for the

first quarter of 2000 were reported to be only $8,031. See Saf T Lok's Form 1 0-QSB for period

end March 31, 2000, filed May 22, 2000. Annualizing this figure for the rest of 2000, the

Company's total cost of sales (sold inventory) could reasonably be expected to be only $32,124

of the total $ 2,322,169. Accordingly, the Goldberg Firm knew or recklessly disregarded that, as

of the March 2000 date of its audit opinion, the Company had sold approximately $8,031 of the

$2,322,169 inventory stockpile which it had on hand as of December 31, 1999.

120. The Goldberg Firm either consciously or recklessly disregarded the facts that (i)

the Company's sales had been minimal and would remain minimal; that (ii) the Company would

not be able to sell its inventory during 2000; (iii) the Company's tools, dies and patents would

never be used to produce additional inventory and had no alternative use to the Company; and

(iv) it failed to issue a qualified opinion (in compliance with GAAP AU Section 508) properly

disclosing these facts.

121. GAAP (Accounting Research Bulletin No. 43, Chapter 4, Paragraph 8) sets forth

the accounting rules governing the valuation of inventory for financial statement purposes. It

states:

Although the cost basis ordinarily achieves the objective of a proper matching of costs and revenues, under certain circumstances cost may not be the amount properly chargeable against the revenues of future periods. A departure from cost is required in these circumstances because cost is satisfactory only if the utility of the goods has not diminished since their acquisition; a loss of utility is to be reflected as a charge against the revenues of the period in which it occurs. Thus, in accounting for inventories, a loss should be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes. The measurement of such losses is accomplished by applying the rule of pricing inventories at cost or market, whichever is lower. This provides a practical means of measuring utility and thereby determining the amount of the loss to be recognized and accounted for in the current period.

-45-


*****

Market should not exceed the net realizable value (i.e., estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal)

122. Based upon this GAAP, the Company was required to recognize losses to the

extent that the Company was unable to realize the value of its inventory through future sale. The

inability to realize the value of its inventory was belatedly admitted to in the 2000 Form 10-

KSB, resulting in a $2,057,659 write-off.

123. The Company's inability to sell, and thus, realize the value of its inventory and

associated productive assets was known to the Goldberg Firm at all relevant times. In

contravention of GAAS, however, the Goldberg Firm made no attempt to assess the magnitude

of the asset impairment losses which were required to be reflected in the Company's financial

statements.

124. The audit of the Company's inventory was performed by Tiffany Kennedy in

accordance with an audit program which called for the auditor to perform procedures to

determine whether: "Excess, slow-moving, obsolete, and defective inventory observed during

the count is identified on separate tags or count sheets for appropriate valuation." See Exhibit T,

"Audit Objectives," B. This audit procedure was not performed.

125. GAAS (AU Section 326) requires the performance of the audit procedures such

as the following to identify excess and slow-moving inventory:

a. Reviewing industry experience and trends.

b. Analytically comparing the relationship of inventory balances to anticipated sales volume.

-46-


Inquiring of production and sales personnel concerning possible excess or obsolete inventory items.

d. Obtaining current market value quotations.

e. Examining sales after year-end and open purchase order commitments.

126. Despite having performed these procedures and others, the Goldberg Firm

blinded itself to the existence of an inordinate amount of non-saleable inventory. As stated in

the 1/14/00 memo prepared by Kennedy, the Goldberg Firm concluded:

Due to the lack of sales in 1999 there is a significant amount of inventory that is in unopened boxes. However, this does not indicate obsolescence. If sales increase in 2000 these parts can be used to produce gunlocks.

Saf T Lok has had very few sales; therefore there has been a small amount shipped or received since the end of the year.

Exhibit F.

127. Because the Company had more inventory than it could reasonably expect to sell

within the next two decades, the Company's tools, dies and patents would never be used to

produce additional inventory and had no alternative use to the Company. The Goldberg Firm

blinded itself to these facts as well, and failed to modify its opinion to reflect a qualification as a

result of the Company's failure to recognize impairment losses associated with the Company's

tools, dies and patents in compliance with GAAP (FASB Statement No. 121 as particularized

above).

128. Subsequent to the issuance of its March 2000 opinion, the Goldberg Firm joined

the Individual Defendants in a campaign to mislead the SEC and to postpone the Company's

-47-


recognition of losses ($2,057,659 associated with inventory and $1,114,029 associated with

other assets) as long as possible, in large part to continue to generate fees from the Company.

129. The Goldberg Firm continued to ignore or recklessly disregard red flags through

the third quarter of 2000. These red flags took the form of observations documented by the

Goldberg Firm in its various workpapers, and through correspondence it began to consistently

receive from the SEC regarding Saf T Lok's reported financial statements and disclosures.

130. What ultimately became an ongoing inquiry by the SEC into SafT Lok's

reported financial statements and disclosures forcing Saf T Lok to restate its financial results for

1999, the first quarter of 2000, the second quarter of 2000 and the third quarter of 2000 started

on September 21, 2000 with a letter from Steven C. Duvall to defendant Franklin Brooks.

131. The letter, raised questions concerning, among other things, accounting and

disclosure issues regarding the Company's Form I 0-KSB for the fiscal year ended December 31,

1999, Form 1 0-QSB for the period ended March 31, 2000 and Form I 0-QSB for the period

ended June 30, 2000. It stated:

In view of the downward sales trend and low turnover rate, revise the notes to the financial statements and MD&A to include analysis demonstrating to a reader why inventory is properly stated at the lower of cost or market value and is properly classified as a current asset at each balance sheet date. Refer to Chapters 3 and ofARB 43.

* ** * *

In view of the downward sales trend, revise the notes to the financial statements and MD&A to include analysis demonstrating to a reader how you determined that long-lived assets, including property and equipment and patents, are recoverable at each balance sheet date. Refer to paragraph 6 of SFAS 121.

132. As alleged in ¶ ¶ 52, 89 above, on October 19, 2000, Harvey B. Goldberg

responded to the above-noted comments raised in the September 21, 2000 SEC letter to the

BEIM


Company. His letter claimed that the Company's assets were not impaired because the Company

was in discussions with "the CFO of the Parent of a major U.S. gun manufacturer to acquire

their Subsidiary" and that, in connection with this acquisition, on July 13, 2000 the Company

obtained a 120,000,000 proposed financing offer from a first tier collateral based lender." See

Exhibit I. Goldberg also proposed certain disclosures on behalf of Saf T Lok.

133. The foregoing representations were materially false and misleading because as

alleged in 11 54, 90-91 above, the Company was not involved in serious acquisition discussions,

did not have the resources to acquire the gun manufacturer, had not received a $20,000,000

proposed financing offer from a first tier collateral based lender, and the contemplated gun

manufacturer had no use for Saf I Lok's product, in any event.

134. The Company had, in fact, only received a letter from GE Capital Commercial

Finance, Inc. which constituted an expression of interest in possible future collateral-based

lending. The letter clearly stated: "Please understand that this letter is simply an indication of

interest and does not constitute a commitment or undertaking to provide financing." See Exhibit

J. Harvey Goldberg referred to this GE expression of intent in his letter to the SEC, but did not

provide a copy of it to the SEC.

135. As alleged more specifically in ¶j 55 and 93 above, on November 3, 2000, the

SEC sent a letter to defendant Brooks in response to Goldberg's October 19, 2000 letter. This

letter, from Duvall, stated, in relevant part:

Your proposed disclosure fails to address the real issue. Why have sales continued to deteriorate during the last 21 months? Why have the number of sizable law enforcement shipments continued to deteriorate during the periods presented? Why has the average sales + volume of law enforcement shipments continued to deteriorate during the periods presented? ...Based on your historical operating results during the past 21 months, we believe that

-49-


significantly enhanced disclosures are necessary for investors to understand how and why you and your auditors concluded that inventory is appropriately valued and properly classified at each balance sheet date.

we believe that significantly enhanced disclosures are necessary for investors to understand how and why you and your auditors concluded that long-lived assets are not impaired at each balance sheet date.

*****

Based on the letterfrom your auditors regarding your pending acquisition of a gun manufacturer, it appears to us that the pending acquisition is probable and that historical and pro forma financial statements are required by items 310(c) and 3 10(d) of Regulation S-B.

(It's not clear to us how and why you and your auditors concluded that after the pending acquisition there will be a market for weapons sold with your locks since it appears that no such market currently exists)

We also note that you and your auditors believe that any disclosures regarding the pending acquisition would be detrimental to shareholders. We do not concur with that conclusion. We believe that if the recoverability ofyour assets is dependent on a pending acquisition, you are required to fully disclose and discuss that fact.

136. The November 3, 2000 letter from Duvall was followed by telephone conferences

between representatives of the Company and representatives of the SEC. These telephone

conferences culminated in a November 15, 2000 letter from Duvall to defendant Franklin

Brooks which stated, in relevant part:

*****

1. Based on our comments and on subsequent phone conferences, please provide the following additional information in order to support the assertions in your proposed disclosures:

- 50 -


(1) the cash flow analysis and assumptions you used to determine that inventory and long-lived assets are recoverable;


(3) the reasons why you concluded that the proposed acquisition of the gun manufacturer is not probable, such that historical and pro forma financial statements for the pending acquisition are not required in Form S-3;


(5) the identity of the gun manufacturer you are seeking to acquire and any financial information that they have provided to you.

(Emphasis added) See Exhibit K.

137. On December 1, 2000, Harvey B. Goldberg sent a response to Amy Kate O'Brien

which was also cc'd to defendant Franklin Brooks:

a. In response to the SEC's request for data regarding the Company's cash flow analysis and assumptions which it used to determine that inventory and long-lived assets are recoverable, Goldberg stated that "a formal cash flow analysis was not prepared."

b. In response to the SEC's inquiry regarding why the assumptions used, including those related to the operation of a gun manufacturer that has not yet been acquired, are reasonable and supportable as required by paragraph 9 of SFAS 121, Goldberg stated that defendants believed "there was no impairment loss to be realized as long as there was a reasonable expectation that the acquisition could be successfully completed."

C. In response to the SEC's inquiry regarding the current status and probability of completing the acquisition of the gun manufacturer, Goldberg stated that "STL understands that they ISTLI are only one of a number of [acquisition] candidates; most of which, if not all, are certainly more substantial entities than STL. This suggests that the probability of a transaction between the ... GM and STL is not currently probable."

- 51 -


(Emphasis added) See Exhibit M.

138. Significantly, the December 1, 2000 letter stated:

At December 31, 1999, and at March 28, 2000, discussions had not progressed to the point where STL had more than a reasonable expectation that the deal could be made.

Through the first three quarters of 2000 there still was not a probability, but only an expectation, that the GM [gun manufacturer] would be acquired.. .the probability of a transaction between the... GM and STL is not currently probable.

139. The foregoing constituted an admission that, as of the March 2000 date of

issuance of its unqualified auditor's report, the Goldberg Firm had no reasonable basis to believe

that the Company's inventory would be sold and that its long lived assets would be recoverable.

140. As evidenced by the SEC's December 19, 2000 letter from Duvall, more

specifically alleged in ¶ ¶ 59,106 above, the SEC did not find the Goldberg Firm's explanations

for STL's classification of inventory to be compelling. Duvall states:

We continue to believe that your classification of all inventory as current assets, at 12/31/99 and subsequent balance sheet dates is not appropriate and does not comply with Chapter 3 of ARB 43.

* ** * *

We continue to believe that you were required by GAAP to prepare undiscounted cash flow analyses to determine the recoverability of your long-lived assets.

141. As alleged above, Harvey B. Goldberg was hospitalized at the time the above-

referenced December 20, 2000 was received by Brooks. As a result, the SEC did not press for

immediate action by the Company.

142. The SEC's skepticism continued to be voiced throughout February 2001, as

evidenced by the February 26, 2001, letter from James Rosenberg, SEC Senior Assistant Chief

Accountant, to defendant Franklin Brooks:

-52-


We considered all of the information you provided to us. We continue to believe your classification of all inventory in current assets at 12131199, and at subsequent balance sheet dates, is inappropriate and should be revised.

(Emphasis added) See Exhibit 0.

143. One month later, on March 26, 2001, the Company filed an amended Form 10-

KSB for the period ended December 31, 1999 and amended Forms I 0-QSB for the periods

ended March 31, 2000, June 30, 2000 and September 30, 2000. These amended filings

contained restated financial statements which reflected "a majority of.. inventory to non-current

assets at 12/31/99 and at subsequent balance sheet date" as mandated by the SEC. They did not,

however, reflect the write-off of $2,057,659 of inventory and other asset impairments of

$1,114,029 because the SEC relied on "management and the independent auditor in their

assessments of the ultimate net realizable value of inventory and the recoverability of long-lived

assets." The SEC's reliance on the honesty and integrity of the Company's management and the

Goldberg Firm was a mistake.

144. The Company's management and the Goldberg Firm knew that the Company's

inventory and related assets were worthless. Such knowledge is evidenced by correspondence

received by defendant John F. Hombostel on April 4, 2001 from both Harvey B. Goldberg and

from co-defendant William Schmidt.

145. The April 4, 2001 letter from Goldberg to Hornbostel stated:

As indicated in my letter of March 19, 2001, I was looking for something to 'hang my hat on'with respect to the company's plans for selling or liquidating the inventory. Although there were intentions to complete the work-in-process inventory, the balance of the plans was somewhat nebulous. I fully understand that you need more time to make arrangements for the sale of the inventory. However, there was no game plan or agenda developed to address the situation... What is the real value of the inventories, tools and dies and patents at December 31, 2000? In the absence of evidence to the contrary, it appears

- 53 -


their value is minimaL How long will it take to sell 90,000 locks when the company only sold 1,915 locks in 2000?

Emphasis added. See Exhibit P.

146. The April 4, 2001 memo from Schmidt to Hornbostel stated:

It doesn't take a rocket scientist to see that sales have been on a downward trend. This trend is probably relative to the decrease in sales efforts due to insufficiency of funds. The majority of the yearly sales for these years have been to law enforcement agencies. Their decision making cycle in deciding to purchase a product such as Saf T Lok is estimated to be from one to three years. Thus, orders will continue to come in, although at a declining rate, after sales efforts have declined. Conversely, orders would not be expected to grow rapidly one the sales efforts are stepped up... .So, absent any increases in sales efforts, my WAG is that sales will do well to hit $50,000 this year and would probably decline to $15,000 to $20,000 the following year and next to nothing after that... The value of the inventory will then revert to salvage value.

Emphasis added. See Exhibit Q.

147. The Goldberg Firm knew it was required to adhere to standards and principles of

GAAS, including the requirement that the financial statements comply in all material respects

with 'GAAP. In issuing its unqualified opinion, the Goldberg Firm knew or recklessly

disregarded that its methodology grossly departed from GAAS.

148. In the introductory portion of Accounting Series Release 173, the SEC made the

following comments pertaining to economic substance:

Another problem.. .is the need for emphasizing the importance of substance over form in determining accounting principles to be applied to particular transactions and situations. In addition to considering substance over form in particular transactions, it is important that the overall impression created by the financial statements be consistent with the business realities of the company's financial position and operations.

We believe that the auditor must stand back from his resolution of particular accounting issues and assess the aggregate impact of theparticular issues upon a reasonable investor'sperception of the economic substance of the enterprise for which the financial statements are being presented.

-54-


149. As noted by the SEC in its Accounting And Auditing Enforcement Release No.

817 (September 19, 1996) "In the Matter of Cypress Bioscience Inc. and Alex P. Dc Soto,

CPA":

It is a well-established tenet of GAAP that transactions must be accounted for in accordance with their substance rather than their form.

150. In opining on the fairness of the Company's financial statements as particularized

above, the Goldberg Firm specifically represented that its audit included "assessing the

accounting principles used.. .by management, as well as evaluating the overall financial statement

presentation." This representation was materially false and misleading because the Goldberg

Firm either failed to assess the propriety of the accounting principles used by the Company and

it failed to consider the importance of substance over form in determining accounting principles

to be applied or did so in an egregiously reckless manner.

151. The Goldberg Firm's March 9, 2000 (except for Note 13, as to which the date was

March 28, 2000) unqualified opinion, insofar as it states that the Goldberg Firm's audit of the

Company's 1999 financial statements were conducted in accordance with GAAS, were false and

misleading because the following GAAS (AU 150) were knowingly and recklessly violated:

a. General Standard No. I was violated, which standard requires that the audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

b. General Standard No. 2 was violated, which standard requires that in all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.

C. General Standard No. 3 was violated, which standard requires that due professional care is to be exercised in the performance of the audit and in the preparation of the report.

- 55 -


d. Standard Of Field Work No. I was violated, which standard requires that the work is to be adequately planned and assistants, if any, are to be properly supervised.

Standard Of Field Work No. 2 was violated, which standard requires that a sufficient understanding of the internal control structure is to be obtained to plan the audit and to determine the nature, timing and extent of tests to be performed.

Standard Of Field Work No. 3 was violated, which standard requires that sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.

g. Standard Of Reporting No. I was violated, which standard requires that the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.

h. Standard Of Reporting No. 3 was violated, which standard requires that informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

152. As particularized herein, the Goldberg Firm failed to comply with GAAS in that

it failed to perform its audit of the Company's 1999 financial statements with a proper degree of

professional skepticism (AU Section 316). In this regard, the Goldberg Firm either identified

and ignored evidence that the Company's financial statements were materially misstated via

fraudulent accounting or recklessly failed to identify such fraudulent accounting.

153. Further, as particularized herein, the Goldberg Firm either identified and ignored,

or recklessly failed to investigate extremely questionable transactions, and made audit

judgements that no reasonable auditor would have made if confronted with the same facts.

Accordingly, the Goldberg Firm's audits were so deficient that it amounted to no audit at all.

154. Had the Goldberg Firm undertaken the performance of those audit procedures

which were required by GAAS, and with the due professional care which was required by

-56-


GAAS, it would have known that the Company's 1999 financial statements were materially false

and misleading because these financial statements were not presented in accordance with GAAP.

In reckless disregard of professional standards, the Goldberg Firm failed to audit the Company's

1999 financial statements in conformity with GAAS.

155. GAAS (AU Section 311) states that:

The auditor should obtain a level of knowledge of the entity's business that will enable him to plan and perform his audit in accordance with generally accepted auditing standards.

That level of knowledge should enable him to obtain an understanding of the events, transactions, and practices that, in his judgment, may have a significant effect on the financial statements. . Knowledge of the entity's business helps the auditor in:

a. Identifying areas that may need special consideration.

b. Assessing conditions under which accounting data are produced, processed, reviewed, and accumulated within the organization.

C. Evaluating the reasonableness of estimates.

d. Evaluating the reasonableness of management representations.

e. Making judgments about the appropriateness of the accounting principles applied and the adequacy of disclosures.

156. Given the fact that the Goldberg Firm had audited the Company's financial

statements and provided tax and consulting services prior to and during the Class Period, it had a

thorough knowledge of the Company's financial history, accounting practices, internal controls,

and business operations. Accordingly, the Goldberg Firm either failed to:

a. Identify areas that needed special consideration (such as the valuation of inventory, tools, dies and patents) or identified such areas and audited them in a manner which was so deficient that it amounted to no audit at all, while making audit judgements that no reasonable auditor would have made if confronted with the same facts.

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b. Assess the conditions under which accounting data (such as the market value of inventory as used in the determination of a lower of cost or market presentation) was produced, processed, reviewed, and accumulated within the organization or assessed such conditions and made audit judgements based upon said assessment that no reasonable auditor would have made if confronted with the same facts.

C. Evaluate the reasonableness of estimates and management's representations (such as its representations regarding the useful life of tools, dies and patents and the recoverability of inventory) or evaluated them in a manner which was so deficient that it amounted to no evaluation at all.

d. Judge the appropriateness of the accounting principles applied (such as the valuation of inordinate quantities of excess and non-salable inventory) and the adequacy of disclosures in the Company's financial statements, or did so and arrived at judgements that no reasonable auditor would have arrived at if confronted with the same facts. In this regard, although the Goldberg Firm's March 9, 2000 (except for Note 13, as to which the date was March 28, 2000) unqualified opinion, stated that the Goldberg Firm had assessed the accounting principles used by the Company, the Goldberg Firm failed to recognize that management had selected and used inappropriate accounting policies to fraudulently overstate reported earnings and assets and avoid delisting.

157. GAAS (AU Section 311) states that audit planning involves developing an overall

strategy for the expected conduct and scope of the audit. Accordingly, GAAS recognizes that

the nature, extent, and timing of planning vary with the size and complexity of the entity,

experience with the entity, and knowledge of the entity's business. In this regard, GAAS (AU

Section 311) provides that in planning the audit, the auditor should prepare a written audit

program (or set of written audit programs) for every audit and that this audit program:

• should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit... In developing the program, the auditor should be guided by the results of the planning considerations and procedures. As the audit progresses, changed conditions may make it necessary-to modify planned audit procedures.

158. In preparing this audit program, GAAS provided that the auditor should consider,

among other things (AU Section 311):

:


a. Matters relating to the entity's business and the industry in which it operates.

b. The entity's accounting policies and procedures.

The methods used by the entity to process significant accounting information.

d. Planned assessed level of control risk.

e. Preliminary judgment about materiality levels for audit purposes.

f. Financial statement items likely to require adjustment.

g. Conditions that may require extension or modification of audit tests.

159. The Goldberg Firm failed to comply with the foregoing provisions of GAAS

because it knew, due to the performance of its prior audits and its various non-audit services, of

the worthlessness of the Company's assets as particularized above and either failed to utilize this

information in planning and performing its audit, or utilized this information in a manner that no

reasonable auditor would have used if confronted with the same facts.

160. The Goldberg Firm failed to comply with the foregoing provisions of GAAS in

that the Goldberg Firm had available information which indicated the magnitude of the

Company's fraudulent overstatement of earnings, assets and shareholders' equity and either failed

to utilize this information in planning and performing its audit, or utilized this information in a

manner that no reasonable auditor would have used if confronted with the same facts.

161. The Goldberg Firm, which had been the Company's independent public

accountant since June 1, 1997, was represented at the February 7, 2000 Annual Meeting of

Stockholders and was available to respond to questions or to make a statement. At this annual

meeting, the Goldberg Firm failed to disclose the fact that the Company was in violation of SEC

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rules which require (i) a reporting company to devise and maintain a system of internal

accounting controls sufficient to reasonably assure, among other things, that transactions are

recorded as necessary to permit preparation of financial statements in conformity with GAAP,

and SEC rules which require (ii) a reporting company to make and keep books, records, and

accounts, which in reasonable detail, accurately and fairly reflect the transactions of the

company. Further, said Goldberg Firm representative failed to disclose the fact that the

Company's 1999 financial statements were not prepared in compliance with GAAP and that they

were materially misleading.

162. The Company was required to disclose in its financial statements the existence of

the material facts described herein and to appropriately report transactions in conformity with

GAAP. The Company failed to make such disclosures and to account for and to report

transactions in the Company's financial statements in conformity with GAAP. The Goldberg

Firm was, therefore, required pursuant to GAAS, to express a qualified opinion on the

Company's financial statements (AU Section 508) and, in so doing, to disclose to the investing

public the nature and extent of the Company's non-GAAP accounting and to provide those

disclosures which the Company failed to provide.

163. The Goldberg Firm violated GAAS in failing to express a qualified opinion on

the Company's 1999 financial statements.

164. The Goldberg Firm knew or recklessly disregarded the facts which indicated that

the 1999 financial statements were false and misleading for the reasons set forth herein, and

were presented in a manner which violated the principles of fair financial reporting and the

GAAP specified herein.

S.


165. In particular, the Goldberg Firm blinded itself to the fact that the Company's

financial statements improperly reported earnings, assets and shareholders' equity at amounts

which were overstated by no less than $3.2 million as particularized above. In addition, the

Goldberg Firm blinded itself to the fact that the Company's financial statements improperly

reflected:

a. Inventories which were not stated at the lower of cost or market as represented.

b. The useful lives of tools and dies to be seven years when they had no useful life.

The useful life of patents to be fifteen years when they had no useful life.

166. The Goldberg Firm either knew and ignored or recklessly failed to know that, but

for the fraudulent non-GAAP accounting, the Company's total assets would have been below $2

million, thereby triggering a likely delisting from the Nasdaq SmallCap Market.

167. The Goldberg Firm was motivated to conceal and to turn a blind eye to the

Company's financial statement fraud in order to obtain and continue to receive lucrative work

from the Company.

168. SEC Regulation SX requires that financial statements filed with the SEC conform

with GAAP. Financial statements filed with the SEC which are not prepared in conformity with

GAAP are presumed to be misleading or inaccurate. [17 C.F.R. §210.401 (a)(1)]. The

Company's financial statements which were disseminated to the investing public during the Class

Period, which represented that the Company's financial position and results of operations were in

conformity with GAAP, were false and misleading for the reasons alleged herein and because

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they constituted an extreme departure from GAAP. Said financial statements violated the

following GAAP concepts and principles, among others particularized above:

a. The concept that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (FASB Statement of Financial Accounting Concepts No. 1).

b. The concept that financial reporting should provide information about an enterprise's financial performance during a period (FASB Statement of Financial Accounting Concepts No. 1).

C. The concept that financial reporting should be reliable in that it represents what it purports to represent (FASB Statement of Financial Accounting Concepts No. 2).

d. The concept of completeness, which means that nothing material is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions (FASB Statement of Financial Accounting Concepts No. 2).

The concept that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered (FASB Statement of Financial Accounting Concepts No. 2).

f. The principle that management should provide commentary relating to the effects of significant events upon the interim financial results (APB Opinion No. 28).

g. The principle that losses be accrued for when a loss contingency exists (Statement of Financial Accounting Standards No. 5).

h. The principle that the quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form (Statement Of Financial Accounting Concepts No. 2).

i. The principle that disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the financial statements (APB Opinion No. 22).

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The principle that a departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as the cost; that where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference should be recognized as a loss of the current period (ARB 43).

k. The principle that if events or changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, the entity shall estimate the future cash flows expected to result from the use of the asset and its eventual disposition and recognize an aimapiment loss to the extent that the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. (Statement of Financial Accounting Standards No. 121).

169. On March 23, 2001, the Goldberg Firm issued a letter, which was reproduced in

the amended 1999 Form 10-K, which stated:

We hereby consent to the use in the Form 1 0-KSB-A Amended Annual Report of Saf T Lok Incorporated for the year ended December 31, 1999, our report dated March 9, 2000 (except for Note 13, as to which the date is March 28, 2000), relating to the financial statements of Saf T Lok Incorporated which appear in such Form 10-KSB-A.

170. The referenced report, which was dated as of March 9, 2000 (except for Note 13,

as to which the date was March 28, 2000) and was materially false and misleading for the same

reasons that the initially issued report was materially false and misleading, stated:

We have audited the consolidated balance sheet of Saf T Lok Incorporated and subsidiaries as of December 31, 1999 and the related consolidated statement of operations, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements as of December 31, 1998, were audited by Goldberg & Company, P.A., who merged with Goldberg Wagner Stump & Jacobs LLP as of January 1, 2000, and whose report dated March 24, 1999 expressed a qualified opinion on those statements.

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We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saf T Lok Incorporated and subsidiaries as of December 31, 1999 and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Saf T Lok Incorporated will continue as a going concern. As discussed in Note 2 to the financial statements, under existing circumstances, there is substantial doubt about the ability of Saf T Lok Incorporated to continue as a going concern at December 31, 1999. Management's plans in regard to that matter also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described in Note 14 to the financial statements, the Company has restated inventories in the 1999 balance sheet to reclassify as a non-current asset those inventories that are not expected to be sold within one year. (Emphasis added)

171. This report acknowledged that the Goldberg Firm knew, as of March 2000, that

$2,225,000 of inventory could not be sold in the foreseeable future and either willfully or

recklessly failed to recognize that a departure from the cost basis of pricing the inventory was

required because the utility of the inventory was no longer as great as the cost; that there was a

preponderance of evidence that the utility of goods, in their disposal in the ordinary course of

business, would be materially less than cost, due to obsolescence, physical deterioration, changes

in price levels, and other causes; that the difference was required to be recognized as a loss of

the current period. In addition, the Goldberg Firm either knew, as of March 23,2001 and

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ignored (or recklessly failed to know) that the tooling, dies and patents associated with this

inventory was also worthless.

172. The Goldberg Firm caused the above report to be reissued in March 2001 in

disregard of, and without disclosing, the fact that management had determined that (i) the

Company's inventory was reflected at an amount that was materially in excess of its net

realizable value and that the Company would announce this fact and a resultant charge to

operations of $2,057,659 within a few weeks; and that (ii) similarly, the Company's dies, tooling

and patents was also presented at an amount that was materially overstated and that the

Company would announce this fact and a resultant charge to operations of $1,114,029 within a

few weeks.

173. Significantly, the Goldberg Firm had issued its auditor's report on the Company's

2000 financial statements on March 28, 2001, just five days after it consented to issuance of the

materially false and misleading report particularized above and just two days after the amended

1999 Form 10-KSB was filed with the SEC, evidencing the fact that it knew that the financial

statements which were to be contained within the 2000 Form I 0-KSB reflected an inventory

valuation loss and an asset impairment loss of $2,057,659 and $1,114,029, respectively.

174. The Goldberg Firm approved the Company's 1999 financial statements by issuing

an unqualified opinion which stated that these financial statements were presented "fairly.. in

conformity with generally accepted accounting principles," despite the fact that they were

materially misstated.

175. Note 2 to the audited financial statements which were contained in the 1999 Form

10-KSB stated that there was "no significant prospects for sales" of the Company's inordinately

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high inventory. Given this fact, the examination of inventory and related tool, die and patent

costs was (or should have been) a principal focus of the audit which was performed by the

Goldberg Firm.

176. With this fact borne, it is incomprehensible that an audit conducted in compliance

with professional standards could have resulted in a failure to identify the fact that the market

value of the Company's inventories, which were represented to be $2,322,169, was actually no

more than $300,000. Similarly, it is incomprehensible that an audit conducted in compliance

with professional standards could have resulted in a failure to identify the fact that the

Company's tools, dies and patent costs, which were represented to be worth more than $1

million were virtually worthless.

177. The staggering magnitude of the unrecognized charges to earnings supports the

inference that the Goldberg Firm's audit was so deficient that it amounted to no audit at all; that

the Goldberg Firm either identified and ignored, or recklessly failed to investigate, extremely

questionable financial data which was material in amount and made audit judgements that no

reasonable auditor would have made if confronted with the same facts.

178. The Goldberg Firm audited the Company's financial statements for a number of

years and counseled Saf T Lok on a wide variety of tax, accounting and other business matters

and was present on a year-round basis. In addition, the Goldberg Firm attended meetings of the

Audit Committee of the Company's Board of Directors to discuss the Company's financial

statements, internal controls and other matters. Accordingly, the Goldberg Firm was intimately

familiar with all aspects of the Company's financial history, accounting practices, internal

controls, and business operations. In addition, all of the Company's books, records, and

MISTOM


personnel had been made available to the Goldberg Firm without restriction or limitation prior to

and during the Class Period.

179. Based upon its audits of the Company's financial statements, its reviews of the

interim financial statements included in the Company's quarterly reports on Form I 0-QSB for

fiscal 2000, its consulting and its other services, the Goldberg Firm knew and recklessly

disregarded, or was reckless in not knowing, the facts set forth herein above concerning the non-

GAAP accounting and the materially false and misleading disclosures in the financial statements

which were contained in the Company's 1999 Form 10-KS B and in the quarterly reports to the

SEC on Form 10-QSB, including the March 2001 amendments thereto. The Goldberg Firm

further knew and disregarded, or was reckless in not knowing, that such non-GAAP accounting

and the materially false and misleading disclosures resulted in material misstatements of the

Company's financial position and results of operation.

THE TRUTH EMERGES

180. On April 16, 2001, the Company filed its 2000 FormlO-KSB with the SEC,

disclosing, for the first time, that the Company lacked a marketing program and that: "A catalog

retailer is liquidating some Company products at extremely low prices, which came from

inventory at United Safety Action, Inc., a former Company distributor."

181. The financial statements contained within the 2000 Form I 0-KSB reflected a

inventory valuation and asset impairment loss of $2,057,659 and $1,114,029, respectively.

Narratives within the 2000 Form 10-KSB explained these charges to earnings as follows:

as 2000 drew to a close management realized that events over which they had no control, would likely result in the inability to realize the value of the inventory within a predictable period of time. Consequently, consistent with standard accounting practice, the inventory was valued at the net realizable value,

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which resulted in a charge to operations of ($2,057,659). Concurrent with the reduction in inventory to its net realizable value, the tooling and patents related to that inventory are subject to the same treatment. Whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets. Therefore, impairment losses of $859,317 have been recognized for the unamortized portion of tools and dies and the unamortized portion of the patent costs of $254,713.

182. Given the fact that SafT Lok admitted to knowing "as 2000 drew to a close", that

there was an "inability to realize the value of the inventory within a predictable period of time,"

Hornbostel, either knew or recklessly disregarded that the amended 1999 Form 1 0-KSB, the

amended first quarter 2000 Form 10-QSB, the amended second quarter 2000 Form 10-QSB and

the amended third quarter 2000 Form 10-QSB which he signed and which were filed with the

SEC on March 26, 2001, were materially false and misleading for the reasons set forth above.

183. According to GAAP, assets are probable future economic benefits obtained or

controlled by an entity as a result of a transaction or event (FASB Statement of Concepts No. 6,

paragraph 25). An essential characteristic of an asset is that "it embodies a probable future

benefit that involves a capacity ... to contribute directly or indirectly to future net cash inflows"

(FASB Statement of Concepts No. 6, paragraph 26).

184. A material portion of the Company's inventory, tools, dies and patent costs which

were presented in the Company's financial statements during the Class Period as valuable assets

had no future economic benefit. These assets should have been written down via a charge to

earnings at the very beginning of the Class Period. To the extent that the recognition of losses

through such write-down's were deferred, the Company's financial statements remained

materially misleading.


185. In its filings with the SEC, the Company was required to recognize and report

expenses in conformity with GAAP and to disclose in its financial statements the existence of

the material facts described herein and to appropriately disclose material information concerning

(i) "known trends or any known demands, commitments, events or uncertainties that will result

in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in

any material way," and (ii) "known trends or uncertainties that the registrant reasonably expects

will have a material impact on net sales, revenues or income from continuing operations."

186. During the Class Period, the Company failed to make such disclosures. This non-

disclosure, coupled with the Company's material misstatements and fraudulent accounting,

served to defraud investors during the Class Period.

187. The financial statements which were disseminated to the investing public during

the Class Period were not prepared in conformity with GAAP for the reasons particularized

above.

188. Defendants knew or recklessly ignored that the Company's financial statements

were required to comply in all material respects with GAAP, and that said financial statements

did not comply as required. In issuing or permitting issuance of the Company's fraudulent

financial statements during the Class Period, Defendants knew or were reckless in not knowing

that members of the Class would be injured.

189. Defendants knew and recklessly disregarded, or were reckless in not knowing, the

facts set forth herein concerning the Company's failure to write off worthless assets and to make

disclosures which were necessary to prevent the financial statements from being materially

misleading.


190. Defendants further knew and disregarded, or were reckless in not knowing, that

said failures resulted in material misstatements of the Company's financial position and results of

operation throughout the Class Period.

191. Defendants also knew and recklessly disregarded, or were reckless in not

knowing, that the financial statements which were contained in documents which were filed with

the SEC during the Class Period misrepresented the future business prospects of the Company,

contained narratives setting forth financial information which was based upon material

departures from GAAP, and contained financial statements which presented material

misstatements of the Company's financial position and results of operation.

192. Defendants knew and recklessly disregarded, or were reckless in not knowing, the

facts which indicated that the financial statements of the Company which were disseminated to

the investing public during the Class Period, and which investors relied upon, were false and

misleading for the reasons set forth herein and were presented in a manner which violated the

principles of fair financial reporting and GAAP.

193. An audit conducted in compliance with professional standards would not have

resulted in a failure to identify that the market value of the Company's inventories, which were

represented to be $2,322,169, was actually no more than $300,000. Similarly, it is

incomprehensible that an audit conducted in compliance with professional standards could have

resulted in a failure to identify the fact that the Company's tools, dies and patent costs, which

were represented to be worth more than $1.1 million were virtually worthless.

194. The market for STL 's common stock was open, well-developed and efficient at

all relevant times. As a result of these materially false and misleading statements and failures to

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disclose, STL common stock traded at artificially inflated prices during the Class Period until the

time the fact that STL had engaged in the wrongful course of conduct described herein was

finally communicated to an understood by the securities markets. Plaintiff and other members of

the Class purchased or otherwise acquired STL common stock relying upon the integrity of the

market price of STL stock and market information relating to STL and have been damaged

thereby.

195. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about STL's business, business practices and operations. These material

misstatements and omissions had the cause and effect of creating in the market an unrealistically

positive assessment of STL and its business, finances and operations, thus causing the

Company's common stock to be overvalued and artificially inflated at all relevant times.

Defendants' materially false and misleading statements during the Class Period resulted in

plaintiffs and other members of the Class purchasing the Company's common stock at an

artificially inflated price, thus causing the damages complained of herein.

THE COMPANY'S FINANCIAL STATEMENTS AND RELATED REPRESENTATIONS

WERE MATERIALLY FALSE AND MISLEADING

196. All of the reported financial statements and the related discussions contained

therein, which the Individual Defendants caused the Company to file and issue during the Class

Period, and in public reports about and press releases issued by the Company were false products

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of financial manipulations which deceived members of the investing public who purchased STL

securities based upon those representations.

197. The undisclosed improper accounting practices employed by defendants misled

the marketplace and investors -- those who reviewed and analyzed the Company's financial

statements -- and artificially inflated the price of STL's stock.

198. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of STL securities by publicly issuing false and misleading statements

and omitting to disclose material facts necessary to make defendants' statements, as set forth

herein, not false and misleading. Said statements and omissions were materially false and

misleading in that they failed to disclose material adverse information and misrepresented the

truth about the Company, its financial performance, accounting, reporting and condition,

including, inter alia:

(i) During the Class Period, the Company net income was materially

overstated;

(ii) The Company's financial statements did not present, in all material

respects, the Company's true financial condition, and did not reflect all adjustments which were

necessary for a fair statement of the interim and full year period presented;

(iii) The Company's interim financial statements were not presented in

conformity with GAAP or principles of fair reporting; and

(iv) By failing to file financial statements with the SEC which conformed to

the requirements of GAAP, such financial statements were presumptively misleading and

inaccurate pursuant to Regulation S-X, 17 CFR 210.4-01 (a)(1).

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APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-TIlE-MARKET DOCTRINE

199. At all relevant times, the market for STL common stock was an efficient market

for the following reasons, among others:

(i) STL common stock met the requirements for listing, and was listed and

actively traded, on the NASDAQ National Market System, a highly efficient market;

(ii) As a regulated issuer, STL filed periodic public reports with the SEC and

the NASD;

(iii) STL stock was followed by securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

(iv) STL regularly issued press releases which were carried by national

newswires. Each of these releases was publicly available and entered the public marketplace.

200. As a result, the market for STL securities promptly digested current information

with respect to STL from all publicly-available sources and reflected such information in STL 's

stock price. Under these circumstances, all purchasers of STL common stock during the Class

Period suffered similar injury through their purchase of stock at artificially inflated prices and a

presumption of reliance applies.

NO SAFE HARBOR

201. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

The specific statements pleaded herein were not identified as "forward-looking statements" when

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made. Nor was it stated with respect to any of the statements forming the basis of this complaint

that actual results "could differ materially from those projected." To the extent there were any

forward-looking statements, there were no meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply

to any forward-looking statements pleaded herein, defendants are liable for those false forward-

looking statements because at the time each of those forward-looking was made the particular

speaker knew that the particular forward-looking statement was false, and/or the forward-

looking statement was authorized and/or approved by an executive officer of STL who knew

that those statements were false when made.

ADDITIONAL SCIENTER ALLEGATIONS

202. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements, issued or disseminated by or in the name of the Company

were materially false and misleading; knew or recklessly disregarded that such statements or

documents would be issued or disseminated to the investing public; and knowingly and

substantially participated or acquiesced in the issuance or dissemination of such statements or

documents as primary violators of the federal securities laws. As set forth elsewhere herein in

detail, defendants, by virtue of their receipt of information reflecting the true facts regarding

STL and its business practices, their control over and/or receipt of STL's allegedly materially

misleading misstatements and/or their associations with the Company which made them privy to

confidential proprietary information concerning STL were active and culpable participants in the

fraudulent scheme alleged herein. Defendants knew and/or recklessly disregarded the falsity and

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misleading nature of the information which they caused to be disseminated to the investing

public. This case does not involve allegations of false forward-looking statements or projections

but instead involves false statements concerning the Company's business, finances and

operations. The ongoing fraudulent scheme described in this complaint could not have been

perpetrated over a substantial period of time, as has occurred, without the knowledge and

complicity of the personnel at the highest level of the Company, including the Individual

Defendants.

203. The Individual Defendants engaged in such a scheme to inflate the price of STL

common stock in order to: (i) protect and enhance their executive positions and the substantial

compensation and prestige they obtained thereby; and (ii) enhance the value of their personal

holdings of STL common stock and options.

204. The magnitude the of the inventory and other assets which defendants improperly

carried on STL's books at full value makes it highly unlikely that defendants committed the

misconduct alleged of herein without knowledge of their wrongdoing.

205. Defendants were motivated to artificially inflate the price of Saf T Lok stock to

ensure that the Company could -- and did -- successfully complete a Regulation D private

placement for the sale of $850,000 worth of convertible debentures in May 2000. Without the

proceeds from this offering, the Company's total cash and equivalents for the period ended June

30, 2000 would have been minus $383,861 instead of the $402,389 reported.

206. Defendants were motivated to materially overstate the Company's non-saleable

inventory and other worthless assets to avoid being delisted by Nasdaq for failing to maintain at

least $2 million worth of assets, as what ultimately occurred on May 15, 2001.

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207. Defendants were motivated to artificially inflate the price of Saf T Lok's stock to

maintain a minimum bid price of $1.00 which is required by Nasdaq for 30 consecutive days to

retain a Nasdaq listing. See Exhibit S (Nasdaq letter dated Nov. 3, 2000)

208. Defendant Franklin W. Brooks consistently received correspondence from the

SEC -- including without limitation, correspondence dated November 3, 2000, November 15,

2000, December 19, 2000 and February 26, 2001 -- expressing the SEC's concerns and doubts

about the validity of the Company's excessive valuation of non-saleable inventory and other

assets and about its noncompliance with GAAP and SEC disclosure requirements.

209. Defendant Franklin W. Brooks was cc'd on all responses to the SEC's

correspondence, on behalf of the Company, from Harvey B. Goldberg.

210. Defendant William Schmidt sent correspondence to co-defendant John

Hornbostel on April 4, 2001 with a corresponding chart, see Exhibit Q, illustrating SafT Lok's

dwindling sales between 1999 and the first quarter of 2001. Schmidt's statements in the April 4,

2001 letter that:

• "[i]t doesn't take a rocket scientist to see that sales have been on a downward trend;"

my WAG is that sales will do well to hit $50,000 this year would probably decline to $15,000 to $20,000 the following year and next to nothing after that;" and

• "[t]he value of the inventory will then revert to its salvage value"

demonstrate these Defendants' knowledge that the Company's sales were minimal and that its

tremendous levels of inventory were non-saleable and were thus required, under GAAP, to be

written down.

-76-


211. The Goldberg Firm's letter to defendant John Hornbostel, dated April 4, 2001

evidences Harvey Goldberg's knowledge that there was no basis for the Company's excessive

valuation of its inventory:

• "As indicated in my letter of March 19, 2001, I was looking for something to 'hang my hat on' with respect to the company's plans for selling or liquidating the inventory;"

• "We have discussed the predicament about the inventory several times in conversations on the telephone. Unfortunately, I am no further along today towards understanding the company's intentions, relating to the inventory, after reading the minutes of your board meeting."

• "What is the real value of the inventories, tools and dies and patents at December 31, 2000? In the absence of evidence to the contrary, it appears their value is minimal." (Emphasis added). See Exhibit P.

212. Correspondence between the Goldberg Firm and the SEC, as well with its co-

defendants, demonstrate that the Goldberg Firm consciously or recklessly disregarded facts

showing that Saf T Lok's inventory was overvalued by the Company.

213. The Company's restated financial results for

• the year ended 1999,

• the first quarter of 2000

• the second quarter of 2000, and

• the third quarter of 2000

served as admissions by defendants that the Company's previously filed financial statements

during those periods were materially false and misleading.

-77-


FST CLAIM (Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against

All Defendants)

214. Plaintiff repeats and realleges each and every allegation contained above.

215. Each of the defendants: (a) knew or recklessly disregarded material adverse non-

public information about STL's financial results and then existing business conditions, which was

not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading

statements, releases, reports and other public representations of and about STL.

216. During the Class Period, defendants, with knowledge of or reckless disregard for the

truth, disseminated or approved the false statements specified above, which were misleading in that

they contained misrepresentations and failed to disclose material facts necessary in order to make

the statements made, in light of the circumstances under which they were made, not misleading.

217. Defendants have violated § 10(b) of the Exchange Act and Rule I Ob-5 promulgated

thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue

statements of material facts or omitted to state material facts necessary in order to make statements

made, in light of the circumstances under which they were made, not misleading; or (c) engaged in

acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of STL

stock during the Class Period.

218. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of

the market, they paid artificially inflated prices for STL stock. Plaintiff and the Class would not

have purchased STL stock at the prices they paid, or at all, if they had been aware that the market

prices had been artificially and falsely inflated by defendants' false and misleading statements.


SECOND CLAIM

(Violation Of Section 20(a) Of The Exchange Act Against Individual Defendants Franklin W. Brooks, Jeffrey W. Brooks,

William Schmidt, James E. Winner, Jr., John F. Hornbostel, Jr.)

219. Plaintiff repeats and realleges each and every allegation contained above.

220. The Individual Defendants acted as controlling persons of STL within the meaning

of Section 20(a) of the Exchange Act. By reason of their senior executive and/or Board positions

they had the power and authority to cause STL to engage in the wrongful conduct complained of

herein.

221. By reason of such wrongful conduct, STL and the Individual Defendants are liable

pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants'

wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with

their purchases of STL stock during the Class Period..

WHEREFORE, plaintiff prays for relief and judgment, as follows:

I) Determining that this action is a proper class action and certifying plaintiff as class

representative under Rule 23 of the Federal Rules of Civil Procedure;

2) Awarding compensatory damages in favor of plaintiff and the other Class members

against all defendants, jointly and severally, for all damages sustained as a result of defendants'

wrongdoing, in an amount to be proven at trial, including interest thereon;

3) Awarding plaintiff and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

4) Such other and further relief as the Court may deem just and proper.

-79-


JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: September 13, 2002 MILBERG WEISS BERSHAD HYNES & LERACH LLP

5355 Town Center Road, Suite 900 Boca Raton, FL 33486 Tel: (561) 361-5000 Fax: (561) 367-8400

Kenneth J. \&'anale Fla. Bar No. 0169668 email: [email protected] Robert R. Adler Fla. Bar No. 122858 email: [email protected]

Lead Plaintiff's Counsel

IM


CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a true and correct copy of the foregoing was furnished by overnight mail this 13th day of September, 2002, to:

DeMAHY, LABRADOR & DRAKE, P.A. Pete L. DeMahy Jason Klein The Colonnade, Suite 550 2333 Ponce de Leon Boulevard Coral Gables, FL 33134 Tel: (305) 443-4850 Fax: (305) 443-5960

Attorneys for Defendant Goldberg Wagner Stump and Jacobs LLP

STROOCK & STROOCK & LA VAN LLP Richard B. Simring First Union Financial Center 200 South Biscayne Boulevard Suite 3300 Miami, FL 33131-2385 Tel: (305) 358-9900 Fax: (305) 789-9302

Attorney for Defendants Franklin W. Brooks, Jeffrey W. Brooks, William Schmidt, James E. Winner, Jr. and John F. Hornbostel, Jr.

F:\PLEADING\SAVILOK\LEP01866.WPD - September 13,2002 (11:32AM)

Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198 -

EXHIBIT A



Case No. )

€1Y - RYSKAMI SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

V.

IAGISTRATE JUDGE ITUNAC

FRANKLIN W. BROOKS AND JOHN L. GARDNER.,

Defendants.

C;

V1 M

n CA

C-, N)

COMPLAINT

Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:

SUMMARY

1. This complaint concerns several materially false and misleading corporate

disclosures made or authorized by the senior management of SafT Lok, Inc., a Florida-based =

corporation that manufactures and markets gun locks. At various times beginning in late 1997

and early 1998, Franklin W. Brooks, the Chairman of Saf T Lok, and John L. Gardner, then-Saf

I Lok's President and CEO, caused the company to publish various press releases and to make

periodic filings with the Commission that falsely described certain sales, consulting and

development contracts to which Sal T Lok was a party. The false disclosures described

agreements that would result in the sale of millions of dollars of SafT Lok's products, or

otherwise materially enhance SafT Lok's business. In each instance, however, Brooks and/or

Gardner knew, or were reckless in not knowing, that the agreements lacked substance and that

=


the descriptions of them in the press releases and Commission filings were materially false or

misleading because they omitted material information. Additionally, Brooks and Gardner

authorized SafT Lok to pay for a research report that included materially false and misleading

financial projections. Brooks and/or Gardner provided misleading information to the author,

edited a draft of the report, represented that the report was consistent with the company's views,

and then released the report for public distribution.

2. By knowingly or recklessly engaging in this conduct, Brooks, directly or indirectly,

violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §

78j(b)], and Rule lOb-5 [17 C.F.R. §§ 240.10b-53 thereunder.

3. By knowingly or recklessly engaging in this conduct, Gardner, directly or indirectly,

violated Section 10(b) of the Exchange Act [15 U.S.C. §* 78j(b)] and Rule lOb-5 thereunder [17

C.F.R. §§ 240.10b-5], and aided and abetted SafT Lok's violations of Section 13(a) of the

Exchange Act [15 U.S.C. § 78m(a)], and Rules 12b-20, 13a-1 1, and 13a-13 [17 C.F.R. §§ 240.12b-

20, 240.13a- 1, and 240.13a- 13] thereunder.

4. The Commission seeks a judgment permanently enjoining Defendants from future

violations, and also seeks imposition of civil penalties.

JURISDICTION

5. This Court has jurisdiction over this action pursuant to Sections 21 and 27 of the

Exchange Act [15 U.S.C. §§ 78u, 78aa].

6. The Commission brings this action pursuant to authority conferred upon it by

Sections 21 (d) and 21(e) of the Exchange Act [15 U.S.C. § § 78u(d), 78u(e)I.

2


7. Defendants, directly or indirectly, used the means and instrumentalities of

interstate commerce, of the mails, or of the facilities of a national securities exchange, in

connection with the acts, practices, and courses of business alleged herein.

8. This Court has venue under 28 U.S.C. § 1391(b) because a substantial part of the

events or omissions giving rise to the Commission's claims occurred in this district.

THE DEFENDANTS

9. Franklin W. Brooks, age 66, is a resident of Jupiter, Florida. Brooks invented Saf

T Lok's gun locking devices, founded the company, and for all relevant periods served as its

Chairman.

10. John L. Gardner, age 64, is a resident of Orlando, Florida. Gardner was President

and Chief Executive Officer of SafT Lok from April 1997 through June 1998.

11. During the relevant period, Brooks and Gardner were primarily responsible for all

major business decisions at SafT Lok, including, among other things, reviewing drafts of all

major press releases prior to dissemination. Additionally, Gardner typically reviewed and

signed SafT Lok's filings with the Commission.

ISSUER

12. SafT Lok, Inc., a Florida corporation headquartered in West Palm Beach,

manufactures and markets locks that are designed to prevent the unauthorized or accidental

discharge of guns on which they are installed. Its common stock is registered with the

Commission pursuant to Section 12(g) of the Exchange Act, and its shares trade on the Nasdaq

SmalICap Market. SafT Lok reported 1999 revenues of approximately S210,000 and losses of

$.28 per share, based on approximately 15.1 million shares outstanding.


SAF T LOK'S FALSE OR MISLEADING DISCLOSURES

13. In June of 1997, Nasdaq officials notified SafT Lok that it faced delisting from

the Nasdaq SmailCap Market because its total assets had fallen below $2 million. Desperate to

raise capital, SafT Lok began negotiating with an individual named Sholam Weiss, who claimed

to represent various offshore entities that were interested in investing in the company through an

offering of restricted stock pursuant to Regulation S of the Securities Act of 1933. To enable Saf

I Lok to avoid delistirig, Weiss agreed to an offering price of $2 per share. SafT Lok thereafter

issued $3 million worth of common stock at $2 per share (as well as stock purchase warrants) to

the three alleged offshore investors represented by Weiss, and avoided delisting.

A. The A.B. & Associates Consulting Agreement

14. As one condition to closing SafT Lok's 1997 Regulation S offering at the $2 per

share price, Weiss demanded that SafT Lok enter into a contract with an entity called A.B. &

Associates ("AR") and pay $250,000 for supposed business consulting services. AB was a shell

entity created by a longtime acquaintance of Weiss. It listed a commercial mail box facility in

Monsey, New York for an address, had no clients, and had never conducted any business,

although its principal had experience in retail distribution. Gardner knew, or recklessly failed to

know, that AR was a shell entity that would not provide any bona tide consulting services to SafT

Lok.

15. Nevertheless, Saf T I_ok entered into a contract (signed by Gardner) pursuant to

which AR would provide generic "consulting" services to SafT Lok including, among other

things, analysis of unspecified investment opportunities and short-term and long-term investment

policies, and advice with respect to public and private financings. Gardner did not attempt to

4


negotiate any of the provisions of the purported agreement, but simply accepted all the terms of a

contract demanded by Weiss.

16. SafT 1_ok disclosed this purported "financial and management consulting services

agreement" with AS in a Form 8-K, which was executed by Gardner and filed with the

Commission on November 14, 1997. The filing failed to disclose any of the material facts

concerning AS, or that Saf T Lok would receive no services or anything else of value from AS

in exchange for its $250,000 payment.

B. The USA Distribution Agreement

17. Weiss also proposed to Brooks and Gardner that he would set up a distribution

company that would sell SafT 1_ok's products. Weiss had a new company, United Safety

Action, Inc. ("USA"), incorporated for the stated purpose of distributing SafT Lok's gun locks.

USA had no assets, offices, or employees; its business address was the same commercial mail

box facility in Monsey, New York used by AS. Weiss proposed to raise $10 million to finance

USA's operations, with $7 million to purchase an inventory of SafT Lok products for resale, and

$3 million earmarked for related expenses. During negotiations of the USA agreement, however,

Weiss indicated that he would be unable to raise the full $10 million, and instead proposed to

raise S2 million to $3 million. In fact, USA eventually received total funding of only $150,000.

18. Despite USA's lack of financing and inability to perform, SafT 1_ok entered into

a distribution agreement with USA on February 12, 1998. Gardner signed the agreement, which

provided that USA would purchase up to $20 million of gun locks over a three-year period.

However, as a practical matter, the agreement only committed USA to purchase S million of

locks. Specifically, the agreement provided that USA could terminate the contract after fulfilling

an "initial order" of $7 million of gun locks. It also provided that any purchase orders SafT Lok

5


= NOW

received from "any customer" would count towards satisfying USA's "initial order" obligation.

On February 11, 1998, one day before entering into the USA agreement, SafT Lok had

announced its receipt of a $6 million purchase order from a third-party wholesaler

("Wholesaler"), potentially leaving USA with a purchase obligation of only $1 million.

19. SafT Lok, through Brooks and/or Gardner, published a series of materially false

or misleading statements concerning the USA agreement in various press releases and

Commission filings in 1998. A February 19, 1998 press release that announced the USA

agreement included the false statement that USA "had secured $10 million in working capital" to

start its business plan and advertising campaign. Additionally, the release falsely claimed that

USA had an "obligation to purchase at least $20 million" of SafT Lok products, and quoted

Gardner as saying that the agreement was "guaranteeing S20 million in sales." Brooks and

Gardner knew, or recklessly failed to know, that these statements were false or misleading.

Brooks and Gardner reviewed a draft of the February 19 press release prior to dissemination, but

neither corrected the press release nor prevented the release from being issued.

20. The following month, on March 13, 1998, SafT Lok filed a Form 8-K, executed

by Gardner, that discussed the terms of the USA distribution agreement, but failed to disclose

that USA was not financially capable of performing its obligations.

21. On May 20, 1998, additionally, SafT Lok filed a Form l0-Q for the first quarter

ended March 31, 1998. That report, executed by Gardner, falsely described USA's minimum

purchase obligations as "in addition" to the $6 million purchase order received from the

Wholesaler. Further, the Form 1O-Q added: "Based on the aforementioned, management

believes it has adequate capital to fund operations for a reasonable period of time."

6


22. Finally, a May 21, 1998 press release falsely stated that the USA contract would

provide a "minimum of $20 million in orders over a 24-month period." The release also

attributed to Gardner the claim that, in light of the USA contract, "the Company will be

of1table in the next quarter." Brooks and Gardner knew, or recklessly failed to know, that

these statements were false or misleading. Brooks and Gardner reviewed a draft of the May 21

press release prior to dissemination, but neither corrected the release nor prevented it from being

issued..

C. The Fingerprint Recognition Development Contract

23. In spring of 1998, SafT Lok considered entering into a contract with a laser

technology company concerning the development of a fingerprint recognition system, mounted

on a handgun, that would unlock the weapon only if the user's fingerprints matched the

fingerprints pre-set in the system. The technology, if effectively applied to SafT Lok's products,

had the potential to revolutionalize its gun locks. Brooks, however, did not want SafT Lok to

spend more than $20,000 to investigate the development of such a system. SafT 1_ok entered

into a contract with the laser technology company in May 1998.

24. On May 26, 1998, SafT Lok announced the contract in a press release that failed

to disclose material uncertainties about the technology or that Brooks did not want SafT Lok to

commit unlimited resources to finance the development of the proposed product. On the

contrary, the release boasted that the fingerprint recognition system "will be available by the end

of the year." Brooks reviewed and commented on the press release prior to dissemination.

Despite his own unwillingness to have SafT Lok finance the agreement, Brooks neither

corrected the press release nor prevented it from being issued.

=

7


25. Approximately two weeks later, on June ii, 1998, Brooks voided the agreement

and directed Sal T Lok to issue a press release announcing the termination of the contract.

D. The Third-PartyReareb Report Paid for by SafT Lok

26. In February 1998, Brooks and Gardner authorized SafT Lok to pay S5,000 to an

independent securities analyst ("Analyst") to prepare a research report for dissemination

concerning SafT Lok and its securities. Brooks and Gardner directed SafT Lok to provide the

Analyst with certain information about the company, including information concerning the

purported USA distribution agreement, and later spoke with the Analyst about SafT Lok and its

products. The Analyst later provided a draft version of the report to Gardner, and had a

conference call with Gardner to discuss possible revisions to the report. Later, Gardner and

Brooks participated in a conference call with a brokerage firm, State Street Securities (now

known as Taylor Stuart Financial), during which they discussed and affirmed the report. State

Street Securities ultimately disseminated the report under its name.

27. The report, released on February 17, 1998, included false or misleading forecasts

about the company's business prospects. For example, the report projected sales of two million

units in 1998 and three million units in 1999, with net sales of $60 million in 1998, and $90

million the following year. The report further said that the stock price "could rise to $20-S40 per

share over the next 12-24 month period." Gardner and Brooks reviewed the report before it was

published, and knew that those projections were unreasonable and far exceeded the company's

own projections. Nevertheless, neither Brooks nor Gardner directed Saf T Lok to issue any

corrective disclosure or take any steps to halt distribution of the report until May 1998, three

months after the report was made public.

8


FIRST CLAIM

Gardner violated Section 10(b) of the Exchange Act 115 U.S.C. § 78j(b)J and Rule lOb-5 [17 C.F.R. §§ 240.10b-51 thereunder, and aided and abetted Sal T Lok's violations of Section

13(a) of the Exchange Act 115 U.S.C. §78m(a)I, and Rules 12b-20 and 13a-11 [17 C.F.R. § 240.240.12b-20,240.13a-111 thereunder

[Disclosure of AB Consulting Agreement in Form S-KI

28. Paragraphs I through 27 are realleged and incorporated herein by reference.

29. SafT Lok's Form 8-K, filed November 14, 1997 and signed by Gardner, was

materially false or misleading in that it disclosed the purported consulting agreement with AB, but

failed to disclose any of the material facts concerning AB, or that SafT Lok would receive no

services or anything else of value from AB in exchange for its $250,000 payment.

30. By reason of the foregoing, Gardner violated Section 10(b) of the Exchange Act

[15 U.S.C. § 78j(b)] and Rule lOb-5 thereunder [17 C.F.R. §§ 240.1Ob-5, and aided and abetted

SafT Lok's violations of the reporting provisions under Section 13(a) of the Exchange Act [15

U.S.C. § 78m(a)], and Rules 12b-20 and 13a-1 I thereunder [17 C.F.R. §§ 240.240.12b-20,

240.13a-1 1.

SECOND CLAIM

Brooks and Gardner violated Section 10(b) of the Exchange Act 115 U.S.C. § 78j(b)j and Rule lOb-5 117 C.F.R. §§ 240.10b-51 thereunder

[Disclosure of USA Distribution Agreement in Press Releases]


32. Brooks and Gardner issued two false and misleading press releases concerning

SafT Lok's purported distribution agreement with USA. A February 19, 1998 press release

announcing the USA agreement included the false statement that USA "had secured $10 million

in working capital" to start its business plan and advertising campaign. Additionally, the release

falsely claimed that USA had an "obligation to purchase at least $20 million" ofSafT I_ok

=


products, and quoted Gardner as saying that the agreement was "guaranteeing $20 million in

sales." Three months later, a May 21, 1998 earnings announcement falsely stated that the USA

contract would provide a "minimum of $20 million in orders over a 24-month period." The

release also attributed to Gardner the claim that, in light of the USA contract, "the Company will

be profitable in the next quarter."

33. By reason of the foregoing, Brooks and Gardner violated Section 10(b) of the

Exchange Act 115 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. §§ 240.10b-5] thereunder.

THIRD CLAIM

Gardner aided and abetted SafT Lok's violations of Section 13(a) of the Exchange Act 115 U.S.C. § 78m(a)), and Rules 12b-20,13a-11, and 13a-13 117 C.F.R. g§ 240.240.12b-20,

240.13a-1 1, and 240.13a-13 thereunder [Disclosure of USA Distribution Agreement in Form 8-K and Form 1O-Q]


35. A Form 8-K filed by SafT Lok on March 13, 1998, and signed by Gardner,

discussed the terms of the USA distribution agreement, but was misleading in that it failed to

disclose that USA was not financially capable of performing its obligations.

36. A Form 10-Q filed by SafT Lok on May 20, 1998 for the first quarter ended

March 31, 1998, and signed by Gardner, falsely described USA's minimum purchase obligations

as "in addition" to the S6 million purchase order received from the Wholesaler. Further, the

Form l0-Q added the baseless statement that "based on the aforementioned, management

believes it has adequate capital to fund operations for a reasonable period of time."

37. By reason of the foregoing, Gardner violated Section 10(b) of the Exchange Act

[15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §§ 240.10b-5], and aided and abetted

SafT Lok's violations of the reporting provisions under Section 13(a) of the Exchange Act [15

U.S.C. § 78m(a)], and Rules 12b-20 and 13a-1 I thereunder [17 C.F.R. §§ 240.240.12b-20,

10


240.13a-11].

FOURTH CLAIM

Brooks violated Section 10(b) of the Exchange Act 115 U.S.C. § 78j(b)1 and Rule lOb-S 117 C.F.R. §§ 240.10b-51 thereunder

[Disclosure of Laser Technology Contract in May 1998 Press Release]

38. Paragraphs 1 through 37 are realleged and incorporated herein by reference.

39. Brooks issued a materially false and misleading press release on May 26, 1998 that

announced the purported fingerprint development contract, and that described contractual

provisions that Brooks knew that SafT Lok would not accept.

40. By reason of the foregoing, Brooks violated Section 10(b) of the Exchange Act [15

U.S.C. § 78j(b)] and Rule I Ob-5 [17 C.F.R. § § 240. 1Ob-5] thereunder.

FIFTH CLAIM

Brooks and Gardner violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)i and Rule 10b-5 117 C.F.R. §§ 240.I0b-51 thereunder

[Disclosures in Research Report Paid for by Sal T Lok]


42. Brooks and Gardner directed SafT Lok to pay $5,000 to an outside analyst to

prepare a research report that included false or misleading projections concerning SafT Lok's

business prospects. The report projected sales of two million units in 1998 and three million

units in 1999, with net sales of $60 million in 1998, and $90 million the following year. The

report further said that the stock price "could rise to 520-$40 per share over the next 12-24

month period." Brooks and Gardner provided information (including a copy of the purported

USA contract) to the author, edited a draft of the report, represented that the report was

consistent with the company's views, and then authorized release of the report for public

distribution.

43. By reason of the foregoing, Brooks and Gardner violated Section 10(b) of the

Exchange Act [15 U.S.C. § 78j(b)] and Rule lOb-S [17 C.F.R. § 240.IOb-5] thereunder.

11

=

Case 9:02-cv-80252-KLR Document 26 Entered on ELSD Docket 09/16/2002 of 198

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court:

I.

Grant injunctions permanently restraining and enjoining Brooks and Gardner, and their

officers, agents, servants, employees, and attorneys, and all persons in active concert or participation

with him, from violating Sections 10(b) and 13(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and

78m(a)], and Rules lOb-5, 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240. l0b-5, 240.12b-20,

240.13a-1, and 240.13a-13J thereunder.

11.

Order Brooks and Gardner to pay civil penalties pursuant to Section 21 (d)(3) of the

Exchange Act [15 U.S.C. § 78u(d)(3)].

Hi.

Grant such other relief as the Court may deem just and appropriate.

Dated: December () , 2000

Respectfully submitted,

Thomas C. Newkirk (DC Bar No. 225748) Erich T. Schwartz Mark K. Braswell Michael S. Fuchs

Attorneys for Plaintiff Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0706 (202) 942-4813 (Fuchs) fax: (202) 942-9639 NewkirkTsec.gov

12

=


CML COVER SHEET The .1541 SOSI ss, thurt mi intyqej,, byd herein ,.t$isr r aiccIetnIer the IiIIl a ,ery.cs of pkWinp or ether pun s$ui.Sd by .5. CICt 0 prowdef by low ,vbu of court. Th.t fore our.u.ed by Ot. .Nd.,sI C.ufsre.e of the Un,Nd Stai,e .n $u.Isb.. 1$74 • is .uoired f.r the iiw of the Clot of Court sor ghe purpwt of .o.t.st.na the civil dM.t 0.,1. IRE IHETUUCTSOHE On TMI REVERIE 05 7148 PORMI

(b) COUNTY OF RESIDENCE OF FIRST LISTED PLAINTIFF

I (EXCEPT IN U.S. PLI31ITIFF CASES)

(C) ATIOdES (FIRM PWAE. ADDRESS. AND 1ELEPI4OJ4du10ER)

Erich T Schwartz (202) 942-4782 U.S. SEX 450 Fifth St., N.W., r -0706

DEFENDANTS 1iO:)1O Brooks, Franki Gardner, John RySKA1fl

MAGISTRATE JULG y1TUNAQ

C*Pdrv OF RESIDENCE OF FIRST LISTED D€FENDmEPa Beach Q=ty- LA

(IN U.S. PLAINTIFF CASEL')

T5 IN LAND CONOEP.VtA7lON CASES. USE T?0 1A THE TRACT OF LAND INVOLVED -.

I SIjn Ruben & Aronson, LIP (202) 5-36( 3299 K St., N..W., Washingt,b.00007 I

1(a) PLAIN11FFS

U. S. Securities & Exchange

(d) CIRCLE COUNTY WHERE ACTION _AROSE: cji DADE, NONROE, BROWARD,(ALN BEiD MARTIN ST. LUCIE. INDIAN RIVER, 0KEECHBE,WIGHLANDS R. BASIS OF JURISDICTION ,..w am a= awn III. CITIZENSHIP OF PRINCIPAL PARTIES

(For Dio.38y Cui. Only) FOR yI.4475! ff10 Old NOR OM 001KNOMM

J, 1 U.S. ao..ern,i.nI 0 3 F,OSI OemulIon

j

Plaintiff (U.S. Gosenmanl Not sPany) PT? DEF PT? OEF CMIIn of This Shel. 01 01 bcot poi .led or Principal Place 04 04

0 2 U.S. Government 0 4 DIversIfy af ivaiwes in neis State OsIvndant (WCII. CbZv1.P d CItn of Anode., Ski. 02 32 be,,..r.I.der,d PiiiieIpaI PlaCe 05 05

PM.. in 11am Ill) of Busiie.*s In Mode.r Slat. Cldz.n or $UC$.ct of. 03 03 FomI, Madan 06 of

Foreign Cmmfry

IV. CAUSE OF ACTION JCM 1.11 1 o,a swum .sa ur.o. .i M ,eer m. NOW TtMVi(WV 01 CMI - - - -

oocsvwuauo.vsesn,i 15 U.S.C. Sections 78(j), (m), SEC alleges violations of the antifraud and reporting provisions of the federal securities laws. IVa. N/A days estimated (for both sides) to try entire case.

V. NATURE OF SUIT (PLACE AN x MI ONE BOX ONLY)

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C 210 Lww Cou...*.. B 0220 '.u.....

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EXHIBIT B


34-43753 wysiwyg:H19/http://www.sec.govllitigation/adniin/34-43753.htm

UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934 Release No. 43753 / December 20, 2000

ADMINISTRATIVE PROCEEDING File No. 3-10395

In the Matter of ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE

SAF T LOK, INC. SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING

Respondent. CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Saf T Lok, Inc. ("Saf T Lok" or the "Respondent") to determine whether SafT Lok violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.

IL

In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement for the purpose of disposing of the issues raised in these proceedings. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, the Respondent, without admitting or denying the findings set forth herein, except that it admits to the jurisdiction of the Commission over it and over the subject matter of these proceedings, consents to the entry of the findings and to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease-and-Desist Order ("Order").

III.

On the basis of this Order and the Respondent's Offer of Settlement, the

Commission finds the following:

A. RESPONDENT

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Saf T Lok, a Florida corporation headquartered in West Palm Beach, manufactures and markets patented gun locks that are designed to prevent the unauthorized or accidental discharge of weapons on which they are installed. Saf T Lok has marketed its products as tools to prevent the unauthorized use of firearms, especially by children. Saf T Lok common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the Nasdaq SmaliCap Market.

B. FACTS

1. Background: Saf T Lok Enters Into a Private Stock Offering to Raise Capital and Avoid Delisting From Nasdaq

In June of 1997, Nasdaq officials notified Saf T Lok management that the company faced delisting from the Nasdaq SmailCap Market because its total assets had fallen below $2 million. Desperate to raise capital, SafT

Lok began negotiating with an individual named Sholam Weiss (I'Weissl'),Z who claimed to represent various offshore entities that were interested in investing in the company through an offering of restricted stock pursuant to Regulation S of the Securities Act of 1933. Discussions between Saf T Lok and Weiss contemplated pricing the Regulation S stock at $1.50 per share, a discount of approximately 60 percent from the market price of approximately $3.60 per share. However, Nasdaq's Listing Qualifications Panel concluded in a letter dated October 14, 1997, that such a discount was "excessive" and that the proposed offering would be "harmful to the investing public." Nasdaq informed SafT Lok that closing the offering at the proposed terms would result in the immediate delisting of the company's securities. Thereafter, Weiss agreed to increase the offering price from $1.50 to $2 per share.

Saf T Lok eventually issued $3 million worth of common stock (and additional stock purchase warrants), to the three alleged offshore investors represented by Weiss, and avoided delisting. As a result of the various fees, expenses and other third-party payments ordered by Weiss, however, Saf T Lok netted a total of only $1,910,000 in exchange for issuing the $3 million of common stock.

2. Saf T Lok Makes False or Misleading Disclosures Concerning a Purported Business Consultancy Contract

As one condition to closing Saf T Lok's 1997 Regulation S offering at the higher price required by Nasdaq, Weiss demanded that Saf I Lok enter into a contract with an entity called A.B. & Associates ("AB") and pay $250,000 for supposed business consulting services. AB was a shell entity created by a longtime acquaintance of Weiss. It listed a commercial mail box facility in Monsey, New York for an address, had no clients, and had never conducted any business. In short, AB had no capacity to provide such services.

Nevertheless, at Weiss's insistence, Saf T Lok entered into a contract with AB to provide certain consulting services. Specifically, the contract provided that AB might, among other things, review, analyze and report on proposed investment opportunities and short-term and long-term investment policies, and render advice with respect to public and private financings. Saf T Lok did not attempt to negotiate any of the provisions of the purported agreement, but simply accepted all the terms of a contract proposed by Weiss.

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Saf T Lok disclosed this purported "financial and management consulting services agreement" with AB in its Form 8-K filed on November 14, 1997, but failed to disclose any of the material facts concerning AB, or that Saf T Lok would receive no services or anything else of value from AB in exchange for its $250,000 payment.

3. Saf T bk Makes False and Misleading Statements Concerning a Purported $20 Million Distribution Agreement

a. Background

While negotiating the terms of Saf T Lok's Regulation S offering on behalf of his purported offshore investors, Weiss proposed to Saf T Lok management that he would set up a distribution company that would sell Saf T Lok's products. Weiss had a new company, United Safety Action, Inc. ("USA"), incorporated for the stated purpose of distributing Saf T Lok's gun locks. USA had no assets, offices, or employees. Its business address was the same commercial mail box facility in Monsey, New York used by AB. Weiss proposed to raise $10 million to finance USA's operations, with $7 million to purchase an inventory of Saf T Lok products for resale, and $3 million earmarked for related expenses. During negotiations of the USA agreement, however, Weiss indicated to Saf T Lok management that he would be unable to raise the full $10 million, although he still proposed to raise a much smaller amount, perhaps as little as $2 million to $3 million. USA eventually received total funding of only $150,000.

b. Saf I Lok Enters Into the USA Distribution Agreement

Despite USA's lack of financing and inability to perform, Saf T Lok entered into a distribution agreement with USA on February 12, 1998. The contract granted USA exclusive rights to distribute Saf T Lok's products to retailers, and provided that USA would purchase up to $20 million of gun locks over a three-year period. However, as a practical matter, the agreement only committed USA to purchase $1 million of locks. Specifically, the agreement provided that USA could terminate the contract after fulfilling the "initial order" of $7 million of gun locks. It also provided that any purchase orders Saf T Lok received from "any customer" would count towards satisfying USA's "initial order" obligation. On February 11, 1998, one day before entering into the USA agreement, Saf T Lok had announced its receipt of a $6 million purchase order from a third-party wholesaler ("Wholesaler"), potentially leaving USA with a purchase obligation of only $1 million.

c. Saf T Lok Makes False or Misleading Statements and Omissions in Describing the USA Distribution Agreement

Saf T Lok published a series of materially false or misleading statements concerning the USA agreement in various press releases and Commission filings in 1998. First, a February 19, 1998 Saf 1 Lok press release announcing the USA distribution agreement included the false statement that USA "had secured $10 million in working capital" to start its business plan and advertising campaign. Additionally, the release falsely claimed that USA had an "obligation to purchase at least $20 million" of Saf T Lok products, and quoted Saf T Lok's president and chief executive officer as saying that the agreement was "guaranteeing $20 million in sales." The following month, on March 13, 1998, SafT Lok filed a Form 8-K that discussed the terms of the USA distribution agreement, but failed to

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disclose that USA was not financially capable of performing its obligations.

Two months later, in May 1998, SafT Lok made additional false or misleading statements and omissions about the USA distribution agreement. Saf T Lok's Form 10-Q for the first quarter ended March 31, 1998 (filed May 20, 1998) falsely described USA's minimum purchase obligations as "in addition" to the $6 million purchase order received from the Wholesaler. Further, the Form 10-Q added: "Based on the aforementioned, management believes it has adequate capital to fund operations for a reasonable period of time." At that late date, however, three months after the purported USA agreement was entered into, USA still had no capital and had not made a single payment to Sal T Lok under the distribution agreement. Finally, in a May 21, 1998 earnings announcement, Sal T Lok falsely stated that the USA contract would provide a "minimum of $20 million in orders over a 24-month period." The release also attributed to Saf T Lok's president and CEO the baseless claim that, in light of the USA contract, "the Company will be profitable in the

next quarter."

4. Saf T bk Announces, Then Voids, a Major Development Contract

In May 1998, Sal T Lok entered into a contract with a laser technology company to develop a fingerprint recognition system, mounted on a handgun, that would unlock the weapon only if the user's fingerprints matched the fingerprints pre-set in the system. The laser technology, if effectively applied to Sal T Lok's products, had the potential to revolutionalize the gun locks. However, the technology necessary to implement such a product was unproven, and SafT Lok lacked the resources to finance its development. Sal T Lok's chairman authorized the expenditure of no more than $20,000 to investigate the possible development and application of the technology. Saf T Lok entered into a contract with the laser technology company in May 1998.

On May 26, 1998, Saf T Lok issued a materially false and misleading press release announcing the contract. The release failed to disclose material uncertainties about the technology or that Saf T Lok lacked the resources to finance the development of the proposed product. On the contrary, the release boasted that the fingerprint recognition system "will be available by the end of the year."

Approximately two weeks later, Sal T Lok voided the contract because it was unwilling to commit the required resources to it. Sal T Lok issued a press release that same day, after the market closed, announcing termination of the agreement.

S. Saf T Lok Pays For and Reviews Drafts of a False and Misleading Third-Party Research Report

In February 1998, Saf T Lok paid $5,000 to a securities analyst ("Analyst") to prepare a research report for dissemination concerning Saf T Lok and its securities. The Analyst received certain financial information from the company, and spoke to senior management and another employee about Sal T Lok and its products. The Analyst later sent a draft of his research report to Sal T Lok, and had a conference call with its CEO to discuss possible revisions.

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The report, issued later under the name of State Street Securities, strongly recommended an investment in Saf T Lok, describing the company and its products in glowing terms and projecting dramatic increases in Saf T Lok's sales, earnings and stock price. State Street Securities placed the report on the PR Newswire and on the Business Wire on February 17, 1998.

The research report included false or misleading forecasts about the company's business prospects. For example, the report projected sales of two million units in 1998 and three million units in 1999, with net sales of

$60 million in 1998, and $90 million the following year, figures that Saf T Lok's chairman and CEO both later acknowledged were unreasonable. The report further said that the stock price "could rise to $20 -$40 per share

over the next 12-24 month period." Saf T Lok officials reviewed the report - including those figures - before it was published, and knew that those projections were unreasonable and far exceeded the company's own projections. Nevertheless, SafT Lok did not object to those financial projections at the time the report was prepared or disseminated, issue any corrective disclosure, or take any steps to halt distribution of the report until May 1998, three months after the report was made public.

6. The Market for Saf T Lok Stock

Several of the false or misleading statements discussed herein had a material impact on the daily trading volume and price of Saf T Lok common stock. For example, for the month of January 1998, Saf T Lok stock traded at an average price of approximately $3 per share, at an average daily volume of approximately 330,200 shares. On February 17, 1998, the day State Street Securities released its "strong buy" recommendation, the stock closed at $4 3/16 per share, an increase of approximately 9.8 percent from the previous day's close of $3 13/16 - on trading volume of nearly 2 million shares. For the three-day period of February 17 through

February 19, 1998 (the date SafT Lok announced the USA distribution agreement), the stock's average daily trading volume was nearly 1.4 million shares. Finally, on June 12, 1998, the first full trading day after Saf T Lok announced the termination of the fingerprint development contract, Saf T Lok's stock price fell approximately 23 percent, from $4.25 per share

to its closing price of $3.25 per sharefi

C. LEGAL ANALYSIS

1. Applicable Law

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the use of manipulative and deceptive practices in connection with the purchase or sale of a security. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rules 13a-11 and 13a-13 require issuers to file Forms 8-K (as necessary) and Forms 10-Q (quarterly), respectively. Inherent in Section 13(a)'s reporting requirement is the requirement that all reports be complete and accurate. A violation of Section 13(a) occurs if periodic reports contain materially false or misleading information. Moreover, Rule 12b-20 requires that such reports contain, in addition to all expressly required disclosures, such other information as is necessary to ensure that the statements made in the report are not materially misleading.

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2. Liability for False and Misleading Disclosures Concerning The Purported Consulting, Sales and Development Contracts

a. The AB Business Consulting Agreement

Saf T Lok violated the antifraud provisions, as well as Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, by falsely describing the AB contract as a bonafide consulting agreement in its Form 8-K filed November 14, 1997, and failing to disclose the true circumstances concerning the formation of the purported agreement. The disclosure was material because it concerned the supposed hiring of a firm to provide advice on raising capital, and involved the disposition of approximately eight percent of the gross proceeds of the Regulation S offering - facts of import to reasonable investors of a company facing possible delisting. Full disclosure of the facts and circumstances concerning the AB agreement was necessary to make Saf T Lok's disclosure not misleading.

b. The USA Distribution Agreement

Saf T Lok violated the antifraud provisions by making false and misleading statements and omissions in two press releases concerning the purported USA distribution agreement. Saf T Lok also violated the antifraud provisions, as well as Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13, and 12b-20 thereunder, by making false or misleading statements and omissions concerning that purported agreement in two Commission

filings.Z The disclosures falsely described USA's financial ability to perform its obligations under the contract, and misrepresented the terms of the agreement. The false or misleading statements was material to investors, since Saf T Lok at that time had little sales and no profits. Full disclosure of the circumstances surrounding the USA agreement was necessary to make Saf T Lok's disclosures not misleading.

c. The Laser-Based Fingerprint Development Contract

Saf T Lok also violated the antifraud provisions by issuing the false and misleading press release on May 26, 1998 that announced the fingerprint development contract, which included terms that SafT Lok was unwilling to accept. The press release was material because it reported a major development - computer-based fingerprint technology - that could have fundamentally changed the nature of Saf T Lok's products.

3. Direct Liability for Inaccurate Projections In a Research Report Paid for by Saf T Lok

Under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Saf T Lok is directly liable for the materially false and misleading projections contained in the analyst report ultimately issued by State Street Securities. SafT Lok paid $5,000 to an analyst to prepare the State Street Securities report; Saf T Lok senior management provided information (including a copy of the illusory USA contract) to the author, edited a draft of the report, represented that the report was consistent with the company's views, and then released the report to State Street Securities for the purpose of public distribution. By exercising such direct control over the report, SafT Lok is directly liable for its contents. SafT Lok management recognized that the report's projections lacked any reasonable basis and they far exceeded internal company projections. For example, the report

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projected sales of two million units in 1998 and three million units in 1999, with net sales of $60 million in 1998, and $90 million the following year. The report further said Saf T Lok's stock price "could rise to $20-$40 per

share over the next 12-24 month period."

Iv.

On the basis of this Order and the Offer of Settlement submitted by the Respondent, the Commission finds that Saf T Lok violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.

In view of the foregoing, the Commission has determined to accept the Respondent's Offer of Settlement.

Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Saf T Lok cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz Secretary

Footnotes

The findings herein are made pursuant to Saf T Lok's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

In an unrelated matter, Weiss, 46, of Monsey, New York, was convicted in November 1999 after a lengthy trial in federal court in Orlando, Florida of 78 counts of racketeering, wire fraud, money laundering, and other crimes in connection with the looting of millions of dollars from a life insurance company. Weiss fled during the start of jury deliberations, and became a fugitive. He was sentenced in absentia to 845 years in prison and ordered to pay a $123 million fine and another $125 million in restitution. He was arrested in Vienna, Austria, on October 24, 2000, and is awaiting extradition proceedings.

For the first quarter of fiscal 1998, Saf T Lok announced a net operating loss of approximately $76,000 on gross revenue of approximately $277,000. The USA contract did not make SafT Lok profitable for any quarter, as neither the Wholesaler nor USA met its obligations under their respective agreements.

State Street Securities, now known as Taylor Stuart Financial, is a registered broker-dealer based in New York, and is not related to State Street Bank and Trust Co. State Street Securities was the placement agent in Saf T Lok's $3 million Regulation S offering in 1997. State Street

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Securities distributed the report at Saf T Lok's invitation, after reviewing its contents with Saf T Lok's senior management.

On February 17, 1998, the date the State Street Securities report was released, Saf T Lok stock closed at $4 1/32 per share.

SafT Lok's June 11, 1998 press release announcing the termination of the fingerprint development contract also announced other events adverse to the company.

Z See supra at Section III B(3)(c).

An issuer that sufficiently involves itself in the preparation of a third-party research report is liable for any false statements or baseless projections contained in the report under a separate theory of liability, sometimes referred to as the "entanglement theory." Under this theory, the issuer's prepublication involvement is such that the information in the report can be reasonably attributed to the company itself. See e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980); Schaffer v. The Timberland Co., 924 F. Supp. 1298, 1310 (D.N.H. 1996) ("liability may attach to an analyst's statements where the defendants have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree"); In re ICN/Viratek Securities Litigation, Fed. Sec. L. Rep. (CCH) 1199,213 (S.D.N.Y. 1996); In the Matter of Presstek, Inc., Exchange Act Rel. No. 39472 (December 22, 1997). Saf T Lok, however, did more than merely involve itself in the publication of the State Street Securities report. By paying for the report, which, as described above, Saf T Lok knew contained false and misleading information, Saf T Lok is directly liable for the report's contents, just as it would be liable for a false and misleading press release prepared by a third-party public relations firm. SEC v. Green Oasis Environmental, Inc., SEC Lit. Rel. No. 15876 (D.S.C. August 21, 1998) (injunction entered against issuer that paid public relations firm which issued false and misleading press releases as part of fraudulent scheme).

http ://www. sec. gov/Iitigation/admin/34-43753 . htm

Home I Previous Page Modified: 12/2612000

Q ,cQ

9/10102 5:27 PM


EXHIBIT C


flEC'Dby


444.

Case No. 0 —Civ - C(U O (72~16" P

)

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

JAN 162001 MADDX

CC REN

St pt

JAN 122001 CLARWCE MADDOX

U.S. DIST. CT. 5.0. aP FLA. •

V.

CLOSED CASE FRANKLIN W. BROOKS AND JOHN L. GARDNER,

Defendants.

FINAL JUDGMENT AS TO FRANKLIN W. BROOKS

Plaintiff Securities and Exchange Commission ("COMMISSION"), having filed a

Complaint for injunctive and other relief (the "COMPLAINT") charging Franklin W. Brooks

r'BROOKS" with violations of Section 10(b) of the Securities Exchange Act of 1934

("Exchange Act"), IS U.S.C. §§ 78j(b), and Rule lOb-S. 17 C.F.R. §§ 240.10b-5 promulgated

thereunder, and BROOKS having executed the annexed Consent and Undertakings of Franklin

W. Brooks ("CONSENT"), having admitted to the jurisdiction of this Court over him and over

the subject matter of this action, having waived the filing of an Answer pursuant to Rule 12 of

the Federal Rules of Civil Procedure and the entry of findings of fact and conclusions of law

pursuant to Rule 52 of the Federal Rules of Civil Procedure, and, without admitting or denying

the allegations contained in the COMPLAINT (cxcept as to jurisdiction, which are admitted),

having consented to the entry of this Final Judgment as to Franklin W. Brooks ("FINAL

7


JUDGMENT"), without further notice:

I.

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that BROOKS be and

hereby is permanently enjoined and restrained from, in connection with the purchase or sale of any

securities, directly or indirectly, by the use of any means or instrumentality of interstate commerce,

or of the mails or of any facility of any national securities exchange:

(I) employing any device, scheme or artifice to defraud;

(2) making any untrue statement of a material fact or omitting to state a material fact

necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading; or

(3) engaging in any act, practice, or course of business which operates or would operate

as a fraud or deceit upon any person;

in violation of Section 10(b) of the Exchange Act [15 U.S.C.. 78j(b)], and Rule lOb-S promulgated

thereunder [17 C.F.R240.lOb-5].

H.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Final

Judgment is binding upon BROOKS, his agents, servants, employces, and attorneys-in-fact, and

upon those persons in active concert or participation with BROOKS who receive actual nOtice of

this Final Judgment by personal service or otherwise, pursuant to Federal Rule of Civil Procedure

65(d).

III.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that BROOKS shall pay

civil penalties of S55,000 pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C.. 78u(d)(3).

2


Iv.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that BROOKS shall

deliver, within fourteen (14) business days of the entry of the FINAL JUDGMENT, a United States

postal money order, certified check, bank cashiers check, or bank money order in the amount of

$55,000, representing the civil penalties described in paragraph III above, to:

Office of the Comptroller Securities and Exchange Commission 450 Fifth Street, N.V. Mail Stop 0-3 Washington, D.C. 20549.

The check or money order shall be made payable to the "SECURITIES AND EXCHANGE

COMMISSION" and bear on its face the caption and case number of this action and the name of

this Court. BROOKS shall deliver a copy of the check or money order, within fourteen (14)

business days of the entry of the FINAL JUDGMENT, to:

Erich T. Schwartz Securities and Exchange Commission 450 Fifth Street, N.W. Mail Stop 7-6 Washington, D.C. 20549-0706.

V.

IT is FURTHER ORDERED, ADJUDGED, AND DECREED that the annexed

CONSENT be, and hereby is, incorporated herein with the same force and effect as if fully set forth

herein.

VI.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that BROOKS shall

fully comply with his undertakings as set forth in the annexed CONSENT.

3

=


VII.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall

retain jurisdiction of this action for all purposes, including implementation and enforcement of this

FINAL JUDGMENT.

There being no reason for delay, the Clerk of Court is hereby directed, pursuant

to Rule 54(b) of the Federal Rules of Civil Procedure to enter this FINAL JUDGMENT forthwith.

lt,a C(xt 6L CitS' -J4 vJ (Cc, ((

J$NITED STATDSTR1CTbGE

Date: -kf:?2001.

4


EXHIBIT D


ANALYTICAL PROCEDURES

WE REVIEWED THE CLIENT'S TRIAL BALANCE AND PRELIMINARY FINANCIAL STATEMENTS. WE COMPARED THE BALANCES FOR THE CURRENT YEAR TO PRIOR YEAR.

THE CLIENT HAS A RELATIVELY LOW LEVEL OF SALES AND RESULTING ACCOUNTS RECEIVABLE AND COST OF GOODS SOLD. AS IS NORMAL, ADMINISTRATIVE EXPENSES ARE HIGH AS WELL AS PROFESSIONAL, INTEREST AND NON-CASH ITEMS. INTEREST EXPENSE WAS HIGH DUE TO THE RECOGNITION OF $431,250 OF INTEREST EXPENSE ON THE BENEFICIAL CONVERSION OF THE DEBENTURES. THE NON-CASH EXPENSES CONSIST OF AMORTIZED DEFERRED COMPENSATION, FEES ASSOCIATED WITH THE SALE OF THE DEBENTURES, OTHER EXPENSES ARE FOR OPTIONS AND STOCK ISSUED FOR COMPENSATION AND SERVICES.

DURING THE YEAR WE ASSISTED THE CLIENT WITH THEIR IOQ'S AND THEREFORE HAD SOME INSIGHT BEFORE THE AUDIT, OF CERTAIN AREAS THAT WE WOULD NEED ADDITIONAL ATTENTION REGARDING ACCOUNTING. DUE TO THE COMPLEXITY OF THE TRANSACTIONS THAT FLOW THROUGH THE EQUITY PORTION OF THE FINANCIAL STATEMENT, THESE TRANSACTIONS WERE CAREFULLY REVIEWED WITH THEIR CORRESPONDING AGREEMENTS.

THERE WERE NO HIGHLY UNUSUAL ITEMS NOTED WHICH WOULD REQUIRE SPECIAL ATTENTION BEYOND OUR NORMAL AUDITING PROCEDURES.


EXHIBIT E

• Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198

i:)

AUDIT PLANNING QUESTIONNAIRE

CLIENT NAME: Saf T Lok, Inc.

DATE OF FINANCIAL STATEMENTS: December 31, 1999

INSTRUCTIONS

This form should be used during the planning phase of the engagement, in order to (1) to obtain a basic knowledge of the entity's industry, operating, and ownership characteristics, and (2) to assess the risk of material misstatement due to fraud. This knowledge of the client's business and industry helps the entire engagement team communicate effectively with management on audit-related matters. Gaining an understanding of the client's business and industry and assessing the risk of material misstatement due to fraud are an ongoing process. The auditor should gather as much information on the client's business and industry as is needed to assist in assessing the risk of material misstatement, whether caused by error or fraud, and in developing an overall audit strategy. As the auditor performs each audit, he or she should continually update this form to reflect the knowledge gained in previous years. Before completing this questionnaire, the auditor should become familiar with the concepts discussed in Chapter 3.

I. KNOWLEDGE OF THE ENTITY'S INDUSTRY, OPERATING, AND OWNERSHIP CHARACTERISTICS

1. Describe the client's business and industry.

Manufactures an integrated gun lock. Presently their competition are manufacturers of trigger gun locks, which are signifigantly less expensive.

2. Pertinent information about key stockholders:

Name of Stockholder Title Ownership Interest Background

Frank Brooks President Less than 1% -Chairman of BOD since 1996; President and CEO of the company since June 1998; founded SafT Lok Corporation in 1989


3

Name of Stockholder Title Ownership Interest Background

Jeff Brooks Vice President Less than 1% Director of the company since 1996; VP, Secretary, Treasurer of the Company since November 1996; Manager of research and development since 1989.

3. Pertinent information about key management employees:

Years with the Name of Employee Title entity

Frank Brooks President 11 years Jeff Brooks VP 11 years Bill Schmidt CFO 5 years

4. Members of the board of directors are as follows:

Name of Director Director Since

Frank Brooks 1996 Jeff Brooks 1996 William Schmidt 1996 Dennis DeConcini 10/97 James Stanton 10/97

5. Members of the audit committee are as follows (if such a committee does not exist, write "None"):

Name of Member Member Since

Dennis DeConcini 1997 James Stanton 1997


6. Affiliated organizations or related parties:

7. Describe significant trends within the industry (e.g., growing, stable, or declining)

Due to political agendas the sales of the Saf T Lok gun lock have not been signifigarit. There are several law enforcement agencies that are using the gun lock. Until there is legislation requiring this type of gun lock as opposed to a much cheaper trigger lock, or a gun maufacturer that puts this lock on their guns, sales will probably remain minimal.

8. Describe how the client's growth and financial results compare with those of the industry and the reasons for significant variances. The clients growth has been minimal for the reasons mentioned above. It is difficult to compare with others in the same industry because no one else manufacturer's this same type of gun lock. But in comparison to others that manufature any kind of gun lock Saf I Lok's sales are low.

9. If the entity is labor intensive, comment on any unusual labor problems and on the degree of unionization within the labor force. N/A

10. Comment on the client's competition, including significant shifts in market share.

See answer to questions 7 and 8


3

11. Describe the nature of the client's significant assets, liabilities, revenues, and expenses.

Assets cash, inventory, and patents; Liabilities - accounts payable, and debetures payable Revenues - sales to law enforcement agencies; Expenses - legal and professional fees, consulting and salaries

12. Describe the extent of government regulations that may affect the client.

Government regulations can have a dramatic effect on sales as described in the response to #7.

13. Describe the methods used to advertise, sell, and distribute the entity's products or services. The company goes to gun shows, has a website, connecting with potential customers via the internet.

14. Describe the extent to which the computer is used in significant accounting applications. The computer is used for all accounting applications

15. Describe the specialized accounting principles, practices, and methods used by the client. none


16. Describe whether new accounting pronouncements are expected to have a material effect on the company's financial statements. none

17. Describe any new auditing pronouncements that may affect the nature, timing, or extent of the current audit period. Communication with the audit committee

18. Is a specialist needed to complete the engagement? Describe. no

19. Review prior years' workpapers and identify areas that pose the greatest audit exposure (e.g., because of dollar value of the account or weaknesses in internal control) or that may result in expanding audit procedures. Describe. Equity section due to the various issuances of options, stock, and non cash transactions that involve stock

20. Describe any additional procedures the client asked us to perform that are beyond the minimum requirements of the audit (e.g., confirm all receivables). none


J

)

21. Summarize the extent of anticipated client assistance in preparing workpapers and pulling supporting documents for examination. The client will assist in the preparation of schedules for the workpapers. See checklist given to client as to detail of information they will provide.

22. Will it be necessary to use the report of another auditor? Describe. no

23. Summarize the staffing plan:

Number of Years on this Staff Name Title Engagement

Tiffany Kennedy Accountant 2 Harvey Goldberg Partner 2 Terikackwith Accountant 0

24. Summarize tentative dates of importance to the audit engagement (e.g., inventory observation date, fieldwork, date audit report is to be issued). Completed by March 31, 2000

II. ASSESSMENT OF THE RISK OF MATERIAL MISSTATEMENT DUE TO FRAUD

Management Characteristics


C)

YES NO N/A

1. Is a significant portion of management's compensation represented by bonuses, stock options, or other incentives, the value of which is contingent upon the company achieving unduly aggressive targets for operating results, financial position, or cash flow? _x_

2. Does management display an excessive interest in maintaining or increasing the company's stock price or earnings trend through the use x of unusually aggressive accounting practices?

3. Does management have a tendency to commit to analysts, creditors, and other third parties to achieve what appear to be unduly aggressive x or clearly unrealistic forecasts?

4. Does management pursue inappropriate means to minimize reported x

earnings for tax-motivated reasons?

5. Does management fail to effectively communicate and support the company's values or ethics, or communicate inappropriate values or x

ethics?

6. Is management dominated by a single person, or a small group, without compensating controls such as effective oversight by the board of directors or audit committee? _x_

X

7. Is there inadequate monitoring of significant controls?

8. Has management failed to correct know reportable conditions on a x

timely basis?

9. Does management tend to set unduly aggressive financial targets and x expectations for operating personnel?

10. Does management display a significant disregard for regulatory x

authorities?

11. Does management have a history of employing an ineffective - x accounting, information technology, or internal auditing staff?

12. Do nonfinancial management excessively participate in, or display an excessive preoccupation with, the selection of accounting principles or x the determination of significant estimates?


13. Is there a high turnover of senior management, counsel, or board members?

14. Are there frequent disputes with the auditors (current or predecessor x auditors) on accounting, auditing, or reporting matters?

15. Are there unreasonable demands on the auditor, including x unreasonable time constraints, regarding the completion of the audit or the issuance of the auditor's reports?

16. Are there formal or informal restrictions on the auditor, including restricted access to people or information and communication with the x board of directors and the audit committee?

17. Does management display a domineering behavior in dealing with the auditor, especially involving attempts to influence the scope of the . x auditor's work?

18. Is there a known history of securities law violations or claims against the company or its senior management alleging fraud or violations of x securities laws?

Industry Conditions

YES NO N/A

1. Are there new accounting, statutory, or regulatory requirements that x could impair the financial stability or profitability of the company?

2. Is the company experiencing a high degree of competition or market x saturation, accompanied by declining margins?

3. Is the company's industry declining with increasing business failures x and significant declines in customer demand?

4. Are there rapid changes in the company's industry, such as high vulnerability to rapidly changing technology or rapid product x obsolescence?

Operating Characteristics and Financial Stability

YES NO N/A

I. Is the company experiencing difficulty generating cash flows from x


YES NO N/A operations while reporting earnings and earnings growth?

2. Is there significant pressure to obtain additional capital necessary to stay competitive considering the financial position of the company, x including need for funds to finance major research and development or capital expenditures?

3. Are the company's assets, liabilities, revenues, or expenses based on significant estimates that involve uncertainties, or that are subject to x potential significant change in the near term in a manner that may have a financially disruptive effect on the company?

4. Are there significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by x another firm?

5. Are there significant unusual or highly complex transactions, especially those close to year-end, that pose difficult "substance over x form" questions?

6. Does the company have significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to x be no clear business justification?

7. Does the company have an overly complex organizational structure involving numerous or unusual legal entities, managerial lines of authority, or contractual arrangements without apparent business x purpose?

8. Is it difficult to determine the organization or individuals that x control(s) the company?

9. Has the company been experiencing unusually rapid growth or profitability, especially compared with that of other companies in the x same industry? - - -

X

10. Is the company highly vulnerable to changes in interest rates?

11. Does the company have an unusually high dependence on debt, a marginal ability to meet debt repayment requirements, or debt x covenants that are difficult to maintain?

12. Does the company have unrealistically aggressive sales or profitability x incentive programs? _____


YES NO N/A

13. Is the company facing the threat of imminent bankruptcy or X

foreclosure, or hostile takeover?

14. Could the company potentially have adverse consequences on significant pending transactions, such as a business combination or X

tract award, if poor financial results are reported?

15. Is the company experiencing poor or deteriorating financial position when management has personally guaranteed significant debts of the x company?

Misappropriation of Assets

Susceptibility of Assets to Misappropriation

1. Does the company have large amounts of cash on hand or process significant cash transactions?

2. Does the company's inventory consist of small-size, high-value, or high-demand items that are susceptible to theft?

3. Does the company have easily convertible assets, such as bearer bonds, diamonds, or computer chips?

4. Does the company have fixed assets that are susceptible to misappropriation, such as small size, marketability, or lack of ownership identification?

Controls

1. Is there a lack of appropriate management oversight?

2. Is there a lack of job applicant screening procedures relating to employees with access to assets susceptible to misappropriation?

3. Does the company have inadequate recordkeeping with respect to assets susceptible to misappropriation?

4. Is there a lack of appropriate segregation of duties or independent

YES NO N/A

X

X

X

X

YES NO N/A

x

X

X

X


checks?

5. Is there a lack of appropriate system of authorization and approval of x transactions?

6. Does the company have poor physical safeguards over cash, x investments, inventory, or fixed assets?

7. Is there a lack of timely and appropriate documentation for x transactions?

8. Is there a lack of mandatory vacations for employees performing key x control functions?

Other Consideration Relating to Fraud

1. Describe below any additional fraud risk factors or conditions identified as being present, and whether there are specific controls that mitigate the risk.

No knowledge of fraudulent activities, aware of risk of misstatement

2. If the entity has established a program that includes steps to prevent, deter, and detect fraud, inquire of those persons overseeing such programs as to whether any fraud risk factors have been identified.

Per Bil Schmidt no formal program is in effect

3. Inquire of management or the owner/manager about (1) their understanding regarding the risk of fraud in the entity and (2) whether they have knowledge of fraud that has been perpetrated on or within the entity. Some examples of matters that might be discussed as part of the inquiry are (1) whether there are particular locations, business segments, types of transactions, account balances, or financial statement categories where fraud risk factors exist or may be more likely to exist, and (2) how management may be addressing such risks.

Managements understands the risk of fraud, but is not aware of any fraudulent actions


4. Document below whether the assessment of the risk of material misstatement due to fraud calls for (1) an overall response; (2) a specific response to a particular account balance, class of transactions, or assertion; or (3) both. Describe whether the nature, timing, and extent of audit procedures have to be modified, and how. Also, describe any specific responses undertaken.

Assessment of material misstatement of risk related to fraud calls for an overall response and a

Specific response to certain area. Due to lack of controls we requested that inventory be counted

at year end. We also confirmed significant AT and A/R.

Prepared by Tiffany Kennedy 4 Date 2/19/00

Approved by Harvey Goldberg Date 3/20/00

Updated in subsequent years as follows:

Year Updated by Date


EXHIBIT F


6K

SAP TLOK,INC FYE 12/31/99

TNK 1/14/00 INVENTORY OBSERVATION

SAP T LOK HAS ONE LOCATION WHERE THEIR INVENTORY IS STORED. THIS IS THE SAME LOCATION OF THEIR CORPORATE OFFICE.

SUSAN HOLICK, THE INVENTORY MANAGER COUNTED AND TAGED THE INVENTORY. SHE STARTED THIS PROCESS APPROXIMATELY ON 12/20/99 AND COMPLETED THE PROCESS ON 1/10/00. SHE HAD THE RACKS CLEARLY LABELED WITH PART NUMBERS. BOXES THAT WERE LOCATED ON THE WAREHOUSE FLOOR WERE GROUPED TOGETHER BY PART AND CLEARLY LABELED AND TAGGED. WHILE COUNTING THE INVENTORY if APPEARED THAT ALL AREAS HAD BEEN TAGGED AND COUNTED. THE ONLY AREA THAT DID NOT HAVE TAGS WAS THE WORK IN PROCESS AREA. THIS AREA CONSISTED OF A SMALL AMOUNT OF INVENTORY DUE TO THE LACK OF PRODUCTION.

DUE TO THE LACK OF SALES IN 1999 THERE IS A SIGNIFIGANT AMOUNT OF INVENTORY THAT IS IN UNOPENED BOXES. HOWEVER THIS DOES NOT INDICATE OBSELESENCE. IF SALES INCREASE IN 2000 THESE PARTS CAN BE USED TO PRODUCE GUNLOCKS.

SAP T LOK HAS HAD VERY FEW SALES; THEREFORE THERE HAS BEEN A SMALL AMOUNT SHIPPED OR RECEIVED SINCE THE END OF THE YEAR.

ON THE DAY OF THE COUNT THERE WAS NO INVENTORY THAT WAS TO BE SHIPPED THAT WAS LOCATED IN THE WAREHOUSE. ALL INVENTORY IN THE WAREHOUSE BELONGS TO THE COMPANY.

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EXHIBIT G


TO: SafT Lok audit ifie

FROM: Teri L. Hackwith

RE: Price testing inventory memo

Harvey & I selected the samples by using the Audit Sampling Worksheet at wp 4457tal The samples were selected from the On Hand Detail Reports by inventory category, e.g., raw materials, wip, finished goods, etc. see ILdL The client starting using the current accounting system, Business Works, in mid-1998. Each inventory item has a beginning balance, which was entered by the former bookkeeper, Cha. However, it became apparent that she entered these balances incorrectly, by misplacing the decimal point. This problem accounted for $181,307.66 of overstatements. See wpI-62 for detail on this testing. The overstatements were compounded by the fact that the accounting system uses average cost to value "physical inventory adjustments" and when building inventory (subassembly component lists). Therefore, those overstated beginning inventory costs get included in the average and overstate the inventory. SafT Lok is on the FIFO inventory method and even though their system uses average cost the difference probably would not have been substantial had the overstated costs not been entered in the system in the first

-"pliVAlso, as part of the price testing, costs were traced to the most recent invoices. See the summarized / results of the inventory price testing at

We also tested the work in process and finished goods by testing the two major parts that go into every finished good; either the grip lock subassembly or the mag lock subassembly. See wp4k,

.5e.t&-for the detail testing of these components. See wp LL..4c7 thimgh A4.6 which are component use reports that show what work in process and finished goods each grip lock or meg lock subassembly goes into. We reviewed the subassembly component lists and traced to vendor invoices for the parts that go into them to come up with a FIFO cost for the subassembly. Then Bill & Harvey reviewed this to determine that all costs were included in these subassemblies. They also reviewed the labor costs and determined the appropriate labor for each subassembly. See wg,,4f6r a time study used for the labor costs on these subassemblies. Based on this information we came up with some significant understatements on the meg lock subassembly, but the grip lock subassembly appeared to be materially correct

100

Per discussion with Sue Holick, inventory manager, the prices for the Inventors' do not fluctuate much, if at all, over time. Therefore, for example, if the price did not change average cost and FIFO would be the same figure. If there were a small variation in the price, average cost and FIFO would differ, but not by a material amount.

3 /

/


p '~l q. Saf T Lok, Inc. Summary of differences for inventory price testing FYE 12131/99 4

E9 Per inventory price schedule at wp 1H ( I $- 75,320.28 client's Inventory, overstated (? Mdt'I differences due to typos at wp LL4-( -a'. (. .1 81,307.66 dients inventory overstated )

Addt'l differences due to testing done on (154.948.96) client's Inventory understated subassemblies at wp LL1-tø

Total differences $101,678.98 net client overstatement

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EXHIBIT H


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UI111ED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-0404

PIP

September 21, 2000

via Facsimile and U.S. Mail

Franklin W. Brooks, CEO Saf I Lok Incorporated 1101 Northpoint Parkway West Palm Beach, Florida 33407

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0CT022000

Re: SalT Lok Incorporated Registration Statement on Form S-3 File No. 333-44054 Filed with the Securities and Exchange Commission on August 17, 2000

Form 10-KSB for the fiscal year ended December 31, 1999 Forms 10-QSB for the period ended March 31,2000 and June 20, 2000 Form 8-K dated April 5, 2000

Dear Mr. Brooks:

We have the fallbwiiigconiménts on thefihin listèdabovd 'Please -file an amended Form S-3 to give effect to these comments. If comments relate to disclosure in your Exchange Act slings, please supplementally respond or amend your Exchange Act reports within 10 business days. To the extent comments on one filing impact disclosure in another, please make corresponding changes to all affected documents.

General

1. As you know, the Division of Enforcement has commenced investigxipns regarding matters related to the company. All persons who are responsible for the accuracy and adequacy of the disclosure in the registration statenment.are urged to be. certain that all information required for investors to make an informed investment decision is provided. Since the company and management are in possession of all facts with respect to the matters under investigation they are responsible for the accuracy and adequacy of the disclosures made.

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5sf T Lok Incorporated Registration statement on Form S-3 page 2

In the event that the company requests acceleration of the effective date of the pending registration statement, the company should furnish a letter at the time of the request which acknowledges the following:

The disclosure in the filing is the responsibility of the company. The company represents to the Commission that should the Commission or the staff acting pursuant to delegated authority declare the filing effective, it does not foreclose the Commission from 1kirg any action with respect to the filing and the company represents that it will not assert this action as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

The company fuither acknowledges, that the action of the Commission or the staff, acting pursuant to delegated authority, in declaring the filing effective does not relieve the company from its full responsibility for the adequacy and accuracy of the disclosures in the filing.

Comments applicable to the entire Form 5-3

2. Please note that we may have further comment once we receive the information requested regarding the private placements for which you are registering shares, as well as the other information we request.

3. It appears you are not registering the common stock that you may issue pursuant to the $50,000 debenture described on page 7 of the registration statement If you are not registering these shares, please clarify the date that you registered them, or when you intend to register these them, and clarify whether these debentures have any registration rights for the common stock that may be issued as payment. Additionaliy, tell us whether the shares underlying the convertible debentures are immediately convertible to common stock, or convertible within one year.

4. We note you are currently registering the shares that may be issued as interest rate payments for two years. Please note that Rule 416 cannot be used to register additional shares used to pay interest, you will need to do this with another registration statement Please advise or revise.

5. Clarify whether interest is payable in common shares at the option of SafT Lok, the debtholders, or both.

6. In the forepart of your document, clearly describe each transaction in which you placed the shares, options, or warrants for which you are registering common stock for resale. Identify the purchasers, and provide the date of the transaction.

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SafT Lok Incorporated Registration statement on Form S-3 page 3

7. Supplementally tell us whether or not Cache Capital (USA) L.P., Alexander Westcott, Inc., J.P. Carey Securities, Inc., Pegasus Capital Inc., or Optimum Fund are broker-dealers or affiliates broker-dealers. We may have further comment.

S. Disclose in the forepart of your prospectus the percentage of outstanding securities of Saf T Lok the shares being offered for resale represent.

9. Supplemeutally tell us whether you have privately sold any additional convertible securities after the date you filed the registration statement We may have further comment

Prospectus Cover Pag

10. Provide the number of shares attributable to each of the methods by which the selling security holders obtained their shares.

IL Empbasize your reference to your Risk Factors section by bold face or other prominent Me. Item 501(b)(5) of Regulation S-B.

Business

11 Move this section so that it follows your Risk Factors section.

13. Your definitions of SafT Lok, we, us, and our are unnecessary. Terms that you use to refer to you or your business should be clear by the context of their use. Please revise.

14. Relocate the disclosure regarding forward looking statements so that it follows your Risk Factors section.

Risk Factors

15. Emphasize your risk factor headings with boldfaced type, or another prominent method.

16. Several of your risk factors state that "there can be no assurance" of, or that you are dependent on various facts or outcomes. The real risk is not the lack of assurance, or dependence, but rather that, for example, your legal proceedings may be resolved against you. Please revise all risk factor disclosure to state the actual risk.

17. Avoid vague descriptions of the impact of the risks you discuss, like "our continued viability will be suspect," "our future remains questionable," and "obstacles to our operations." Revise to specify the impact on your results of operations or financial performance.

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18. Discuss all related risk factors at the same point in the document For example, group the risks related to your operations, your industry and this offering under descriptive sub-headings. Please revise.

19. Add a risk factor discussing the impact of the amortization of the interest expense and conversion discount feature of your outstanding convertible debt on your net income.

Inferior and less expensive gun locks, produced by our competitors, page 1

20. Provide the basis for your statement that gun locks produced by your competitors are inferior, or delete this statement from your risk factor heading.

We have an accumulated deficit, page 2

21. Include the auditor's statement that you have substantially funded your working capital needs by the sale of common stock, warrants and convertible debentures, and the specific language that there is substantial doubt about our ability to continue as a going concern.

Our success requires us -to attract a partner for a business combination. page 2

22. Supplementally advise us, with a view to disclosure, that whether you are currently involved in any negotiations.

In the event we consummate a business combination, page 2

23. In the third bullet point under this heading, provide the number of options held by your officers, directors and affiliates, and provide a weighted average exercise price for those

options.

Our deficit and history of losses, page 2

24. Briefly explain how you have recently raised approximately $875,000.

We have substantial outstanding debt, me 2

25. Disclose whether any of your debt payments are -past due, the amount, the nature of your debt, for example taxes, and all relevant issues about any past due obligations as of the date of the prospectus. Disclose whether any action has been taken or threats have been made to call the debt as applicable, and/or force the company into Bankruptcy. Additionally, in our view your Rule 512 undertakings would obligate the company to file a post effective amendment if it later becomes past due in material amounts of its payments.

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Sal T Lok Incorporated Registration statement on Form S-3 page 5

We are the subject of an SEC investigation, page 3

26. Revise this risk factor to indicate the nature of the SEC's investigation, the securities laws allegedly violated, and the mnner in which they were allegedly violated. Identify any officers or directors allegedly involved, and discuss the impact of resolution of this investigation against you. We may have further comment.

If lezal proceedings pending against us are not resolved in our favor, Page 3

27. Revise this risk factor to describe all pending litigation that may have a material adverse effect on your business.

28. Update the status of the Winner litigation, and disclose whether or not your insurance carriers have determined whether they will provide either indemnity or a defense to these claims.

Purchasers of our shares could suffer substantial dilution, page 4

29. Include disclosure in this risk factor describing the voting dilution shareholders will experience from the issuance of the shares you have reserved.

30. Provide the weighted average exercise price of the outstanding options, warrants, and convertible notes.

31. Clarify whether the 3,992,834 million shares reserved for issuance include the shares in this offering. If not, revise to include these shares in the number reserved for issuance and in the percentage of increased shares after the offering.

32.. Supplementally advise us whether you considered using Rule 429 to carry forward for the 3,992,834 shares that have been registered.

33. Disclose The total amount of convertible debt outstanding, and provide the price per share and number of shares that the debt could be converted into as of the latest practicable date.

34. Include the disclosure in your From I 0-Q for the periods ended March 31, 2000 and June 30, 2000 that you expect to sell more notes to raise sufficient funds to operate during the remainder of the year 2000. As applicable, describe any arrangements and file any contracts as an exhibit.

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Ifthe ctprice of our shares declines and causes us to be delisted from Nasdaq SmallCap ma±et,page4

35. Briefly describe, and quantify, the Nasdaq SinaliCap listing requirements that may cause you to be delisted from Nasdaq, including those in the NASD Interpretive Material regarding Future Priced Securities.

36. Provide more detailed disclosure on the requirements of Rule 15g-9, and specify bow compliance with that rule will affect the ability to sell your shares.

Our products are characterized by continuous and rapid technological advances, pages

37. Clarify what you mean by "operating systems" and "communications protocols"

Where You Can Find More Information, page 4

38. Provide the address of the SEC's public reference room.

39. Revise the statement on page 5 to remove the implication that your disclosure regarding contracts or other documents referred to in the prospectus is not complete. See Rule 411 of Regulation C.

40. Revise the second to last sentence under this heading to include beneficial owners. See Item 12 of Form S-3.

Information Incorporated by Reference

41. Revise the last sentence under this heading to reflect your legal duty to update information in the prospectus.

Selling Security Holders

42. Briefly identify the purchasers of the 6% convertible debentures, describe thepiacement of the warrants, and describe the placement of the options -described in the first paragraph, including the dates of sale. Disclose the exercise price of the options and warrants and the conversion rate for the 6% convertible note.

43. Identify the natural person or persons who have voting and/or investment control over Saf T Lok's securities owned by Cache Capital, Alexander Westoott, J.P. Carey Securities, Pegasus Capital, and Optimum Fund. See Rule 13d-3.

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44. Supplemexitally tell us whether any selling shareholder may transfer its interest in obthinig SafT Lok's shares under the agreement to a third party. If so, identify the third party in the Selling Security Holder table.

Plan of Distribution

45. Disclose whether any selling shareholders have taken a short position in SafT Lok's stock. If any selling shareholders intend to enter into short positions, disclose the effects of selling short on Sal 1 Lok's stock price.

46. Clarify your statement on page 7 that "it is possible that a significant number of shares could be sold at the same time hereunder ... ."

Part

Item 16. Exhibits and Consolidated Financial Statement Schedules

47. Please file all exhibits with your amended registration statement as we may have substantial comments.

Form 10-KSB for the period ended December 31, 1999

Item 3. Legal Proceedings

48. Disclose the total amount of the settlement, and the total costs incurred in connection with the class actions instituted in the Southern District of Florida.

Item 10. Executive Compensation

Report on Repricing of Options, page 15

49. Please clarify the difference between New Exercise Price and Exercise Price.

Form 10-QSB for the period ended June 30, 2000

Item 2. Management's Discussion and Analysis -

Three months ended 6/30/00 compared to three months ended 030199

Revenues

50. Clarify why the difference in revenues is largely a matter of timing. For example, what factors affected total sales? Make similar revisions to your six month comparison period.

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Accounting Comments

Form 5-3

51. Provide a currently dated, signed auditors' consent(s) in your amendment

Form 10-KM for the year ended 121309 Form 10-QSB for the period ended 3131100 Form 10-QSB for the period ended 6(30100

Management's Discussion and Analysis of Financial Condition and Results of Operations

52. Disclose the nature of the $2.8 million you spent during 1998 on "business development that culminated in the Distribution Agreement" and identify who you paid. The additional disclosures should clarify what you received for the $2.8 million you spent. In addition, specifically address if any amounts you spent were paid, directly or indirectly, to USA, the Wholesaler discussed in note 9(b) to your financial statements, or anyone related or affiliated with either entity.

Consolidated Financial Statements

Independent Auditors' Report

53. Your consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended 12/31/98 are also required to be covered by an auditors' report Refer to Item 310 of Regulation S-B.

Note 1(G) and Note 4

54. In view of the downward sales trend and low turnover rate, revise the notes to the financial statements and MD&A to include an analysis demonstrating to a reader why inventory is appropriately stated at the lower of cost or market value and is properly classified as a current asset at each balance sheet date. Refer to Chapters 3 and 401 ARB 43.

Note 1(F),Note 1(H) and Note 6

55. In view of the downward sales trend, revise the notes to the financial statements and MD&A to include an analysis demonstrating to a reader how you determined that long-lived assets, including property and equipment and patents, are recoverable at each balance sheet date. Refer to paragraph 6 of SFAS 121.

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Closing Comments

Please respond to these comments by filing an amended Form S3. If appropriate, amend the Form 10-K and other periodic filings. Include a letter that responds to each staff comment and notes the location of corresponding revisions. Please also note the location of any material changes made for reasons other than in response to staff comments.

To expedite staff review, you may wish to provide complete packages to each of the persons named below. Each package should include a copy of your letter of response and any supplemental information, as well as the amended Form S-3, marked to indicate any changes.

Please direct questions regarding accounting comments to Anne McConnell at (202) 942- 1795, or to James Rosenberg, Assistant Chief Accountant, at (202) 942-1803. Direct questions on other disclosure issues to Amy O'Brien at (202) 942-2885. In this regard, please do not hesitate to contact the undersigned, who supervised the review of your filing, at (202) 942-1950.

Sincerely,

eAssistant Director

Cc: Robert L. Ruben Edward A. Friedman Ruben & Aronson, UI?

3299 K Street, N.W., Suite 403 Washington, D.C. 20007

td 8888ST9 01 ONI >101 .1. dS I.J08 OT:OZ ØgØ-t7t-fl0N


EXHIBIT I


a

-

October 19, 2000

IIA1'D DELIVERED

Ms. Amy Kate O'Brien United States Securities and

Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549

Re: SafT Lok Incorporated (the "Company") Registration Statement on Form S-3 File No. 333-44054 Filed with the Securities and Exchange Commission

on August 17, 2000 Form 10-KSB for the fiscal year ended December 31, 1999 Forms 10-QSB for the period ended March 31, 2000 and June 30, 2000 Form 8-K dated April 5, 2000

Dear Ms. O'Brien:

Pursuant to your instructions during our telephone conversation, I am requesting that you review comments number 54 and 55 on page eight of your comment letter to the Company dated September 21, 2000.

The Company is very mindful of its requirements under FAS 121 and ARB 43. Paragraph 5(e) of FAS 121 provides an example of events or changes in circumstances that indicate when the recoverability of the carrying amount of an asset should be assessed. It states that recoverability should be assessed "when a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing income" exists. When evaluating future cash flows paragraph 9 gives the following guidance. "Estimates of expected future cash flows shall be the best estimate based on reasonable and supportable assumptions and projections. All available evidence should be considered in developing estimates of expected future cosh flows."

The following facts and circumstances were taken into consideration by the Company in not writing down either inventories or the related equipment used to manufacture the inventories:

I. Although the Company has a history of losses, it did enter into a sales agreement with United Safety Action ("USA") for up to twenty million dollars in 1998. If successful


Ms. Amy Kate O'Brien United States Security and

Exchange Commission October 19, 2000 Page Two

this would have made a significant difference in the Company's profitability. Because of this exclusive sales contract the Company eliminated its sales efforts to the retail/consumer market and concentrated on fulfilling the agreement with USA and on sales to law enforcement.

2. During 1999 the Company revived its sales efforts to the retail/consumer market in an effort to overcome the effect of canceling the USA agreement. Unfortunately, the results were not immediate since it takes time to recognize the effect of a new sales promotion program on revenue.

3. Massachusetts, New Jersey and Maryland have initiated legislation to require gun locks. On March 27, 2000, the Maryland Senate passed SB 211 that requires by January 1, 2003 "any new handguns sold in Maryland to, be equipped with an integrated mechanical safety device or other incorporated design technology to prevent children and other unauthorized users from firing the handgun". During the process of this bill going through the Maryland Congress, the Company's President testified at hearings. The language in the bill requires the type of lock that is sold by the Company. Presently, no other lock provides a viable alternative to comply with the Maryland law.

4. In December 1999, the Company engaged the services of the investment banking firm Friedman, Billings and Ramsey ("FBR") to find a strategic alliance partner. It was the Company's intention to either acquire a profitable company or be acquired. In January 2000, discussions were commenced with the CFO of the Parent of a major U.S. gun manufacturer to acquire their Subsidiary. These discussions continued through March 28, 2000, the date of our auditors' report, and are still in progress.

Although items one and two are important, they do not provide us a reasonable and supportable basis to estimate that future cash flows would exceed the value of the assets in question. In determining future cash flows it would be difficult to estimate the effect of the new legislation relating to handguns, but it would definitely be a factor. The Maryland law is certainly favorable to the Company, but the effect on sales would not be felt until 2002. However, we believed that there was enough evidence to support a position that the Company could successfully conclude its discussions to acquire the gun manufacturer, based on the following chain of events:

• 01/05/2000 - Initial introduction and contact made with Parent and Subsidiary. • 01/17/2000 - Meeting by Frank Brooks with President of Subsidiary. • 01127/2000 - Conference call by Frank Brooks with CFO of Parent. • 02/16/2000 - Company and Parent sign confidentiality agreement. • 02/19/2000 - Meeting between Frank Brooks, FBR and CFO of Parent. • 02/24/2000 - Correspondence from FBR to CFO re: structure of sale. • 03/09/2000 - Conference call with Frank Brooks, FBR and CFO to discuss

CFO's meeting with their investment banker. • 03/10/2000 - CFO sends financial information to FBR.



Exchange Commission October 19, 2000 Page Three

• 03/20/2000 - Conference call with FBR and CFO. • 04112/2000 - E-mail from CFO to FBR indicating their intention to move

forward. • 05/12/2000 - Parent sends additional financial information. • 0511712000 - Frank Brooks and FBR meet with CFO in Detroit. • 05/17/2000 - Company sends draft letter of intent to Parent for parties to begin

due diligence. • 06/13/2000 - Company meeting in Washington, D.C. office of FBR with advisors

to Parent. • 06/29/2000 - FBR receives complete due diligence information from Parent. • 07/05/2000 - Additional confidentiality agreement sent to CFO. • 07/13/2000 - Company receives $20,000,000 proposed financing offer from a

first tier collateral based lender. • 07/26/2000 - Company sends amended draft letter of intent to Parent. • 08/18/2000 - Parent sends July 2000 financial information of Subsidiary. • 08/29/2000 - Conference call with Frank Brooks, CFO and President of Parent

regarding July proposal. • 09/12/2000 - Parent sends August 2000 financial information of Subsidiary. • 09/14/2000 - Meeting in New York with Parent's investment bankers and

attorneys, Parent's U.S. and foreign liaisons, Company's first-tier lender, FBR, Company's Washington counsel and Company representatives.

• 09/25/2000 - Conference call between Company's attorney and Parent's attorney. • 10/13/2000 - Letter from Frank Brooks to President of Parent company.

Considering the positive effect that the Maryland law could have on future sales, and assuming that the gun manufacturer would be acquired, we believed that the asset values would be recoverable. The gun manufacturer has annual sales in excess of one hundred million dollars. Their product line would easily absorb the inventory on hand. In addition to the discussions listed above, the Company has received overtures from another gun manufacturer in Europe who wants to sell their company. Pending the Company's concluding a successful agreement with the U.S. gun manufacturer, no further discussions were held with this foreign gun manufacturer. The Company believes that there are opportunities to acquire a gun manufacturer because of the current political and legal climate. The addition of a Saf T Lokrin new guns during manufacturing would materially alter the gun lock controversy and could diffuse future litigation aimed at the gun manufacturer.

You requested that the Company disclose their discussions in Note 1(G) and (F) as a reason for not writing down the inventory and equipment as impaired. The Company believed that it would be detrimental to the discussions to make such a disclosure. Recognizing that the shareholders should be fully informed, Note 9(D) disclosed the agreement with an investment-banking firm and the reason for entering into the agreement, namely to find a strategic alliance partner. The

Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198 - -

—--,'


Exchange Commission October 19, 2000 Page Four

discussions with the Parent of the gun manufacturer were held in the strictest of confidence and if the wrong people at the target company prematurely learned of these discussions the deal would probably be impaired. In the event that happened, and discussions were terminated, management believes that the loss would be significant to the shareholders. It was for this reason that disclosure was not made. In addition, any premature announcement would only serve to improperly affect the stock's market price, which could subject the Company to litigation from shareholders. We believed that the discussions had progressed sufficiently for there to be a probability of success which could be factored into a cash flow analysis, which would demonstrate the recoverability of the assets.

The Company, however, will consider including the following paragraph in its accounting policy note in future annual reports and will include it in their MD&A of Form 10-KSB/A for the year ended December 31, 1999, and its form l0-QSB/A for the quarters ended March 31, 2000 and June 30, 2000 and in future quarterly reports, to the extent applicable:

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.

We believe that the financial statements were fairly stated with respect to inventories and equipment, giving consideration to all of the facts and circumstances available for our review. We respectfully request that you review the information provided in connection with your comments number 54 and 55 and advise us if you come to the same conclusion or would like to discuss the matter further.

Very truly yours,

GOLDBERG WAGNER STUMP & JACOBS LLP

Harvey B. Goldberg, C.P.A.

HBG/jcb

cc: Franklin W. Brooks Robert L. Ruben (by fax) Edward A. Friedman (by fax)


EXHIBIT J


JUL-14-00 FRI 12:44 P11

FAX NO. P. 02/06

GE Capital

-----..- -. .a1 $iiiaI Caçdw( &51c

Wke IiL Omjmtm JSJ Swst. wu PAW CO4F1QN11AL SW kntm rA MI! l5Z77-74I7. rw 415 Y/Amm

July 13, 2000

W. Frank Bra*s Sat 7 I.ok Incorporated iIOI Noilh Point Parkway West Palm Beadi, Fl.. 33407

Dear Mr. Brooks:

GE Capital Commercial Finance, inc. ("GE Capitar) is pleased to cenfirm Its btemst In providing up to $20,000,000 of fItiancing (the 'F'mandng' In support of the proposed acquisition (the "Acquisition Trans-adion') by Saf T t.ok Inc (the "Borrewar) of aft of the stock of Smith & Wesaun Corp. ('Targef). Based upon the iftrmatw you have pTwided, we understand that the BcrTU*t Is a domestic operating corn-PaiY which owns siibeIeLaIJy all of Its asseta and does not have any significant Indebtedness. it is con-tampiated that the Financing would include: a $12150(1,000 Sealer SecuredRe4oWng C',redit Facality 'Re-volver') and a *7,500.000 Senior Secured Term Loan ('Term Loan').

Please undetand that this letter Is simply an indication of interest and does not constitute a commitment orunderfa(dng to provide financkig.

StMARY OF PROPOSED TERMS

BORROWER Sal T Loc. Inc. and Target.

REVOLVING CREDIT FACILITY

AMOUNT Up to $12,500,000 (including a Letter of Credit Subfaclltty of up to $500,000). Letters of Credit would be issued by a bank, and on terms,

4. acceptable to GE Capital, and would be guaranteed or btherwfse backed by GE Capital.

jl-

LENDING FORMULA Up to 85% on Borrower's eligible domestic accounts receivable (assuming dilution of less than 5%). GE Capital would retain the right 1mm time to time to adjust advance rates, standards of eligibility and establish re-ears against avaiiab8tty (Including adjustments to the advance rate lbr increased dliution. The faoe amount of all letters of credit under the Letter of Credit Subfacility wouki be reserved In full against avabbIlIt y.

AMOUNT Up to $7,500,000 would be determined as foflows

Equipment - The lesser of $7,500,000 or 80 0A of the orderly liquidation value of eligible equipment as determined by an appraiser acceptable to GE Cap.

TERM Three (3) Years.

TERM Three (3) Years. with two optional one year renewals.


JUL-14-00 FRI 12:45 P!1 FAX NO. P. 1)3/06

I.

AMORTIZATiON Monthly amortization to be equal monthly principal payments utilizing a ex year sfralgtne amortization sthedule and a balloon payment at MaMw-

If the Revolving Credit Loan were terminated, the Term Loan would Im-mediately be due and payable in lulL

USE OF PROCEEDS For working capital purposes, capital expendItures funding the MqUis-Son Transaction and other corporate purposes to be determined.

p •

INTEREST On the revolving credit advances floating Interest at the Index Rate plus three and one-quarter percent (325%) and on the outstanding balance of the Texrn Loan ftoetiig Interest at the Index Rate plus three and one-heW peccant (3.50%). The Index Rate would be defined as the latest month-end published rate for 304W dealer commercial paper sold through dealers by m*r corporatns which nom%altIj appears In the Monej Rates column of the Wall Street Journal. All Interest expense would be payable monthly in arrears calculated on the basis of a 360 day year and actual days elapsed.

Collections to the Revolving Credit Fmcty would be credited one (1) business day foflowhiq GE Capitars receipt of good funds.

FEES Commitment Fee of $100,000 due and payable to GE Capital upon ac-ceptance of a commitment letter.

Closing Fee of $100,000 payable at dosing.

Letter of Credit Fee equal to two percent (2.0%)per annum (calculated on the basis of a 360-day year and actual days elapsed) on the face amount of the letters of credit, payable monthly In arrears, plus any charges as-sessed by the issuIng bank.

Unused Facthty Fee equal to one quarter of one percent (025%) per an-num (calculated on the basis of a 360-day year and actual days elapsed) on the average unused daily balance of (he Revolver, payable monthly In arrears.

Field examination fee of $750 per person per diem plus out of podcct expenses In connection with the conduct of our initial and ongoing field examinations.

Prepayment premium, payable In the event that the Financing Is termi-nated for any reason prior to the third ertnivessaty of the dosing date (or during any renewal period) as follows: an amount equal to the total corn. milled amount of the Revolver and the amount being prepaid on the Term Loan awitiplied by 3% If terminated during the fist year. 2% If ter-minated during the second year, and 1%!? terminated during the third year (or during any renewal period).

DEFAULT RATES Default Interest and letter of credit fees at 2% above the rate otherwise applicable.

SECURITY Fully perfected first priority security interest in all existing and after-acquired assets (including all real and Intellectual property) of Borrower and Its subsidiaries, if any, (including any insurance or other proceeds). All collateral would be free and dear of other tens, claims and encem-

-2-


JUL-14-00 FRI 12:45 PH FAX NO F. 04/06

branoes. In addon, a pledge of all of the Essued and outstanding capita odc of Boimwer and tts subsidiaries.

Saf T Lok, Inc. will provide a corporate guaranty.

FINANCIAL REPORTING Monthly I agy prepared financial statemen. Yearty Audited finan- aal statements ((rudIng any management letter) prepared by a ac-counting tiwi accepts to GE Capital as well as an annual approved opera&g plan ktcluding monthly cash flow projections and excess bor-rieg waIIabULty for the owing year. Pa equIred: Borrowing Base Ceflificete, coIitaral reports, and such other Information and reports to-quested by GE Capital. Al reports and financial statements to be In form and scope a- eptabl , to GE Capital.

OTHER TERMS AND CONLM11ONS (All to be satisfactory to GE Capital and its counsel) • Acceptable cash management systen s. including the establishment

of Iocicbox account arrangements with daily sweeps of cash to GE Capital.

• Satisfactory completion of all business, environmental and legal due diligence (induding asset appraisals, environmental audits, and cot-lateral audit).

• Corporate structure, capital structure, other debt instruments. mate-rial contracts, and governing documents of Borrower and affiliates, arid tax effects resutting from Acquisition Transaction to be accept-able.

• Satisfactory receipt of detailed financial statement projections of Bor-rower and its subsidlartes including income statement, balance sheet and cash few an a monthly basis for the twelve months foflowing the estli ted dosmg date and on an annual basis for Ilte toltowing Uo fiscal

• Satisfactory background and reference thecks on the Botrower, any guarantors and all other credit parties.

• Satisfactory review of all pending litigation of both Borrower and Tar-get by GE Capital.

• Satisfactory review by GE Capital of e,osting and pending legislation whioh would have a material Impact on Bom,wei's operations.

• Acquisition documents, structure and terms to be otherwise accept. able.

• Limitations an commercial transactions, management agreements, service agreements, and borrowing transactions between Borrower and Its officers. directors, employees and aThllates.

• Limitations on, or prohililtions of, cash dividends, other distributions to equity holders, payments in respect of subordinated debt, payment of management fees to affiliates and redemption of common or pm-fen-ad stock.

• Prctdbilion of a direct or indirect change In control of Borrower. • Acceptable final documentation, • Financial covenants to include a minimum fixed charge coverage ra-

tio and an annual maximum capital expenditure bmft to be deter-mined.

• Mmirnum excess avatabWty at dosing of $1,000,000. • GE Capital syndlcaliorilassignment ,ghts. • Governing taw. California

-3.


JUL-14-00 FRI 12:46 PH FAX NO. 1. . P. 05/06

- J EXPENSES

By signing this letter, regardless of whether the Financing Is approved or closes EomYdmr agrees to pay upon demand to GE Capita) all out-of-pocket expanses (including all legal, environmental and other con-sultant costs and fees) Incurred In connection with this totter and the Financing and a field examination be of 760 per pecon per don, plus actual out-di.pixMt experes In connection with the conduct at O Capital's fti audit

DEPOSIT

Upon acceptance of this letter. Borrower will provide an Initial underwriting deposit of $50,000 (the initial UnderwtIng Daposr) against wtch will be tharged the expenses referred to In the Immediately preced-ingperagreph. Such expenses may begreafer than the Initial Underwriting DMosit later dab. prior to dosing, we may r)ue5t additional underwriting deposits (sixth additional uridcrwdthig deposits, to9ather with On lnWal Undenwlting Deposit, the underwriting Deposlt against tICh will be Chergerj any such additional expenses. The balance of tba Underwriting Deposit net of the expenses refened to in the immediately preceding paragraph) will be:

a) Returned bBorraww ff the credit approval torthe Financing Is not obtained byGE Capital byreason of circumstances other than those set forth in clause (d) bebiiç

b) Crodltedbthe loan account ofBormwerff the Financing ls approved and closes;

C) RetalnedI,yGE Capital e fee If credit approval lsobtained for the Financing and the Financing does not close within tony-fIve (45) days from the date of such approval, whether as a result of your election for my reason riot to do business with GE Capital ore failure to fulfIll any of the conditions of the proposed Financing as approved by GE Capital, and

ci) Retained by GE Capital as a fee if at any time during the credit review process Borrower Intentionally misleads GE Capita) or fails to disclose material Information or elects to remain with its existing Lender or obtain Financing from another source or otherwise terminates GE Capital's efforts hereunder.

The preceding summary of proposed tms and conditions is not Intended to be all-inclusive- Any terms and conditions Welch are not specifically addressed above would be subject to future negottions. Moreover, by slgrthlg this letter, the parties ac&iowfedge that (I) this letter-is not a binding commitment on the past of any peeoti to ptoslde or arrange for financing on the terms and conditions Set forth herein or otherwise (11) any such commitment on the pert of GE Capital would be in a separate written instrument signed by GE Capital following satisfactory upletton of GE Capital's due diligence, Internal review and approval process, including approval by GE Capital's Senior management (which approvals have not yet been sought or obtained); (iii) this letter supersedes any and all discussions and understandings, written or oral, between or among GE Capital and any other person as to the subject matter hereof, and (iv) GE Capital may, at any level of Its approval process, decline any further consideration of the Financing and terminate Its credit review process.

Except as required by law, neither this latter nor its contents will be disclosed publicly or privately except to Those individuals who are your officers, employees or advisors who have a need to know as a result of being involved in the Financing and then only on the condition that such matters may not be further rile-Ck3&ed. No one 51* exoWas required by taw, use the name of. or refer to, GE Capital, or any of Its at-lillates in any correspondence, dtocussion, advertisement or disclosure made in corinec&m with the Fi-nancing and Acquisition Transaction without the prior consent of GE Capita).

Regantless of whether the Financing is approved or closes. Eorrower agrees to trrclemnify and hold GE CpltaI, Its aftillelea and the duiectars, officers, employees, and representatives of any of them, harmless

___ horn and against all claims, expenses (Including, but not limited to, attorneys' fees), damages, and habill-. tins of any kind which may be Incurred by, or asserted against, any such person in connection With, or arising out of, this letter, Me Financing, the As.ulsfljee Transaction, any other misted dnancing, docu-mentation, disputes or environrnental ilablilties or any related investigation, litigation. or proceeding- Un-der no circumstances shall GE Capital or any of Its affiliates be liable for any punitive, exemplary, conse-.

4..

Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198 - --

- - - • JUL-14-00 FRI 12:46 PM FRX NO. r. Ub/Ub

quenU or indirect damages which may be alleged to iult in connection with this letter. the Acquisition Transaction, or the Financing or any other tinancing.

So that vw. may begin our due diligence and field audit, please sign and return this letter, along with your lnIaaI UndawiiUng Deposit before July 31, 2000.

s-s IBE CAPITAL COMMERCIAL FINANCE, INC.

AGREED AND ACCEPTED THIS DAY OF 2000.

SAF T 10K INCORPpRATED

Narne The

-5-


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EXHIBIT L


t-15-ø 04:12P FROM: RUBEN & PRONSON 2029653700 0:15616158888 P:3'4 2:39tid NU*1J?i c5I:ui ui -sI-rO

UNITED STAT5

WAZH$NGTON, D.C. 54-O404 Mul SECURITiES AND EXCHANGE COMMISSION

nivmoi o

November 15,2000

via Facsimile and U.S. Mail

PrnkThi W. Brooks, CEO Saf I Lok Incorporated 1101 NorthpointParkway 'West Palm Beach, Florida 33407

Re SofT Lok Incorporated Registration Statement on Form S-3 File No. 33344054 Filed with the Securities and !xchonge Commission on August 17,2000

Form 10-KSB for the fiscal year ended December 31, 1999 Forms 10-QSB for the period ended March 31,2000 and June 20 v 2000. - Form 8-K dated April 5, 2000

Dear Mr. Brooks:

We have the following comments on your filing. Please file an amended Form S-3 to give effect to these comments, in addition to the other comte in our September21, 2000 letter. If comments relate to disclosure in your Exchange Act filings, please suppleuncotafly respond or amend your Exchange Act reports within 10 business days. To the tent comments on one filing impact disclosure in another, please make corresponding changes to all affected documents.

We considered the proposed financial statement note disclosures that you faxed to us on. November 9, 2000. Based on our comments and on subsequent phone conferences, please provide the following additional information in order to support the assertions in your proposed disclosures:

(I) the cash flow analyses and assumptions you used to determine that inventory and long-lived assets are recoverable;

4I nI%I e Uti .l.s T 7I.0WA7 &i.flY Aft IPITT NDU-15-2003 16:21 20296537 P.03


• NOU-15-2@@@ @4: 13P FROM: RUBEN &ARONSON 202965370 - TO:15616j588 P:4'4

NUtIMJCIO i C ui • ~. ui –I LX1

SifT Lok Inco!porated Registration statement on Form S-3 page 2

(2) the reasons why the assumptions you used, including those related to tbe operation of a gun manufactuier that you have not yet acquired, are reasonable and supportable as required by paragraph 9 of SPAS 121;

(3) dw reasons why you concluded that the proposed acquisition of the gun manufacturer is not probable, such that historical and pro forms financial statements for the pending acquisition are not required in the Form S-3;

(4) the parent status and probability of completing the acquisition, of the gun 4uL, including the remsining unresolved issues and the reasons why

negotiations have continued for over 10 months; and

(5) the identity of the gun manucturcr you are seeking to acquire and any financial informtian that they have provided to you.

Closing Comments

Please respond to these comments by filing an amended Form S..3. If apptupriate, emend the form 10-K and other periodic filings. Include a letter that responds to each staff gummfit.. and notes the location of corresponding revisions. Please "now the location of any material. changes made for reasons other than in response to staff comments

- Please direct questions regding accounting comments to Anne McConnell at (202)942- 1795, or to James Rosenberg, Assistant Chief Accountant, at (202) 942-1-803. Direct questions on other disclosure issues to Amy O'Brien at (202) 942-2885. In this regard, please do not hesitate to contact the undersigned, who supervised the review of your filing, at (202) 942-1950.

Sincerely, — - —7-- , •/ __•__s

Cc: Robert L. Ruben Edward A. Friedman Ruben & Aronson, LLP 3299 K Street, N.W., Suite 403 Washington, D.C. 20007

flfl/flnI5i ci ut.zv 6 H9 13 Tsrp6Or,, ç:gj 00/r NOV-15-2000 16:21 2029653700 P.04


EXHIBIT M


I

) Correspondence File

Goldberg Wagner & Jacobs LLP Certiflei tubIiC Accountants 6L /\QVISOtS

2161 Palm Beach Lakes Blvd., Suite 450 West Palm Beach, FL 33409

(561) 615.8585 Fax (561) 615-8888

www.gwjllp.com December 1, 2000

BAND DELIVERED

CONFIDENTIAL

Ms. Amy Kate O'Brien United States Securities and

Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549

Re: SafT Lok Incorporated (the "Company") Registration Statement on Form S-3 File No. 333-44054 Filed with the Securities and Exchange Commission

on August 17, 2000 Form 10-KSB for the fiscal year ended December 31, 1999 Forms 10-QSB for the period ended March 31, 2000 and June 30, 2000 Form 8.-K dated April 5, 2000

Dear Ms. O'Brien:

Please excuse our delay in responding to your comment letter of November 15, 2000. However, our client's counsel was endeavoring to obtain the consent of the gun manufacturer to disclose their identity. In addition, during the Thanksgiving holiday Sal T Lok's CFO was away and could not be reached. At this date, Jim Rosenberg has received a telephone call from Mr. Fox, the parent ("Parent") company's attorney, identifying the gun manufacturer ("GM"). Obviously, this information is extremely confidential and should not be disclosed to any other parties.

With the knowledge of the identity of the GM I hope that our reasoning and conclusions will become more acceptable. I will respond to your request for additional information in the order asked.

Cash flow analysis and assumptions used to determine that inventory and long-lived assets are recoverable:

In December 1999, Saf T Lok ("STL") engaged the services of the investment banking firm Friedman, Billings and Ramsey ("FBR") to find a strategic alliance partner. In January 2000, a very unique opportunity, to acquire a significant gun manufacturer, presented itself to STL after initial discussions were held with the executives of the Parent of the GM. There was an obvious reason that the Parent was interested in divesting themselves of the GM. Major litigation issues



Exchange Commission December 1, 2000 Page Two

1) ( Goldberg wagner & Jacobs LLP

Ce

from a very minor holding in their portfolio, threatened the stability of the Parent's organization. SU believed it could provide the solution that would mitigate the litigation concerns and could provide the solution to the GM complying with a Settlement Agreement they entered into with the U.S. Government (through inclusion of its gun locks in the GM's products and its focus on gun safety).

The GM has entered into a Settlement Agreement with the U.S. Government in which they agreed to install a built-in, on board, locking system by which the firearm can only be operated with a key or combination or other mechanism unique to that gun. The Agreement provided for compliance starting in sixty days from execution through two years from execution. SU could provide the locking mechanisms that would put the GM in compliance at an earlier date and thereby forestall, and possibly eliminate, the litigation issue entirely. This would be a major benefit to both the GM and STL.

STL was, and still is, selling the grip lock and magazine lock at prices ranging between $55 and 575 to the public and law enforcement. The costs of the locks are $12.23 and $21.37, respectively. The inventory of completed locks, work-in-process and raw materials would result in a total of approximately 31,000 revolver grip locks and 64,000 pistol magazine locks available for sale. During the GM's 1999 fiscal year they sold in excess of 150,000 guns, which were comprised of revolvers and pistols.

Based on the information available, and the need for the GM's compliance with the Settlement Agreement, a formal cash flow analysis was not prepared for the application of the inventory to satisfy the needs of the GM. Assuming a deal could be consummated within six months, management believed that the inventory could be absorbed into the GM's current year's production of revolvers and pistols based on the GM's prior year's sales and year 2000 sales projections.

The state of Maryland passed legislation requiring an integrated locking mechanism in all new handguns sold after December 31, 2002, and New Jersey and Massachusetts are enacting legislation to require gun locks. The language of the Maryland law requires the type of lock that is only sold by SU, and for which STL holds the patents. Management believes the political climate will provide incentives for gun manufacturers and/or purchasers to acquire SU's locking systems. This should enhance the viability of the product and it's salability over the next five years.

Why the assumptions used, including those related to the operation of a gun manufacturer that you have not yet acquired, are reasonable and supportable as required by paragraph 9 of SFAS 121:

The timetable of events provided in my letter dated October 19, 2000 details a very deliberate and concentrated effort on behalf of the two companies to reach some agreement. There was

Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198 - -

)


Exchange Commission December 1, 2000 Pare Three

Goldberg Wagner & Jacobs UPCd AaI

considerable correspondence and discussions, as described in the timetable, which enhanced the credibility of the GM's apparent intention to complete a transaction. However, I believe it is important to relay the following facts. After initial discussions with the Parent's representatives, it was suggested by STL's advisors that SU offer $3.5 million in cash and the assumption of all of the GM's legal and environmental liabilities to acquire the GM. The second draft letter of intent prepared by SU included this offer. When the president of the Parent received this offer he believed that STL was not serious and rejected STL as an acquirer of the GM. SU's management was unaware of this predicament and weeks elapsed with no word from the Parent. Frank Brooks, president of STh, called the Parent's president to determine what was holding up the deal and learned of the bad advice STL had received. A new offer was discussed which required cash of fifteen million dollars and negotiations continued with a significant meeting in New York attended by all of the parties. Unfortunately, shortly after this meeting the president of the Parent resigned and negotiations stalled while the Parent attended to their internal problems.

In mid year an article appeared in a leading financial newspaper indicating that the Parent was putting the GM up for sale. This announcement came after STL received the final due diligence information from Parent, sent Parent an additional confidentiality letter and provided evidence of a twenty million dollar conditional financing offer from GE Capital, which was a requirement of the deal.

In retrospect, it is important to understand the activities at the time they were occurring, in order to put them in the proper perspective. We believe the following facts and circumstances provided us a reasonable and supportable basis for the assumptions made:

• The nature and scope of the contacts with the Parent were at the highest level and were very serious. All of the parties involved were of major importance to the Parent's and SU's organizations. These were meaningful discussions directed towards making a deal for the sale of the GM.

• The GM had intense pressure to comply with their Agreement with the U.S. Government and to deal with the ramifications of the mounting litigation throughout the country. STL believed they could provide a solution to both of these problems that would relieve the Parent of its ongoing and future liability.

• There was a growing awareness of the need to prevent handgun accidents and killings, as was evidenced by new legislation enacted, and being considered, by various states and municipalities.

The management of STL believed they had a reasonable expectation that they could conclude this acquisition within the current year based on discussions with the Parent. It was not inconceivable that this could be accomplished. FASB 121 requires that all available evidence and the likelihood of all possible outcomes should be considered in determining the best estimate of future cash flows to evaluate whether the value of an asset is impaired. It was our judgment,



Exchange Commission December 1, 2000 Page Four

G1 GoIiberg Wagner & Jacobs 112

based on management's assertions, and what we believed were reasonable and supportable assumptions, that there was no impairment loss to be realized as long as there was a reasonable expectation that the GM acquisition could be successfully completed.

The reasons why you concluded that the proposed acquisition of the gun manufacturer is not probable, such that the historical and pro forma financial statements for the pending acquisition are not required in the form S-3:

At December 31, 1999, and at March 28, 2000, discussions had not progressed to the point where SU had more than a reasonable expectation that the deal could be made. Through the first three quarters of 2000 there still was not a probability, but only an expectation, that the GM would be acquired. As previously described, there was no agreement as to the purchase price. Instead of preparing a new draft letter of intent a meeting was held in New York on September 12, 2000. In addition, the parties never reached any understanding to prevent the Parent of the GM from seeking other alternative transactions. The unfortunate outcome of the resignation of the Parent's president was that further negotiations were put on hold, but not terminated. Because of this chain of events it is difficult, if not impossible, to say that the acquisition is probable. However, we still believe there is a reasonable expectation that discussions will continue when the Parent is ready. In the interim, the lines of communication are being kept open.

The current status and probability of completing the acquisition of the gun manufacturer, including the remaining unresolved issues and the reasons why negotiations have continued for over 10 months:

Frank Brooks received a letter from the executive chairman of the Parent, dated October 18, 2000, stating that they are continuing to evaluate their options regarding the GM and understand SU's interest. In addition, Mr. Brooks received a telephone call from the Parent's CFO telling him that STL is still on the list of candidates for the sale of the GM. As a result of that conversation, and prior discussions, STL understands that they are only one of a number of candidates; most of which, if not all, are certainly more substantial entities than STL. This suggests that the probability of a transaction between the Parent of the GM and SU is not currently probable. The Parent is currently considering the legal issues concerning any possible sale and the ramifications they could have. STL believes that the negotiations have continued for ten months because of (i) the complexity of the liability and valuation issues involved in any potential transaction; (ii) the difficult financial and operating situation of STL; (iii) changes in the Parent's management team; (iv) possible alternative transactions that are being considered by the Parent.



Exchange Commission December 1, 2000 Page Five

) :)

Goldberg Wagner & Jacobs UP CW cca &M

The identity of the gun manufacturer you are seeking to acquire and any financial information that they provided to you:

The identity of the gun manufacturer has been provided. STL received schedules of fixed assets, projections of sales and expenses, budgets, selected financial information, product line analysis, internally generated balance sheets and profit and loss statements. The disclosure of this Information is limited by the terms of a confidentiality agreement. I hope we have been responsive to your comments and questions. Please understand that this was, and still is, a very unusual transaction and opportunity for STL. We believe that the possibility of having a favorable outcome was reasonable, under the circumstances, at each date we evaluated the factors. However, as you can tell, the probability has not yet materialized.

Very truly yours,

GOLDBERG WAGNER & JACOBS LLP


HBGjcb

cc: Franklin W. Brooks Edward A. Friedman, Esq. (by fax)


EXHIBIT N


1•

12/19/00 16:19 766 OWE 996 -

2029429531 CF BR 9 AND 10

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-0404

I402 j

Decemb '19, .2000

wiaFacsjm[e and U.S. Mail

Prin W. Brooks, CEO Sa.fTLoklncorporatnd 1101 NorthpointParkway West Palm Beach, Florida 33407

Item SafTLok Incorporated Registration Statement on Form 5-3 File No. 333-44054 Filed with the Securities and Exchange Commission on August 172 2000

Form 10-MB for the fiscal year ended December 31, 1999

LI

Forms 10-QSB for the period ended March 31, 2000, June 30, 2000, and Septembër3, 2000 - Form 8-K dated April 5, 2000

Dear .Mx. Brooks:

We reviewed the niditional information that you sent us on December 4, 2000 and havp the followmg comments that you should comply with in amendments to your 12I3l/99.&m 10-K, and subsequent quarterly slings, within 10 business days of the date of this letter.

Inventory : .• •

1. You have not provided us compelling information to support your conclusion as to the classification of invx)ry. We continue to believe that your classification of all inventory in uent assets, at 12/31/99 and subsequent balance sheet dates, is not appropriate and does not comply with Chapter 3 of ABB 43. In deteiming the appropriate classification of inventory, you considered sales projections that assumed you acquired an existing gun manufacturer. Based on the information you have provided, it does not appear to us that it is appropriate for you to conclude that this acquisijion i9• "reasonably expected" to be consummated and, ifconsurumared, that all your inventory is "reasonably expected" to bc sold within one year of each balance sheet date. Revise your ñnancial statciuenrsto appropriately classify -inventory at each balance sheet date. Refer

t.

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to AICPA Technical Practice Aid Section 2140.13. In addition, revise MD&A and the notes to the finanl statts to disclose how and why you determined that inventory is approp&iately stated at the lower of cost or maiket value at each -balance sheet date

- Pursuant to Chapter 4 of ARB 43.

Other LonaUved Assets

2. We continue to believe that you were required by GAAP to prepare undiscounted cash flow analyses to detennine the recoverability of your long-lived assets. As previously requested, prepare such analyses, at 12/31/99 and subsequent balance sheet datcs as required by paragraph 6 of SFAS 121 and, if applicable, record any impaixmeits required

• by paxgtaph7 of SPAS 121. Cash flow analyses should be baod onassunpions that are reasonable and supportable and should be based on information that existed at the time financial statements were originally issued. Tell us the significant assumptions you use to prepare the cash flow analyses and tell us your basis -for each significant assumption. See paragraph 9 of WAS 121 and SAB Topic 5.CC Question 7. if you record an impairment, provide all of the disclosres required by paragraph 14 of SFAS 121.

C

Please direct questions regarding accounting couimetts to -Anne , McConnell at (202)942- 1795, orb James Rosenberg, Assistant Chief Accountant, at (202) 942-1803. Direct questions on other disclosure issues to Mark Anstin at (202) 9424884. In this regard, please do not hesitate to contact the undersigned, who supervised the review of your filing, at (202)9424950.

Cc Robert LRuben Edward A. Friedman Ruben & Arena, LLP 3299 K Street, N.W., Suite 403 Wnbington,D.C. 20007

Sincerely,

teven C. Dtivall Assistant Director

Prnlrlin W. Brooks, CEO SafTLokincoipmid Deoesubcr 19 2000 page!

ft •1 I

I

E/E d

dli MOSWONd I4afl ]IMO rin L4d9t:Pe 90' Gt


FILE No.019 12#20 '00 16:34 ID:BEDERSON B. CO. FAX:973 736 3163

364 12-99 Topic 5—MIsuslIsnesus Accounting 508943

• are $280 and $480, respectively, which are not impaired on a "held and used" basis.

Question 5. is It appropriate to recognize an impairment loss of $860 ($280+$4804200) based on the excess of the carrying amount of goodwill and fixed assets over net sales proceed?

Jnt.pretiv. Response: No. An i&pair-meat less can be recognised only for the $80 1c ($2804200) on the sale of the facilities. Paragraph 128 of SPAS 121 indicates that goodwill related to assets to be disposed of by an entity should be accounted for under the provisions of APB 17. paragraph 32, which states:

"Ordinarily goodwill and similar Intangi-ble assets cannot be disposed of apart from the enterprise as a whole. However, a large segment or separable group of assets of an acquired company or the entire acquired company may be sold or otherwise liqui-dated, and all or a portion of the unamor-tized coat of the goodwill recognized in the acquisition should be included In the cost of the assets sold."

In the above fact pattern, the staff be-lieves that the operations and business of' Company B. which supported the initial pre-mium resulting in the recognition of good-will, were not diminished by the disposition of solely physical facilities. The underlying operations, customer relationships, future revenue streams, and business outlook re-mained intact end, as a result, the staff be-lieves that it is inappropriate to treat the disposition of manufacturing facilities as If the business itself had been disposed of. The staff would object to the allocation of good-will to the disposed manufacturing facilities.

Paragraph 19 of SPAS 121 requires disclo-sure of the results of operations of assets held for disposal, if revenues attributable to assets to be disposed of, that remain in oper-ation for some period of time prior to their disposal, cannot be segregated because sub-stantially the same revenues will continue after the assets are disposed of, the amount of the benefit from suspending depreciation, in accordance with SPAS 121, paragraph 16, should be disclosed. The effect associated with assets held for disposal should be dis-cussed in Management's Discussion and Analysis (MD &A), if material.

Facts: Assume the same fact pattern as for Question 5, except that the four manufactur-ing facilities will be shut down, but not dis-posed of or abandoned. The four manufacturing facilities do not meet the cri-teria necessary to be classified as "to be dis-posed of' under SFAS 121 but are impaired

on a 'held and used" basis under SPAS 121. Company A intends to retain the four facili-ties in case the need arises in the future for further manufacturing capacity.

Question & Would the staff object to the company's proposal to recognize an impah meat lose based on the excess of the carrying amount of goodwill and fixed assets over fair value?

Interpretive Response: Yea. Paragraph 12 of SPAS 121 specifies:

"If an asset being tested for recoverability was acquired in a business combination ac-counted for using the purchase method, the goodwill that arose In that transaction shall be accounted for as part of the asset grouping

in determining recoverability. If some but not all of the seats acquired in that transac-tion are being tested, goodwill shall be allo-cated to the assets being tested for recoverability on a pro rate basis using the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date unless there is evidence to suggest that some other method of associat-ing the goodwill with those assets is more appropriate."

In the above fact pattern, the staff be-lieves that it is inappropriate to allocate the carrying amount of the goodwill balance to the four facilities being evaluated for im-pairment In this instance, the goodwill that existed at the time Company B was acquired principally was the result of a customer base, marketing activities, existing product lines and new products being developed. It did not relate to the fixed assets but, rather, the ongoing operations of the business, which have not been reduced In any way. The goodwill represents the inherent value of the going concern element of Company B and the ability of the onLiLy to generate it

return in excess of the return that could be generated on the acquired iSlets individu-ally, all of which are still in place. The staff contrasts this sëénario with one where facili-ties are eliminated in conjunction with a subsequent decision to abandon the product or business line housed in those facititites. U the revenue producing activity and the facil-ities had been acquired in a business combi-nation giving rise to recognition of goodwill, a portion of goodwill should be allocated to the facilities based on their relative fair value, unless another allocation method is more appropriate.

Question 7: Has the staff expressed any views with respect to company-determined estimates of cash flows used for assessing

el", SEC Accounting Rules

77389

DEC-20--2000 16:49 973 736 3163 96

P.02


FILE No.019 12'20 '00 16:34

5090

and measuring impairment of assets under WAS

Interpretive Response. In providing guld-ance on the development of cash flows for purposes of applying the provisions of WAS 121, paragraph 9 of that standard indicates that eetimtes of expected future cub flows should be the best estimate based on reason-able and supportable assumptions and pro-jections. Additionally, paragraph 9 indicates that all available evidence should be consid. eyed in developing estimates of expected f'ii-twt cash flows and that the weight given to the evidence should be commensurate with the extent to which the evidence can be veal-red objectively.

The staff recognizes that various factors, including management's judgments and as-suuaptions about the business plans and strategies, affect the development of future cub flow projections for purposes of apply-jog WAS 121. The staff, however, cautious registrants that the judgments and assump-tions made for purposes of applying SPAS 121 must be consistent with other financial statement calculations and disclosures and disclosures in MD &A. The staff also expects that forecasts made for purposes of applying SPAS 121 be consistent with other forward-looking information prepared by the com-pany, such as that used for internal budgets, incentive compensation plans, discussions with lenders or third parties, and/ or report-ing to management or the board of directors.

For example, the staff has reviewed a fact pattern where a registrant developed cub flow projections for purposes of applying the provisions of SPAS 121 using one set of as-sumptions and utilized a second, more con-servative set of assumptions for purposes of determining whether deferred tax valuation Allowances were necessary when applying the provisions of Statement of Financial Ac-counting Standards No. 109, Accounting for Income Tam In this case, the staff objected to the use of inconsistent assumptions.

In addition to disclosure of key assump-tions used in the development of cash flow projections, the staff also has required dis-cussion in MD&A of the implications of as-sumptions. For example, do the projections indicate that a company Is likely to violate debt covenants In the future? What are the ramifications to the cash flow projections used in the Impairment analysis? If growth rates used in the Impairment analysis are lower than those used by outside analysts, has the company had discussions with the analysts regarding their overly optimistic projections? Has the company appropriately informed the market and its shareholders of its reduced expectations for the future that are sufficient to cause an impairment charge? The staff believes that cash flow projections used In the impairment analysis must be both internally consistent with the company's other projections and externally consistent with financial statement and other public disclosures.

(Added in SAB 100.3

.

ID:BEDERSQN & CO. FiX:973 736 3163

PP6E 3, 3

Stilt Accounting Bulletins

364 l2-9

17389

01999, CCH INCORPORATED

tEC-20-.200 16:49 973 736 3163 961/ P.03


EXHIBIT 0


9G OZZG,'Cj 15:23 IeZI 9531

P99999t9s SS :St TOO-9-a CF BR a AND 10 1100Z

UNfTED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 2aS41-0404

February 26,2001

via Facsimile and U. Mail

Frwiikln W. Binoks, cBO SafTLoklncolpornted 1101 l4orthpoint Parkway \Vcst Palm Beach, Florida 33407

Ith SaT T Lek kcorporated Regi*alion Statement ox Form S-3

e !(o. 33344054

Form- 19.KS8 for the fivcM year ended December 31, IM Forms I O-QSB fw- the pekiod3 ended Mpxch 31, 2000, June 30, 2000 and September 30,2001

We cowidercd all the information you provided to us 1 including the otniatien you presentedin your meeting with usori February l3,2001. Wehave the following Comment ttI8t

you should comp ly within amendments to your 1999 Exchange Act repoem within tO boines

Wv, c wtinae to believe that your classification of all invenlory in cuniit asses at l251199, and at subsequent balance sheet dales, is inapproprialo and should be reyised. We believe that at each balante. sheet date ym should only classi in currant "seu, the arnoutti of inventory you reasonably thxecast to acil within the next twelve months. We tbfore belicve that you should revise your fma=aj statenicutn to ss&L'y a substantial majority of your inventory to non-current assets at 1213 1 and at each stzbsequent balance sheet dat& Howcvex, we have determined that we will rely on management aud the indcpendent auditor in their assenarnenis of the ultimate not realizable value of mvenbmry and the recoverability of long-lived

d 689et9 01 DNL )i(i I 5 ii06:1 4v:St 19-8


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Sal T Lak IncOipOTaXOd FamwY 26,200t page2

Comrn

Yiease ãimt q tio1TegardiI%g this comzt to Aim McConfli at (2O2)94Z4795 o

me at (202) 942-1g03. DirL qcstions ca oZka discoswv i=lw to Mazk Mstin at (202)942-

Sincexely,

Cl '/. Janes R.oseziber,i

Senior Aw

cc: B.cbt I... Ruben Bdwad. A. Filedman Rmbm & Meaaon,UP 3299K Stroet, N.W. Suite 403 wingtu,D.C. 20007

NI >c - I JOS I40 4V:GT t893


Exhibit P


,orrespondenCe File

Goldberg Wagner & Jacobs LLP Certified Public Accountants & Advisors

2161 Palm Beach Lakes Blvd., Suite 450 West Palm Beach, FL 33409

(561) 615-8585 Fax (561) 615-8888

April 4, 2001 www.gwjllp.com

SENT BY FACSIMILE & MAILED

John F. Hombostel, Jr., Esq., Secretary SafT Lok Incorporated 32 West State Street Sharon, Pennsylvania 16146

Dear John,

I received, and read with interest, the minutes of the special board of directors meeting held on March 27, 2001. As indicated in my letter of March 19, 2001, I was looking for something to "hang my hat on" with respect to the company's plans for selling or liquidating the inventory. Although there were intentions to complete the work-in-process inventory, the balance of the plans was somewhat nebulous. I fully understand that you need more time to make arrangements for the sale of the inventory. However, there was no game plan or agenda developed to address the situation.

It is management's responsibility to provide the framework within which decisions can be made. In the absence of this framework, I can only look towards the past experience of the company, and guess at the future, in making decisions concerning the valuation of inventories and fixed assets. We have discussed the predicament about the inventory several times in conversations on the telephone. Unfortunately, I am no further along today towards understanding the company's intentions, relating to the inventory, after reading the minutes of your board meeting.

What is the real value of the inventories, tools and dies and patents at December 31, 2000? In the absence of evidence to the contrary, it appears their value is minimal. How long will it take to sell 90,000 locks when the company only sold 1,915 locks in 2000? Unless I can be convinced to the contrary, I am proposing to write down the inventory to 10% of its value, write off the tools & dies as impaired and write off the patents as impaired. The result would be a charge to operations of approximately $2,800,000 in 2000.

Please advise me timely whether the audit committee concurs or disagrees with this proposed adjustment. If the audit committee disagrees, I would appreciate a detailed written explanation for their position. Obviously, I will be available to discuss this matter with them by telephone.

Sincerely,


HBGrjcb


-

1..

S

Go .ner &Ja.cobs LIP SC PutMIc Accwnmnts 1. Advism 2161 P..hn beach Luke. bh.. Suke 40

Palm &adi. Ft. .111409 (dfl 6:3-e541$

Fu (561) 6154dl

DATE: April 4, 2001

FROM: HARVEY B. GOLDBERG

TO: JOHN F. HORNBOSTEL, JR., ESQ.

COMPANY: SAP T LOK INCORPORATED

FAXNUMBER; 724-981-1216

NO. OF PAGES: 2 (including Cover Page)

COMMENTS:

PLEASE PROVIDE A COPY OF THIS LETTER TO MR MONK AND MR FLORIDA. IT WOULD BE HELPFUL IF YOU COULD SEND ME THEIR PAX NUMBERS AND/OR E-MAIL ADDRESSES. THANK YOU.

Accouse Numbcr

CONFIDENTIAL

The faimik contains rRIVII.P.GIID AND CONFIDENTIAL information intended only for the use of the addressee(s) named above. It you Kc not the intended recipient of this liesimile, or the axzployee or agent rusponuibic for delivering It to the intended rccjpicot, you are hereby notified that any dissemination or copdnj of this Ihclmi)c is Lrictty prohibited. If you have received this facsimile In snot, plane immediately notify us by telephone and return

the orjghia) tacuimilc to us it the above address via the U.S. Mail. Thank you.

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EXHIBIT Q


(

1-21-199S 0: 2&4M FROM p

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N4 d kde4l

DR_04_2001 20:44 98% P.20


1-81 -19% O: 284M FROM P.21

Date: April 4, 2001

To: John Hombostel, Jr.

Subject: Sales Trends

Attached is a chart of SafT Lok net yearly sales for 1999, 2000, and the first quarter of 2001 nnnnjili,ed by multiplying first quarter sales by 4 quarters. First quarter 2001 sales to law enforcement agencies was 212 units fbr approximately $14,000.

It-doesn't take a rocket scientist to see that sales have been on a downward trend. This trend is probably relative to the decrease is sales efforts due to insufficiency of funds. The majority of the yearly sales for these years have been to law enforcement agencies. Their decision making cycle in deciding to purchase a product such as a SafT Lok is estimated to be from one to three years. Thus, orders will continue to come in, although at a declining rate, after sales efforts have declined. Conversely, orders would not be expected to grew rapidly once the sales efforts are stepped up.

For nrc to forecast future sales with any degree of accuracy are impossible since I do not know what efforts or resources new management is willing to dedicate Absent that knowledge the only safe assumption is That sales will continue to decline and will probably level out at some small quantity.

5, absent any increases in sales efforts, my WAG is that sales will do well to hit $50,000 this year and would probably decline to S15,000 to $20,000 the following year and next to nothing after that

The value of the inventory will then revert wits salvage value. The only shred of information I can use to help establish salvage value is that a liquidator. I think it is CDNN, had magazine locks listed for, I think about $12 and grip locks listed at about $6.! don't know what profit margins a liquidator operates on but it is probably 50% or more which would put the salvage value of the locks at $3 to $5 at best.

As far as the salvage value of the individual parts, the bulk of the material in the lock is nickel-plated zinc diecast which has no salvage value. The n1sgr7itIs with dummy locks in them may have a salvage value of S to $3 and the plastic parts probably have a scrap value of maybe $0.10 per pound.

I make the above sales estimates with only the knowledge of what little sales efforts are currently underway. The management of 5sf T Lok will have to adjust these estimates for whatever plans they have to sell the locks.

Any final sales forecasts given to the Auditor must come from SafT Lok management who will bear full responsibility for their numbers.

Sincerely,

William M. Schmidt

APR-04-2001 20:45 99% P.21

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EXHIBIT R


. )

r )

AP-5: AUDIT PROGRAM FOR INVENTORY OBSERVATION Page of _

Company: Saf I Lok, Inc. 113alance Sheet Date: December 31, 1999 The company's inventory locations and physical observation dates are:

Type of Approximate % of Date and Telephone

Address Inventory the Total Inventory Time of Count Number

fbi /3o 4'1 &:. Ku.kf

tiTPi FL.- _ i),i'o

240') wP tiys:.5

nstructions: The inventory observation program is an addendum to the audit program for inventory. Procedures in this observation program are designed to obtain evidential matter for the financial statement assertions of existence and completeness.

Audit N/A Workpaper Objectives Audit Procedures for Consideration Performed Index

by

WDIT OBJECTIVES

The company's procedures and controls for recording an accurate count of inventory on hand, in transit, or at outside locations are adequate and operating effectively.

B. Excess, slow-moving, obsolete, and defective inventory observed during the count is identified on separate tags o count sheets for appropriate valuation.

C. Significant current year additions or retirements of property, plant, and equipment, and defective or obsolete equipment noted during the observation is identified for tracing to the property accounts.

Page 1

-


)

Audit

NIA

Workpaper Objectives Audit Procedures for Consideration

Performed

Index by

ie letters preceding each of the above audit objectives, i.e., A, B, etc., serve identification codes. These codes are presented in the left column labeled

udit Objectives" when a procedure accomplishes an objective. If the alpha de appears in a bracket, e.g., [A], [B], etc., the audit procedure only candailly accomplishes the objective. if an asterisk precedes a procedure, it a preliminary step or a follow up step that does not accomplish an objective.

PROCEDURES

* 1. In advance of the physical inventory date, obtain an understanding of the location of the company's inventory and the date of the count. Determine those locations that should be observed. For locations not observed, determine if a confirmation letter for these inventories would be appropriate.

2. Inquire about the procedures that will be used to count the inventory.

* I. Determine those items of inventory that, when priced and extended, will result in individually significant items. Analyze the latest stock status report and select an appropriate sample of test counts.

LII. 7_

L1.L.

A, B Observe the physical inventory count by performing the following procedures for raw materials and finished goods:

a. Observe the counting by employees and determine whether (1) their athtude and conduct is likely to 7J It-. hIi'( z-3 produce accurate results, (2) the client's inventory instructions are being followed, and (3) the counts are neatly and accurately recorded.

b. Make test counts to the extent considered necessary, preferably including each section of the plant. Be sure to obtain adequate test counts of items that will result in significant amounts when priced and extended. If you observe differences in the count and your test, determine if they are isolated or whether an entire section must be recounted. Verify that all differences you note are corrected.

K I9LS'/5

Page 2


)

Audit Objectives Audit Procedures for Consideration

c. While observing physical count procedures, determine whether any inventory appears to be obsolete or very old and whether the client has properly identified those items. Be aware of items stored in inaccessible areas, items that are deteriorated, items that appear to be in the same location and condition as the prior year. Make note of these Items and, if possible, have the client identify all such items to ensure that they are properly handled in the subsequent pricing of the counts.

d. When the counting of all areas is complete, tour the plant to determine if all areas appear to be counted. Obtain an adequate explanation of any omissions. When you are satisfied, instruct the client to accumulate the tags (if they are used) and if possible, accompany the personnel when the tags are pulled to prevent invalid tags from being introduced in the accumulation process.

NIA Workpaper Performed Index

by

--L- '-q.!51.2_

-uJ Ic 44t. -1-

e. Determine that all tag numbers are accounted for as - used, voided, or unused. Obtain the sequences of tag s that fall into these three categories.

L14 3

f. Select several tags and trace the count to the stock IL' LIt

status report.

A,B

A,B

g. Determine that items of raw material or finished goods counted as part of work-in-process are not counted again as raw material or finished goods.

To determine the accuracy of the shipping/receiving cutoff procedures, perform the following steps:

Identify work-in-process inventory and apply the same count procedures identified in Step 4 for items selected for test t j)

counting. Also perform the following procedures:

a. Determine that the information recorded on the count - tags or sheets is adequate to properly price work-in-process, i.e., percentage complete of material, labor, and overhead.

Page 3


)

Audit - N/A Workpaper

Objectives Audit Procedures for Consideration Performed Index by

a. Determine the last five shipping and receiving I -. transactions of the year and the first five transactions OQ.- a,,P1-' 4eT1r after the date of the warehouse stock report. Prepare a &ii4_ elioxoa list of those transactions or obtain copies of the documentation for those transactions.

b. By observation, determine that there is no signifigant movement of inventory between raw materials, work-in-process, and finished goods. If a major movement Tli occurs, obtain adequate information (quantity and product description) to test the treatment of the item.

c. Tour the shipping and receiving area . Obtain information about the status of numerous pallets or boxes of items in these areas. Determine whether they - should be counted or excluded from the count. Obtain documents for these items to test the accounting cutoff.

A 7. Inquire of the owner/manager, production personnel, and counters if inventory held by the company for others is segregated and excluded from the count. Also inquire about inventory held related to "bill and hold" transactions.

C8. During the time of the physical count, perform the following procedures related to other audit areas:

a. Identify major property and equipment additions and observe the condition and description (serial number, if iA) - necessary).

b. Observe the condition and existence of any obsolete or damaged equipment Inquire if there are any assets that - 'J)Y-- were retired and removed from the premises. Ust significant items for later tracing to property records.

Page 4


)


Consider the need to apply one or more additional procedures. The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substantive tests or from other sources during the audit alter your judgment about the need to obtain a further understanding of control activities, the assessed level of risk of material misstatements (including the risk of material misstatement due to fraud), and on an evaluation of whether the basic procedures have been sufficient to achieve the audit objectives. Attach audit program sheets to document additional procedures.

0. Consider whether the results of audit procedures indicate reportable condition in internal control and, if so, add to the memo of points for the communication of reportable conditions.


by

have performed procedures sufficient to achieve the audit ctives for the observation of inventory, and the results of th edures are adequately documented in the accompanying kpapers. Of you are unable to conclude on any objective, are a memo documenting your reason.)

Y

Page 5


EXHIBIT S


- 9:55 FROM SRF T LOK INC

TO

6159888 P.02

)

By Facsimile and Overnight Mall

(l t40VO72OO —' November 3, 2000

Mr. Franklin W. Brooks Chairman, President, and Chief Executive Officer

SafT Lok Incorporated 1101 Northpoint Parkway West Palm Beach, FL 33407

Re SafT Lok Incorporated (the "Company")

Dear Mr. Brooks:

The Company's common stock has failed to maintain a minimum bid price of$ 1.00 over the last 30 consecutive trading days as required for continued listing on The Nasdaq SmaliCap Market as set forth in Marketplace Rule 4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B), the Company will be provided 90 calendar days, or until February 1, 2001 to regain compliance with this Rule. If at anytime before February 1, 2001, the bid price of the Company's common stock is at least $1.00 for a minimum of 10 consecutive trading days, Staff will determine if the Company complies with the Rule. However, if the Company is unable to demonstrate compliance with the Rule on or before February 1, 2001, its common stock will be delisted at the opening of business on February 5, 2001.

The Company may appeal Staff's determination to a Nasdaq Listing Qualifications Panel (the "Panel"), pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800 Series. A bearing request will stay the delisung of the Company's securities pending the Panel's decision. The Company may request either an oral hearing or a hearing based solely on written submissions. The fee for an oral hearing is $2,300; the fee for a hearing based on written submissions is $1,400. Please note that the hearing fee is non-refundable and that the check must be made payable to "The Nasdaq Stock Market ".2 The request for a hearing must be received by the Nasdaq Listing Qualifications Hearings Department (the "Hearings Department") by the close of business on February 1, 2001. The request must be in writing and forwarded, with the appropriate fee payment, to:

1 The 90 day period relates exclusively to the bid price deficiency. The Company may be delisted during the 90 day period for failure to maintain compliance with any other listing requirement for which it is currently on notice or which occurs during the period. 2 1f the Company would like to pay its hearing ice by wire transfer, please contact Donna Barnes at (301) 978-8071.

The Nasdaq Stock Maticet, Inc.. at NASD Company 981 Washingtonian BNd., Gaithersburg, MD 20378 877 536 2737

RDR-09-21NII 11 :07 5616B88784 96 P.02


R---2ø1 09:55 FROM SAF T LOK INC TO 5158888

P.03 /

I

Mr. ?rm*lifl W. Brooks November 3, 2000 Pap 2

David A. Donohoe, Jr., Esq. Chief Counsel

The Nasdaq Stock Market 9801 Washingtonian Blvd., Fifth Floor

Gaithersburg, MD 20878.

Hearing requests should not contain written arguments in support of the Company's position. If you would like additional information regarding the hearing process, please call the Hearings Department at (301) 978-8203.

Marketplace Rule 4890 prohibits communications relevant to the merits of a proceeding under the Marketplace Rule 4800 Series between the Company and the Hearings Department unless Staff is provided notice and an opportunity to participate. In that regard, Staff waived its right to participate in any oral communications between the Company and the Hearings Department. Should .Staff determine to revoke such waiver, the Company will be immediately notified, and the requirements of Marketplace Rule 4890 will be strictly enforced.

If you have any questions concerning the compliance issues discussed above, please contact Randy Genau, Listing Analyst at (301) 978-8049.

Sincerely,

• --,('$ -.'-, -p'.

-

Larkin .AssociatelDirector Nasdag Listing Qualifications

TOTAL P.03

FFR-09-2001 11:07 5616888784 96% P.03


EXHIBIT T

-1

' Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198

AP-5: AUDIT PROGRAM FOR INVENTORY OBSERVATION Page J_. of

Company: Saf T Lok, Inc. JBalance Sheet Date: December 31, 1999 The company's inventory locations and physical observation dates are:

Type of Approximate % of Date and Telephone

Address Inventory the Total Inventory Time of Count Number

OI 3o'ii

oOhPf L 9')

3240') ( W P LySIS

Instructions: The inventory observation program is an addendum to the audit program for inventory. Procedures in this observation program are designed to obtain evidential matter for the financial statement assertions of existence and completeness.

Audit NIA Workpaper Objectives Audit Procedures for Consideration Performed Index

by

AUDIT OBJECTIVES

A. The company's procedures and controls for recording an accurate count of inventory on hand, in transit, or at outside locations are adequate and operating effectively.

B. Excess, slow-moving, obsolete, and defective inventory observed during the count is identified on separate tags or count sheets for appropriate valuation.

C. Significant current year additions or retirements of property, plant, and equipment, and defective or obsolete equipment noted during the observation is identified for tracing to the property accounts.

Page 1


Audit N/A Workpaper Objectives Audit Procedures for Consideration Performed Index

by

ie letters preceding each of the above audit objectives, i.e., A. B. etc., serve kienlification codes. These codes are presented in the left column labeled

udit Objectives" when a procedure accomplishes an objective. If the alpha de appears in a bracket, e.g., [Al, (BI, etc., the audit procedure only condarily accomplishes the objective. If an asterisk precedes a procedure, it a preliminary step or a follow up step that does not accomplish an objective.

PROCEDURES

In advance of the physical inventory date, obtain an IL -,St.,. understanding of the location of the company's inventory and the date of the count. Determine those locations that should be observed. For locations not observed, determine if a confirmation letter for these inventories would be appropriate.

Inquire about the procedures that will be used to count the L.- L .si. inventory.

Determine those items of inventory that, when priced and extended, will result in individually significant items. Analyze IL the latest stock status report and select an appropriate sample of test counts.

A,B

Observe the physical inventory count by performing the following procedures for raw materials and finished goods:

a. Observe the counting by employees and determine whether (1) their attitude and conduct is likely to -j jL. Ljcj -zj3 produce accurate results, (2) the client's inventory instructions are being followed, and (3) the counts are neatly and accurately recorded.

b. Make test counts to the extent considered necessary, preferably including each section of the plant. Be sure to obtain adequate test counts of items that will result in significant amounts when priced and extended. If you observe differences in the count and your test, determine if they are isolated or whether an entire section must be recounted. Verify that all differences you note are corrected.

7J& L114- T1.5

Page 2

• Case 9:02-cv-80252-KLR Document 26 Entered on FLSD Docket 09/16/2002 of 198 : 1)


by

c. While observing physical count procedures, determine whether any inventory appears to be obsolete or very old and whether the client has properly identified those items. Be aware of items stored in inaccessible areas, items that are deteriorated, items that appear to be in the same location and condition as the prior year. Make note of these Items and, if possible, have the client identify all such items to ensure that they are properly handled in the subsequent pricing of the counts.

d. When the counting of all areas is complete, tour the plant to determine if all areas appear to be counted. Obtain an adequate explanation of any omissions. When you are satisfied, instruct the client to accumulate the tags (if they are used) and if possible, accompany the personnel when the tags are pulled to prevent invalid tags from being introduced in the accumulation process.

j4-5l. 2-

94-L .-

e. Determine that all tag numbers are accounted for as I - Ic used, voided, or unused. Obtain the sequences of tag s that fall into these three categories.

1j4 3

f. Select several tags and trace the count to the stock AII-' L1(1

status report.

A,B

Identify work-in-process inventory and apply the same count procedures identified in Step 4 for items selected for test iLi I

counting. Also perform the following procedures:

a. Determine that the information recorded on the count tags or sheets is adequate to properly price work-in-process, i.e., percentage complete of material, labor, and overhead.

b. Determine that items of raw material or finished goods counted as part of work-in-process are not counted again as raw material or finished goods.

-r,-

A,B To determine the accuracy of the shipping/receiving cutoff procedures, perform the following steps:

Page 3

(



by

a. Determine the last five shipping and receiving I -. transactions of the year and the first live transactions - O'- after the date of the warehouse stock report. Prepare a list of those transactions or obtain copies of the documentation for those transactions.

b. By observation, determine that there is no signifigant movement of inventory between raw materials, work-in-process, and finished goods. If a major movement 'L occurs, obtain adequate Information (quantity and product description) to test the treatment of the item.

c. Tour the shipping and receiving area . Obtain information about the status of numerous pallets or boxes of items in these areas. Determine whether they - should be counted or excluded from the count Obtain .'

documents for these items to test the accounting cutoff.

A I. Inquire of the owner/manager, production personnel, and counters if inventory held by the company for others is ..- segregated and excluded from the count Also inquire about 11,3 inventory held related to "bill and hold" transactions.

CDuring the time of the physical count, perform the following 8. procedures related to other audit areas:

a. Identify major property and equipment additions and observe the condition and description (serial number, if iA) -

necessary).

b. Observe the condition and existence of any obsolete or damaged equipment. Inquire if there are any assets that ir)- were retired and removed from the premises. List significant items for later tracing to property records.

Page 4



Consider the need to apply one or more additional procedures. The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substantive tests or from other sources during the audit alter your judgment about the need to obtain a further understanding of control activities, the assessed level of risk of material misstatements (including the risk of material misstatement due to fraud), and on an evaluation of whether the basic procedures have been sufficient to achieve the audit objectives. Attach audit program sheets to document additional procedures.


by

0. Consider whether the results of audit procedures indicate reportable condition in internal control and, if so, add to the J' memo of points for the communication of reportable conditions.

have performed procedures sufficient to achieve the audit ctives for the observation of inventory, and the results of ti edures are adequately documented in the accompanying cpapers. (If you are unable to conclude on any objective, are a memo documenting your reason.)

y

Page 5


EXHIBIT U


CERTIFICATION OF PLAThTWF PURSUANT TO FEDERAL SECURITIES LAWS

EDW&RD COHEN ("Plaintiff') declares:

1. plaintiff has reviewed a complaint and authorized its filing.

2. Plaintiff did not purchase the security that is the subject of this action at the

direction of plaintiffs counsel or in order to participate in this private action or any other litigation

under the federal securities laws.

3. Plaintiff is willing to serve as a representative party on behalf of the class,

including providing testimony at deposition and trial, if necessary.

4. Plaintiff has made no transaction(s) during the Class Period in the debt or

equity securities that are the subject of this action except those set forth below:

5. During the three years prior to the date of this Certificate, Plaintiff has sought to

serve or served as a representative party for a class in the following actions filed under the federal

securities laws:

6. The Plaintiff will not accept any payment for serving as a representative party on

behalf of the class beyond the Plaintiffs pro rata share of any recovery, except such reasonable costs

and expenses (including lost wages) directly relating to the representation of the class as ordered or

approved by the court.

I declare under penalty of perjury that the foregoing is true and correct. Executed this day

of 14 Ac I, 2002.

Edward CC____'


C

2000 Schedule 0 Capital Gains and Losses from Stocks Shares _Purchased Date Sold Sates Price Cost or Gain or Loss Lock Other Basis -

5000 9122/2 0_2/21j 591 $ 4,709•99 $ 2 0.L____ 1600. 9/22/2001 2I2191.$__685.9 $ 1,463.99

400 9/22/2000 $ 366.00 $ -

5000 9/25/2000 $ 3,809.99$ -

2000 9/25/2000: $ 1,769.99 $ -

2300 912712000 I $ 1,748.00 $ - -

20001 10/11/2000 $ 1,269.99 $ -

3000; 10/1 1/2000 . $ 1,890.00 $ -

5000 10/12/2000: $ 3,009.99 . $ -

2980 10/13/2000 $ 1,698.60$ -

100 10/16/2000 $ 57.00 $ -

1920: 10/1712000 $ 1,104.39 $

2280. 10/18/2000 $ 1,162.80 $ -

400 1119/2000 $ 204.00 $ -

4953 2/2212001 $ 3,130.38 $ - 35933 : $ 24,264.73 $ -

$ Sold 6400 shares Balance 32,533 $ - April 2000 reverse Split now 3,253 shares $ -

Total $ (3.030.10)


2000 IM I Shares Purchased Date Sold Sales Price Cost Gain or lost

lock

550 12/19/20007 $ 143.00 5000: 12121/2000. $ 959.99 9363 1212912000 $ 1,518.06

14913 $ 2,621.05

Aoril reverse sDllt Now 1491 shares

in re saf t lok, inc. securities litigation...

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