-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FBx6zP+sXwPmVggx10mCPb0Z8S+5GaQhO+Tg/zAwnZn2i7CfaEd0S7+XcV43XfbG GKHb9SVMRBXQp5HTeTz/BA== 0001104038-03-000003.txt : 20030414 0001104038-03-000003.hdr.sgml : 20030414 20030414160844 ACCESSION NUMBER: 0001104038-03-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASERLOCK TECHNOLOGIES INC CENTRAL INDEX KEY: 0001104038 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 233023677 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-31927 FILM NUMBER: 03648701 BUSINESS ADDRESS: STREET 1: 837 LINDY LANE CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 6109091000 MAIL ADDRESS: STREET 1: 837 LINDY LANE CITY: BALA CYNWYD STATE: PA ZIP: 19004 10KSB 1 annual.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 LASERLOCK TECHNOLOGIES, INC. ------------------------------ (Exact name of registrant as specified in Its charter) NEVADA 23-3023677 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 837 Lindy Lane, Bala Cynwyd, PA 19004 ------------------------------------------------------------ (Address of Principal Executive offices) (Zip Code) Registrant's telephone number, with area code: (610) 668 - 1952 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock of $0.001 par value per share Indicate by, check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X State Issuer's Revenues for its most recent fiscal year: $126,299. Aggregate market value of the voting stock held by non-affiliates of registrant: $2,017,421 as of December 31, 2002. Number of shares outstanding as of December 31, 2002: 19,334,742 Documents incorporated by reference: None. Part I. Item 1 DESCRIPTION OF BUSINESS ORGANIZATION AND CHARTER LaserLock Technologies, Inc., (the "Company" or "LaserLock") was formed under the laws of Nevada on November 10, 1999. The Company was formed in order to develop and market technologies which will both allow for easy product and document authentication, and to prevent product and document counterfeiting. The initial amount of authorized capital was $50,000. This consisted of 40,000,000 shares of Common Stock authorized, $0.001 par value, and 10,000,000 shares of Preferred Stock authorized, $0.001 par value. A copy of the Company's initial Articles of Incorporation is attached hereto and is incorporated by reference. See Part III, Item 1. The Company is fully reporting under The Securities Exchange Act of 1934. As a fully reporting company under The Securities Exchange Act of 1934, the Company is required to file quarterly and annual and certain event triggered reports with the Securities and Exchange Commission. These reporting requirements add to the expense and timeliness of certain business transactions which the Company may endeavor to undertake in the future -- such as a merger or any other material business undertaking. The Company's Common Stock trades on the OTC Bulletin Board (OTC:BB), under the trading symbol "LLTI." The public may read and copy this document, and any other materials the Company files with the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Information is available on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Additionally, the Commission maintains an internet site (http://www.sec.gov) that contains all reports, proxy and information statements, and other information regarding companies which file electronically. LaserLock currently has a web site at www.laserlocktech.com. BUSINESS OF THE COMPANY Background LaserLock Technologies, Inc. was organized to utilize a technology discovered by its founder, Norman A. Gardner, which allows for non-intrusive document and product authentication that can reduce losses caused by fraudulent document reproduction and by product counterfeiting and/or diversion. This technology involves the utilization of an ink activating system which is completely compatible with currently used printing systems (it is a part of the ink and can be used in offset, flexographic, silkscreen, gravure, and laser ink systems) and based upon Mr. Gardner's experience, the Company believes it can be incorporated into existing manufacturing processes. Since September of 2001, the Company has a 4 year exclusive license in the casino and gambling industry from NoCopi Technologies, Inc. which allows the Company to utilize a patented technology called Rub & Reveal. This technology utilizes an ink activating system which changes to certain specified colors when scratched. In December of 2001, the Company's wholly owned subsidiary, LL Security Products, Inc. acquired E.D.S. Marketing, Inc. in a cash and equity transaction which gave the Company ownership of personal computer based security and profiling technology (such as software based fingerprint character identification). The Company intends to be involved in the business of product and document authentication and security. It plans to develop and market its technology in a variety of applications. The Company believes that the proprietary technologies it owns or licenses will enable businesses to re-construct their overall approaches to corporate security - from counterfeit identification and/or diversion to employee or customer monitoring. Potential applications for the Company's technologies are available in different types of products and industries - e.g. gaming, tobacco, perfume, compact disks, pharmaceuticals, event and transportation tickets, drivers licenses, insurance cards, passports, etc. Sales are intended to be made either through licensees or directly to end-users. The first industry in which the Company is pursuing commercial application of its technology is the casino and gaming industry. The Company believes that its technologies are applicable to the industry in a variety of ways - from the detection of counterfeit dice, cards, and chips, to internal employee security verification via thumbprints for use in locks, computer systems, and to verify cashless tickets from slot machines for fraud. The Company also intends to be involved in the advertising and promotion business as it pertains to the gaming industry. The Company has acquired the exclusive rights to advertise on the reverse side of slot tickets which are used in cashless slot machines. The Company acquired this right from Translucent Technologies, the largest manufacturer of slot tickets in the U.S. Anti-Counterfeiting and Anti-Diversion Technologies and Products Recent developments in copying and printing technologies have made it even easier to counterfeit a wide variety of documents. Currency, lottery tickets, gift certificates, event and transportation tickets, casino fraud, travelers' checks and the like are all susceptible to counterfeiting, and the Company believes that losses from such counterfeiting have increased substantially with improvements in technology ("Latest Use for One's DNA - Thwarting Counterfeiters", San Francisco Chronicle, page C1, September 11, 2000). Counterfeiting has long caused losses to manufacturers of brand name products, and the Company believes these losses have also increased as the counterfeiting of labeling and packaging has become easier. The Company's document authentication technologies are useful to businesses desiring to authenticate a wide variety of printed materials and products. These include a technology with the ability to print invisibly in specific areas of a document which can then be activated or revealed by use of an inexpensive laser light when authentication is required, and a technology which can allow a certain code, message or emblem to self-reveal when rubbed. These technologies are intended to be substantially different than pen systems currently in the marketplace. Pen systems work by a similar invisible ink which is activated by a special marker. If the item is an original and not an illegitimate copy, then the ink will be activated and show a visible mark as a different color than on an illegitimate copy. LaserLock believes that its technologies are superior to the pen system technology because in the case of its laser technology, it will not result in a permanent mark on the merchandise which generally leads to the disposal of the merchandise or its sale as a "second" rather than best quality goods, and in the case of its rubbed ink technology it does not require any special tools to reveal the counterfeit. Other possible variations of the Company's laser based technology involve multiple color responses from a common laser, visible marks of one color that turn another color with a second laser or visible and invisible marks that turn into a multicolored image. These technologies provide users with the ability to authenticate products and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as currency, checks, travelers' checks, gift certificates and event tickets, and the authentication of product labeling and packaging. When applied to product labels and packaging, such technologies can be used to detect counterfeit products whose labels and packaging would not contain the authenticating marks invisibly printed on the packaging or labels of the legitimate product, as well as to combat product diversion (i.e., the sale of legitimate products through unauthorized distribution channels or in unauthorized markets). The Company believes that its technologies could also be used in a manner which permits manufacturers and distributors to track the movement of products from production to ultimate consumption when coupled with proprietary software. The Company has been initially focused on the widespread problem of counterfeiting in the gaming industry. The product is to be incorporated into traditional gaming accessories such as playing cards, chips, and dice as well as gaming based machinery such as slot machines with cashless gaming systems. This is accomplished during the regular manufacturing and printing processes. The protected items can be viewed with the laser to reveal the authenticity of the item. These covert authenticating technologies are also intended to be marketed to manufacturers of compact discs to identify CD's produced by that manufacturer. The Company believes that this technology can provide CD manufacturers and publishers with a tool to combat the significant losses sustained as a result of illegal pirating and counterfeiting of data, music and video discs. Marketing The marketing approach of the Company is to have sufficient flexibility in its products and technologies so as to provide cost-effective solutions to a wide variety of counterfeiting, diversion and copier fraud problems. As a technology company, the Company intends to generate revenues primarily by collecting license fees from manufacturers who incorporate the Company's technologies into their manufacturing process and their products, and in the case of cashless gaming systems via the right to sell advertising on the back of cashless gaming tickets. The Company has identified a number of major markets for its technologies and products, including gaming, document security printers, manufacturers of labels and packaging materials and distributors of brand name products. Within each market, key potential users have been identified. Within North America and Europe, sales are intended to be effected via direct selling by company personnel or consultants to create end user demand and selling through licensee sales forces with support from company personnel. The Company has determined that technical sales support by its personnel will be of great importance to increasing its licensees' sales of products incorporating the Company's technologies and, therefore, plans to be very committed to providing such support. The Company anticipates that should European sales be made, the technical support could initially be handled from the United States, and the Company could eventually open a European support division and/or establish a sales/marketing relationship with a European company should consumer demand justify the associated costs. As continued improvements in color copier and desktop publishing technology make counterfeiting and fraud opportunities less expensive and the internet makes these products more available, the Company intends to maintain an interactive product development and enhancement program whereby it will utilize its R&D and marketing skills in order to constantly upgrade and improve on its technology with the combined efforts of marketing, applications engineering and research and development. The Company believes that utilizing these methodologies - whereby a product is developed by the company, delivered to the client, feedback is received from the client, and the product is changed and enhanced to reflect the client feedback, will lead to faster development cycles for the Company's products. The Company's objective is to concentrate its efforts on developing market-ready products with the most beneficial ratios of market potential to development time and cost. The Company intends to utilize the extensive contacts of its President, Norman A. Gardner, in the counterfeit prevention and detection and gaming industries to effectuate sales. Manufacturing The Company does not have manufacturing facilities. The Company intends to subcontract the manufacture of its technology to third party manufacturers. Applications of the Company's technology are expected to be effected mainly through printing and coating. The inks are to be custom manufactured for the Company by a third party. Because some of the processes that the Company intends to use in its applications are based on relatively common manufacturing techniques, there appears to be no technical or economic reason for the Company to invest capital in its own manufacturing facilities at this stage. The Company intends to establish a quality control program that includes laboratory analysis of developed technologies. The Company intends to include as part of this quality control program the placement of a specially trained technician on site at third party production facilities to monitor the manufacturing process, when or if warranted. Regulation The Company is not currently aware of any regulations affecting its products; however, the Company's technology is dependant upon an ink based product. Therefore, it is possible that the Company's products will be subject to environmental regulations in the future. Patents and Licenses The Company acquired the rights to a pending U.S. patent application and its equivalent international Patent Cooperation Treaty (PCT) application via its employment contract with its President, Norman A. Gardner. The United States patent application was assigned to LaserLock Technologies, Inc. upon filing, and the Assignment has been recorded at the US Patent and Trademark Office. The Assignment by its terms conveys the entire right, title and interest in and to the invention of the pending patent application (entitled "Counterfeit Detection System") and all improvements thereon which may be made, conceived or acquired by Norman Gardner during the course of his association with LaserLock Technologies, Inc. and for one year thereafter. The PCT application was filed by the Company as applicant. Patent applications for the Company's technology (including improvements in the technology) are intended to be filed in selected jurisdictions where commercial usage is foreseen, including Europe, Australia and the Far East, if funds permit. There can be no assurance, however, that such protection will be obtained, or that if obtained that they can be maintained once obtained. The subject patent application was filed December 10, 1999 and the patent was issued in November, 2002, as patent No. 6,483,576. The allowed claims define the invention as a process involving latent marking that is excited at plural excitation wavelengths outside of the visible spectrum. The international PCT application was filed in June, 2002. The LaserLock technology according to the allowed patent application is a process whereby uniquely formulated normally-invisible code markings are applied to a product and can be activated or revealed by an activation device which the company intends to have manufactured and supplied to users. The Company has filed two new patent applications for two new methods of counterfeit and diversion protection in 2002. When a new product or process is developed, the developer may seek to preserve for itself the economic benefit of the product or process by applying for a patent in each jurisdiction in which the product or process is likely to be exploited. Generally, for a patent to be granted, the product or process must be new and be inventively different from what has been previously patented or otherwise known anywhere in the world. Patents generally have a duration of 20 years from the date of application depending on the jurisdiction concerned, after which time any person is free to exploit the product or process covered by a patent. A person who is the owner of a patent has, within the jurisdiction in which the patent is granted, the exclusive right to exclude others from practicing the subject matter defined in the patent claims. LaserLock Technologies, Inc. intends to extend its patent filings to other countries insofar as reasonably possible in view of the considerable expense of foreign patent applications and the increasing level of activity of the company. Currently, the Company believes that the only foreign countries for which it will be filing for patent protection are Europe, Australia and one or more countries in the Far East. The granting of a patent does not prevent a third party from seeking a judicial determination that the patent is invalid. Such challenges to the validity of a patent are not uncommon and are occasionally successful. There can be no assurance that a challenge will not be filed to one or more of the Company's patents , if granted, and that, if filed, such challenge(s) will not be successful. The granting of a U.S. patent does not ensure that patents will be granted in other countries where protection is sought. Standards for granting patents vary and there is a possibility that prior art not yet discovered could arise and could prevent the grant of a foreign patent and/or cast into question the validity of any U.S. patent. Additionally, the Company has licensed "Rub and Reveal" technology via a license agreement with NoCopi Technologies, Inc. The Agreement covers the exclusive use of this patented technology in gaming, and the non-exclusive use of this patented technology elsewhere. Research and Development The Company has been involved in research and development since its inception, and intends to continue its research and development activities, funds permitting. The Company hopes to expand its technology into new areas of implementation and to develop unique customer applications. For the period from inception at November 10, 1999 to December 31, 2002, the Company spent $375,878 on research and development. For the year ended December 31, 2002, the Company spent a total of $141,748 on research and development - all of which was spent on the enhancement of its ink and its activation product, and the application of its Rub and Reveal license technology. At the current time, the Company hopes to spend about $35,000 in R&D over the 2003 fiscal year. The Company's research and development is done in Glen Mills, Pennsylvania at the facilities of its research and development consultant. The Company's quality control program is run in Saranac, New York at the facilities of its technical consultant. The consulting fees paid cover all costs associated with facility and equipment usage. Product Development To date, the Company has only made very limited sales of its products. The Company has done independent testing and commercial trials have been completed at several manufacturers and have been successful from a production perspective. The Company has also developed what it believes to be a proprietary trade secret enabling it to offer its clients the ability to change the combination lock on its lasers to prevent any breach of security by counterfeiters. This is accomplished by changing the reaction between the Company's uniquely formulated code markings in its products, and the laser which reacts with it. The changes are made via direct interaction by the Company with the client to make slight modifications to the Company's products. Management believes that the Company is the only company offering such a protection to its product line. Description of the Industry Recent developments in copying and printing technologies have made it ever easier to counterfeit a wide variety of documents. Lottery tickets, gift certificates, event and transportation tickets, travelers' checks and the like are all susceptible to counterfeiting, and the Company believes that losses from such counterfeiting have increased substantially with improvements in technology. Counterfeiting has long caused losses to manufacturers of brand name products, and the Company believes these losses have also increased as the counterfeiting of labeling and packaging has become easier. The Company's document authentication technologies are useful to businesses desiring to authenticate a wide variety of printed documents and products. These include a technology with the ability to print invisibly on certain areas of a document which can be activated or revealed by use of a special laser light when authentication is required. This is intended to be different than pen systems currently in the marketplace because it will not result in a permanent mark on the merchandise, which generally leads to the disposal of the merchandise or its sale as a "second" rather than best quality goods. Other possible variations of the Company's technology involve multiple color responses from a common laser, visible marks of one color that turn another color with the laser or visible and invisible marks that turn into a multicolored image. These technologies provide users with the ability to authenticate documents and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as checks, travelers' checks, gift certificates and event tickets, and the authentication of product labeling and packaging. When applied to product labels and packaging, such technologies can be used to detect counterfeit products whose labels and packaging would not contain the authenticating marks invisibly printed on the packaging or labels of the legitimate product, as well as to combat product diversion (i.e., the sale of legitimate products through unauthorized distribution channels or in unauthorized markets). The Company believes that the technology could also be used in a manner permitting manufacturers and distributors to track the movement of products from production to ultimate consumption when coupled with proprietary software. The Company has focused initially on the widespread problem of fraud in the gaming industry. Via initial agreements which the Company has with some large suppliers to the gaming industry, the Company's products will be used in ink which is then incorporated into dice, chips, and playing cards. These products can be viewed with the laser to reveal the authenticity of the item. Additionally, the Company has reached agreement to have its technology used on slot tickets in cashless gaming slot machines. In this scenario, the Company's Laser Lock or Rub and Reveal technologies or a combination thereof would be utilized to reveal the authenticity of a slot ticket prior to its redemption at the cashier. Competition In the area of document and product authentication and serialization, the Company is aware of other competing technologies, both covert and overt surface-marking techniques, requiring decoding elements or analytical methods to reveal the relevant information. These technologies are offered by other companies for the same anti-counterfeiting and anti-diversion purposes the Company markets its covert technologies. These include, among others, biological DNA codes, microtaggants, thermochronic, UV and infrared inks, as well as encryption, 2D symbology and laser engraving. The Company is aware of at least twenty companies which will be competing with it in these markets. However, the Company believes that it has proprietary technologies which provide a unique and cost-effective solution to the problem of counterfeiting and gray marketing. The Company is aware of a limited number of competitors which are attempting similar approaches to the same problems which the Company's products address. Other indirect competitors are marketing products utilizing the hologram and "copy void" technologies. The hologram, which has been incorporated into credit cards to foil counterfeiting, is considerably more costly than the Company's technology. Copy void technologies are security devices which have been developed to indicate whether a document has been photocopied. The Company has limited resources, and there can be no assurance that businesses with greater resources than the Company will not enter the market and compete with the Company. Employees The Company currently has a five year employment contract in place with its President, Norman A. Gardner, which commenced October 1, 2001. Pursuant to this agreement, Mr. Gardner's compensation is $10,000 per month, and will increase to $12,500 per month on commencing October 1, 2003. In order to help the Company's cash position, Mr. Gardner only took salary of $105,000 during 2002. Pursuant to the agreement, Mr. Gardner has options to purchase up to 500,000 shares of the Company's stock at prices ranging from $0.17 to $0.35. In addition to base salary the Company will from time to time pay Mr. Gardner incentive bonuses and reasonable expenses incurred in connection with the performance of his duties. Throughout the term of this employment agreement, the Company will furnish Mr. Gardner with an automobile and automobile expenses and will reimburse travel on Company business as well as reimburse employees for the expenses incurred in connection with the Company's operation. Additionally, pursuant to its acquisition of the assets E.D.S. Marketing, Inc., the Company has entered into employment agreements with Edward J. Fishman - - the Company's Vice Chairman of the Board of Directors, Steven W. Meistrich - the Company's Executive Vice President, and Doug Wise - the Company's Vice President of Sales and Marketing. Pursuant to the acquisition of EDS, the Company pays certain overhead expenses and limited guaranteed salaries (draws on commission) which total in the aggregate, $20,000 per month. All expenses associated with the E.D.S. marketing, Inc. acquisition were curtailed in September, 2002. If and when the Company hires full time employees other than the Company's president Norm Gardner, all full time Employees shall be entitled to health, life, accident or disability insurance plans, any profit sharing or retirement plans and stock option plans the Company makes available. The Company has two part time employees, its book-keeper, who is a part time employee, and its secretary, also a part time employee. Outside Sales Agents / Independent Contractors The Company has consulting contracts with several outside sales agents and independent contractors who are being compensated via stock options, stock grants, and for the sales agents, commissions on sales to various customers of the Company. The Company's outside sales agents and independent contractors will also receive payment for certain expenses. RISK FACTORS STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company desires to take advantage of certain "Safe Harbor" provisions of the Reform Act and is including this special note to enable the Company to do so. This document contains forward-looking statements that reflect the views of the Company's management with respect to future events and financial performance. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, the words "anticipates", "believes", "estimates", "expects", "plans", "projects", "targets", and similar expressions that identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Absence of Trading Market There is no trading market for the Company's Common Stock and there is no assurance that such a market will develop, or if such a market develops, that it will be maintained. Holders of the Shares may, therefore, have difficulty in selling their stock should they desire to do so and should be able to withstand the risk of holding their Shares indefinitely. Penny Stock Rules. The Company believes its Common Stock will be subject to the Penny Stock Rules promulgated under the Securities Exchange Act of 1934 due to its price being less than $5.00 per share. If the Company were to meet the requirements to exempt its securities from application of the Penny Stock Rules, there can be no assurance that such price will be maintained if a market develops and thus the Penny Stock Rules may come into effect. These rules regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The Penny Stock Rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the Penny Stock Rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Company's securities. While the Company's Common Stock remains subject to the Penny Stock Rules, investors may find it more difficult to sell such securities. Need for Subsequent Funding; No Assurance of Future Offering In order to finance expansion of our business operations, to attempt to patent our technologies, and to implement our business plans, we need to raise more capital. Our ability to continue in business and effectively implement its plans may depend upon our ability to raise additional funds. There is no assurance that additional funding, if required, will be obtainable in amounts or on terms favorable or acceptable to the Company. The capital resources required to develop each new product are significant. The Company believes combined cash on hand and cash generated from future operations, will provide the Company with the financing required to conduct its business at least through June, 2003, but there is no guarantee that the Company is correct, or that it will be able to raise additional capital, if required. The Company completed Private Placements raising $690,600 in 2002. Lack of Dividends We have not paid any cash dividends since our inception and do not intend to pay dividends in the foreseeable future. We intend to retain all earnings, if any, for use in our business operations. Risks Associated With Our Being A New Business. Our operations are subject to all of the risks inherent in a new business enterprise. We currently have limited revenue, limited operating history, and limited salable product. We are subject to the same types of risks that many new business face - like shortages of cash, under-capitalization, and expenses of new product development. We do not anticipate positive cash flow on a monthly basis until the end of 2003 at the earliest, and even then we cannot give assurances that we will be operating at break-even levels at that time or in the future. Various problems, expenses, complications and delays may be encountered in connection with our development both in terms of our products and our business. Future growth beyond present capacity will require significant expenditures for expansion, marketing, research and development. These expenses must either be paid out of the proceeds of this or future offerings or out of our generated revenues and profits, if any. The availability of funds from either of these sources cannot be assured. General Risks Of The Counterfeit Prevention Industry The industry in which we intend to compete is subject to the traditional risks faced by any business of adverse changes in general economic conditions, the availability and expense of liability insurance, and adverse changes in local markets. However, we will also be subject to industry specific risks such as counterfeiters learning how to circumvent new and existing technologies; evolving consumer preference and health-related concerns; federal, state and local chemical processing controls; consumer product liability claims; risks of product tampering. Competition In Our Industry In the area of document security and product authentication and serialization, we are aware of other companies and other similar technologies, both covert and overt surface marking techniques, which require decoding elements or analytical methods to reveal the relevant information. These technologies are offered by other companies for the same anti-counterfeiting and anti-diversion purposes to which we plan to market our technologies. Other competitors are marketing products utilizing the hologram and copy void technologies. The hologram, which has been incorporated into credit cards to foil counterfeiting, is considerably more costly than our technology. Copy void is a security device which has been developed to indicate whether a document has been photocopied. It is anticipated that a significant number of companies of varying sizes, which may ultimately include divisions or subsidiaries of larger companies, will be vying for the same market segment as we are. A number of these competitors may have substantially greater financial and other resources available to them. There can be no assurance that we can compete successfully with such other companies. Competitive pressures or other factors could cause us to lose market share if it develops at all, or result in significant price erosion, either of which would have a material adverse effect on our results of operations. Governmental Regulation Of Our Fields Our operations may be subject to varying degrees of federal, state or local laws and regulations. Operations such as those we intend to conduct may be subject to federal, state and local laws and regulations controlling the development of technologies related to privacy protection, to the protection of the environment from materials that we may use in our inks, and advanced algorithm formulations or encryption tactics that we may develop. Any of these regulations may have a materially adverse effect upon our operations. Technology Staffing We anticipate that staffing will represent one of our largest expenses. We will compete with other copy security prevention technologies in attracting and retaining qualified or skilled personnel. A shortage of trained personnel or general economic inflationary pressures may require us to enhance our wage and benefits package in order to compete with other employers. There can be no assurance that our labor costs will be sustainable. Our failure to attract and retain qualified employees to control our labor costs or to match increases in our labor expenses with corresponding increases in revenues could have a material adverse effect on the business. Due to our financial situation, over the last fiscal year we have reduced the number of staff which we employed as part of our purchase of EDS. If we are unable to hire or maintain similarly positioned staff again in the future, the Company could experience material adverse affects. Rapidly Changing Market. We believe that the market for our products is rapidly changing with evolving industry standards. Our future success will depend in part upon our ability to introduce new products and features to meet changing customer requirements and emerging industry standards. There can be no assurance that we will successfully complete the development of future products or that our current or future products will achieve market acceptance. Any delay or failure of these products to achieve market acceptance would adversely affect our business. In addition, there can be no assurance that products or technologies developed by others will not render our products or technologies non-competitive or obsolete. Patents; Intellectual Property Pursuant to an employment agreement with our president, Norman A. Gardner, we have received all rights in a pending U.S. patent application and any improvements, and we have additionally filed two patent applications in the United States. The initial application has been allowed and a corresponding international (PCT) application has been found to meet the PCT requirements for novelty, inventive step and industrial applicability. There can be no assurance that any patent, or any other patents which we may obtain or apply for in the future, will be granted or will be granted with claims of commercially useful breadth, or will be safe from challenge. Until such time as a patent is issued, we will not have the right to bring a patent infringement action against a third party who makes a product or uses a process identical or similar to a product or process that we employ. Even if patents were granted, there is no assurance that such patents would not be attacked by third parties or that, if any such attack were made, it would not be successful. The costs involved in defending a patent or prosecuting a patent infringement action could be substantial. At present we do not have the resources to pursue or defend such an action. We plan to rely on confidentiality, non-compete and licensing agreements to establish and protect our rights in any proprietary technologies. While we intend to actively protect these rights, our technologies could possibly be compromised through reverse engineering or other means. There can be no assurance that we will be able to protect the basis of our technologies from discovery by unauthorized third parties, thus adversely affecting our customer and licensee relationships. Prior Relationships Of Our President. Norman A. Gardner, our President, founded Nocopi Technologies, Inc. ('NoCopi'), and served as its President and Chief Executive Officer from October, 1985, until October, 1997, and as its Chairman of the Board until March, 1998. Currently, Mr. Gardner has no relationship with Nocopi Technologies, Inc. We view Nocopi as one of our competitors in our marketplace in that we plan to develop and sell technology to prospects and clients that we believe is completely different from, but competitive with, that sold by Nocopi to the same or similar prospects and clients. Mr. Gardner's termination agreement with Nocopi does not impose a post-termination restrictive covenant upon Mr. Gardner, and Mr. Gardner has assured us that he has not and will not, divulge, furnish, or make accessible to anyone any confidences or secrets of Nocopi in violation of the Agreement. Furthermore, the Company has a working relationship with NoCopi, and has licensed certain technologies from NoCopi for a four year period. Rule 144 Shares A majority of the shares of Common Stock presently outstanding (approximately 12,100,000 shares, or 63.15%) were issued on the date of the company's inception or later and are considered "restricted securities". These shares may be publicly resold in compliance with Rule 144 adopted under the Securities Act of 1933, as amended. Rule 144 provides, in part, that after holding restricted securities for a period of one (1) year non-affiliated shareholders (affiliates include officers, directors, and ten percent or greater shareholders) may sell, during any three months, in a brokerage transaction, or to a market maker, an amount equal to the greater of one percent (1%) of the Company's outstanding Common Stock, or the average weekly trading volume, if any, in the Common Stock during four calendar weeks preceding the filing of a Form 144 relating to such sale. After two (2) years non-affiliated shareholders (who have been non-affiliates for at least three months) may sell an unlimited amount of the Company's outstanding Common Stock. Rule 144 also provides that after holding restricted securities for a period of two (2) years, affiliates of the company may sell every third month in a brokerage transaction, or to a market maker, an amount equal to the greater of one percent (1%) of the Company's outstanding Common Stock, or the average weekly trading volume, if any, in the Common Stock during four calendar weeks preceding the filing of a Form 144 relating to such sale. Such sales, if made under certain circumstances, would depress the market price and render difficult the sale of the Company's securities purchased hereunder. Certain of the outstanding shares were be eligible for sale pursuant to Rule 144 as of November, 2000. Dependence on Key Personnel We will be dependent on our current management for the foreseeable future. The loss of the services of any member of these persons would have a material adverse effect on our operations and prospects. Our success will be dependent to a substantial degree on our Chief Executive Officer, Norman A. Gardner. Mr. Gardner's continued involvement is particularly critical to us. In the event Mr. Gardner were unavailable, it would have a material adverse effect on our operations. At this time, we have an employment agreements with Mr. Norman A. Gardner, our Chief Executive Officer and President, and Ed Bell, our Director of Research and Development. We have only obtained "key man" insurance policies on Mr. Gardner. The expansion of our business will be largely contingent on our ability to attract and retain a highly qualified management team. There is no assurance that we can find suitable management personnel or that we will have the financial resources to attract or retain such people if found. Indemnification The Company's By-Laws include provisions that indemnify any director or officer made a party to any action, suit or proceeding for negligence or misconduct in the performance of his duties made in good faith, by reason of the fact that he is or was a director, officer or employee of the Company against reasonable expense including legal fees, actually or necessarily incurred by him in connection with the defense of such action, suit or proceedings or in connection with any appeal therein. Currently, the Company spends $3,500 per month on its Directors and Officers liability insurance for a policy which has a limit of $1,000,000. The Company is considering canceling this policy if it is unable to increase revenues or raise capital by the second fiscal quarter of 2003. Dependence Upon Third Parties. We intend to pursue a policy of licensing our technologies for incorporation into products made and distributed by third parties. Although we plan to negotiate guaranteed minimum royalties in our licensing arrangements, our revenues will be substantially dependent on the sale of products incorporating our technologies by third parties. We intend to provide technical marketing support to our licensees. However, the successful marketing of such products and, therefore, our revenues and operating income, depend substantially on the marketing efforts of such third parties, over which we will have little, if any, control. Technical Obsolescence. The value of our technology and any products derived from our technology could be substantially reduced as new or modified techniques for combating document and product counterfeiting and product diversion are developed and become widely accepted. We can't guarantee that future technological developments will not result in the obsolescence of our technologies. Dependence Upon Marketing. While we believe that our products hold unsatisfied market demand, our ability to generate sales will depend upon developing and implementing a marketing strategy. There can be no assurance that we can successfully develop, promote and maintain an active market for our products. Management Of Growth. If we are successful in increasing demand for our products, of which there can be no assurance, our growth could create certain additional risks. Rapid growth can be expected to place a substantial burden on our management resources and financial controls. Our ability to manage growth effectively will require us to continue to implement and refine our operational, financial and information management systems and to train, motivate and manage our employees. Our ability to attract and retain qualified personnel will have a significant effect on our ability to establish and maintain our position in our various markets, and our failure to manage our growth effectively could have material adverse effects on our results of operations. Risks Associated With The Company's Ability To Continue As A Going Concern. The Company has no operating history, limited sales, and has incurred operating losses since inception and requires additional capital to continue its operations and to implement its business plans. The Company's certifying accountants have issued a going concern qualification in their report for the year ended December 31, 2002. Although the Company intends to raise money, implement sales, and become profitable, if the Company fails to achieve any one of these goals, then it is unlikely that the Company will be successful, and very likely that the Company will become insolvent or otherwise forced to close its doors. If this occurs, it will have a material adverse affect on the Company and any results of operations. Lack Of Diversification. The Company's proposed operations, even if successful, will in all likelihood result in the Company's engaging in a business which is concentrated in only one industry. Consequently, the Company's activities will be limited to the anti-counterfeiting industry. The Company's inability to diversify its activities into a number of areas may subject the Company to economic fluctuations within a particular business or industry and, therefore, increase the risks associated with the Company's operations. Item 2. DESCRIPTION OF PROPERTY The Company's east coast offices are presently located in 1000 sq. ft. of office space in the home of its president, Norman A. Gardner, at 837 Lindy Lane, Bala Cynwyd, PA 19004. The Company pays no rent for the use of this space. As part of cost cutting measures instituted in fiscal 2002, the Company closed its west coast offices in February, 2003. The Company's west coast offices had been located in 1725 sq. ft. of office space at 2659 Townsgate Rd., Suite 113, Westlake Village, California 91361. The Company was paying approximately $3,000 per month for the rent of this space. The Company has been assigned one patent, and the rights to two additional patent applications submitted by its President, Norman A. Gardner. The Company believes that the granting of its patent application will enhance the Company's position in the market place, but that even if not granted, the Company will be able to compete effectively in the market place by utilizing non-competition and confidentiality terms in contracts it will enter into with any employees, and non-disclosure and non-analysis agreements given to every potential supplier and customer of the Company. Item 3. LEGAL PROCEEDINGS The are no material legal proceedings pending or, to the Company's knowledge, threatened against the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company submitted no matters to a vote of its security holders during its fiscal year ended December 31, 2002. Part II. Item 4. RECENT SALES OF UNREGISTERED SECURITIES From inception in November of 1999 through December, 1999 the Company issued 7,600,000 common shares to its founder, Norman Gardner; several people who assisted Mr. Gardner in the formation of the Company and its technology - Michael J. Prevot, a director, and George Hess and his children, Eric J. Hess, Mark A. Hess, and Brian K. Hess; its attorneys, Jay Hait and Tom Schneider, and several business associates and friends of Mr. Gardner's, who are not involved in the day to day business operations of the Company in exchange for assets and services valued at $120,533. From April, 2000, to September 2000, the Company issued a total of 5,449,999 shares of its common stock at $0.17 per share, for a total consideration of $926,500, in an offering done pursuant to Rule 504 as promulgated under Regulation D of the Securities Act of 1933, and registered in the State of New Jersey. No commission was paid on these sales. The determination as to whether or not the shares are restricted or free trading was made based upon whether the purchaser (a)was an accredited investor, as based on the results of a questionnaire, and (b)lived in a state in which the securities were registered with a qualitative review, or (c) lived in a state with the appropriate applicable exemption after the shares had been registered with a qualitative review in a different state. From July, 2000, to September, 2000 the Company issued 240,000 shares of Common Stock to a total of nine non-employee consultants, for services valued at $40,800, pursuant to Rule 701 promulgated under Section 3(b) of the Securities Act of 1933. The Company relied on the following facts in determining that Rule 701 was available: (a) the shares were issued pursuant to a written agreement between the consultants and the Company, (b) the consultants rendered bonafide services not in connection with the offer or sale of securities in capital raising transactions, (c) the shares were issued pursuant to a written contract relating to the issuance of shares paid as compensation for services rendered, and (d) the amount of shares offered and sold in reliance on Rule 701 did not exceed $500,000 and all securities sold in the last 12 months have not exceeded $5,000,000. In July of 2000 the Company issued options to purchase 1,135,000 shares of the Company's common stock to sales employees and consultants. In October of 2001, the Company entered into a new employment contract with its President, and pursuant to the new employment contract it has granted him options to purchase a total 500,000 shares of it's common stock, 250,000 shares at $0.17 per share, and 250,000 shares at $0.35 per share. In March of 2001, pursuant to Rule 506 as promulgated under Regulation D of the Securities Act of 1933, the Company sold an option for $15,000 to PFK Acquisition Group II, LLC, a California Limited Liability Corporation, and an accredited investor, which gives it the right to purchase 1,500,000 shares of the Company's common stock at a price of $0.16 per share by May 22, 2001. PFK paid to the Company $85,000 of the option execution price, and the Company extended the option until June 22, 2001, by which date PFK exercised the options. On December 31, 2001, pursuant to section 4(2) of the Securities Act of 1933, the Company issued 2,000,000 common shares as part of the acquisition price for E.D.S. Marketing, Inc, at a valuation of $0.035 per share. On November 1, 2002, the holders of these shares cancelled one million of these shares as part of a purchase price adjustment. In March of 2002, pursuant to Rule 506 as promulgated under Regulation D of the Securities Act of 1933, the Company sold 1,350,000 common shares at a price of $0.32 per share for a total of $432,000. The shares were sold to accredited investors who were personal acquaintances of the Company's President, Norman Gardner, and its Vice-Chairman, Edward Fishman. In October of 2002, pursuant to Rule 506 as promulgated under Regulation D of the Securities Act of 1933, the Company sold 2,026,875 common shares at a price of $0.125 per share for a total of $258,000. The shares were sold to accredited investors who were personal acquaintances of the Company's President, Norman Gardner, and its Vice-Chairman, Edward Fishman. Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's Common Stock is quoted on the bulletin board under the symbol "LLTI" The following table sets forth the high and low bid prices as reported by the National Association of Securities Dealers (NASD) for the periods ending December 31, 2002. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not reflect actual transactions. As of December 31, 2002 there were approximately 125 shareholders of Common Stock. High Low ----- ---- 2002 ----- First Quarter 0.50 0.30 Second Quarter 0.50 0.35 Third Quarter 0.41 0.25 Fourth Quarter 0.35 0.11 2001 ----- First Quarter 0.55 0.25 Second Quarter 0.50 0.30 Third Quarter 0.50 0.35 Fourth Quarter 0.60 0.32 (b) As of December 31, 2002, there were approximately 125 holders of the Company's Common Stock. (c) No dividends were paid during the fiscal year ending December 31, 2002. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR PLAN OF OPERATION The following discussion and analysis should be read in conjunction with LaserLock's financial statements and the Notes thereto contained elsewhere in this registration statement. This registration statement contains forward-looking statements that involve risks and uncertainties. LaserLock's actual results may differ significantly from the result discussed in the forward looking statements. Factors that might cause such a difference are discussed in "Risk Factors." Overview Due to the lack of cash flow to the Company's operations, which stem from, among other things, a lower than projected amount of sales for fiscal 2002, the Company has taken a number of steps to lower its monthly negative cash flow from $90,000 to $35,000. We believe that these steps are temporary, and that as the economy strengthens so will the Company's sales and we will be able to implement these programs once again. We believe that our laser and ink combination products are ready for commercial production and we have been soliciting orders for our products. We had previously entered into licensing agreements with the Bud Jones Company, Bourgogne et Grasset, and Slot Tickets to utilize our technology in the gaming industry. These contracts have generated limited operating revenues during 2002, and we expect them to generate greater sales during fiscal 2003. From its inception in 1999, LaserLock has been engaged primarily in activities devoted towards obtaining the patent rights to the technology, general business operations, research and development, negotiating licenses and agreements with potential customers, creating a sales and management infrastructure by hiring consultants and independent contractors , and obtaining financing. The Company intends to spend between $25,000 to $50,000 for consultant services during the 2003 fiscal year. There have been limited revenues from sales to date. The Company is a technology licensing Company which licenses its technology to both third parties who incorporate it into their products for resale to their customers, and also directly to end users who incorporate the technology into their products at their manufacturing facilities. The Company receives per unit royalties on volume usage of its technology. The Company intends to require, whenever possible, minimum annual royalties to enter into these licensing agreements. The Company believes that its current office space, which consists of approximately 1,000 square feet located in the home of its President, Norman Gardner, and for which it pays no rent, will be sufficient to house its operations for the next year. Results of Operations for the year ended December 31, 2002 as compared to the year ended December 31, 2001 It is difficult for LaserLock to forecast its revenue or earnings accurately. We believe that period-to-period comparisons of our operating results may not be meaningful. We believe that we will start generating larger amounts of revenue in the coming fiscal year due to the sales and products infrastructure which we have been attempting to create over the past year, including our asset purchase of EDS Marketing, Inc. As a result of our extremely limited operating history, we do not have historical financial data for a significant number of periods on which to base planned operating expenses. Our expense levels are based upon our expectations concerning future revenue. Thus, annual revenue and results of operation are difficult to project. For the year ending December 31, 2002, the Company had Sales and Royalties revenues of $126,299, as opposed to Sales and Royalties revenues of $11,803 for the year ending December 31, 2001. The increase in sales and revenues is due to the Company's delivery of materials pursuant to contracts the Company has entered into. The Company's general and administrative costs aggregated approximately $385,990 for the year ended December 31, 2002 as compared to $422,700 for the year ended December 31, 2001 representing an decrease of $36,710. These costs reflect a tax offset benefit of $145,000. Without the tax offset, general and administrative costs would have been $108,290 higher for the year ended December 31, 2002 as compared to the year ended December 31, 2001 due to costs associated with the acquisition of EDS Marketing, Inc., the Company's Los Angeles office, and staff and commission advances to Ed Fishman, Steve Meistrich, and Doug Wise The Company's sales and marketing costs aggregated approximately $583,339 for the year ended December 31, 2002 as compared to $625,641 for the year ended December 31, 2001 representing a decrease of $42,302. This decrease represents decreased spending related to the Company's marketing after the purchase of the assets EDS Marketing, Inc.. Specifically, the Company continued marketing its products in earnest this year by attending trade shows, creating promotional materials, adding sales staff, and building a web site, but lowered costs in its staffing. The Company's research and development costs aggregated approximately $141,748 for the year ended December 31, 2002 as compared to $173,412 for the year ended December 31, 2001 representing an decrease of $31,664. This decrease represents decreased spending related to the Company's research team which has resulted in two additional patents during the year. Finally, the Company's legal and accounting costs aggregated approximately $67,753 for the year ended December 31, 2002 as compared to $146,845 for the year ended December 31, 2001 representing an decrease of $79,092. This decrease represents the decreased legal costs the Company incurred this year since it did not have costs similar to 2001's one time costs involved in the Company's purchase of the assets EDS Marketing, Inc, and its license acquisition from Nocopi Technologies, Inc. Liquidity and Capital Resources The Company decreased its cash balance by $ 146,391 from a cash balance at December 31, 2001 of $268,984 to $112,593 at December 31, 2002. Working capital at December 31, 2002 is positive at $124,465. LaserLock has incurred negative cash flows from operation since its inception. The Company has begun to solicit business, and expects to continue to expend sums to market and sell its products. Our future capital requirements and the adequacy of available funds will depend on numerous factors, including the successful commercialization of our existing products, cost of filing, prosecuting, defending and enforcing current and any future patent claims and other intellectual property rights, competing technological and market developments, and the development of strategic alliances for the development and marketing of our products. In the event LaserLock's plans change or its assumptions change or prove to be inaccurate or the funds available prove to be insufficient to fund operations at the planned level (due to further unanticipated expenses, delays, problems or otherwise), LaserLock could be required to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through other sources in order to bring its products through to commercialization. LaserLock does not have any committed sources of additional financing, and there can be no assurance that additional funding, if necessary, will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to further delay, scale-back, or eliminate certain aspects of our operations or attempt to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates, products, or potential markets. Specifically, the Company may have to delay its anticipated marketing and delivery dates, or scale back its third party production capabilities if it is unable to consummate sales, or to eliminate certain areas of further research and development. If adequate funds are not available, LaserLock's business, financial condition, and results of operations will be materially and adversely affected. The actual research and development and related activities of LaserLock may vary significantly from current plans depending on numerous factors, including changes in the costs of such activities from current estimates, the results of LaserLock's research and development programs, the results of clinical studies, the timing of regulatory submissions, technological advances, determinations as to commercial potential and the status of competitive products. The Company expects to expend $70,000 on its research and development program in the upcoming year and the Company's research and development plans to perform over the next year includes the application of its product to additional materials, as well as improving its existing products in conjunction with client feedback. The focus and direction of LaserLock's operations will also be dependent upon the establishment of collaborative arrangements with other companies, and other factors. The Company has no plans to change the number of employees or independent contractors it employs at this time, and plans to continue to utilize its current employees and contractors for at least the duration of 2003. The Company intends to third party manufacture all of its products, and does not believe that it will be making any plant and equipment purchases during the upcoming year. Until required for operations, LaserLock's policy is to invest its cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, U.S. government instruments or other investment-grade quality instruments. There can be no assurance that LaserLock will be able to commercialize its technologies, or that profitability will ever be achieved. LaserLock expects that its operating results will fluctuate significantly from year to year in the future and will depend on a number of factors, most of which are outside LaserLock's control. ITEM 7. FINANCIAL STATEMENTS The financial statements are attached hereto at page 17. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company's former accountants, Larson, Allen, Weishair & Co., LLP, P.C. ('Larson') resigned from their position as the Company's auditor as of August 23, 2002. Larson's report on the Company's financial statements for the period November 10, 1999 (date of inception) to December 31, 2000 and 2001 contained an unqualified opinion modified for uncertainty as to the Company's ability to continue as a going concern. Other than that, their report on the Company's financial statements since inception did not contain an adverse opinion, disclaimer of opinion, or any qualifications or modifications with regard to uncertainy, audit scope, or accounting principles. For the Company's last two fiscal years, and any subsequent interim period prior to their resignation, the Company did not have any disagreements with Larson with respect to accounting and auditing issues of the type discussed in Item 304(a)(iv) of Regulation S-B. As of October 10, 2002, the Company has retained the public accounting firm of Cogen Sklar, LLP, ('Cogen'), whose principal business address is 150 Monument Rd., Suite 500, Bala Cynwyd, PA 19004, to perform its annual audit for inclusion of its report in Form 10-KSB, and perform SAS 71 reviews of quarterly information in connection with Form 10-QSB filings. The Company had not previously consulted with Cogen on any matters, and for the year ended December 31, 2002 has not had any disagreements with Cogen on accounting or financial disclosure. Part III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF REGISTRANT The Board of Directors of the Company is comprised of only one class of director. Each director is elected to hold office until the next annual meeting of shareholders and until his successor has been elected and qualified. Officers are elected annually by the Board of Directors and hold office until successors are duly elected and qualified. The following is a brief account of the business experience of each director and executive officer of the Company. The position(s) held by each Officer and Director of the Company are shown on the following table. Directors Norman Gardner and Michael Prevot were elected in November, 1999, and Directors Ed Fishman, Steven Meistrich, and Joel Pinsky were elected during 2001. All Directors will serve for one year or until the next annual meeting of the Company's Shareholders and until a successor is elected and has qualified. Name Age Position Norman A. Gardner 60 CEO, and Chairman of the Board of Directors Ed Fishman* 59 Vice Chairman of the Board of Directors Steven Meistrich* 44 Executive Vice President and a Director Ed Bell 54 Director of Research and Development Joel A. Pinsky 66 Director Michael J. Prevot 47 Vice President and a Director Doug Wise* 57 Vice President of Sales and Marketing - ------------------------------ * Messrs. Fishman, Meistrich, and Wise have all handed in letters resigning from their board and/or executive positions with the Company effective May 1, 2003 for personal reasons. Although they will no longer be involved with the Company in their executive and/or board positions, they have all indicated they they intend to remain on the Company's Board of Advisors. NORMAN A. GARDNER Norman A. Gardner has been the President of the Company since inception on November 11, 1999. From 1974 to 1985 Mr. Gardner served as President of Polymark Management, Ltd., a Canadian public relations firm. In 1982, Mr. Gardner founded Nocopi Technologies, Inc. of West Conshohocken, PA, a publicly traded company. He served as President and Chief Executive Officer of Nocopi from 1985 until 1997, and as Chairman of its board until March, 1998. Mr. Gardner received his B.A. in English from McGill University in 1963. ED FISHMAN Mr. Fishman has been the Company's Vice Chairman of the Board of Directors since the Company's acquisition of EDS Marketing, Inc, where he was the Chairman of the board since 2000. Prior to that, Mr. Fishman had been the Chairman and CEO of Players International, Inc., which he founded, built and eventually sold to Harrah's. Mr. Fishman received his B.A. degree from California State University, Northridge, in 1966. STEVEN MEISTRICH Mr. Meistrich has been the Company's Executive Vice President and a Director since the Company's acquisition of EDS Marketing, Inc, in Los Angeles, where he was the Chief Executive Officer since 2000. Prior to that, Mr. Meistrich had been the founder of Best Bet TV of Los Angeles, since 1999, CEO of Entertainment Marketing Technology of Los Angeles since 1998, and founder and CEO of the Lab-e-rinth Group of Los Angeles since 1989. Mr. Meistrich received his Masters degree from Johns Hopkins in 1979. ED BELL Mr. Bell has been the Company's Director of Research & Development since 2000. From 1989 to 1999, Mr. Bell was Vice-President of Olde Philadelphia Mint. In 1999, Mr. Bell formed Educational Computer Company which consults with Coin Mechanisms Inc. and Kilmartin Industries Inc. Mr. Bell holds over a dozen patents in the fields of fluidics, mechanics and electronics. JOEL PINSKY Mr. Pinsky has been International Counsel of the Company since October 2001. Mr. Pinsky is a founding partner with the law firm of GROSS, PINSKY and has practiced his profession in Montreal, Canada on full-time basis for over 40 years. He received his B.A. degree from McGill University in 1957, his B.C.L. degree from McGill University in 1960 and his B.Com degree from Concordia University in 1961. MICHAEL J. PREVOT Michael Prevot has been the Vice-President of Sales of the Company since inception. From 1985 to 1999, Mr. Prevot has served as President of Vista Security Papers, a San Francisco based company which sells security products. Mr. Prevot studied business at the College of San Mateo in San Mateo, California, in 1974-1975, and at Skyline College in San Bruno, California in 1975-1976. Mr. Prevot dedicates 10 - 20 percent of his time performing his tasks for the Company. These tasks include approaching potential clients and arranging for sales meetings and presentations. DOUG WISE Mr. Wise has been the Company's Vice President of Sales and Marketing since the Company's acquisition of EDS Marketing, Inc, where he was the Executive Vice President of Sales since 200. Prior to that, Mr. Wise had been the Director and Vice President of Marketing for Entertainment Marketing Technology since 1988, and Senior Vice President of Development and Marketing for Players International since 1986. Mr. Wise received his B.B.A degree from University of Memphis in 1968. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during the fiscal year ended December 31, 2002, to the Company's Chief Executive Officer and each of the Company's officers and directors. No other person received compensation equal to or exceeding $100,000 in fiscal 2002 and no bonuses were awarded during fiscal 2002.
Annual Compensation Awards Payouts ------------------------------ ------------------------- --------- Other All Annual Restricted Securities Other compen- Stock Underlying LTIP Compen- sation Award(s) Options/SAR Payouts sation Name and Principal Position Year Salary ($) Bonus ($) ($) ($) (#) ($) ($) - - ---------- ---- ---------- --------- ------- ----------- ------------ --------- -------- Norman Gardner(1) 2002 105,000 -0- 15,600 -0- -0- -0- -0- President, 2001 86,250(3) -0- 15,600(2)(3) -0- 500,000 -0- -0- Director 2000 75,000 -0- 15,600(2) -0- -0- -0- -0- 1999 -0- -0- -0- -0- -0- -0- -0- Michael Prevot 2002 -0- -0- -0- -0- -0- -0- -0- Vice President of Marketing, 2001 -0- -0- -0- -0- -0- -0- -0- Director 2000 -0- -0- -0- -0- -0- -0- -0- 1999 -0- -0- -0- -0- -0- -0- -0- Ed Fishman, 2002 32,000 -0- -0- -0- -0- -0- -0- Vice Chairman of 2001 8,000(4) -0- -0- -0- 500,000 -0- -0- Board of Directors Steven Meistrich, 2002 32,000 -0- -0- -0- -0- -0- -0- Executive Vice President 2001 8,000(4) -0- -0- -0- 500,000 -0- -0- Director Ed Bell, 2002 -0- -0- -0- -0- -0- -0- -0- Director of 2001 -0- -0- -0- -0- 500,000 -0- -0- Research and Development Joel Pinsky, 2002 -0- -0- -0- -0- -0- -0- -0- Director 2001 -0- -0- -0- -0- -0- -0- -0- Director Doug Wise, 2002 32,000 -0- -0- -0- -0- -0- -0- Vice President 2001 8,000(4) -0- -0- -0- 500,000 -0- -0- Sales and Marketing - --------------------------------------------- 1. On October 1, 2001 the Company entered into a new employment agreement with its President, Norman Gardner, which provides for compensation of $120,000 annually, commencing October 1, 2001, and escalating to $150,000 per year from October 1, 2003, and which expires on September 30, 2006. In addition the agreement grants Mr. Gardner 500,000 options to purchase the Company's common stock, 250,000 shares at $0.17 per share, and 250,000 shares at $0.35 per share. In all other respects, the contract is the same as his employment agreement from January 1, 2000. 2. Company car, insurance, repairs and expenses. 3. Computed as funds expended as of the date of this filing. 4. Advances against commissions.
Item 11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth certain information known to the Company regarding the beneficial ownership of Common Stock as of December 31, 2002, by (i) each Director of the Company, (ii) each executive officer of the Company, (iii) all directors and executive officers as a group, and (iv) each person known to the Company to be the beneficial owner of more than 5% of its outstanding shares of Common Stock.
Shares Beneficially Owned ------------------------- Percentage Directors and Executive Officers Shares Held Owned (1) - - -------------------------------- ----------- --------- Norman Gardner 3,150,000 16.29% President 837 Lindy Lane Bala Cynwyd, PA 19004 Michael J. Prevot 106,500 0.5% 419 Buena Vista Ave. San Mateo, CA 94403 Ed Fishman 250,000 1.29% 27234 Pacific Coast Highway Malibu, CA 90265 Steven Meistrich 250,000 1.29% 4312 Manorview Court Moorpark, CA 93021 Doug Wise 250,000 1.29% 5318 Old Hwy 96 Franklin, TN 37064 Joel Pinsky 0 0% 2 Place Alexis Nihon Suite 1000 3500 de Maisonneuve Boulevard West Montreal, QC, Canada H3Z 3C1 Ed Bell 45,010 0.26% 5 Alexandra Court Glenn Mills, PA 19342 Directors and Officers as a Group 4,051,510 22.09% (1) Percentage of ownership is based on 19,334,742 shares of Common Stock issued and outstanding as of December 31, 2002.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHERS On December 23, 2001, the Company purchased the assets of E.D.S. Marketing, Inc. for 2,000,000 shares of restricted stock. Prior to the transaction, the Company had no relationship with that Company or with management of that Company. As a result of the acquisition, three former employees of E.D.S. Marketing, Inc. became management employees of the Company. These people are Ed Fishman, the Company's Vice Chairman of the Board of Directors, Steven Meistrich, the Company's Executive Vice President and a Director, and Doug Wise, the Company's Vice President of Sales and Marketing. In addition to becoming employees of the Company, pursuant to the transaction each of these three persons received 500,000 of the total 2,000,000 shares used to purchase the assets E.D.S. Marketing, Inc., and received grants of options to purchase an additional 500,000 shares each. During 2002, in order to adjust the purchase price of E.D.S. Marketing, Inc. , each of the persons who received common stock as part of the Company's acquisition of E.D.S. Marketing, Inc. (Ed Fishman, Steven Meistrich, Doug Wise, and Howard Goldberg) cancelled 250,000 of their common shares, lowering the Company's then issued and outstanding common shares by 1,000,000 shares. There have been no other material transactions, series of similar transactions, or currently proposed transactions, to which the Company was or is to be a party, in which the amount involved exceeds $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record or beneficially more than five percent of the Company's Common Stock, or any member of the immediate family of any of the foregoing persons, had a material interest. CERTAIN BUSINESS RELATIONSHIPS There have been no material transactions, series of similar transactions, currently proposed transactions, or series of similar transactions, to which the Company was or is to be a party, in which the amount involved exceeds $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record or beneficially more than five percent of the Company's Common Stock, or any member of the immediate family of any of the foregoing persons, had a material interest other than the one listed in Transaction with Management and Others section, above. Item 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a) All required exhibits are incorporated herein by reference from the Company's Form 10-SB filed on November 14, 2000, and Amendments thereto. ITEM 14. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Within the 90 days prior to the date of this report, we carried out an evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Exchange Act Rules 13a-14(c) and 15d-14(c)) under the supervision and with the participation of our management, including Norman Gardner, our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, Mr. Gardner concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission`s rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Changes in Internal Controls ----------------------------- There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the date we carried out this evaluation. Financial Statements LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) DECEMBER 31, 2002 AND 2001 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) C O N T E N T S ------------------- PAGE ------ INDEPENDENT AUDITORS REPORTS ................................... F-1 and F-2 CONSOLIDATED BALANCE SHEETS .................................... F-3 CONSOLIDATED STATEMENTS OF OPERATIONS .......................... F-4 CONSOLIDATED STATEMENTS OF CHANGES IN .......................... F-5 STOCKHOLDER'S EQUITY CONSOLIDATED STATEMENTS OF CASH FLOWS .......................... F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................... F-7 to F-17 INDEPENDENT AUDITORS' REPORT To the Board of Directors LaserLock Technologies, Inc. (A Development Stage Company) Bala Cynwyd, Pennsylvania We have audited the accompanying consolidated balance sheet of LaserLock Technologies, Inc. and Subsidiaries (a development stage company) as of December 31, 2002, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended and for the period November 10, 1999 (date of inception) to December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The company's financial statements as of and for the year ended December 31, 2001, and for the period November 10, 1999 (date of inception) through December 3, 2001 were audited by other auditors whose report, dated March 26, 2002, on those statements included an explanatory paragraph that described the substantial doubt about the Company's ability to continue as a going concern discussed in Note 2 to the financial statements. The financial statements for the period November 10, 1999 (date of inception) through December 31, 2001 reflect total revenues and net loss of $11,803 and $1,474,241, respectively, of the related totals. The other auditors' report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such prior period, is based solely on the report of such other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 consolidated 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, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LaserLock Technologies, Inc. and Subsidiaries (a development stage company) as of December 31, 2002 and the consolidated results of their operations and their cash flows for the year then ended and for the period November 10, 1999 (date of inception) to December 31, 2002, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's losses from development stage activities raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. COGEN SKLAR, LLP Bala Cynwyd, Pennsylvania March 12, 2003 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors LaserLock Technologies, Inc. (A Development Stage Company) Bala Cynwyd, Pennsylvania We have audited the accompanying balance sheets of LaserLock Technologies, Inc. and Subsidiaries (a development stage company) as of December 31, 2001, and the related statements of operations, changes in stockholders' equity and cash flows for the year then ended and for the period November 10, 1999 (date of inception) to December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaserLock Technologies, Inc. and Subsidiaries (a development stage company) as of December 31, 2001 and the results of its operations and its cash flows for the year then ended and for the period November 10, 1999 (date of inception) to December 31, 2001 in conformity with U.S. generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's losses from development stage activities raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/LARSON, ALLEN, WEISHAIR & CO., LLP LARSON, ALLEN, WEISHAIR & CO., LLP Blue Bell, Pennsylvania March 26, 2002 F-2 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
2002 2001 ------------------ ------------------ ASSETS Current Assets Cash and cash equivalents $ 122,593 $ 268,984 Receivables 27,358 5,593 Note receivable - 15,000 Prepaid expenses 11,250 26,250 ------------------ ------------------ Total Current Assets 161,201 315,827 ------------------ ------------------ Property and Equipment Capital equipment 9,445 - Less: accumulated depreciation 1,889 - ------------------ ------------------ 7,556 - ------------------ ------------------ Other Assets Intangible assets, net of accumulated amortization of $114,383 and $13,305 as of December 31, 2002 and 2001 114,617 744,694 Patent costs, net of accumulated amortization of $1,022 and $-0- as of December 31, 2002 and 2001 23,376 - ------------------ ------------------ 137,993 744,694 ------------------ ------------------ Total Assets $ 306,750 $1,060,521 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses $ 36,736 $ 19,312 Deferred revenue - 21,042 ------------------ ------------------ Total Current Liabilities 36,736 40,354 ------------------ ------------------ Stockholders' Equity Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value; 40,000,000 shares authorized, 19,334,742 shares outstanding at December 31, 2002 and 16,957,867 shares outstanding at December 31, 2001 19,335 16,958 Additional paid-in capital 2,920,673 2,477,450 Deficit accumulated during the development stage (2,669,994) (1,474,241) ------------------ ------------------ Total Stockholders' Equity 270,014 1,020,167 ------------------ ------------------ Total Liabilities and Stockholders' Equity $ 306,750 $1,060,521 ================== ==================
The accompanying notes are an integral part of these consolidated financial statements. F-3 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND THE PERIOD NOVEMBER 10, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 2002
Cumulative Year Ended Year Ended Since December 31, December 31, Inception 2002 2001 ------------- -------------- ------------- REVENUES Sales $ 46,117 $ 39,522 $ 6,595 Royalties 91,985 86,777 5,208 ------------- -------------- ------------- Total revenues 138,102 126,299 11,803 COSTS AND EXPENSES Research and development 375,878 141,748 173,412 Patent costs 50,989 - 25,989 Legal and accounting 251,533 67,753 146,845 Sales and marketing 1,358,336 583,339 625,641 General and administrative 982,570 385,990 422,700 ------------- -------------- ------------- Total costs and expenses 3,019,306 1,178,830 1,394,587 ------------- -------------- ------------- LOSS BEFORE OTHER INCOME (2,881,204) (1,052,531) (1,382,784) OTHER INCOME Interest income 46,210 1,778 20,485 ------------- -------------- ------------- LOSS BEFORE INCOME TAX BENEFIT (2,834,994) (1,050,753) (1,362,299) INCOME TAX BENEFIT (PROVISION) 165,000 (145,000) 310,000 ------------- -------------- ------------- NET LOSS $(2,669,994) $(1,195,753) $(1,052,299) ============= ============== ============= BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.06) $ (0.07) ================ ============= BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,361,695 14,105,028 ================ =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD NOVEMBER 10, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 2002
Accumulated Common Stock Additional during the Number of Consulting Paid-In Development Shares Amount Fees Capital Stage Total -------------- ---------- --------- ------------- --------------- ------------ Issuance of initial 4,278,000 shares on November 10, 1999 4,278,000 $ 4,278 $ - $ 16,595 $ - $ 20,873 Issuance of shares of common stock in exchange for services 1,232,000 1,232 - 35,728 - 36,960 Issuance of shares of common stock 2,090,000 2,090 - 60,610 - 62,700 Stock issuance costs - - - (13,690) - (13,690) Net loss - - - - (54,113) (54,113) -------------- ---------- --------- ------------- --------------- ------------ Balance, December 31, 1999 7,600,000 7,600 - 99,243 (54,113) 52,730 Issuance of shares of common stock 5,449,999 5,450 - 921,050 - 926,500 Issuance of shares of common stock in exchange for services 240,000 240 (40,800) 40,560 - - Stock issuance costs - - - (16,335) - (16,335) Fair value of non-employee stock options grants - - - 50,350 - 50,350 Amortization of deferred consulting fees - - 20,117 - - 20,117 Net loss - - - - (367,829) (367,829) -------------- ---------- --------- ------------- --------------- ------------ Balance, December 31, 2000 13,289,999 13,290 (20,683) 1,094,868 (421,942) 665,533 Issuance of shares of common stock 217,500 218 - 77,723 - 77,941 Issuance of shares of common stock and stock options for acquisition of subsidiary 2,000,000 2,000 - 736,000 - 738,000 Issuance of stock options - - - 15,000 - 15,000 Exercise of options 1,450,368 1,450 - 230,609 - 232,059 Fair value of non-employee stock options - - - 323,250 - 323,250 Amortization of deferred consulting fees - - 20,683 - - 20,683 Net loss - - - - (1,052,299) (1,052,299) -------------- ---------- --------- ------------- --------------- ------------ Balance, December 31, 2001 16,957,867 16,958 - 2,477,450 (1,474,241) 1,020,167 Issuance of shares of common stock 3,376,875 3,377 - 687,223 - 690,600 Fair value of non-employee stock options - - - 94,000 - 94,000 Salary due to stockholder contributed to capital - - - 15,000 - 15,000 Return of shares of common stock related to purchase price adjustment (1,000,000) (1,000) - (353,000) - (354,000) Net loss - - - - (1,195,753) (1,195,753) -------------- ---------- --------- ------------- --------------- ------------ Balance, December 31, 2002 19,334,742 $ 19,335 $ - $2,920,673 $ (2,669,994) $ 270,014 ============== ========== ========= ============= =============== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND THE PERIOD NOVEMBER 10, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 2002
Cumulative Year Ended Year Ended Since December 31, December 31, Inception 2002 2001 ---------------------- ---------------- ------------------ Cash Flows From Operating Activities Net Income $(2,669,994) $(1,195,753) $(1,052,299) Adjustments to reconcile net loss to net cash flows used in operating activities: Fair value of options issued in exchange for services 467,600 94,000 323,250 Salary due to stockholder contributed to capital 15,000 15,000 - Amortization and depreciation 292,293 278,988 13,305 Stock issued in exchange for services 36,960 - - Amortization of deferred consulting fees 40,800 - 20,683 (Increase) decrease in assets Receivables (27,358) (21,765) (868) Prepaid expenses (11,250) 15,000 (22,000) Increase (decrease) in liabilities Accounts payable and accrued expenses 36,737 17,424 19,068 Deferred revenue - (21,042) 21,042 ---------------------- ---------------- ------------------ Net cash used in operating activities (1,819,212) (818,148) (677,819) ---------------------- ---------------- ------------------ Cash Flows From Investing Activities Purchase of capital equipment (9,445) (9,445) - Purchase of intangibles (20,000) - (20,000) Purchase of patent costs (24,398) (24,398) - Decrease (increase) in notes receivable - 15,000 (15,000) ---------------------- ---------------- ------------------ Net cash used in investing activities (53,843) (18,843) (35,000) ---------------------- ---------------- ------------------ Cash Flows From Financing Activities Proceeds from issuance of common stock 1,778,614 690,600 77,941 Proceeds from exercise of stock options 232,059 - 232,059 Proceeds from issuance of stock options 15,000 - 15,000 Stock issuance costs (30,025) - - ---------------------- ---------------- ------------------ Net cash provided by financing activities 1,995,648 690,600 325,000 ---------------------- ---------------- ------------------ Net Increase (decrease) in Cash and Cash Equivalents 122,593 (146,391) (387,819) Cash and Cash Equivalents, Beginning of Period - 268,984 656,803 ---------------------- ---------------- ------------------ Cash and Cash Equivalents, End of Period $ 122,593 $ 122,593 $- $ 268,984 ====================== ================ ================== Supplemental Disclosure of Non-Cash Investing and Financing Activities: Return of shares of common stock related to purchase price adjustment: Common stock $ (1,000) $ (1,000) $ - Additional paid-in capital (353,000) (353,000) - ---------------------- ---------------- ------------------ Intangible assets $ (354,000) $ (354,000) $ - ====================== ================ ================== Issuance of common stock and stock options for acquisition of subsidiary $ 738,000 $ - $ 738,000 ====================== ================ ==================
The accompanying notes are an integral part of these consolidated financial statements. F-6 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - ------------------- The Company is a development stage enterprise incorporated in the state of Nevada on November 10, 1999. Since inception, substantially all of the efforts of the Company have been developing technologies for the prevention of product and document counterfeiting. The Company is in the development stage of raising capital, financial planning, establishing sources of supply, and acquiring property, plant and equipment. The Company anticipates establishing markets for its technologies in North America and Europe. Principle of Consolidation - -------------------------- The accompanying consolidated financial statements include the accounts of LaserLock Technologies, Inc. and its wholly-owned subsidiaries, LL Security Products, Inc. and EDS Marketing, Inc. All inter-company transactions have been eliminated in consolidation. Use of Estimates - ----------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Comprehensive Income - --------------------- The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Since the Company has no items of other comprehensive income, comprehensive income (loss) is equal to net income (loss). Fair Value of Financial Instruments - ------------------------------------ The Company's financial instruments consist of cash receivables and accounts payable. The carrying values of cash, receivables and accounts payable approximate fair value because of their short maturities. Concentration of Credit Risk Involving Cash - -------------------------------------------- At December 31, 2002, the Company has deposits with a financial institution which exceed Federal Depository Insurance limits. This financial institution has a strong credit rating and management believes that credit risk related to these deposits is minimal. Cash and Cash Equivalents - -------------------------- For purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and commercial paper with original maturities of 90 days or less to be cash or cash equivalents. Property and Equipment - ----------------------- Capital equipment are stated at cost. Depreciation is computed using applicable methods over the estimated useful lives of the assets, principally five to seven years. F-7 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment (Continued) - ------------------------------------ Maintenance and repairs of property are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of property and equipment, the costs and accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in operations. Depreciation for 2002 and 2001 was $1,899 and $-0-. Patents - --------- Patents are capitalized and amortized over an estimated useful life of 17 years. Patent amortization expense for 2002 and 2001 was $1,022 and $-0-. Revenue Recognition - --------------------- The Company recognizes revenue from the sale of counterfeiting prevention technology when shipped. Revenue from licensing fees will be recognized proportionately over the period of the licensing agreement. Income Taxes - ---------------- The Company follows SFAS 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Loss Per Share - --------------- The Company follows SFAS No. 128, "Earnings Per Share" resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss in 2002 and 2001, common stock equivalents, including stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Research and Development Costs - ------------------------------- Research and development costs are expensed when incurred. Total amount expensed for the years ending December 31, 2002 and 2001 was $141,748 and $173,412, respectively. Reclassification - ----------------- Certain costs and expenses in the 2001 consolidated financial statements have been reclassified to conform to the presentation in the 2002 consolidated financial statements. Intangibles - --------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Accounting for Business Combinations" and Statement No. 142, "Accounting for Goodwill and Other Intangible Assets." The provisions of Statement No. 141 apply to business combination transactions that occur after June 30, 2001. Implementation of Statement No. 141 has not effected the consolidated financial statements of the Company. The provisions of Statement No. 142, implemented effective January 1, 2002, eliminated goodwill amortization and provides for standards on testing the impairment of goodwill and other intangible assets at least annually. The adoption of this standard has had no effect on the Company's consolidated financial statements. F-8 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment - ----------- In October 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144"), effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. Statement 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. Statement 144 superseded Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company adopted Statement 144 effective January 1, 2002. The adoption of this statement has had no effect on the Company's financial statements. Recently Issued Accounting Principles - -------------------------------------- In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and amends Statement No. 123. The adoption of this standard is not expected to have an effect of the Company's consolidated financial statements. The Company did not adopt this voluntary change for year ended December 31, 2002. The following recently issued accounting pronouncements are currently not applicable to the Company. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction." This Statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation expands the disclosures to be made by a guarantor about its obligations under certain guarantees and requires that, at the inception of a guarantee, a guarantor recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective immediately. The initial recognition and measurement provisions of this Interpretation are effective for guarantees issued or modified after December 31, 2002. NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and negative cash flow during the development stage. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is in the development stage at December 31, 2002. Successful completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. The Company has entered into an agreement with an equity firm to raise additional capital. However, there can be no assurances that the Company will be able to secure additional equity investment. F-9 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 3 - CONVERTIBLE PROMISSORY NOTE RECEIVABLE On November 30, 2001 LaserLock loaned an unrelated corporation $15,000, bearing 10% interest per annum, due and payable sixty (60) days from the date the money was received by the corporation. The note was satisfied in full in 2002 in accordance with the terms of the note. NOTE 4 - DEFERRED REVENUE At December 31, 2001, LaserLock was in the process of negotiating a contract with an unrelated third party. As part of the negotiations, the unrelated third party agreed to advance LaserLock $60,000 and LaserLock agreed that the advance would be credited against future royalties if an agreement was finalized. LaserLock received $20,000 in 2001 and the remaining $40,000 during the first quarter 2002. The entire $60,000 of revenue was earned in 2002. NOTE 5 - INCOME TAXES Under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," an entity recognizes deferred tax assets and liabilities for future tax consequences or events that have been previously recognized in the Company's consolidated financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. Deferred tax liabilities would arise principally from intangible assets in the consolidated financial statements and compared to the tax treatment of such costs (these assets have no tax basis). Additionally, differences in depreciation methods for financial statement purposes and for income taxes result in temporary differences, as well. At December 31, 2002, the Company has a net operating loss ("NOL") that approximates $1,830,000. Consequently, the Company had NOL carry forwards available for federal income tax purposes, which begin to expire in 2019. Deferred tax assets would arise from the recognition of anticipated utilization of these net operating losses to offset future taxable income. Finally, valuation allowances are provided against both deferred tax assets and liabilities in assessing the likelihood of ultimate realization of the deferred tax consequence or benefit. The income tax benefit (provision) consists of the following: 2002 2001 ----------- ---------- Current $ - $ - Deferred 307,000 303,000 Change in Valuation allowance (452,000) 7,000 ----------- ---------- (145,000) 310,000 =========== ========== F-10 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 5 - INCOME TAXES (Continued) The following is a reconciliation of the tax derived by applying the U.S. Federal Statutory Rate of 35% to the earnings before income taxes and comparing that to the recorded income tax provisions.
2002 2001 ----------------------------- ------------------------------- Amount Percentage Amount Percentage ----------- ------------- ------------- ------------- U.S. federal income tax benefit at Federal statutory rate $(418,000) (35) $(477,000) (35) State tax, net of federal tax effect (77,000) (7) (47,000) (3) Non-deductible excess purchase price 53,000 5 109,000 8 Non-deductible options 33,000 3 112,000 8 Non-deductible amortization 97,000 8 - - Non-deductibel salary consolidated 5,000 - - - Change in valuation allowance 452,000 38 (7,000) (1) ----------- ------------- ------------- ------------- $ 145,000 12 $(310,000) (23) =========== ============= ============= =============
The primary components of the Company's 2002 and 2001 deferred tax assets, liabilities and the related valuation allowance are as follows: 2002 2001 ----------- ------------ Deferred tax asset for NOL carry forwards $759,000 $452,000 Deferred tax liability for intangibles (160,000) (305,000) Valuation allowance (599,000) (147,000) ----------- ------------ $ - $ - =========== ============ Management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of such benefits. NOTE 6 - COMMON STOCK In connection with two private placements that occurred in March and October 2002, the Company sold 3,376,875 shares of its common stock for a total of $690,000. In addition, on or about November 1, 2002, as part of a purchase price adjustment associated with the 2001 acquisition of EDS Marketing, Inc., one million shares of the Company's common stock was returned to the Company and cancelled (Note 12). During 2001, the Company sold 217,500 shares of its common stock for a total of $77,941. In addition, 1,450,368 shares of common stock were issued upon the exercise of options for net proceeds of $232,250. On December 31, 2001, the Company issued two million shares of its common stock for the acquisition of EDS Marketing, Inc. (Note 12). F-11 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 7 - STOCK OPTION PLAN During 1999, the Board of Directors ("Board") of the Company adopted, with the approval of the stockholders, a Stock Option Plan. In 2000, the Board superseded that plan and created a new Stock Option Plan (the "Plan"), pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock to the Company's employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options"). All options granted under the Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options ("Non-Statutory Stock Options"). The Plan is administered by a committee of the Board of Directors ("Stock Option Committee") which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provision of the Plan. In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plant of the company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise. Stock option transactions for employees during 2002 and 2001 were as follows: Exercise Price Option Vested Per Common Shares Shares Share Range ----------- ----------- ----------------- Balance, December 31, 2000 25,000 25,000 $0.17 Granted/vested during the year 500,000 500,000 $0.17 to $0.35 Exercised during the year - - - ----------- ----------- ----------------- Balance, December 31, 2001 525,000 525,000 $0.17 to $0.35 Granted/vested during the year - - - Exercised during the year - - - ----------- ----------- ----------------- Balance, December 31, 2002 525,000 525,000 $0.17 to $0.35 =========== =========== ================= F-12 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 7 - STOCK OPTION PLAN (Continued) Information with respect to employee stock options outstanding and employee stock options exercisable at December 31, 2002 is as follows:
Employee Options Outstanding ---------------------------------------------------------------------------------- Weighted Average Exercise Price of Range of Number Outstanding Weighted Average Remaining Options Currently Exercise Prices at December 31, 2002 Contractual Life Exercisable - ----------------- -------------------- --------------------------------- ---------------------- $0.17 to $0.35 525,000 2.98 years $0.26
The Company accounts for stock-based compensation in accordance with SFAS No. 123. Accounting for Stock-Based Compensation, which for employee stock options permits the use of intrinsic value method described in APB opinion No. 25, Accounting for Stock Issued to Employees, and requires the Company to disclose the pro forma effects for accounting for stock-based compensation using the fair value method as described in the optional accounting requirements of SFAS No. 123. As permitted by SFAS No. 123, the Company will continue to account for stock-based compensation under APB Opinion No. 25, under which the Company has recognized no compensation expense for employee granted options. Had compensation cost for the Company's stock option plan been determined based on the fair value of the Company's common stock at the dates of awards under the fair value method of SFAS No. 123, the Company's 2001 net loss and net loss per common share would have been increased to the pro forma amounts indicated below. In 2001 the fair value amounts were estimated using the Black-Scholes options pricing model with the following assumptions: no dividend yield, expected volatility of 30%, risk-free interest rate of 5% and expected option life of five years. There were no employee stock options issued during 2002. December 31, 2001 ------------------- Net loss: As reported $1,052,299 Pro froma 1,072,299 Net loss per common share basic and diluted: As reported $ 0.07 Pro forma $ 0.08 F-13 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 7 - STOCK OPTION PLAN (Continued) In addition to options granted to employees under the plans, the Company issued stock options pursuant to contractual agreements to non-employees. Options granted under the agreements are expensed when the related service or product is provided. Stock option transactions for non-employees during 2002 and 2001 were as follows:
Exercise Price Option Vested Per Common Shares Shares Share Range -------------- --------------- ------------------ Balance, December 31, 2000 1,110,000 1,110,000 $0.17 to $0.35 Granted/vested during the year 3,650,000 1,650,000 $0.16 to $0.35 Exercised during the year (1,450,368) (1,450,368) $0.16 -------------- --------------- ------------------ Balance, December 31, 2001 3,309,632 1,309,632 $0.16 to $0.35 Granted/vested during the year 585,000 1,060,000 $0.40 to $0.75 Exercised during the year - - - -------------- --------------- ------------------ Balance, December 31, 2002 3,894,632 2,369,632 $0.16 to $0.75 ============== =============== ==================
Included in options granted during 2001 are the 2,000,000 options shares granted in connection with the acquisition of EDS Marketing, Inc. as disclosed in Note 13. Total expense recognized by the Company during 2002 and 2001 for non-employee granted options was $94,000 and $323,250. The 2002 and 2001 fair value amounts of the non-employee options were estimated using the Black-Scholes options pricing model with the following assumptions: no dividend yield for 2002 and 2001, expected volatility of 60% for 2002 and 30% for 2001, risk free interest rate of return of approximately 5% and expected option life of two to five years for 2002 and 2001. Information with respect to non-employee stock options outstanding the non-employee stock options exercisable at December 31, 2002 is as follows:
Non-Employee Options Outstanding ---------------------------------------------------------------------------------------- Weighted Average Exercise Price of Range of Number Outstanding Weighted Average Remaining Options Currently Exercise Prices at December 31, 2002 Contractual Life Exercisable - -------------------- -------------------------- ---------------------------------- ---------------------- $0.16 to $1.00 2,369,632 2.28 years $0.34
F-14 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 7 - STOCK OPTION PLAN (Continued) In conjunction with a 2002 contractual agreement, the Company granted options to a customer. The number of options to be granted are contingent upon the gross amount of product sales during each of four years in the period ended December 31, 2006, at exercise prices ranging from $1.25 to $2.25. The contingent issuable options will be valued in accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued To Other Than Employees for Aquiring, Or In Conjunction With Selling, Goods Or Services," which generally will be at the end of each reporting date when the amount of the product sales are known. NOTE 8 - RELATED PARTY TRANSACTIONS The Company leases its sales office located in Los Angeles, California from a company owned by officers and minority stockholders of LaserLock. The Company incurred expenses associated with the Los Angeles, California office of $170,000 and $40,000 for 2002 and 2001. In October 2000, the Company entered into a four-year employment agreement with its President effective January 1, 2001. The agreement provides for annual compensation of $90,000 and payment of certain fringe benefits, including use of an automobile. Additionally, the agreement provides for the issuance of Non-Statutory Stock Options (not covered by the Stock Option Plan discussed in Note 7) to purchase 250,000 shares of common stock at $0.17 per share and 250,000 shares at $.35 per share. Effective October 1, 2001, the Company modified its employment agreement with its President. The modifications include raising the annual compensation to $120,000 until September 30, 2003 and then to $150,000 per annum during the period October 1, 2003 to September 30, 2006. All other terms of employment remains the same. The Company maintains its office at the home of its President. No formal lease agreement exists and no rent expense has been incurred. During 2002 and 2001, the Company paid approximately $7,000 and $5,000 to one of its minority stockholders for general legal services. NOTE 9 - COMMITMENTS Office Lease - ------------ The Company leases office space in Los Angeles, California (Note 8.) The current lease expired in February 2003. The lease was not renewed and the office was closed in February 2003. During 2000, the Company entered into commission agreements with sales representatives. Under the terms of the contracts, expiring on various dates, the representatives are entitled to commissions based on certain percentage of sales, as defined in the agreements which may be renewed annually. The commissions from sales will be expensed as sales are generated. However, the commission from sales will be paid over 4-year terms at defined percentages. The Company entered into a consulting agreement with one of its minority stockholders to manage the Company's sales force effective June 2000. The contract expired in May 2001 and was not renewed. F-15 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 10 - LICENSING AGREEMENT In October 2001, the Company entered into a licensing agreement with a company located in the United States and a company located in France (together the Licensee which grants the Licensee the non-exclusive rights to use the company's technology to market, promote, sell, manufacture and have manufactured non-exclusive products or components of non-exclusive products in the licensee's territory. The Licensee's territory is the world. In consideration of the rights granted to the Licensee under the agreement, the Licensee agrees to pay to the Company royalties in accordance with the agreement. The minimum, annual royalty fee of $25,000 shall be paid by the Licensee to the company by way of four quarterly payments of $6,250. The Company received $25,000 in 2002 and $6,250 in 2001. The agreement is for one year and may be automatically renewed from year to year by the Licensee. The license was renewed in October 2002. NOTE 11 - PATENTS The Company has acquired the rights to a patent application in the United States via its employment contract with its President, Norman A. Gardner. The pending United States patent application was assigned to LaserLock Technologies, Inc. upon filing, and the Assignment has been recorded at the US Patent and Trademark Office. The Assignment by its terms conveys the entire right, title and interest in and to the invention of the pending patent application (entitle "Counterfeit Detection System") and all improvements thereon which may be made, conceived or acquired by Norman Gardner during the course of this association with LaserLock Technologies, Inc. and for one year thereafter. Patent applications for the Company's technology (including improvements in the technology) are intended to be filed in other jurisdictions where commercial usage is foreseen, including countries in Europe. There can be no assurance, however, that such protection will be obtained. The subject patent application was filed December 10, 1999 and notification that it will be granted was received March 12, 2002. NOTE 12 - ACQUISITIONS EDS Marketing, Inc. - ----------------------- On December 31, 2001 the Company acquired 100% of EDS Marketing, Inc.'s ("EDS") common stock for $20,000, 2,000,000 shares of its common stock and options to purchase 2,000,000 shares of its common stock. The value of the 2,000,000 shares of common stock was $708,000 and the value of the options to purchase 2,000,000 shares of common stock was $30,000. The total consideration for the common stock of EDS was $758,000. EDS is a recently formed corporation consisting of a collection of assets transferred into the corporation prior to the merger. EDS Marketing, Inc. was not an operating business prior to the acquisition. At the time of the acquisition, three of EDS's officers entered into employment contracts whereby they are employed at will and one officer entered into a consulting agreement that terminated on March 31, 2002. F-16 LASERLOCK TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 12 - ACQUISITIONS (Continued) EDS assigned four marketing agreements with unrelated enterprises to the Company. The agreements were for 120 days with options to renew for 24 months. The companies are engaged in security technology involving the following activities: o Biometric security and profiling o Anonymous internet shopping o Anonymous telecommunications o Offsite supervision through the internet Management believes that these technologies have gaming industry applications. EDS also assigned an agreement to market and sell slot machine tickets with third party advertising thereon to casinos and other engaged in the gaming industry. Management originally assigned the purchase price to the intangible assets and lives to the intangible assets as follows: Value Life ------------ ------------ Employment contracts $100,000 24 months Four marketing agreements 300,000 24 months Slot machine tickets agreement 358,000 36 months ------------ $758,000 ============ The assets acquired have no tax basis. Accordingly, a deferred tax liability of $310,000 was recorded upon acquisition. The difference between the net assets acquired, after considering the deferred tax liability, and the purchase price was immediately expensed. In addition, the deferred tax liability reduced the need for a valuation allowance in the same amount resulting in a tax benefit during 2001. On November 1, 2002, one million shares of the original two million shares issued in the EDS acquisition were returned to the Company as the result of a purchase price adjustment. The returned shares were canceled upon receipt. The shares were valued at the original price per share at the time acquisition ($0.35 per share) and the carrying value of the intangible assets were reduced by $354,000, leaving a carrying value of $114,617, which will be amortized over the following 23 months. The reduction in the purchase price of $354,000 resulted in a deferred tax expense of $145,000 and a credit to operations. Amortization expense totaled $276,078 in 2002 and $13,305 in 2001. LL Security Products, Inc. - --------------------------- In July 2001, the Company formed LL Security Products, Inc. with an investment of $50,000. LL Security Products, inc. was incorporated to operate the Company's marketing aspects of its business. F-17 THIS PAGE LEFT INTENTIONALLY BLANK SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: 3-10-03 By: /s/ Norman A. Gardner Norman Gardner President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated. Signature Title Date /s/ Norman A. Gardner 3-10-03 Norman A. Gardner Pres. CEO, Chairman Bd of Dir. /s/ Ed Fishman 3-10-03 Ed Fishman Vice Chairman Bd of Dir. /s/ Steven Meistrich 3-10-03 Steven Meistrich Executive V.P., Director /s/ Joel Pinsky 3-10-03 Joel Pinsky Director /s/ Michael J. Prevot 3-10-03 Michael J. Prevot V.P., Director LASERLOCK TECHNOLOGIES, INC. OFFICERS STATEMENT PURSUANT TO REQUIREMENTS OF SARBANES-OXLEY ACT OF 2002 Each of the undersigned, the Chief Executive Officer and the Chief Financial Officer, respectively, of LaserLock Technologies, Inc. (the 'Company'), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350, hereby certifies as follows: To my knowledge: (1) the periodic report of the Company accompanying this statement fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d); and (2) the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 10, 2003 /s/ Norman Gardner ---------------------------------- Norman Gardner, Chief Executive Officer Date: March 10, 2003 /s/ Norman Gardner ---------------------------------- Norman Gardner, Chief Financial Officer CERTIFICATIONS I, Norman Gardner, certify that: I have reviewed this annual report on Form 10-KSB of December 31, 2002. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report: Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the annual report (the "Evaluation Date"); and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. April 12, 2003 By:/s/ Norman Gardner Norman Gardner Chief Executive Officer and Chief Financial Officer
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