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As filed with the Securities and Exchange Commission on September 17, 1998,
File No. 000-24725
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
GLOBAL ELECTION SYSTEMS INC.
(Name of Small Business Issuer in Its Charter)
BRITISH COLUMBIA, CANADA 85-0394190
(Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
1611 WILMETH ROAD, MCKINNEY, TX 75069
(Address of Principal Executive Offices) (Zip Code)
972-542-6000
Registrant's Telephone Number, Including Area Code
Securities to be registered pursuant to Section 12(b) of the Act:
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Title Of Each Class Name of Each Exchange On Which
To Be So Registered Each Class Is To Be Registered
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Securities to be registered pursuant to Section 12(g) of the Act:
NO PAR VALUE COMMON STOCK
(Title of Class)
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CERTAIN OF THE INFORMATION IN THIS REGISTRATION STATEMENT CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND OTHER
FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG THESE FACTORS ARE: GENERAL
BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE
COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE
NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS; THE INTERACTION WITH GOVERNMENTAL ENTITIES IN THE UNITED
STATES AND WORLDWIDE WHICH PURCHASE THE COMPANY'S PRODUCTS; AND OTHER RISK
FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE SEC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Global Election Systems Inc. (the "Company") is the leading
manufacturer and seller, through its wholly-owned United States subsidiary,
Global Election Systems Inc., ("Global USA") of state of the art computerized
electronic election management systems designed for convenient voting. Its
compact systems permit efficient early voting and non-geographic voting. Unlike
other systems which require terminals to be configured to the polling district,
the Company's systems are stand-alone and offer every ballot style required for
a voting jurisdiction, even for an entire state. The Company's signature
products are the ES-2000 AccuVote Voting System ("AccuVote"), and the paperless
Accu-Touch touch screen voting system ("Accu-Touch") using the Voter Access Card
"smart card" ("Smart Card"). The AccuVote Voting System and the Accu-Touch
system are each complete voting systems which are both a precinct count and
central accumulation system and which permit management control of the voting
process from ballot preparation to verification of results. The Smart Card and
the AccuTouch, which are both "paperless DRE", or direct record equipment, were
added to the Company's product line
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in 1997 when the Company acquired all of the assets of I-Mark Systems, Inc.
The Company was formed in British Columbia, Canada on November 22,
1991, through the amalgamation of North American Professional Technologies B.C.
Ltd. and Macrotrends International Ventures Inc. Global USA was incorporated in
Delaware in 1991. The address of the Company's executive offices is 1611 Wilmeth
Road, McKinney, TX 75069; and its telephone number is (972) 542-6000. The
Company's no par value common stock ("Common Stock") is traded on the Toronto
Exchange under the symbol GSM. References in this document to the "Company"
include its wholly-owned subsidiary, Global USA, unless the context otherwise
requires. All funds are reported in U.S. dollars unless otherwise specified.
Canadian funds are designated by "C$".
INDUSTRY OVERVIEW
All over the world, elections are held under the auspices of various
governmental systems, especially those in democratic countries. Until the
1960's, almost all elections were conducted with paper ballots and lever voting
machines which were mechanical counters. These machines, which were bulky and
heavy and the mechanisms of which had many moving parts, required significant
maintenance, and were expensive to warehouse. This method of voting and tallying
votes, in addition to being cumbersome and inefficient, was susceptible to
inaccuracies in tallying, significant time delays, and other not insignificant
difficulties. In 1964, the punch card voting system was patented. While this
system has not been built in quantity since about the mid-1980's, it remains the
most used system in the world. By the early 1980's, a scanning system which
could read ballots optically was introduced.
In recent years, the election industry, characterized by inertia in
adoption of new technology, has begun to computerize in response to increased
public acceptance and familiarity with using computers. Computers offer the
opportunity to count ballots accurately and speedily, as well as a method to
offer efficient early voting and to adopt more convenient ways to vote in order
to encourage
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participation. In addition, service and support have become increasingly
important components of technologically advanced newer election systems. In
spite of the development of the election systems industry, however, many
available election systems have continued to lag in application of state-of-the
art computer technology, and have lacked durability, flexible functionality and
sufficient pre-election to post-election support.
GLOBAL ELECTION'S STRATEGY
The Company is the leading manufacturer and seller of state of the art
computerized electronic election management systems designed for convenient
voting. Its compact systems permit efficient early voting and precinct-based
voting. The Company capitalizes on its advanced product design, and customer
support to market its election systems to voting jurisdictions in the United
States, Canada, and world-wide. Its objective is to become a leading supplier of
comprehensive voter registration and election systems to governments in the
United States, Canada, and around the world. The Company believes that the
continuing need for accurate, efficient election systems and the increasingly
recognized need for the voting process to be highly voter accessible and simple
to use will provide numerous opportunities for the Company to expand the scope
of its activity.
* Expand Market Penetration Through Internal Growth. The Company has
achieved growth in its market and has expanded its market through continual
innovation in and expansion of its product line and aggressive marketing of its
election systems to increasingly populous voting jurisdictions. For example, the
Company has recently entered into an agreement with King County, Washington. The
Company provides election solutions, such as voter registration technology and
systems, complimentary to its election system products. It also seeks to apply
its products to governmental information management needs outside of the
election process but operating similarly, such as vehicle registration.
* Compliment Internal Growth Through Acquisition or Selling
Arrangements. The Company has developed its business, in part, through
acquisition of an election
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products company and entering into arrangements with other companies which
produce leading edge technology products to offer those products in conjunction
with the Company's products . As a result, the Company is able to offer state of
the art integrated election systems to its customers, which has permitted it to
expand into more populous markets.
* Continued Technology Innovation and Integration. The Company conducts
on-going research and development to improve product performance and provide
innovative solutions to the needs of the voting jurisdictions and other
governmental applications. For example, while continually upgrading its existing
products, the Company has developed a Windows NT(R)-based, state of the art
system which will identify a voter by a finger swipe on the voting screen. All
of the products offered by the Company are designed to be used together to
integrate the entire election process, from voter registration and election
management through tabulation and reporting of election results.
* International Sales. The Company seeks to sell its state of the art
electronic computerized election systems not only in the United States and
Canada, but throughout the world, initially primarily in Latin America, where
the Company believes there is demand for election systems perceived to be
accurate by the voting public.
* Customer Support. Customer support is a significant part of the
Company's marketing strategy and its system sales. The Company intends to
continue its commitment to, and to enhance, its pre-election through
post-election assistance to its customers. It offers service contracts for all
aspects of the election process, including election management training,
assistance with the conduct of elections, and complete running of the election.
GLOBAL ELECTION'S PRODUCTS
The products currently offered by the Company are election system
products which are comprised of state of the art computerized electronic voting
systems and software products such as the voting registration
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and election management systems that lay out ballots, tabulate results and
print reports.
State of the Art Computerized Electronic Voting Systems. The Company's
signature product is its patented Accu-Vote ES-2000 Election System. The
Accu-Vote system, patented in Canada and the United States, automates all facets
of election administration from initial ballot layout through certification of
results. The ballot processing unit optically scans marked voted paper ballots
and produces printed precinct level results immediately after the polls close.
Totals are captured on a memory card and transferred to the counting center or
sent from the precinct tabulator directly to the host computer over a modem
using common carrier lines. Designed for security and integrity, the ballot
processing unit nevertheless is compact and lightweight and is easily
transported to and from the polling place.
The Accu-Vote Vote Tally System ("VTS") software automates the entire
election administration cycle from ballot layout through certification of
results. VTS is used to define all election-specific parameters.
Smart Card and Electronic Balloting Products. The Company offers
additional, technologically-advanced election assistance products through its
Smart Card. The "Voter Access Card" is a "smart card" which stores voter
identification information, allowing the automatic selection of any ballot style
for any voter at any polling place. The Voter Access Card can permit the
placement of voting stations in places where people assemble, like shopping
malls, rather than in specific precinct locations.
The Company's Accu-Touch(TM) ballot station, is designed to eliminate
the need for paper ballots. A voter accesses the appropriate ballot screen by
inserting the voter's Voter Access Card and votes by touching the screen. Each
station can house thousands of ballot styles, accessed on demand for a specific
precinct, ward, block, or language. In addition, the Accu-Touch system software
permits election officials to design all ballot formats, provide multi-lingual
ballots, merge totals from early voting, postal and election-day voting, and
customize and generate post-election reports and audits.
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Accu-Vote and Accu-Touch can be used as a blended system, permitting
flexibility in solving the particular problems and requirements of a voting
jurisdiction. For instance, Accu-Touch can be used for early voting, where its
capacity to store all ballot styles allows early voters from all precincts to
insert Smart Cards into the same unit to select their particular precinct
ballot. Accu-Vote systems can be used at the precinct level during the election.
The vote tallies from both the Accu-Vote and Accu-Touch units are then sent to a
host computer to be combined to determine the election result.
Accu-Vote and Accu-Touch systems units have a list price of
approximately $6,500 per unit, to which quantity discounts and additional
products may be added, depending upon the needs and size of the election
district.
Other Product Arrangements. The Company occasionally makes arrangements
with companies producing other products which are complementary to and enhance
the Company's product offering to a particular voting jurisdiction. For
instance, in King County, Washington, the Company is providing, through a
license, additional voter registration software. These arrangements are
generally made on a case-by-case basis, depending on the need and size of a
voting jurisdiction.
Backlog. At March 31, 1998, nine months into the current fiscal
year, the Company had a backlog of approximately $1,500,000, representing 300
units, of orders for its Accu-Vote, Accu-Touch and Smart Card products. This
backlog compared to a backlog of $250,000 on June 30, 1997 (short fiscal year)
and $1,500,000 at December 31, 1996. Backlogs are principally the result of
customer-scheduled shipment dates, which are usually a period of months after
the contract date and which may also be in installments. The increase in the
backlog is attributable primarily to increased sales and to the timing of
delivery schedules.
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CUSTOMER SUPPORT SERVICES
The Company emphasizes continuing service support to its customers.
These services begin with initial equipment acceptance and testing and continue
through on-site election day and election night support. Some election-specific
services provided by the Company are pre-election consultation, ballot
design/layout assistance, precinct worker training, voter education assistance,
system testing and verification, and on-site election day and election night
support.
CUSTOMERS
The Company's customers include approximately 600 voting jurisdictions
in the United States and Canada. Recent contract awards include the State of
North Carolina, King County, Washington, Chatham County, Georgia, Tular County,
California, Pima and Yavapi Counties, Arizona, and the State of Alaska. During
the six months ended June 30, 1997 (a short fiscal year), Jefferson County,
Kentucky, accounted for approximately 30.3% of Company revenues. During the
fiscal years ended December 31, 1996, and December 31, 1995, the Company was
not dependent on one or a few major customers, nor does it expect to be in the
current fiscal year.
SALES AND MARKETING
The Company markets its products both domestically and internationally
to governments. Because of the close involvement of the Company in the use of
its election systems by customer governments and the Company's desire to
maintain a high level of contact and service, sales are made by salaried,
commissioned salespersons employed by the Company and assigned to various
territories. Salespersons work directly with the election officials in each
territory to close and implement sales. At March 31, 1998, the Company employed
13 of these salespersons, who were assigned to specific territories in the
United States and Canada. The Company also has five resellers which are
established in the election business and have contracts for specific
territories. Sales outside the United States and Canada are supervised by the
Company's sales staff. The Company plans to use in-country representatives in
these countries, but currently has none.
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Payment for sales is typically made in United States and Canadian
dollars. As a result, the Company's actual receipts are subject to fluctuation
based upon currency exchange rates between the United States and Canada and,
should the Company accept payment in another currency, to the fluctuations in
that currency's exchange rate.
The Company, because it sells election products and services, could
tend to operate on a two-year business cycle because in the United States, a
substantially larger number of elections for public office are held in
even-numbered years than in odd-numbered years. As a result, revenues and
underlying production and support activities for a majority of the Company's
products and services could significantly increase or decrease in accordance
with the election cycle. However, because the Company's fiscal year ends June
30, and because many voting jurisdictions now attempt to purchase election
products and services immediately after an election, the Company believes that
it has ameliorated the possible effect of the United States' biennial election
cycle. Also, in Canada, elections are conducted on an irregular schedule which
differs in and among national, provincial and municipal elections. Thus, the
Company's Canadian business may also be expected to ameliorate any United States
cyclicality.
RESEARCH AND DEVELOPMENT
The Company expended approximately $184,414, $451,113 and $674,144 for
research and development during the fiscal years ended June 30, 1997 (a six
month fiscal year due to a fiscal year change), December 31, 1996, and December
31, 1995, respectively. All of the Company's in-house research efforts are
conducted at its facilities in Vancouver, Canada, and McKinney, Texas.
COMPETITION
The election system market is defined by the voting needs and
specifications of voting jurisdictions. In that regard, sales, and therefore
competition, are directed to election officials in each voting jurisdiction who
issue requests for proposals in which desired specifications are set forth.
Responsive bids are submitted to these officials and other specified reviewers
for their
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evaluation and the selection of the company awarded the project. Competitive
factors include accuracy, security and speed of voting and tallying of votes,
ease of use of the system, flexibility in ballot preparation, cost and customer
support. Because of its ability to offer a complete, state of the art,
integrated election system which can be tailored to the customer's needs, the
Company believes it is able to compete in all major areas of the election
systems market. However, several of the Company's existing and potential
competitors have financial, and could develop technological and marketing,
resources significantly greater than those of the Company. They may have
established relationships with customers or potential customers that afford them
a competitive advantage. There can be no assurance that the Company will be able
to compete effectively in its current or future markets or that competitive
pressures will not adversely affect its business, financial condition or results
of operations.
In North America, the Company competes primarily with moderately-sized
companies (some of which are affiliates of much larger companies) in the overall
election system market and with some small companies who offer some aspect
otherwise included in the overall system, such as voting equipment. The
Company's largest competitors in the North American election system market are
Sequoia Pacific Systems, Inc. ("Sequoia"), a subsidiary of Jefferson Smurfit,
and ES&S ("ESS"). ESS and Sequioia offer local and state election management
systems, optical scan ballot tallying and reporting, and election information
management software. Microvote, Inc., of Indianapolis, offers a direct record
voting system. The Company also competes with a number of companies, including
those mentioned previously, which produce and sell products designed to provide
specific election-related functions.
MANUFACTURING
The Company assembles its Accu-Vote products at its recently-opened
plant in McKinney, Texas, and contracts for the assembly of its Accu-Touch
system. With the exception of its visible light optical reader (which it obtains
from another source but could replace with an in-house product) and its ballot
box (for which the Company owns the molds and could obtain an alternate
manufacturer), the Company
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obtains components for its products largely from various off-the-shelf vendors
of electronic components, any of which could be replaced by another vendor
should the need present itself.
INTELLECTUAL PROPERTY
Patents. The Company holds the United States and Canadian patents, the
rights to which it purchased in 1991, on its Accu-Vote ES-2000 system
("Patent"). Except for the Patent, the Company has not sought patent protection
for its technology, even though it believes that some of its processes and
equipment are proprietary to it. The Company has relied upon industrial
know-how, and trade secret laws. The Company cannot assure that its proprietary
processes and equipment will provide it with sufficient competitive advantage to
overcome its lack of patent protection, nor can it assure that others will not
independently develop equivalent or superior products or technology. Also, the
Company cannot assure that it will be able to establish trade secret protection
or that trade secret obligations will be honored. To the extent that
consultants, employees and other parties apply technological information
developed independently by them or others to Company projects, disputes may
arise as to the proprietary rights to that information, which may not be
resolved in favor of the Company. It is also possible that litigation may be
necessary to enforce the Company's proprietary rights, to protect its trade
secrets, to determine the validity and scope of the intellectual property rights
of others or to defend against claims of infringement. Litigation of that nature
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operation.
Patent applications in the United States are not disclosed until the
patents issue; therefore, patent applications could have been filed which relate
to the Company's processes and equipment. The Company does not believe that it
infringes any patents of which it is aware; however, it cannot assure that
patent infringement claims will not be asserted against the Company. These
claims, if
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asserted, could have a material adverse effect on the Company's business,
financial condition or results of operation. If infringement or invalidity
claims were to be asserted against the Company, litigation could become
necessary to defend the Company against those claims. In certain circumstances,
the Company might choose to seek to obtain a license under the third party's
intellectual property rights, which the Company cannot assure would be
available, if at all, on terms acceptable to the Company.
Trademarks and Tradenames. The Company has no registered trademarks or
tradenames, but claims proprietary rights to Accu-Vote. A trademark registration
application has been filed for Accu-Vote in the United States, but no assurance
can be given that this trademark will issue.
GOVERNMENT REGULATION
The Company's products are sold almost exclusively to governmental
units. The Company's Accu-Vote and Accu-Touch election products meet or exceed
United States Federal Election Commission ("FEC") standards and are required to
be, and are, tested to FEC standards by Wyle Labs, the industry's designated
Independent Testing Authority. In the United States, election systems must also
be certified in each State where they are used. Currently, one or the other or
both of the Company's systems are certified in 34 States. Canada does not
require testing and certification.
Each governmental unit to which the Company markets its products
specifies its own particular requirements for system operation. Without
exception, the Company's customers seek, and require, tamper-proof, efficient,
confidential and expeditious election equipment and systems. These requirements
and others typically are embodied in the customer's Request for Proposal
("RFP"), issued to solicit bids from the Company and others. Because the Company
must be able to respond with complying bids to RFP's, the Company must
continually monitor, adapt to, anticipate and design for changes in
specifications and in the expectations that governmental units have for
efficient systems. For example, in the United States, promoting and increasing
voter participation is a concern of many jurisdictions. As a result, enhancing
convenience and opportunity to vote are increasingly important. The
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Company's products are a direct response to these changing needs. To the extent
that the Company is or becomes unable to anticipate or respond to the concerns
of jurisdictions, its ability to submit responsive bids to RFP's will be
impeded.
Because the Company is incorporated and does business in British
Columbia and its subsidiary, Global USA, is incorporated in the State of
Delaware and does business in the United States and internationally, the Company
as a whole is subject to both Canadian and United States tax laws. Additionally,
the Company must comply with the taxation, export and import, currency, and
other laws of each country in which it sells products or otherwise does
business. These laws can be burdensome. To the extent that the Company is unable
or unwilling to comply, its business in a particular country may be expected to
be materially adversely affected.
WARRANTIES. Key to all elections is the reliability of the system, including the
voting equipment, accuracy of voting results, and accuracy of tallying of
results. The Company's equipment is designed to optimize this reliability. The
Company warrants its election systems for a period of one year from purchase,
unless another period is specified by the RFP from a voting jurisdiction. The
Company self-insures against warranty claims. The Company has never been the
subject of any material warranty claims and has generally repaired or replaced
malfunctioning equipment in the pre-election stage; however, if a claim were to
be made and to prevail, a lack or insufficiency of insurance coverage could have
a material adverse effect on the Company. However, all contracts with customers
require insurance to be in place before execution of the contract.
ENVIRONMENTAL COMPLIANCE
The Company operates a manufacturing plant in McKinney, Texas. Although
its manufacturing consists largely of parts assembly, the Company is required to
comply with United States and Texas environmental and Occupational Safety and
Health Act requirements applicable to electronics manufacturing operations in
general, including, for example, storage, marking, and disposal of various
products used for cleaning parts to be assembled. Although the Company takes
appropriate measures to comply with these requirements, violations can occur.
The Company was cited once by the New York Department of Environmental
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Conservation for alleged violation of certain storage, marking and disposal
requirements applicable to two of these substances used at its former New York
manufacturing facility and responded immediately to correct the situation. The
Company believes that its compliance programs are adequate, but cannot assure
that no problems will arise in the future, some of which could have a material
adverse impact on the Company and its business.
EMPLOYEES
As of March 31, 1998, the Company had approximately 49 employees, of
whom all were full-time, at its 3 locations in Canada and the United States. Of
the full-time employees, 9 were in executive and administrative positions, 11
were in sales, marketing and customer relations, 5 were in research and
development, 12 were in manufacturing, and 12 were in field customer support.
RISK FACTORS
In addition to the matters set forth in the foregoing discussion of the
Company's business, the operations and financial performance of the Company are
subject to the risks, among others, described below.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced fluctuations in
its operating results in the past and may experience those fluctuations in the
future. Sales, on both an annual and quarterly basis, are subject to
fluctuations as a result of a variety of factors, many of which are beyond the
control of the Company. These factors include the timing of customer orders,
delays in shipment due to component shortages or defects which must be remedied,
production problems, cancellation of orders, and regulatory changes. In
addition, the Company, because it sells election products and services, could
tend to operate on a two-year business cycle because in the United States, a
substantially larger number of elections for public office are held in
even-numbered years than in odd-numbered years. As a result, revenues and
underlying production and support activities for a majority of the Company's
products and services could significantly increase or decrease in accordance
with the election cycle.
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However, because the Company's fiscal year ends June 30, and because many voting
jurisdictions now attempt to purchase election products and services immediately
after an election, the Company believes that it has ameliorated the possible
effect of the United States' biennial election cycle. Also, in Canada, elections
are conducted on an irregular schedule which differs in and among national,
provincial and municipal elections. Thus, the Company's Canadian business may
also be expected to ameliorate any United States cyclicality. Given the
possibility of fluctuations, the Company believes that comparisons of the
results of its operations for the preceding year or quarters are not necessarily
meaningful and that the results for any particular year or quarter should not be
relied upon as an indication of future performance. If the Company's sales or
earnings for any year or quarter are less than the level expected by securities
analysts or the market in general, the shortfall could have an immediate and
significant adverse impact on the market price of the Company's Common Stock.
INTEGRATION OF ACQUIRED BUSINESSES AND DISTRIBUTORSHIP. One of the Company's
strategies is to increase its scope of business and the product lines it offers
by acquiring other election businesses and products or entering into
distributorship or similar arrangements with other producers. There can be no
assurance that the Company's management and financial controls, personnel, and
other corporate support systems will be adequate to manage the increase in the
size and diversity of scope of the Company's operations as a result of any such
acquisition or distributorship. Also, there can be no assurance that the
acquisition or distributorship arrangement will be accretive to earnings. By its
nature, a distributorship does not give the Company complete control over the
distributed products' manufacturing, shipment or quality, all of which are the
responsibility of the manufacturer. Problems in any of these areas should they
occur, could materially adversely affect the Company and its business.
If and when appropriate acquisition opportunities, some of which could
be material, arise, the Company intends to pursue them actively. No assurance
can be given that any acquisition by the Company will or will not occur, that if
such an acquisition does occur that it will not, despite
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the Company's efforts, materially and adversely affect the Company, or that any
such acquisition will be successful in enhancing the Company's business.
DEPENDENCE ON TESTING AND CERTIFICATION; GOVERNMENTAL IMPACT. In the United
States, the Company's ability to respond to RFP's from voting jurisdictions and
to make sales to those jurisdictions is dependent upon satisfactory completion
of testing of the Accu-Vote and Accu-Touch (and similar future products or
variations) by Wylie Labs, the industry's designated Independent Testing
Authority and upon certification by each State. The Company's products have
never had unsatisfactory testing results; however, if for some reason not now
known or anticipated, a product did not test satisfactorily, the Company's
business could be materially adversely affected to the extent it was unable to
offer and sell that product. Similarly, the failure of a product to be certified
in a State would prevent the sale of the product in that State and the voting
jurisdictions in that State.
Because the Company deals with governmental authorities in making
offers and sales of its products, it can also be adversely affected by changes
in those authorities, revisions to or promulgation of new requirements and
standards in a State, and unanticipated or unforeseen impediments in the
bidding, award and implementation process.
INTERNATIONAL SALES IN GENERAL. The Company sells its election systems primarily
in the United States and Canada, but intends to market actively to other
countries throughout the world, particularly in Latin America. Sales of the
Company's election systems will subject it to various governmental regulations,
exports controls, and the normal risks involved in international sales. Sales of
products and services in Latin America and elsewhere are subject to political,
economic and other uncertainties, including, among others, risk of war,
revolution, expropriation, renegotiation or modification of existing contracts,
election laws and regulations, standards and tariffs, and taxation policies, as
well as international monetary fluctuations which may make payment in United
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States dollars more expensive for foreign customers, and other uncertainties and
trade barriers.
CHANGES IN EXCHANGE RATES. Substantially all of the Company's revenues to date
have been received in United States and Canadian dollars; however, some sales in
the future may be in other currencies. Any decline in the value of other
currencies in which the Company makes sales against the United States dollar
will have the effect of decreasing the Company's earnings when stated in United
States dollars. The Company does not engage in any hedging transactions that
might have the effect of minimizing the consequences of currency fluctuations
(which are not currently material) and does not intend to do so in the immediate
future.
TRANSFER PRICING. The Company and Global USA have entered into various
agreements between themselves with respect to the transfer of technology,
services and manufactured product. As the Company is generally subject only to
Canadian taxation and Global USA is generally subject only to U.S. taxation,
issues of transfer pricing arise. Both the Canadian and U.S. tax authorities
generally require that pricing arrangements between the Company and Global USA
be entered into on a fair market basis. Further, Canada will now require that
contemporaneous documentation be completed evidencing the arrangements. While
the Company is attempting to meet its obligations in this regard, the Company
could be subject to various penalties, and increased tax, if the taxing
authorities take issue with the transfer pricing arrangements reached between
the Company and Global USA. Because appropriate transfer prices cannot be
arrived at with certainty, there is no assurance that the taxing authorities
would agree with the Company's transfer pricing arrangements.
POLITICAL INSTABILITY. The political and economic instability in some countries
in Latin America and elsewhere could result in the adoption of new trade
policies or lead to trade disputes, which could materially adversely affect the
Company and its business. The Company has no insurance against political
instability.
COMPETITION. The election system market is dependent upon the voting needs and
specifications of governmental
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jurisdictions. In that regard, sales, and therefore competition, are directed to
secretaries of state and election officials in each voting jurisdiction who
prepare requests for proposals in which desired specifications are set forth.
Responsive bids are submitted to these officials for their evaluation and the
selection of the company awarded the project. Competitive factors include
accuracy, security and speed of voting and tallying of votes, ease of use of the
system, flexibility in ballot preparation, cost and customer support. Because of
its ability to offer a complete, state of the art, integrated election system
which can be tailored to the customer's needs, or segments of a system if only
one function is desired, the Company believes it is able to compete in all major
areas of the election system market. However, several of the Company's existing
and potential competitors have financial, and could develop technological and
marketing, resources significantly greater than those of the Company and may
have established relationships with customers or potential customers that afford
them a competitive advantage. There can be no assurance that the Company will be
able to compete effectively in its future markets or that competitive pressures
will not adversely affect its business, financial condition or results of
operations. See "--Competition" above.
INTELLECTUAL PROPERTY
Patents. The Company holds the United States and Canadian patents, the
rights to which it purchased in 1991, on its Accu-Vote ES-2000 system
("Patent"). Except for the Patent, the Company has not sought patent protection
for its technology, even though it believes that some of its processes and
equipment are proprietary to it. The Company has relied upon industrial
know-how, and trade secret laws. The Company cannot assure that its proprietary
processes and equipment will provide it with sufficient competitive advantage to
overcome its lack of patent protection, nor can it assure that others will not
independently develop equivalent or superior products or technology. Also, the
Company cannot assure that it will be able to establish trade secret protection
or that trade secret obligations will be honored. To the extent that
consultants, employees and other parties apply technological information
developed independently by them or others to Company projects, disputes may
arise as to the proprietary rights to that
18
<PAGE> 19
information, which may not be resolved in favor of the Company. It is also
possible that litigation may be necessary to enforce the Company's proprietary
rights, to protect its trade secrets, to determine the validity and scope of the
intellectual property rights of others or to defend against claims of
infringement. Litigation of that nature could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business, financial condition and results of operation.
Patent applications in the United States are not disclosed until the
patents issue; therefore, patent applications could have been filed which relate
to the Company's processes and equipment. The Company does not believe that it
infringes any patents of which it is aware; however, it cannot assure that
patent infringement claims will not be asserted against the Company. These
claims, if asserted, could have a material adverse effect on the Company's
business, financial condition or results of operation. If infringement or
invalidity claims were to be asserted against the Company, litigation could
become necessary to defend the Company against those claims. In certain
circumstances, the Company might choose to seek to obtain a license under the
third party's intellectual property rights, which the Company cannot assure
would be available, if at all, on terms acceptable to the Company.
Trademarks and Tradenames. The Company has no registered trademarks or
tradenames, but claims proprietary rights to Accu-Vote. A trademark registration
application has been filed for Accu-Vote in the United States, but no assurance
can be given that this trademark will issue.
DEPENDENCE UPON CERTAIN OFFICERS. The success of the Company is dependent upon
the services of its President, Mr. Van Pelt, its Vice President of Operations,
Mr. Ensminger, and its Vice President of Sales/Marketing/Business Development,
Mr. Urosevich. The Company has employment agreements with Mr. Van Pelt and Mr.
Urosevich, but not Mr. Ensminger. However, the loss of the services of any one
of them for any reason could materially impede the Company's marketing effort
and strategic planning.
19
<PAGE> 20
POTENTIAL DILUTIVE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. As of March 31,
1998, the Company had 1,295,000 options and 166,667 warrants for Common Stock
outstanding. To the extent that any outstanding options and warrants for Common
Stock are exercised, there will be additional dilution in excess of that
resulting from use of common and common equivalent shares in earnings
calculations.
LACK OF MARKET IN UNITED STATES; VOLATILITY OF STOCK PRICE. The Company's Common
Stock is traded on the Toronto (Canada) Exchange and is expected to trade on the
Nasdaq electronic bulletin board. While a public market for the Company's Common
Stock currently exists in Canada, no such market exists in the United States as
yet and, even though the Common Stock will be registered under Section 12(g) of
the Securities Exchange Act of 1934, no assurance can be given that any market
for the Common Stock will develop in the United States. The number of shares in
the Canadian market is, and the number of shares expected to be in the United
States market is, about 95% of the 18,457,440 shares of Common Stock outstanding
at March 31, 1998. However, trading volume in the four weeks ended March 31,
1998 in Canada averaged 73,745 shares traded per day. Thus, even though a
substantial percentage of the Company's outstanding shares could be traded,
trading of relatively small blocks of stock can have a significant impact on the
price at which the stock is traded. In addition, the Nasdaq electronic bulletin
board has experienced, and is likely to experience in the future, significant
price and volume fluctuations which could adversely affect the market price of
the Common Stock without regard to the operating performance of the Company. The
Company believes that factors such as quarterly and annual fluctuations in
financial results, announcements by competitors, or changes in securities
analysts' recommendations may cause the market price to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions, such
as recessions or high interest rates, may adversely affect the market price of
the Common Stock. See "Part IV. Item 1. Market Price of and Dividends on the
Registrant's Common Equity and Other Shareholder Matters".
SHARES ELIGIBLE FOR FUTURE SALE; PREFERRED SHARES. Future sales by existing
shareholders could adversely affect the prevailing market price of the Common
Stock. At
20
<PAGE> 21
March 31, 1998, the Company had 18,457,440 shares of Common Stock
outstanding, of which about 1,000,000 shares will become eligible for sale under
the provisions of Rule 144 under the Securities Act of ("1933 Act") in
approximately December 1998 and 1,145,000 shares issued or to be issued under an
employee option plan will be eligible for sale under Rule 701 under the 1933 Act
90 days after the effective date of this Registration Statement.
In addition, the authorized capital of the Company includes 20,000,000
shares of Preferred Stock, none of which had been issued as of March 31, 1998.
See "Item 8. Description of Securities". However, the Board of Directors may
determine at any time and from time to time to set the terms and preferences of
the Preferred Stock, or a series of it, and to issue it, subject to approval of
the Toronto Stock Exchange.
ABSENCE OF DIVIDENDS. Since its inception, the Company has not paid cash
dividends on its Common Stock. The Company intends to retain future earnings, if
any, to provide funds for business operations and, accordingly, does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussion and analysis of the operating results and the financial
position of the Company should be read in conjunction with the financial
statements and the notes to them set out in this Registration Statement. See
"Financial Statements". The financial statements have been prepared in United
States dollars in accordance with Canadian GAAP. See Note 17 of the Notes to
Consolidated Financial Statements for an explanation of differences between
Canadian GAAP and United States GAAP.
CONDENSED FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
9 MONTHS 9 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED
31-MAR-98 31-MAR-97 30-JUN-97 30-JUN-96
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES AND OPERATING INCOME $ 12,086,413 $ 7,083,753 $ 6,758,954 $ 1,918,564
OTHER INCOME 90,606 47,835 51,496 27,922
------------ ----------- ----------- -----------
12,177,019 7,131,588 6,810,450 1,946,486
------------ ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES 5,764,909 4,135,740 2,815,680 1,372,730
SELLING, ADMINISTRATIVE AND GENERAL
EXPENSES 3,344,678 2,374,736 1,655,250 1,284,006
RESEARCH AND DEVELOPMENT EXPENSES 311,464 356,469 184,414 178,522
AMORTIZATION 263,461 86,919 70,472 83,039
INTEREST 72,470 66,996 27,845 8,317
LOSS ON CAPITAL LEASE RECEIVABLE - - - -
SETTLEMENT OF LAWSUIT AND LEGAL COSTS - - - -
OTHER EXPENSES - 1,104 3,277 400
------------ ----------- ----------- -----------
9,756,982 7,021,964 4,756,938 2,927,014
------------ ----------- ----------- -----------
NET INCOME (LOSS) FOR THE PERIOD $ 2,420,037 $ 109,624 $ 2,053,512 $ (980,528)
------------ ----------- ----------- -----------
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
31-DEC-96 31-DEC-95 31-DEC-94
--------- --------- ---------
<S> <C> <C> <C>
SALES AND OPERATING INCOME $ 6,041,173 $ 5,961,586 $ 4,519,457
OTHER INCOME 66,606 34,834 57,420
------------ ------------ ------------
6,107,779 5,996,420 4,576,877
------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES 4,216,805 2,757,247 2,423,255
SELLING, ADMINISTRATIVE AND GENERAL
EXPENSES 2,969,256 2,650,174 2,544,553
RESEARCH AND DEVELOPMENT EXPENSES 451,113 674,144 464,616
AMORTIZATION 135,140 183,857 169,853
INTEREST 71,166 7,044 1,320
LOSS ON CAPITAL LEASE RECEIVABLE - 550,735 414,175
SETTLEMENT OF LAWSUIT AND LEGAL COSTS - 202,138 6,422
OTHER EXPENSES 956 13,123 60,897
------------ ------------ ------------
7,844,436 7,038,462 6,085,091
------------ ------------ ------------
NET INCOME (LOSS) FOR THE PERIOD $ (1,736,657) $ (1,042,042) $ (1,508,214)
------------ ------------ ------------
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Sales and operating income. In the nine months ended March 31, 1998,
sales and operating income increased 70.6%, or $5.0 million, from $7.1 million
in the 1997 period to $12.1 million . This increase resulted largely from a
significant increase in sales of the Company's AccuVote
21
<PAGE> 22
Voting System in the United States, reflecting increases in unit volume, new
product introductions, and the addition of new customers.
Other income. In the nine months ended March 31, 1998, other income
increased 89.4%, or $43,000, from $48,000 in the 1997 period to $91,000. This
increase resulted largely from more warranties expiring, resulting in the
purchase of maintenance agreements.
Cost of sales and operating expenses. In the nine months ended March
31, 1998, cost of sales and operating expenses increased 39.4%, or $1.7 million,
from $4.1 million in the 1997 period to $5.8 million. This increased amount
resulted from the additional expense incurred to support the increased sales of
systems during the period. In the 1998 period, cost of sales and operating
expenses as a percentage of sales and operating income decreased from 58.4% in
the 1997 period to 47.7%, largely as a result of more efficient use of labor and
reduction in the cost of parts.
Selling, administrative and general expenses. In the nine months ended
March 31, 1998, selling, administrative and general expenses increased 40.8%, or
$1 million, from $2.4 million in the 1997 period to $3.4 million. This increase
was largely due to additional staff.
Research and development expenses. In the nine months ended March 31,
1998, research and development expenses decreased 12.6%, or $45,000, from
$356,000 in the 1997 period to $311,000. This reduction resulted primarily from
reduction in the cost of consulting services.
Amortization. In the nine months ended March 31, 1998, amortization
increased 203.1%, or $177,000, from $87,000 in the 1997 period to $264,000. This
increase was due primarily to the acquisition of $483,000 of capital assets and
the capitalization of $1,200,000 of goodwill in the nine months ended March 31,
1998.
Interest. In the nine months ended March 31, 1998, interest expense
increased 8.2%, or $5,500, from $67,000 to $72,500. This increase resulted
primarily from the increase in loans payable to finance operations.
22
<PAGE> 23
Other expenses. In the nine months ended March 31, 1998, other expenses
decreased to none, from $1,100 in the 1997 period. Other expenses generally
include fiscal agency fees, loss on sale or disposal of assets. The decrease in
the 1998 period was due primarily to no expenses being incurred for that
period.
SHORT YEAR ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
In this discussion, please note that figures for the six months ended
June 30, 1997 have been audited; figures for the six months ended June 30, 1996
are unaudited.
Sales and operating income. In the six months ended June 30, 1997,
sales and operating income increased 252.3%, or $4.9 million, from $1.9 million
in the 1996 period to $6.8 million. This increase resulted largely from a
significant increase in sales of the Company's AccuVote Voting System in the
United States, reflecting increases in unit volume, and the addition of new
customers.
Other income. In the six months ended June 30, 1997, other income
increased 84.4%, or $23,000, from $28,000 in the 1996 period to $51,000. Other
income includes income from maintenance agreements and ballot preparation. This
increase resulted primarily from the increase in sales volumes.
Cost of sales and operating expenses. In the six months ended June 30,
1997, cost of sales and operating expenses increased 105.1%, or $1.4 million,
from $1.4 million in the 1996 period to $2.8 million. This increased amount
results from the additional expenses incurred to support the increased sales of
systems during the period. In the 1997 period, cost of sales and operating
expenses as a percentage of sales and operating income decreased from 71.5% in
the 1996 period to 41.7%, largely as a result of economies of scale.
Selling, administrative and general expenses. In the six months ended
June 30, 1997, selling, administrative and general expenses increased 28.9%, or
$0.4 million, from
23
<PAGE> 24
$1.3 million in the 1996 period to $1.7. This increase was largely due to
additional personnel requirements.
Research and development expenses. In the six months ended June 30,
1997, research and development expenses increased 3.3%, or $6,000, from
$178,000 in the 1996 period to $184,000. This increase resulted primarily from
production improvements of hardware and software.
Amortization. In the six months ended June 30, 1997, amortization
decreased 15%, or $13,000, from $83,000 in the 1996 period to $70,000. This
decrease was due primarily to the use of the declining balance method of
amortization on capital assets and very minor new acquisitions.
Interest. In the six months ended June 30, 1997, interest expense
increased 234%, or $19,600, from $8,300 to $27,000. This increase resulted
primarily from an increase in loans payable to finance operations.
Other expenses. In the six months ended June 30, 1997, other expenses
increased 719.3%, or $2,900, from $400 in the 1996 period to $3,300. Other
expenses generally include fiscal agency fees, loss on sale or disposal of
assets. The increase in the 1997 period was due primarily to increases in built
and installed systems.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales and operating income. In fiscal 1996, sales and operating income
increased 1.3%, or $0.1 million, from $5.9 million in fiscal 1995 to $6.0
million. Sales remained essentially the same for the two fiscal years, largely
due to market conditions.
Other income. In fiscal 1996, other income increased 91.2%, or $32,000,
from $35,000 in fiscal 1995 to $67,000. Other income includes income from
maintenance agreements and ballot preparation. In fiscal 1996, the increase
resulted largely from the expiration of initial warranty
24
<PAGE> 25
agreements and the consequent sale of maintenance agreements.
Cost of sales and operating expense. In fiscal 1996, cost of sales and
operating expense increased 52.9%, or $1.4 million, from $2.8 million in fiscal
1995 to $4.2 million. This increase resulted largely from costly third party
manufacturing and increased product cost.
Selling, administrative and general expenses. In fiscal 1996, selling,
administrative and general expenses increased 12.0%, or $0.3 million, from $2.7
million in fiscal 1995 to $3.0 million. This increase resulted largely from
additional personnel and increased operating costs.
Research and development expenses. In fiscal 1996, research and
development expenses decreased 33.1%, or $223,000, from $674,000 in fiscal 1995
to $451,000. This reduction resulted primarily from a decrease in outside
consulting fees.
Amortization. In fiscal 1996, amortization decreased 26.5%, or $49,000,
from $184,000 in fiscal 1995 to $135,000. This decrease was due primarily to the
use of the declining balance method of amortization and very minimal new
acquisitions.
Interest. In fiscal 1996, interest expense increased 910.3%, or
$64,000, from $7,000 to $71,000. This increase resulted primarily from the
increase in loans payable to finance operations.
Loss on write-down of capital lease receivable. In fiscal 1996, loss on
write-down of capital lease receivable decreased 100.0%, or $551,000, from
$551,000 in fiscal 1995 to $0. This loss, which was written off in fiscal 1995,
resulted from the government of Venezuela's failure to pay for lease of
Accu-Vote equipment entered into by a previous government.
Settlement of lawsuit and related legal costs. In fiscal 1996, expense
incurred in the settlement of lawsuit and related legal costs decreased 100.0%,
or $202,000, from $202,000 in fiscal 1995 to $0. This expense was incurred in
fiscal 1995 in connection with the settlement of a
25
<PAGE> 26
lawsuit for alleged breach of contract brought by CEC, Inc. in California.
Other expenses. In fiscal 1996, other expenses decreased 92.7%, or
$12,000, from $13,000 in fiscal 1995 to $1,000. Other expenses generally include
loss on disposal of fixed assets. The decline in fiscal 1996 was due primarily
to decreases in loss in fixed asset disposal.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales and operating income. In fiscal 1995, sales and operating income
increased 31.9%, or $1.4 million, from $4.5 million in fiscal 1994 to $6.0
million. The increase reflected increases in unit sales.
Other income. In fiscal 1995, other income decreased 39.3%, or $22,000,
from $57,000 in fiscal 1994 to $35,000. Other income includes maintenance
agreements and ballot preparation. In fiscal 1995, the decrease resulted largely
from a decline in income from ballot preparation.
Cost of sales and operating expense. In fiscal 1995, cost of sales and
operating expense increased 13.8%, or $0.4 million, from $2.4 million in fiscal
1994 to $2.8 million. This increase resulted largely from increases in supplier
prices due to the Company's request for increased product capability.
Selling, administrative and general expenses. In fiscal 1995, selling,
administrative and general expenses increased 4.2%, or $0.1 million, from $2.5
million in fiscal 1994 to $2.7 million. This increase resulted largely from
increases in the sales staff.
Research and development expenses. In fiscal 1995, research and
development expenses increased 45.1%, or $209,000, from $465,000 in fiscal 1994
to $674,000. This increase resulted primarily from expenditures related to
enhancement of reader capability and new product development.
Amortization. In fiscal 1995, amortization increased 8.2%, or $14,000,
from $170,000 in fiscal 1994 to $184,000.
26
<PAGE> 27
This increase was due primarily to the acquisition of new capital assets during
1994 and 1995.
Interest. In fiscal 1995, interest expense increased 433.7%, or $6,000,
from $1,000 in fiscal 1994 to $7,000. This increase resulted primarily from
additional borrowing to fund operations.
Other expenses. In fiscal 1995, other expenses decreased 78.5%, or
$48,000, from $61,000 in fiscal 1994 to $13,000. Other expenses generally
include fiscal agency fees and other miscellaneous amounts. The decline in
fiscal 1995 was due primarily to decreases in fiscal agency fees paid in the
year.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses a combination of internally generated funds and bank
borrowings to finance its acquisitions, working capital requirements, capital
expenses and operations.
During the short fiscal year ended June 30, 1997 and the last full
fiscal year ended December 31, 1996, the Company generated most of its funding
needs through cash flow.
At June 30, 1997, the Company cash totaled $78,000, a decrease of
$402,000 from December 31, 1996, while accounts receivable increased to $4.8
million at June 30, 1997 from $1.2 million at December 31, 1996, in each case
reflecting the particular payment schedules of the Company's contracts. Because
of the nature of the Company's business, timing of payments on large contracts
may vary significantly, causing significant variances from period to period in
the mix of cash and other liquid funds and accounts receivable. Likewise,
inventory figures may vary significantly, depending upon delivery dates for
voting systems. At June 30, 1997, inventory was $1.6 million, very similar to
the $1.9 million in inventory at December 31, 1996; however, this may not
necessarily be
27
<PAGE> 28
representative of the figure at the end of any given fiscal period.
Also in connection with its contractual arrangements with customers,
the Company may extend credit terms for the payment of amounts due for voting
systems. At June 30, 1997, loans receivable, less current portion, stood at
$900,000, approximately the same amount as was reported at December 31, 1996.
These loans are repaid on varying terms and with varying interest rates,
determined on a case by case basis. The Company has not historically experienced
any default rate in connection with loans due from customers, except for amounts
due from Venezuela under a 1991 agreement, which were written off.
The Company currently has two loans outstanding, each with Western
Bank, Albuquerque, New Mexico. One loan in the amount of $600,000 is secured by
Global USA accounts receivable. This loan bears an interest rate of Western Bank
of Albuquerque Prime Rate and is due January 6, 1999. The second loan is in the
amount of $770,000 and is secured by a specific Global USA contract valued at
$2,100,000. This loan bears an interest rate of 1% above the Western Bank of
Albuquerque Prime Rate and is payable on November 15, 1998. In order to avoid
cash flow constrictions, the Company occasionally enters into short-term loan
arrangements. The Company entered into, on March 31, 1998, loans of C$500,000
each with two Canadian individuals. Partial funding of these loans was received
on March 31, 1998 and the remaining on April 1, 1998. They were due and payable
on March 31, 1999, but were repaid in full on June 1, 1998. The loans were
evidenced by promissory notes and bore interest at a rate of 8% per year,
calculated and payable on the last day of each month. Each loan was secured by
an Accounts Security Agreement, which has since been released which grants to
each lender a security interest in Global USA's debts, accounts, claims,
demands, monies and choses in action and proceeds therefrom. As additional
compensation to the lenders, the Company issued to each of them a Share Purchase
Warrant for 83,333 shares and 83,334 respectively, of Common Stock, immediately
exercisable at a price of C$1.89 and expiring at 4:00 p.m. local time in
Vancouver, B.C. on March 31, 2001.
During the Company's three most recently ended fiscal years, the
Company has experienced no material impact from
28
<PAGE> 29
inflation or changing prices on its net sales and revenues or on income from
continuing operations.
Management believes that financial resources, including internally
generated funds and available bank borrowings will be sufficient to finance the
Company's current operations and capital expenditures, excluding acquisitions,
for the next twelve months.
The following table sets out the exchange rates, based on the noon
buying rates in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York, for the
conversion of Canadian dollars into United States dollars in effect at the end
of the following periods, and the average exchange rates (based on the average
of the exchange rates on the last day of each month in those periods) and the
range of high and low exchange rates for those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 YEAR ENDED
JUNE 30, 1997
(short period)
1993 1994 1995 1996
<S> <C> <C> <C> <C>
END OF PERIOD 1.32550 1.40300 1.37135 1.36447 1.37579
AVERAGE FOR PERIOD 1.2092 1.3664 1.3725 1.3849 1.37579
HIGH FOR PERIOD 1.24279 1.31030 1.32849 1.33199 1.33920
LOW FOR PERIOD 1.34429 1.40350 1.42379 1.38220 1.29789
</TABLE>
On June 30, 1997, the noon rate of exchange as reported by the Federal Reserve
Bank of New York for the conversion of United States dollars into Canadian
dollars was $0.724113 (US$1.00=C$1.38799). As of March 31, 1998, the noon rate
of exchange as reported by the Federal Reserve Bank of New York for the
conversion of United States dollars into Canadian dollars was $0.705219
(US$1.00=C$1.417999).
THE YEAR 2000 ISSUE. The year 2000 issue ("Y2K") arises from a computer's
inability to recognize the two-digit field "00" as the year 2000 instead of the
year 1900. The computer's mistaking "00" as the year 1900 could result in system
failures or miscalculations causing disruptions to operations, including
manufacturing, a temporary inability
29
<PAGE> 30
to process transactions, send invoices, or engage in other normal business
activities. This is a significant issue for most companies, with far-reaching
implications, some of which cannot be anticipated or predicted with any degree
of certainty.
The Company has completed an assessment of the magnitude of the Y2K
issue with respect to the Company's products. The Company's Accu-Vote and
Accu-Touch systems are designed to be Y2K compliant, which is generally a
requirement in RFP's for voting systems, and the Company does not expect any
material problems or difficulties to arise out of its systems. The Company is
communicating with its customers to determine the extent of the Company's
vulnerability to the failure of third parties to remediate their own Y2K issues.
In conjunction with the Company's assessment of Y2K issues which might
affect it, the Company is formulating plans to address the Y2K issue, including
contingencies to address unforeseen problems. The Company has not been required
to incur costs for remedial work and accordingly has not set aside any
contingency fund to deal with any contingencies which may arise. The costs for
Y2K compliance are based upon management's best estimates, which were derived
from numerous assumptions about future events, including third-party
modification plans and other factors. However, there can be no guarantee that
those estimates will be accurate and actual results could differ materially from
those plans. Specific factors that might cause material differences include, but
are not limited to, the availability and cost of personnel trained in this area
and the ability to identify and correct all relevant computer codes.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases office and manufacturing facilities in McKinney,
Texas, in Omaha, Nebraska and Vancouver, British Columbia. The Company's
standard practice is to lease its facilities, and to insure the facilities and
their contents under an insurance plan.
30
<PAGE> 31
The McKinney, Texas, leased facility consists of about 13,050 square
feet in a stand-alone, one-story building. This facility includes the Company's
manufacturing operations and its United States corporate headquarters. The
current capacity utilization of the manufacturing area is about 100%. Management
anticipates that this facility may be expanded at some time during the next
fiscal year. The lease term commenced on August 1, 1997 and continues for a
period of five years, with two five-year options to renew.
The Vancouver, British Columbia leased facility consists of about 8,150
square feet in an office warehouse, one-story building. This facility houses the
Company's Canadian corporate headquarters and most of its research and
development activities. The lease term commenced on May 1, 1993 and continued
for a period of five years. The Company has executed a Lease Renewal agreement
for a term of eight months beginning May 1, 1998 and terminating December 31,
1998 on the same terms and conditions as contained in the original Lease. The
Company plans to move its Vancouver operations to smaller premises.
The Omaha, Nebraska leased facility consists of approximately 610
square feet. The facility is used for field support. The lease term commenced
on September 1, 1997 and continues for a period of two years.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership, as of March 31, 1998, of (i) each person known to the Company to own
beneficially more than 5% of the Common Stock, (ii) each Director of the
Company, (iii) each of the Company's Executive Officers, and (iv) all Officers
and Directors as a group. Except as otherwise noted, the Company believes that
the persons listed below have sole investment and voting power with respect to
the Common Stock owned by them.
31
<PAGE> 32
<TABLE>
<CAPTION>
NAME SHARES PERCENT OF CLASS
BENEFICIALLY OWNED (1)
<S> <C> <C>
David H. Brown (2) 1,310,067 7.1%
Howard Van Pelt (3) 941,469(4) 5.1
Clinton H. Rickards(2) 921,019(5) 5.0
Larry Ensminger (3) 402,835(5) 2.2
Maurice E. Sokulski(3) 215,000(6) 1.6
Robert Urosevich(3) 160,000(7) *
George Cobbe (3) 100,000(6) *
Nicholas Glass (2) 50,000(5) *
All Directors and Officers as a group 4,100,390(8) 22.2%
</TABLE>
* less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by that person within 60 days from the date of this Registration
Statement upon exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that are
held by that person and that are exercisable within 60 days from the date of
this Registration Statement have been exercised.
(2) The address of the shareholder is 1562 Rand Avenue, Vancouver, British
Columbia, Canada V6P 3G2.
(3) The address of the shareholder is 1611 Wilmeth Road, McKinney, Texas 75069.
(4) Includes options for 50,000 shares which are currently exercisable at C$1.25
per share and 9,380 shares owned by Mr. Van Pelt's wife (as to which he
disclaims beneficial ownership). The options have been issued subject to Toronto
Stock Exchange and shareholder approval.
(5) Includes options, for 50,000 shares which are currently exercisable at
C$1.25 per share, subject to shareholder approval, and, as Messrs. Rickards and
Glass, Toronto Stock Exchange approval.
(6) Includes options issued subject to Toronto Stock Exchange and shareholder
approval, for 100,000 shares which are currently exercisable at C$1.25 per share
(7) Includes options for 120,000 shares which are currently exercisable at
C$1.25 per share.
(8) Includes options for 520,000 shares which are currently exercisable at
C$1.25 per share.
32
<PAGE> 33
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
EXECUTIVE OFFICERS AND DIRECTORS
The Executive Officers and Directors of the Company are as follows:
<TABLE>
<S> <C> <C>
David H. Brown 69 Chairman of the Board, Director
Howard T. Van Pelt 56 President, Chief Financial Officer of
Registrant and of Global USA, Director
Clinton H. Rickards 50 Vice President for Canada Sales and
Stockholder Relations, Director
Larry Ensminger 59 Vice President of Operations
Maurice E. Sokulski 54 Treasurer, Controller
Robert Urosevich 50 Vice President for Sales/Marketing/New Business
George Cobbe 60 Director
Nicholas Glass 53 Director
</TABLE>
David H. Brown has been a Director of the Company since 1991 and its Chairman of
the Board since 1993. At his retirement in 1989, Mr. Brown was vice chairman of
the investment firm Burns Fry Limited, Toronto, Ontario, Canada. Mr. Brown holds
a bachelor of science degree from Concordia University, and a master of business
administration from Harvard University.
33
<PAGE> 34
Howard T. Van Pelt has been President and Chief Financial Officer of the Company
since 1993 and of Global USA since 1991, and has been a Director since 1991. In
1970, he became a regional marketing manager for Computer Election Systems Inc.,
an election voting machine company, and was regional manager, Southern division,
of that company when it was sold in 1981 to Hale Bros. From 1964 to 1968, Mr.
Van Pelt was a marketing representative for IBM Corporation, and from 1968 to
1970, he was a registered representative for Rauscher Pierce Securities. Mr. Van
Pelt attended the University of New Mexico from 1960 to 1964 and the New York
Institute of Finance in 1968.
Clinton H. Rickards has been the Company's Vice President for Canada Sales and
Stockholder Relations since 1993, and a Director since 1991. He has been in the
computer industry for almost 30 years. In 1980, he, together with partners he
subsequently bought out, founded the private computer company NAPT. This company
began the development of the ES-2000, the Company's signature product, in 1986.
Larry Ensminger has been the Company's Vice President of Operations since 1997.
From 1993 to 1997, he was the manager of sales and operations, and from 1991 to
1993, he was a sales representative, for the Company. Mr. Ensminger holds an
Associate of Arts degree in education from Dodge City Community College, and a
Bachelor of Science and a Master of Science in engineering from Kansas State
College.
Maurice E. Sokulski has been Treasurer of the Company since 1994, Controller
since 1996, and served as a Director of the Company from 1996 to 1997. From 1993
to 1994, he was controller of Northcoast Building Products Ltd., a British
Columbia distributor of lumber products. In 1992, he was controller for Adagio
Enterprises Ltd., a British Columbia manufacturer and distributor of lingerie.
He is a chartered accountant and holds a bachelor of commerce degree from the
University of Alberta.
Robert Urosevich has been the Company's Vice President for Sales/Marketing/
Business Development since August 1997. From 1995 to 1997, he was president of
I-Mark Systems, Inc., which was acquired by the Company in 1997. From 1994 to
1995, he was president of DATA Duplicating, Inc. Mr. Urosevich attended Coe
College from 1966 to 1970.
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<PAGE> 35
George Cobbe has been a Director of the Company since 1997. Mr. Cobbe has worked
in various marketing and executive capacities for Hewlett-Packard Company since
1961. Since 1993, he has been general manager and director of North American
Field Operations for Hewlett-Packard Company, and, since 1995, a vice president
of that company. Mr. Cobbe holds a bachelor of science degree in electrical
engineering from Stanford University.
Nicholas Glass has been a Director of the Company since 1997. Mr. Glass is a
member of the Bar of British Columbia, and of England and Wales, and currently
practices in the field of labor relations as a mediator and arbitrator. He is a
director of CTI Conservation Technologies, a private British Columbia company in
the business of powerline carrier communications, is an advisor to the board of
directors of Q-Media Software Corporation, a public company traded on the
Toronto Stock Exchange which is a manufacturer and distributor to the software
industry, and is a director of Belvedere Resources, a public company traded on
the Vancouver Stock Exchange which owns mineral rights in Finland. From 1992 to
1996, Mr. Glass was a director of Tradepoint Investment Exchange, a public
company traded on AIM in London and the Vancouver Stock Exchange which has
started a new electronic stock exchange based in London. From 1972 to 1990, he
was a civil trial lawyer at the firm of Swinton and Company in Vancouver. Mr.
Glass holds a Master of Arts degree from Trinity College, Oxford University.
No Director or Executive Officer of the Company is related to any other by blood
or marriage.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth an overview
of compensation for the fiscal years ended June 30, 1997 (as short fiscal year),
and December 31, 1996, and 1995 to the Company's Chief Executive Officer and
each of the Company's other Executive Officers whose total compensation exceeded
$100,000.
35
<PAGE> 36
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation Long-Term All Other
Compensation Compensation
Salary Bonus Restricted Securities
Stock Under-
Award lying
Option
(#Shares)*
<S> <C> <C> <C> <C> <C>
Howard T. Van Pelt (1)
1997 $ 75,000 $ 65,000 -0- -0- $
1996 150,000 -0- -0- -0- 1,339
1995 150,000 -0- -0- -0- 1,072
Clinton H. Rickards
1997 C68,000 C33,750
1996 C147,083 -0- -0- -0- 324
1995 C150,000 342
Larry Ensminger
1997(2) 90,000
1996 90,000
1995 90,000
Maurice E. Sokulski
1997(3) 27,324
1996 50,000
1995 50,000
Robert Urosevich
1997(4) 115,000
1996
1995
Robert W. Ross,Jr.(5)
1997 29,938
1996 135,000 -0- -0- -0- 5,192
1995 135,000 -0- -0- -0- 4,009
</TABLE>
* For information on performance share options granted to certain Directors,
officers and employees in November 1991, amended as to term in December 1996,
see "Item 7. Certain Relationships and Related Transactions."
(1) Effective August 1, 1997, Mr. Van Pelt's salary was adjusted to $180,000 per
year.
(2) Effective August 1, 1998, Mr. Ensminger's salary was adjusted to $96,000 per
year.
36
<PAGE> 37
(3) Effective July 1, 1997, Mr. Sokulski's salary was adjusted to $75,000 per
year.
(4) Effective August 1, 1997, Mr. Urosevich's salary was adjusted to $115,000
per year.
(5) Mr. Ross resigned from his position as Vice President, U.S., for
Manufacturing Operations in December, 1996.
Robert W. Ross, Jr., a former Director, received c$41,330 in FY1997,
c$191,152 in FY 1996, and c$190,804 in FY1995 in consulting fees from the
Company.
The Company granted no options for Common Stock and made no awards
under long-term incentive plans to named Executive Officers during the fiscal
year ended June 30, 1997 (a short fiscal year), or during the previous fiscal
year ended December 31, 1996. See Item 4. Security Ownership of Certain
Beneficial Owners and Management.
The following table sets out information with respect to stock options
held by Executive Officers and option values as of June 30, 1997, the end of the
fiscal year. Exercisable options are indicated by an "E"; unexercisable options
are indicated by a "U".
<TABLE>
<CAPTION>
Value of
Unexercised
Shares Underlying In-The-Money
Shares Acquired on Unexercised Options at
Name Exercise Value Realized Options at 6/30/97 6/30/97
- ---- ------------------ -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Howard Van Pelt -0- -0- -0- -0-
Clinton Rickards -0- -0- -0- -0-
Robert Ross, Jr.(1) -0- -0- -0- -0-
</TABLE>
(1) Resigned in December, 1996.
37
<PAGE> 38
COMPENSATION OF DIRECTORS. Non-employee Directors, with the exception of Mr.
Brown, are not paid cash compensation for their service. Expenses incurred in
connection with attending Board and committee meetings were in fiscal 1997 and
are reimbursed. Mr. Brown, as Chairman of the Board, receives, and received in
the last fiscal year, a fee of C$50,000. Directors Cobbe and Glass, who joined
the Board after the end of the last fiscal year, each received options for
Common Stock in connection with their agreement to serve. Option agreements
relating to these options have not been executed, pending Toronto Stock Exchange
and shareholder approval. See Item 4. Security Ownership of Certain Beneficial
Owners and Management. The Company has no other Director compensation plans in
place, but is considering cash compensation payments to its other non-employee
Board Members.
EMPLOYMENT AGREEMENTS
The Company has a three-year employment agreement dated August 1, 1997
with its President, Mr. Van Pelt under which he is paid a salary of $180,000 per
year and a bonus of 3% of earnings not to exceed $200,000. The employment
agreement also provides that Mr. Van Pelt's employment may be terminated only
for cause and that upon termination for other than criminal behavior, the
Company will pay a severance benefit equal to six months base salary at the time
of termination.
Under a two-year employment agreement dated September 30, 1996, the
Company pays its Vice President of Sales for Canada and Stockholder Relations,
Mr. Rickards, an annual salary of C$136,000 plus a bonus of 3% of Canadian sales
and 1% of the pre-tax earnings, net of the Canadian gross profit. The agreement
may be terminated for cause or not for cause upon six months' notice by either
party.
The Company has no compensatory plan or arrangement for its Executive
Officers with respect to their termination of employment or a change in control
of the Company other than as set out in their respective employment agreements.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the employment arrangements discussed under Item 6.
Executive Compensation, the Company employs
38
<PAGE> 39
Larry Ensminger, its Vice President of Operations, at a salary of $96,000 per
year. Until the beginning of the current fiscal year, the Company paid Mr.
Ensminger a salary of $90,000 per year. The Company employs its Treasurer,
Maurice E. Sokulski, at a salary of $75,000 per year; for the previous three
fiscal years, the Company paid Mr. Sokulski a salary in the amount of C$75,000.
Robert Urosevich, the Company's Vice President for Sales/Marketing/New Business
since August 1997, is paid a salary of $115,000 per year pursuant to a three
year employment contract which commenced in August of 1997.
Until May 1998, when the lease was terminated by agreement of the
parties and payment by the Company of a $29,000 termination fee, the Company
leased from Robert W. Ross, Jr., a former Director and Vice President who
resigned in December 1996, the Company's former manufacturing facility in
Honeoye Falls, New York.
The Company also leased office space from a company controlled by
Howard Van Pelt, a Director. During the fiscal years ended June 30, 1997 and
December 31, 1996 and 1995, the Company paid rent in the amount of $18,530.
By an agreement dated November 22, 1991, the Company reserved for
issuance 4,150,000 treasury shares for issuance as "performance shares". These
shares were to be issued at $0.08 per share, and, upon issuance, were to be held
in escrow and released to specified employees on the basis of "cumulative cash
flow". Two of the original allotees ceased to be employees of the Company and,
therefore, were no longer eligible for performance shares. Their 270,000 share
allotment was canceled, leaving a balance of 3,880,000 reserved for issuance.
During 1996, the Directors resolved to cancel 1,142,000 of the allotted but
unissued performance shares and to extend the earn-out period on the remaining
2,738,000 performance shares from January 17, 1997 to January 17, 2000. The
Directors' resolution was subsequently approved by shareholders and regulatory
authorities. On December 6, 1996, the Company
39
<PAGE> 40
entered into an Amended and Restated Performance Shares Allotment Agreement with
respect to the remaining shares which extended the earn-out time from January
17, 1997 to January 17, 2000, but retained the earn-out requirements of the
earlier agreement. Those requirements provided that performance shares would
have to be earned out on the basis of one performance share for every C$0.7975
cumulative cash flow. The following Directors and Officers were awarded the
following performance shares, subject to the escrow terms: Howard Van Pelt,
2,187,581; David H. Brown, 88,208; and Clinton H. Rickards, 282,267. Subsequent
to the end of the last fiscal year, in January 1998, the performance shares were
earned, purchased and released from escrow. Of Mr. Van Pelt's allotment,
1,305,492 were issued to other employees, leaving him a balance of 882,089
shares.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 100,000,000
common shares without par value ("Common Shares") and 20,000,000 convertible
voting preferred shares without par value ("Preferred Shares").
COMMON SHARES
As of March 31, 1998, 18,457,440 Common Shares were issued and
outstanding. All of the authorized Common Shares are of the same class and rank
equally as to dividends, voting powers and participation in assets. Holders of
Common Shares are entitled to one vote, either in person or by proxy, on all
matters that may be voted upon by the registered holders thereof at meetings of
shareholders.
Holders of Common Shares do not have any pre-emptive rights or rights
to subscribe for additional shares of the Company. Pursuant to the Articles of
the Company, the Company may, by a resolution of its Directors and in compliance
with the Company Act (British Columbia) ("Company Act"), purchase any of the
Common Shares at a price and upon the terms specified in that resolution. The
40
<PAGE> 41
Common Shares are not redeemable and there are no sinking fund provisions.
PREFERRED SHARES
The Preferred Shares may be issued at any time and from time to time in
one or more series. The Directors may, by resolution, alter the Memorandum of
the Company to fix the number of Preferred Shares in, and to determine the
designation of Preferred Shares of, that series and alter the Memorandum or
Articles to create, define and attach special rights and restrictions to the
Preferred Shares of that series relating only to the conversion of those
Preferred Shares into Common Shares of the Company. The Company currently has no
Preferred Shares outstanding and the Directors have not yet designated any
series thereof. The Company has no present plan to issue any Preferred Shares.
Each Preferred Share held is entitled to one vote, in person or by proxy, at all
general meetings of the Company.
Holders of Preferred Shares are entitled, on the distribution of assets
of the Company upon liquidation, dissolution or winding-up of the Company or on
any other distribution of assets of the Company among its members for the
purpose of winding up its affairs, to receive before any distribution to holders
of Common Shares or any other shares of the Company ranking junior to the
Preferred Shares with respect to repayment of capital, the amount paid up with
respect to each Preferred Share held by them. After payment to holders of
Preferred Shares of the amounts so payable to them, they are not entitled to
share in any further distribution of the property or assets of the Company.
No dividends may be paid to the holders of Common Shares or to holders
of other shares of the Company ranking junior to the Preferred Shares unless the
Directors have previously declared that the holders of the Preferred Shares are
entitled to receive dividends in an amount per Preferred Share equal to or
greater than any dividend per Common Share which may be paid to the holders of
the Common Shares.
41
<PAGE> 42
No Preferred Shares which are to be convertible into Common Shares may
be allocated or issued without the Company first obtaining the written consent
of the Toronto Stock Exchange or any other stock exchange on which the
securities of the Company are traded.
The Preferred Shares are not redeemable and there are no sinking fund
provisions.
CERTAIN PROVISIONS OF THE BRITISH COLUMBIA COMPANY ACT
The Company Act provides that shareholders are entitled to dissent in
respect of certain actions proposed to be taken by the Company. If the Company
proposes to:
(a) continue out of the jurisdiction of the Company Act;
(b) offer financial assistance for the purpose of purchasing
shares or convertible debt obligations of the Company or on the security of a
pledge of or charge on shares of the Company given by that person to the
Company, or in any other case, unless there are reasonable grounds for believing
that, or the Directors are of the opinion that, the giving of financial
assistance is in the best interests of the Company;
(c) sell, lease or otherwise dispose of the whole or
substantially the whole of the Company's undertaking;
(d) alter its Memorandum by altering any restriction on the
business carried on or to be carried on by the Company or on its powers;
(e) convert from a specially limited company(as defined in
Section 243 of the Company Act;
(f) amalgamate with another corporation; or
(g) transfer or sell the whole or part of its business or
property to another company when it is being wound-up and for that transfer or
sale, the members of the
42
<PAGE> 43
Company receive shares, debentures or other similar interests from the other
company, or instead or in addition to cash, shares, debentures or other similar
interests, have the right to participate in profits of or receive any other
benefit from the other company;
a shareholder may exercise a right of dissent and is entitled to be paid the
fair value of the shareholder's shares as of the day before the date on which
the shareholders' resolution approving the transaction was passed.
The Company Act further provides that Directors must not sell, lease or
otherwise dispose of the whole or substantially the whole of the undertaking of
the Company unless they have the approval of the members by a resolution passed
by a majority of not less than three-quarters of the votes cast by those members
of the Company voting at a general meeting.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no governmental laws, decrees or regulations in Canada or the
Province of British Columbia that restrict the export or import of capital,
including foreign exchange controls, or that affect the remittance of dividends,
interest or other payments to non-resident holders of the Company's securities,
other than withholding tax on dividend payments, as described below under the
heading "Taxation".
Except as provided in the Investment Canada Act (the "Investment Act")
and the British Columbia Company Act (the "Company Act"), there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter or any other constituent documents of the Company on the right of
foreigners to hold or vote the Common Shares.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or government agency, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless after review the minister responsible
for the Investment Act is satisfied that the investment is likely to be of net
benefit to
43
<PAGE> 44
Canada. An investment in Common Shares by a non-Canadian (other than an
"American" as defined in the Investment Act) will be reviewable under the
Investment Act if it is an investment to acquire control of the Company and the
value of the assets of the company is then $5 million or more. A non-Canadian
will be deemed to acquire control of the Company for the purposes of the
Investment Act if he or she acquires a majority of the outstanding Common
Shares. A non-Canadian will be presumed to acquire control of the Company if he
acquires more than one-third (but less than a majority) of the outstanding
Common Shares, unless it can be established that, on the acquisition, the
Company is not controlled in fact by the non-Canadian through the ownership of
such shares. A non-Canadian will be deemed not to acquire control if he or she
acquires less than one-third of the outstanding Common Shares.
The Investment Act was amended with the Canada-United States Free Trade
Agreement to provide for special review thresholds for "Americans", as defined
in the Investment Act. The definition of American includes American-controlled
entities, as defined in the Investment Act. Under the Investment Act, as
amended, an investment in the Common Shares by an American will be reviewable
only if it is an investment to acquire control of the Company and the value of
the assets of the Company is equal to or greater than a specified amount (the
"Review Threshold"), which increases in stages. The Review Threshold is adjusted
annually each year after 1992 to be equivalent to $150 million in constant 1992
dollars (calculated as prescribed in the Investment Act).
If a non-Canadian acquires control of the Company by the acquisition of
Common Shares, but the transaction is not reviewable as described above, the
non-Canadian is required to notify the government and to provide certain basic
information relating to the investment. If the business of the Company is then a
prescribed type of business activity related to Canada's cultural heritage or
national identity, and if the government considers it to be in the public
interest to do so, then the government may give a notice in writing within 21
days requiring the investment to be reviewed.
44
<PAGE> 45
For non-Canadians (other than Americans, as defined in the Investment
Act), an indirect acquisition of control, by the acquisition of voting interests
of an entity that directly or indirectly controls the Company, is reviewable if
the value of the assets of the Company is then $50 million or more. This
requirement does not apply to an American, as defined in the Investment Act.
As a company incorporated under, and governed by, the provisions of the
Company Act, the Company is required to have at least one director resident in
the Province of British Columbia and a majority of directors must be residents
of Canada. Accordingly, the ability of shareholders to elect directors is
constrained to the extent that the board of directors of the Company must at all
times meet these requirements.
CANADIAN TAXATION OF UNITED STATES PERSONS
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to the purchase, disposition and ownership
of Common Shares of the Company by residents and citizens of the United States
and is not a complete analysis or listing of all possible tax consequences of
such purchase, disposition or ownership. Nor does this summary deal with all
aspects of Canadian federal taxation that may be relevant to particular
investors. This summary is general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any particular person.
Holders of Common Shares should seek independent advice from their own tax
advisors as to the income tax consequences to them having regard to their
particular circumstances.
The following summary is based upon the current provisions of the
Income Tax Act (Canada) (the "ITA") and the regulations thereunder publicly
released by the Minister of Finance as of the date hereof. Except for the
foregoing, this summary does not take into account or anticipate changes in the
law or the administrative or assessing practices of Revenue Canada, Taxation and
all proposed amendments to the ITA and the regulations
45
<PAGE> 46
thereunder publicly released by the Minister of Finance as of the date hereof.
Except for the foregoing, this summary does not take into account or anticipate
changes in the law or the administrative or assessing practices of Revenue
Canada, Taxation whether by legislative, governmental, or judicial action and
does not take into account or anticipate provincial, territorial or foreign tax
considerations.
This summary relates to the principal Canadian federal income tax
considerations under the ITA generally applicable to holders of Common Shares
who, for purposes of the ITA, are not and will not be or be deemed to be
resident in Canada at any time while they hold Common Shares, deal at an arm's
length with the Company, will hold their Common Shares as capital property and
do not use or hold, and or not deemed under the ITA to use or hold their Common
Shares in, or in the course of carrying on a business in Canada.
A holder who is not resident in Canada for purposes of the ITA will
generally not be subject to tax under the ITA in respect of any capital gain or
capital loss realized on the disposition of a Common Share unless such share is
"taxable Canadian property" for purposes of the ITA and the holder is not
entitled to relief under an applicable tax treaty between Canada and the
holder's jurisdiction of residence. A Common Share will be "taxable Canadian
property" of the holder, if, at any time during the five year period immediately
preceding the disposition of the Common Share, not less than 25% of the issued
shares of any class or series of the Company belongs to the holder, to persons
with whom the holder did not deal at arm's length or a combination thereof. In
addition, the Canada-United States Income Tax Convention (1980) (the "Treaty")
will generally exempt a holder who is resident of the United States for purposes
of the Treaty from income tax in respect of a disposition of Common Shares
provided the value of the shares of the Company is not derived principally from
real property (including resource property) situated in Canada and provided such
holder does not have and has not had within the twelve month period preceding
the disposition a permanent establishment or fixed base available to such holder
in Canada.
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<PAGE> 47
In general, a holder who receives a dividend in respect of a Common
Share will be subject to Canadian withholding tax at the rate of 25% of the
gross amount of the dividend (computed in Canadian dollars), unless such rate is
reduced under the provisions of a tax treaty between Canada and the holder's
jurisdiction of residence. Under the Treaty, the rate of withholding tax on
dividends payable to U.S. resident individuals is reduced to 15%. The Treaty
also reduces the rate of withholding tax to 5% for dividends paid to a company
which beneficially owns at least 10% of the voting stock of the Company.
When a holder dies holding Common Shares, the holder will be deemed for
Canadian tax purposes to have disposed of those Common Shares for an amount
equal to the fair market value thereof immediately before the holder's death and
will be subject to the tax treatment with respect to dispositions described
above. Any person who acquires those Common Shares as a consequence of the death
of such holder will be deemed to have acquired such shares for the fair market
value at that time. There is currently no Canadian federal estate tax.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Toronto Stock Exchange
under the symbol "GSM". The following table sets forth for the periods indicated
the high and low closing prices of the Company's Common Stock as reported by the
Toronto Stock Exchange, in Canadian funds.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year 1996
Quarter ended March 31, 1996 $ 1.15 0.82
Quarter ended June 30, 1996 1.09 0.74
Quarter ended September 30, 1996 0.93 0.61
Quarter ended December 31, 1996 0.85 0.55
Fiscal Year 1997(as short year)
Quarter ended March 31, 1997 0.70 0.51
Quarter ended June 30, 1997 0.68 0.50
Fiscal Year 1998
Quarter ended September 30, 1997 1.50 0.45
Quarter ended December 31, 1997 2.15 1.38
Quarter ended March 31, 1998 2.05 1.35
</TABLE>
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<PAGE> 48
The last sale price of the Company's Common Stock on September 15, 1998
as reported on the Toronto [Canada] Stock Exchange was C$2.60 per share. As of
March 31, 1998, there were approximately 705 holders of record of the Company's
Common Stock, of whom approximately 72.1% were in the United States. At that
date, approximately 29.8% of the outstanding 18,457,440 shares of Common Stock
was held in the United States.
Since its inception, the Company has not paid cash dividends on its
Common Stock. The Company intends to retain future earnings, if any, to provide
funds for business operations and, accordingly, does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
On August 21, 1998, ES&S filed a suit against Global USA in the
United States District Court for the District of Nebraska. The suit alleges
that Global USA has infringed ES&S's U.S. Patent No. 5,583,329, which covers
a direct recording electronic voting machine and voting process ("ES&S
Patent"). ES&S has asked for treble monetary damages to be proven at time of
trial, declaratory judgment stating that Global USA's products and technology
infringe the ES&S Patent, and injunctive relief. Based upon an opinion of
patent counsel obtained when the Company acquired assets of I-Mark in 1997,
Global USA answered by affirmatively stating that its products and technology
do not infringe the ES&S Patent. Global USA intends to defend vigorously
against the suit. Except for the ES&S lawsuit, the Registrant is not a party to
any material pending legal proceedings and is not aware of any proceeding that a
governmental authority is contemplating.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the Registrant's two most recent fiscal years or any later
interim period, the Registrant's principal independent accountants were Staley,
Okada, Chandler & Scott, Chartered Accountants, Burnaby, British Columbia,
Canada, and that firm is currently retained in that capacity.
48
<PAGE> 49
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since July 31, 1995, the Registrant has issued the following securities
without registration under the Securities Act of 1933, pursuant to exemptions
from registration under that Act:
<TABLE>
<CAPTION>
DATE ISSUANCE EXEMPTION RELIED UPON
<S> <C> <C>
11/22/96 400,000 shares issued to Clinton Richards upon exercise of Issued under Canadian
options law
11/22/96 100,000 shares issued to David Brown upon exercise of options Issued under Canadian
law
7/31/97 1,000,000 shares of Common Stock to I-Mark Systems, Inc. in the Section 4(2): Pur-
acquisition of the assets of I-Mark Systems, Inc., a Nebraska chaser had access to
corporation. all information
needed to make an
investment decision
through its due dili-
gence in the acquisi-
tion.
1/16/98 2,738,000 performance shares to Directors, Officers and Issued under Canadian
selected employees, as approved by the Toronto Stock Exchange law
8/22/97 Options for 1,145,000 shares issued to 26 employees, including Issued under Canadian
officers law and, as to
U.S. residents, Rule
701.
12/17/97 Options for 50,000 shares issued to Nicholas Glass, a Director Issued under Canadian
law
2/13/98 Options for 100,000 shares issued to George Cobbe, a Director Issued under Canadian
law
3/31/98 Warrants for 166,667 shares issued to David Ross and Victoria Issued under Canadian
Ross law
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated pursuant to the Company Act of British
Columbia, Canada. Section 128 of the Company Act permits the Company, with the
approval of the Supreme Court of British Columbia, to indemnify a person who is
a Director, or former Director of the Company against all costs, charges and
expenses, including (i) an
49
<PAGE> 50
amount paid to settle an action or satisfy a judgment, actually and reasonably
incurred by the person, (ii) an amount paid to settle an action or satisfy a
judgment in a civil, criminal or administrative action or proceeding to which
the person is made a party because of having been a Director of the Company,
(iii) an action brought by the Company, if the person acted honestly and in good
faith with a view to the best interests of the Company, and, in the case of a
criminal or administrative action or proceeding, the person had reasonable
grounds for believing that the person's conduct was lawful. Part 20 of the
Company's Articles embodies the statutory provisions and also provides for
indemnification of officers, employees and agents of the Company, as well as for
the purchase of insurance for the persons indemnified.
Article XI of the Certificate of Incorporation of Global USA provides
for limitation of director liability and for indemnification of directors,
officers and employees of the corporation. This limitation and indemnification
is in addition to that provided under the laws of British Columbia for Directors
and Officers of the Company and benefits persons serving Global USA, whether or
not they also serve the Company. The directors of Global USA are the same
persons who are Directors of the Company. A Global USA director will not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director except for breach of the duty of
loyalty to the corporation or its stockholders, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
liability under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the Director derives improper personal benefit. The
Article also provides that changes in Delaware law further eliminating or
limiting liability of Directors will be automatically applied to directors of
the corporation.
Article XI provides for indemnification of and the purchase of
insurance covering directors, officers and employees of Global USA and to those
serving in another entity at the request of the corporation to the fullest
extent allowed by law. Indemnification includes expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, and may be paid in
advance of final
50
<PAGE> 51
disposition of an action, suit or proceeding. It does not limit other rights to
which any person seeking indemnification from the corporation may be entitled
under an agreement, vote of stockholders or disinterested directors, or
otherwise.
The Company also maintains a claims made Directors, Officers and
Corporate Liability Policy in the aggregate amount of $5 million.
PART FS
The following Consolidated Financial Statements of the Registrant are included:
Audited:
Consolidated Balance Sheet as at 30 June 1997, and 31 December 1996 and 1995.
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Income (Loss) for the Six Months Ended 30 June 1997
and the Years Ended 31 December 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Six Months Ended 30 June 1997, and
the Years Ended 31 December 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Unaudited:
Interim Consolidated Balance Sheet as at 31 March 1998
Interim Consolidated Statement of Changes in Shareholders' Equity
Interim Consolidated Statement of Income for the Nine Months Ended 31 March 1998
Interim Consolidated Statement of Cash Flow for the Nine Months Ended 31 March
1998
Notes to Interim Consolidated Financial Statements
51
<PAGE> 52
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibits to this Form 10-SB are as follows:
EXHIBIT
2(1) Memorandum and Articles of Incorporation, as amended.*
3 Instruments Defining the Rights of Security Holders *
3(1) Parts 7, 10, 12 and 27 of the Registrant's Memorandum and Articles of
Incorporation, as amended, set forth in Exhibit 2(1) *
6 Material Contracts
6(1)(i) Employment Agreement with Howard Van Pelt dated August 1, 1997 *
(ii) Employment Agreement, dated October 1, 1996, with Clinton H.
Richards*
(iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997*
6(2) Amended and Restated Performance Share Allotment Agreement dated December
6, 1996 *
6(3)(i) Lease (Vancouver, British Columbia)*
(ii) Lease (McKinney, Texas)*
(iii) Lease (Omaha, Nebraska)(to be filed by Amendment)*
6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated
July 31, 1997*
6(5) Promissory Notes and associated Accounts Security Agreements and Stock
Purchase Warrants, all dated March 31, 1998, to each of David Ross and
Victoria Ross. Termination of each Promissory Note.*
6(6) Option agreements:
(i) Form of Option Agreement with employees*
(ii) Option Agreement dated August 22, 1997 between the Company and Howard
T. Van Pelt*
52
<PAGE> 53
(iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997*
6(2) Amended and Restated Performance Share Allotment Agreement dated December
6, 1996 *
6(3)(i) Lease (Vancouver, British Columbia)*
(ii) Lease (McKinney, Texas)*
(iii) Lease (Omaha, Nebraska)(to be filed by Amendment)*
6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated
July 31, 1997*
6(5) Promissory Notes and associated Accounts Security Agreements and Stock
Purchase Warrants, all dated March 31, 1998, to each of David Ross and
Victoria Ross. Termination of each Promissory Note.*
6(6) Option agreements:
(i) Form of Option Agreement with employees*
(ii) Option Agreement dated August 22, 1997 between the Company and Howard
T. Van Pelt*
(iii) Option Agreement dated August 22, 1997 between the Company and
Clinton H. Rickards*
(iv) Option Agreement dated August 22, 1997 between the Company and Larry
Ensminger*
(v) Option Agreement dated August 22, 1997 between the Company and
Maurice E. Sokulski*
(vi) Option Agreement dated August 22, 1997 between the Company and Robert
Urosevich*
6(7) Other material agreements
(i) Promissory Note to Western Bank Albuquerque for $770,000.*
(ii) Promissory Note to Western Bank Albuquerque for $600,000.*
10 Consent of Staley, Okada, Chandler & Scott Chartered Accountants.
13 Form F-X*
* Incorporated by reference to the Registrant's Form 10-SB filed July 31,
1998.
<PAGE> 54
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of McKinney, State of
Texas, on September 17, 1998.
Global Election Systems, Inc.
By: /s/ HOWARD T. VAN PELT
---------------------------------------------
Howard T. Van Pelt
President and Chief Executive
Officer
<PAGE> 55
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this registration statement or amendment thereto has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ DAVID H. BROWN*
- ------------------------------- Chairman of the Board 9/17/98
David H. Brown and Director
/s/ HOWARD T. VAN PELT
- -------------------------------- President, Chief Executive 9/17/98
Howard T. Van Pelt Officer, Chief Financial Officer
and Director
/s/ CLINTON H. RICKARDS*
- -------------------------------- Vice President of Marketing, 9/17/98
Clinton H. Rickards Canada, and Stockholder
Relations, and Director
/s/ MAURICE E. SOKULSKI*
- ------------------------------- Treasurer, Comptroller 9/17/98
Maurice E. Sokulski
/s/ GEORGE COBBE*
- ------------------------------ Director 9/17/98
George Cobbe
/s/ NICHOLAS GLASS*
- ----------------------------- Director 9/17/98
Nicholas Glass
</TABLE>
* By: /s/ HOWARD T. VAN PELT
------------------------ 9/17/98
Attorney-in-fact
<PAGE> 56
GLOBAL ELECTION SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997
and
31 DECEMBER 1996 and 1995
U.S. Funds
STALEY, OKADA, CHANDLER & SCOTT
Chartered Accountants
<PAGE> 57
================================================================================
[STALEY, OKADA, CHANDLER & SCOTT LETTERHEAD]
================================================================================
AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Directors of
Global Election
Systems Inc.: We have audited the consolidated balance sheet of
Global Election Systems Inc. as at 30 June 1997
and 31 December 1996 and 1995 and the
consolidated statements of changes in
shareholders' equity, income (loss) and cash
flows for the six months ended 30 June 1997 and
the years ended 31 December 1996, 1995 and 1994.
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
generally accepted auditing standards in Canada.
Those standards require that we plan and perform
an audit to obtain reasonable assurance whether
the financial statements are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit
also includes assessing the accounting principles
used and significant estimates made by
management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial
statements present fairly, in all material
respects, the financial position of the company
as at 30 June 1997 and 31 December 1996 and 1995
and the results of its operations and the changes
in its financial position for the six months
ended 30 June 1997 and years ended 31 December
1996, 1995 and 1994 in accordance with generally
accepted accounting principles in Canada. As
required by the Company Act of British Columbia,
we report that, in our opinion, these principles
have been applied on a basis consistent with that
of the preceding year.
/s/ STALEY, OKADA, CHANDLER & SCOTT
Burnaby, B.C. STALEY, OKADA, CHANDLER & SCOTT
8 August 1997 CHARTERED ACCOUNTANTS
- --------------------------------------------------------------------------------
<PAGE> 58
GLOBAL ELECTION SYSTEMS INC. Statement 1
CONSOLIDATED BALANCE SHEET
U.S. Funds
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
ASSETS 1997 1996 1995
(Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT Cash and short term deposits $ 77,830 $ 479,996 $ 309,973
Accounts receivable 4,762,419 1,220,632 3,586,131
Deposits and prepaid expenses 54,909 72,961 124,927
Inventory (Note 3) 1,632,367 1,917,749 1,511,686
Current portion of loans receivable 426,919 478,480 194,209
----------------------------------------
6,954,444 4,169,818 5,726,926
AGREEMENTS RECEIVABLE (Note 4) 884,510 904,697 722,503
CAPITAL ASSETS (Note 5) 183,193 214,527 264,259
OTHER ASSETS (Note 6) 137,286 168,586 231,747
--------------------------------------------------------------------------------------
$8,159,433 $5,457,628 $6,945,435
==============================================================================================================================
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT Bank loan (Note 7) $ 290,000 $ 89,356 $ 419,919
Accounts payable and accrued
liabilities 1,163,558 939,163 1,037,226
Customer deposits 36,219 110,745 --
Deferred revenue 324,922 29,785 64,223
Current portion of loans payable 156,239 155,118 --
----------------------------------------
1,970,938 1,324,167 1,521,368
LOANS PAYABLE (Note 8) 212,151 210,629 --
--------------------------------------------------------------------------------------
2,183,089 1,534,796 1,521,368
======================================================================================
COMMITMENTS (Note 11)
CONTINGENCY (Note 12)
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
SHARE CAPITAL (Note 9) Authorized:
100,000,000 common voting shares, without par value
20,000,000 convertible voting preferred shares, without par value
Issued and fully paid:
14,689,440 common shares
(1996 - 14,689,440; 1995 - 14,189,440) 9,374,197 9,374,197 9,138,775
DEFICIT - Statement 2 (3,397,853) (5,451,365) (3,714,708)
----------------------------------------
5,976,344 3,992,832 5,424,067
--------------------------------------------------------------------------------------
$8,159,433 $5,457,628 $6,945,435
==============================================================================================================================
</TABLE>
ON BEHALF OF THE BOARD:
/s/ ILLEGIBLE , Director
- -----------------------------
/s/ ILLEGIBLE , Director
- -----------------------------
- See Accompanying Notes -
<PAGE> 59
GLOBAL ELECTION SYSTEMS INC. Statement 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. Funds
<TABLE>
<CAPTION>
Common Shares
Shares Amount Deficit Total
================================================================================================================================
<S> <C> <C> <C> <C>
Balance - 31 December 1993 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884
Issuance of shares for name and operating assets of
Lynro Manufacturing Corporation ($1.74 per share) 250,000 434,626 -- 434,626
Issuance of shares for expenses ($0.83 per share) 58,334 48,594 -- 48,594
Issuance of shares on exercise of options ($0.48 per share) 50,000 23,904 -- 23,904
Loss for the year - Statement 3 -- -- (1,508,214) (1,508,214)
-----------------------------------------------------------
Balance - 31 December 1994 13,885,571 8,926,460 (2,672,666) 6,253,794
Issuance of shares on exercise of warrants ($0.77 per share) 203,869 156,538 -- 156,538
Issuance of shares on exercise of options ($0.56 per share) 100,000 55,777 -- 55,777
Loss for the year - Statement 3 -- -- (1,042,042) (1,042,042)
-----------------------------------------------------------
Balance - 31 December 1995 14,189,440 9,138,775 (3,714,708) 5,424,067
Issuance of shares on exercise of options ($0.47 per share) 500,000 235,422 -- 235,422
Loss for the year - Statement 3 -- -- (1,736,657) (1,736,657)
-----------------------------------------------------------
Balance - 31 December 1996 14,689,440 9,374,197 (5,451,365) 3,922,832
Net income for the period - Statement 3 -- -- 2,053,512 2,053,512
-----------------------------------------------------------
Balance - 30 June 1997 (Note 1a) 14,689,440 $ 9,374,197 $(3,397,853) $ 5,976,344
================================================================================================================================
</TABLE>
- See Accompanying Notes -
<PAGE> 60
GLOBAL ELECTION SYSTEMS INC. Statement 3
CONSOLIDATED STATEMENT OF INCOME (LOSS)
U.S. Funds
<TABLE>
<CAPTION>
SIX MONTHS Year Year Year
ENDED Ended Ended Ended
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
(Note 1a)
================================================================================================================================
<S> <C> <C> <C> <C>
REVENUES Sales and operating income (Note 15) $ 6,758,954 $ 6,041,173 $ 5,961,586 $ 4,519,457
Other income 51,496 66,606 34,834 57,420
-----------------------------------------------------------------
6,810,450 6,107,779 5,996,420 4,576,877
------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales and operating expenses 2,815,680 4,216,805 2,757,247 2,423,255
Selling, administrative and general
expenses 1,655,250 2,969,256 2,650,174 2,544,553
Research and development expenses 184,414 451,113 674,144 464,616
Amortization 70,472 135,140 183,857 169,853
Interest 27,845 71,166 7,044 1,320
Loss on write-down of capital lease
receivable -- -- 550,735 414,175
Settlement of lawsuit and related legal
costs -- -- 202,138 6,422
Other expenses 3,277 956 13,123 60,897
-----------------------------------------------------------------
4,756,938 7,844,436 7,038,462 6,085,091
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ 2,053,512 $ (1,736,657) $ (1,042,042) $ (1,508,214)
================================================================================================================================
EARNINGS (LOSS) PER SHARE
Basic $ 0.14 $ (0.12) $ (0.07) $ (0.11)
Fully diluted 0.12 N/A N/A N/A
================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,689,440 14,242,865 14,104,530 13,850,090
================================================================================================================================
</TABLE>
- See Accompanying Notes -
<PAGE> 61
GLOBAL ELECTION SYSTEMS INC. Statement 4
CONSOLIDATED STATEMENT OF CASH FLOWS
U.S. Funds
<TABLE>
<CAPTION>
SIX MONTHS Year Year Year
ENDED Ended Ended Ended
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
(Note 1a)
===========================================================================================================================
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period $ 2,053,512 $(1,736,657) $(1,042,042) $(1,508,214)
Item not affecting cash
Amortization 70,472 135,140 183,857 169,853
--------------------------------------------------------------
2,123,984 (1,601,517) (858,185) (1,338,361)
Changes in non-cash working capital
Accounts receivable (3,541,787) 2,365,499 (1,247,551) 1,344,585
Deposits and prepaid expenses 18,052 51,966 25,913 (113,232)
Inventory 285,382 (406,063) 566,588 (747,094)
Accounts payable and accrued liabilities 224,395 (98,063) 400,274 161,164
Customer deposits (74,526) 110,745 -- --
Deferred revenue 295,137 (34,438) 1,973 (5,722)
--------------------------------------------------------------
(669,363) 388,129 (1,110,988) (698,660)
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital assets acquired (8,032) (22,247) (88,406) (136,830)
Proceeds on sale of capital assets 194 -- -- 15,090
Agreements receivable 71,748 (466,465) (37,739) (878,973)
--------------------------------------------------------------
63,910 (488,712) (126,145) (1,000,713)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank loan 200,644 (330,563) 419,919 --
Loans payable 2,643 365,747 -- (822,029)
Common shares issued -- 235,422 212,315 507,124
--------------------------------------------------------------
203,287 270,606 632,234 (314,905)
-----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (402,166) 170,023 (604,899) (2,014,278)
Cash position - Beginning of period 479,996 309,973 914,872 2,929,150
-----------------------------------------------------------------------------------------------------------
CASH POSITION - END OF PERIOD $ 77,830 $ 479,996 $ 309,973 $ 914,872
===========================================================================================================================
</TABLE>
- See Accompanying Notes -
<PAGE> 62
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING
POLICIES These financial statements have been
prepared using generally accepted
accounting principles of Canada as
follows:
a) PERIOD OF OPERATIONS
The company has adopted a new
year-end of 30 June which results in
a six month period of operations for
the period ended 30 June 1997.
b) NATURE OF OPERATIONS
The company markets a complete
electronic voting system which
includes vote tally and voter
registration software.
c) CONSOLIDATION
These financial statements include
the accounts of the company and its
wholly-owned subsidiary, Global
Election Systems, Inc., a company
incorporated in Delaware and
operating in New Mexico, U.S.A. The
purchase method of accounting has
been applied to this acquisition.
d) FOREIGN CURRENCY TRANSLATION
The accounts of the company were
prepared in Canadian funds through
to 30 June 1997 as follows:
i) Monetary assets and liabilities
at year-end rates,
ii) All other assets and
liabilities at historical
rates, and
iii) Revenue and expense
items at the average rate of
exchange prevailing during the
year.
Exchange gains and losses arising
from these transactions were
reflected in income or expense in
the year.
Subsequent to 30 June 1997, the
company adopted the U.S. currency as
its reporting currency and
accordingly, has prepared its
financial statements on that basis.
Accordingly, all prior years'
figures are recast in the U.S.
currency through a "translation of
convenience" whereby all amounts
appearing are restated from Canadian
to U.S. currency using the exchange
rate prevailing at 30 June 1997.
e) INVENTORY
Inventory of finished goods and
work-in-progress is valued at the
lower of cost and net realizable
value as estimated by management.
Raw materials, which consist of
parts and components, are valued at
average cost less any allowances for
obsolescence. Inventory of goods
taken in trade is valued at the
lesser of trade-in value and net
realizable value as estimated by
management.
f) AMORTIZATION
Capital assets are recorded at cost
and the company provides for
amortization on the following basis:
Demonstration and computer
equipment - 20% to 30% declining
balance method
Manufacturing equipment - 20%
declining balance method
Furniture and equipment - 20%
declining balance method
Leasehold improvements - straight-
line over 5 years
One-half of the rate is applied in
the year of acquisition.
<PAGE> 63
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING
POLICIES - Continued g) PATENTS
Patents are recorded at cost and the
company provides for amortization on
a straight-line basis over 10 years.
h) GOODWILL
Goodwill is recorded at cost and the
company provides for amortization on
a straight-line basis over 5 years.
i) REVENUE RECOGNITION
Revenue from sales of products and
supplies is recognized at the time
of shipment of products and supplies
to customers. Revenue from sales of
services is recognized on completion
of the related services.
The company defers a portion of
revenue received related to
contracted future services to match
against management's estimate of the
future costs of providing these
services to customers.
j) WARRANTY RESERVE
Provisions for future estimated
warranty costs are recorded in the
accounts based upon historical
maintenance records. Management
periodically reviews the warranty
reserve to determine the adequacy of
the provision.
k) RESEARCH AND DEVELOPMENT TAX CREDITS
Research and development tax credits
are applied against research and
development expenses in the period
in which the tax credit is received.
l) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share
computations are based on the
weighted average number of shares
outstanding during the year. Fully
diluted earnings per share are based
on the actual number of shares
outstanding at the end of the year
plus performance shares, and share
purchase options and warrants as if
they had been issued as at the
beginning of the year. Fully diluted
loss per share is not presented for
the comparative years as the effect
of outstanding performance shares,
options and warrants is
anti-dilutive.
- --------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL
INSTRUMENTS The carrying value of cash and short
term deposits, accounts receivable,
deposits, loans receivable, bank loans,
accounts payable and customer deposits
approximates their fair value due to
their short term maturity or capacity of
prompt liquidation.
- --------------------------------------------------------------------------------
<PAGE> 64
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
3. INVENTORY Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Supplies $ 457,707 $ 685,308 $ 656,178
Work-in-progress 5,857 52,462 76,540
Trade-in goods 761,380 146,690 144,927
Finished goods 407,423 1,033,289 634,041
---------------------------------------------------------------------------
$ 1,632,367 $ 1,917,749 $ 1,511,686
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
4. AGREEMENTS RECEIVABLE Details of amounts receivable from
customers are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales agreement receivable with interest at 5%
per annum, repayable in 60 equal monthly
payments commencing 15 December 1995,
secured by the underlying goods (i) $ 600,285 $ 677,133 $ 839,625
Sales agreement receivable with interest at 10%
per annum, commencing 1 June 1997 and due
in full by 31 December 1998 78,020 77,460 77,087
Sales agreement receivable with interest at 5%
per annum commencing 20 November 1996,
repayable at $250,000 on 20 November 1997
and the balance on 20 November 1998 (ii) 500,000 496,414 --
Sales agreement receivable with interest at 9%
per annum commencing 25 June 1996,
repayable at $33,646 per annum for
principal and interest on 1 July 1997 to
1 July 2001 (ii) 133,124 132,170 --
-----------------------------------------------------------------------------------------
1,311,429 1,383,177 916,712
Less: Current portion (426,919) (478,480) (194,209)
-----------------------------------------------------------------------------------------
$ 884,510 $ 904,697 $ 722,503
=========================================================================================
</TABLE>
(i) The sales agreement receivable has
been pledged as security for the
bank loan (Note 7).
(ii) The sales agreement receivable has
been pledged as security for the
related loan payable (Note 8).
Scheduled principal repayments on the
sales agreement receivable are as
follows:
<TABLE>
<S> <C>
1998 $ 426,919
1999 529,301
2000 212,497
2001 108,665
2002 34,047
---------------------------------------------------------------------------
$ 1,311,429
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 65
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
5. CAPITAL ASSETS Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
Accumulated NET BOOK Net Book Net Book
Cost Amortization VALUE Value Value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demonstration and
computer equipment $ 323,115 $ 227,988 $ 95,127 $ 115,168 $ 138,290
Manufacturing equipment 125,703 68,875 56,828 63,619 79,523
Furniture and equipment 82,748 52,150 30,598 33,998 42,498
Leasehold improvements 11,027 10,387 640 1,742 3,948
---------------------------------------------------------------------------------------------
$ 542,593 $ 359,400 $ 183,193 $ 214,527 $ 264,259
=============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6. OTHER ASSETS Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
Accumulated NET BOOK Net Book Net Book
Cost Amortization VALUE Value Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Patents $ 144,621 $ 79,542 $ 65,079 $ 72,311 $ 86,773
Goodwill 240,689 168,482 72,207 96,275 144,974
---------------------------------------------------------------------------
$ 385,310 $ 248,024 $ 137,286 $ 168,586 $ 231,747
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
7. BANK LOAN Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Line of credit, bearing interest at bank
prime, interest payments due quarterly
beginning 16 March 1997, due in full by
16 December 1997, secured by the
$600,285 loan receivable (Note 4) $ 290,000 $ 89,356 $ 419,919
-------------------------------------------------------------------------------------------
</TABLE>
The maximum approved line of credit is U.S. $600,000.
- --------------------------------------------------------------------------------
8. LOANS PAYABLE Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December
1997 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Note payable, bearing interest at bank prime, repayable
at $137,602 plus interest on 15 November 1997 and the
balance due in full on 15 November 1998, secured
by the $500,000 sales agreement receivable (Note 4) $ 275,203 $ 273,228 $ --
Note payable, bearing interest at bank prime payable
quarterly commencing 12 December 1996, repayable at
$18,637 per annum commencing 1 July 1997, secured
by the $133,124 sales agreement receivable (Note 4) 93,187 92,519 --
---------------------------------------------------------------------------------------------
368,390 365,747 --
Less: Current portion (156,239) (155,118) --
---------------------------------------------------------------------------------------------
$ 212,151 $ 210,629 $ --
=============================================================================================
</TABLE>
Scheduled principal repayments on the
loans payable are as follows:
<TABLE>
<S> <C>
1998 $ 156,239
1999 156,239
2000 18,637
2001 18,637
2002 18,638
---------------------------------------------------------------------------
$ 368,390
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 66
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- -------------------------------------------------------------------------------
9. SHARE CAPITAL a) The authorized share capital is
120,000,000 shares divided into
100,000,000 voting common shares
without par value and 20,000,000
convertible voting preferred shares
without par value.
The issued and outstanding share
capital consists of:
<TABLE>
<CAPTION>
Common
Shares Unit Value Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - 31 December 1993 13,527,237 $8,419,336
Acquisition of name and operating
assets of Lynro Manufacturing
Corporation 250,000 $ 1.74 434,626
Fiscal agency fees 58,334 $ 0.83 48,594
Options exercised 50,000 $ 0.48 23,904
-----------------------------------------------------------------------------
Balance - 31 December 1994 13,885,571 8,926,460
Warrants exercised 203,869 $ 0.77 156,538
Options exercised 100,000 $ 0.56 55,777
-----------------------------------------------------------------------------
Balance - 31 December 1995 14,189,440 9,138,775
Options exercised 500,000 $ 0.47 235,422
-----------------------------------------------------------------------------
Balance - 31 December 1996
and 30 June 1997 14,689,440 $9,374,197
-----------------------------------------------------------------------------
</TABLE>
b) By agreement dated 22 November 1991,
the company reserved for issuance
4,150,000 treasury shares. These
shares were to be issued at $0.06 per
share, and upon issuance, were to be
held in escrow and released on the
basis of "cumulative cash flow" (as
defined). Two of the original
allottees are no longer employees nor
directors of the company and
therefore have ceased to be eligible
for performance shares and
accordingly 270,000 of the original
shares reserved for issuance have
been cancelled leaving a balance of
3,880,000 shares reserved for
issuance.
During 1996, the directors passed a
resolution to cancel 1,142,000 of the
allotted but unissued performance
shares and to extend the earn-out
period on the remaining 2,738,000
performance shares from 17 January
1997 to 17 January 2000. The
resolution was then passed by the
shareholders at an extraordinary
general meeting on 6 December 1996
and subsequently approved by the
regulatory authorities. On 6 December
1996, the company entered into an
Amended and Restated Performance
Shares Allotment Agreement on the
remaining 2,738,000 allotted but
unissued treasury shares under the
same release provisions as the
original 22 November 1991 agreement.
Based upon the "cumulative cash flow"
of the company to 30 June 1997, the
2,738,000 performance shares may be
issued from escrow upon payment of
the $0.06 per share and upon receipt
of regulatory approval.
<PAGE> 67
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- -------------------------------------------------------------------------------
9. SHARE CAPITAL - Continued c) STOCK OPTION PLAN
The company has a stock option plan
which covers its officers and
directors. The options are granted
for varying terms ranging from three
to five years and are immediately
vested upon grant. The following is a
schedule of the activity pursuant to
this stock option plan:
<TABLE>
<CAPTION>
Number Price per
of Shares Share Expiration Date
($ CDN)
-------------------------------------------------------------------------
<S> <C> <C> <C>
500,000 $ 0.65 22 November 1996
30,000 $ 0.75 4 February 1997
100,000 $ 2.30 22 April 1997
200,000 $ 0.77 9 February 1998
200,000 $ 2.40 17 September 1998
100,000 $ 3.10 15 November 1998
150,000 $ 1.89 20 September 1999
100,000 $ 1.33 1 November 1999
-------------------------------------------------------------------------
Balance - 31 December 1994 1,380,000 $ 0.65 to $ 3.10
Options exercised (100,000) $ 0.77 9 February 1998
Options expired (100,000) $ 0.77 9 February 1998
Options expired (80,000) $ 3.10 15 November 1998
Options expired (20,000) $ 1.89 20 September 1999
New options granted 100,000 $ 1.35 22 February 2000
New options granted 100,000 $ 1.00 17 August 2000
-----------------------------------------------------------------------
Balance - 31 December 1995 1,280,000 $ 0.65 to $ 3.10
Options exercised (500,000) $ 0.65 22 November 1996
Options expired (200,000) $ 2.40 17 September 1998
Options expired (100,000) $ 1.00 17 August 2000
-----------------------------------------------------------------------
Balance - 31 December 1996 480,000 $ 1.33 to $ 3.10
Options expired (30,000) $ 0.75 4 February 1997
Options expired (100,000) $ 1.35 22 February 2000
Options expired (100,000) $ 2.30 22 April 1997
-----------------------------------------------------------------------
Balance - 30 June 1997 250,000 $ 1.33 to $ 3.10
-----------------------------------------------------------------------
</TABLE>
d) SHARE PURCHASE WARRANTS
The following is a schedule of the
activity pursuant to share purchase
warrants:
<TABLE>
<CAPTION>
Number Price per
of Shares Share Expiration Date
-----------------------------------------------------------------------
<S> <C> <C> <C>
Balance - 31 December 1994 869,565 $ 0.77 12 March 1995
Warrants exercised (203,869) $ 0.77 12 March 1995
Warrants expired (665,696) $ 0.77 12 March 1995
-----------------------------------------------------------------------
Balance - 31 December 1995,
31 December 1996 and
30 June 1997 NIL
-----------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<PAGE> 68
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
10. INCOME TAXES a) A summary of the taxable income of
the company for the six months ended
30 June 1997 is as follows:
<TABLE>
<CAPTION>
Canadian U.S.
Parent Subsidiary Total
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income before taxes per financial
statements $ 1,795,726 $ 257,786 $ 2,053,512
Application of losses carried forward (219,052) (257,786) (476,838)
Application of unclaimed scientific
research and experimental
development deductions (1,576,674) -- (1,576,674)
------------------------------------------------------------------------------------
Taxable income $ -- $ -- $ --
------------------------------------------------------------------------------------
</TABLE>
Accordingly, no provision for income
taxes has been recorded in these
financial statements.
b) The company has unclaimed scientific
research and experimental development
deductions, for Canadian tax
purposes, in the amount of $104,000
which may be carried forward to be
applied against future taxable
income. The future tax benefits, if
any, of these deductions have not
been recognized in the accounts.
c) The company has unclaimed investment
tax credits, for Canadian tax
purposes, arising from its research
and development activities in the
amount of $425,000 which may be
carried forward to be applied against
future federal taxes payable. The
future tax benefits, if any, of these
tax credits have not been recognized
in the accounts and expire as
follows:
<TABLE>
<CAPTION>
Year Amount
------------------------------------------------------------------------
<S> <C>
1998 $ 109,000
1999 85,000
2000 37,000
2003 68,000
2004 126,000
------------------------------------------------------------------------
$ 425,000
------------------------------------------------------------------------
</TABLE>
d) As at 30 June 1997, the company's
subsidiary has tax losses, for U.S.
tax purposes, of approximately
$4,089,000 which may be carried
forward to be applied against future
taxable income. The future benefits,
if any, of these tax losses have not
been recognized in the accounts of
the company and expire as follows:
<TABLE>
<CAPTION>
Year Amount
------------------------------------------------------------------------
<S> <C>
2008 $ 1,285,000
2009 1,118,000
2010 1,686,000
------------------------------------------------------------------------
$ 4,089,000
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 69
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- -------------------------------------------------------------------------------
11. COMMITMENTS a) By way of a management services
agreement, the company has secured
the services of a key employee for a
term expiring 30 September 1998. The
contract contains fixed annual
compensation totalling $100,000 per
annum plus a bonus of:
i) 3% of Canadian sales; and
ii) 1% of the net profits before
taxes for all sales (excluding
those in Canada) of the company.
b) Under the terms of a lease agreement
dated 1 May 1993, the company is
committed to minimum annual lease
payments of $37,668 plus its share of
common area costs. The lease is for a
five year term to 30 April 1998 with
a 5 year renewal option at an annual
lease amount to be negotiated
representing a lease commitment of
$31,389 for the year ending 30 June
1998.
c) The company's United States
subsidiary has agreed to lease 20,000
square feet of the Lynro
Manufacturing premises for 5 years,
expiring 31 December 1998, for
$100,000 per annum representing a
lease commitment of:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------------------------------------
<S> <C>
1998 $ 100,000
1999 50,000
------------------------------------------------------------------------
$ 150,000
------------------------------------------------------------------------
</TABLE>
Management has decided to relocate
its manufacturing operations.
Accordingly, during 1997 the company
will vacate the Lynro Manufacturing
premises and will seek to negotiate a
settlement or sublease.
d) The company's United States
subsidiary has agreed to lease office
space in Albuquerque, New Mexico for
2 years, expiring 30 September 1997,
for $22,848 per annum representing a
lease commitment of $5,712 for the
year ending 30 June 1998.
e) By an agreement dated 4 March 1997,
the company's United States
subsidiary has agreed to lease 13,050
square feet of general office and
warehouse space in McKinney, Texas
for five years from 1 July 1997. The
annual lease amount is $110,272
representing a minimum lease
commitment of:
<TABLE>
<CAPTION>
Year Amount
------------------------------------------------------------------------
<S> <C>
1998 $ 110,272
1999 110,272
2000 110,272
2001 110,272
2002 110,272
------------------------------------------------------------------------
$ 551,360
------------------------------------------------------------------------
</TABLE>
The landlord has agreed to fund up to
$188,709 of leasehold improvements to
the premises and will allow the
company to use up to $100,000 of this
amount to buy-down the monthly rental
payments.
The lease may be extended for two
additional terms of five years with
the rate to be the lesser of a
consumer price adjustment or a fair
rental value adjustment.
- --------------------------------------------------------------------------------
<PAGE> 70
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
12. CONTINGENCY By an agreement dated 25 November
1991, the company retained Overseas
Management Services, Inc. ("OMS") as
its exclusive sales and marketing
representative for Venezuela for an
initial term of 5 years. OMS was to
receive a 20% commission on all sales
of the product within Venezuela and
was responsible for its own
out-of-pocket costs.
Management believes OMS breached
certain conditions of its agreement
with the company and has given OMS
the required 30 day notice of
cancellation. OMS collected
approximately U.S. $96,000 of the
U.S. $209,700 commission it has
claimed on the Consejo capital lease.
The balance of the commission payable
to OMS has not been recorded in these
consolidated financial statements due
to the alleged breach of contract.
The company has initiated a lawsuit
against OMS for damages resulting
from the alleged breaches by OMS of
the 25 November 1991 agreement. The
outcome of this case and the amount
of damages to be received by the
company, if any, cannot be reasonably
determined at this time.
OMS has filed a counter-claim against
the company in New Hampshire
alleging, interalia, a claim for
future commissions on the capital
lease.
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS In addition to items disclosed
elsewhere in these consolidated
financial statements, the company
conducted the following transactions
with related parties:
a) EXPENDITURES
Details are as follows:
<TABLE>
<CAPTION>
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paid/accrued salaries and fees to four
directors all of whom are officers
of the company $236,086 $346,919 $432,230 $392,231
Paid salary to a former director 29,938 138,466 -- --
Paid rent for premises to a company
controlled by a director -- -- 13,423 17,809
Paid rent (at fair market value) to a
company controlled by a former
director 50,000 100,000 100,000 100,000
------------------------------------------------------------------------------------
$316,024 $585,385 $545,653 $510,040
------------------------------------------------------------------------------------
</TABLE>
b) SHARE CAPITAL
During 1996, two directors exercised
500,000 options for cash in the
amount of $235,422 (Note 9a).
Included in the 203,869 warrants
exercised during 1995 (Note 9a) were
135,869 exercised by a director for
cash in the amount of $104,619.
- -------------------------------------------------------------------------------
<PAGE> 71
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. FUNDS
- -------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS a) By an agreement dated 31 July 1997,
subject to regulatory approval, the
company agreed to acquire the assets,
business and name of I-Mark Systems,
Inc., a Nebraska corporation.
Consideration for the acquisition is
$1,000,000 cash and 1,000,000 common
shares of the company on closing. The
closing date for the agreement shall
be after receipt of regulatory
approval but in no event later than 1
September 1997. Should regulatory
approval not be obtained by 1
September 1997, the agreement will be
terminated.
b) Subject to regulatory approval, the
company has negotiated an agency
arrangement in order to complete a
private placement of 3,652,174 Series
A preferred shares at $0.83 per share
to raise $3,042,375 (CDN $1.15 per
share to raise CDN $4,200,000). The
shares will pay a quarterly dividend
at the rate of 6% per annum and will
be convertible into common shares,
after the first year of their term,
at $1.08 (CDN $1.495) per common
share for a maximum issuance of
2,809,364 common shares on full
conversion of the preferred shares.
The agent will receive a fee of 10%
of the total proceeds raised plus a
3% non-accountable out-of-pocket fee
on the total proceeds raised. To 8
August 1997, no proceeds have been
raised from this private placement
pending receipt of regulatory
approval and successful placement of
the preferred shares.
----------------------------------------------------------
15. SALES AND OPERATING INCOME Details of sales and operating income
generated from customers which account
for more than 10% of that period's
consolidated sales and operating income
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS Year Year Year
ENDED Ended Ended Ended
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of Large Customers 1 4 2 5
--------------------------------------------------------------------------------
Amount of Sales to Large
Customers $2,051,000 $2,737,000 $1,411,000 $3,066,000
================================================================================
Total Consolidated Sales
and Operating Income $6,759,000 $6,041,000 $5,962,000 $4,519,000
================================================================================
Total Percentage of
Consolidated Sales and
Operating Income
Generated from Large
Customers 30.3% 45.3% 23.7% 67.8%
================================================================================
</TABLE>
Due to the nature of the company's
business, large sales to individual
customers are generated on a
non-recurring basis. As a result, the
company is not dependent on any single
customer or small group of customers
such that the loss of any of these would
have a material adverse effect on the
future results of the company.
- -------------------------------------------------------------------------------
<PAGE> 72
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
16. SEGMENTED INFORMATION The company operated in only one
industry segment in Canada and the
United States as follows:
<TABLE>
<CAPTION>
Canada United States
1997 1996 1995 1997 1996 1995
(6 MONTHS) (12 Months) (12 Months) (6 MONTHS) (12 Months) (12 Months)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers $ 1,929,744 $ 846,024 $ 5,584 $ 4,829,210 $ 5,195,149 $ 5,956,002
Sales between the segments 1,351,707 1,332,707 $ 1,683,581 -- -- --
--------------------------------------------------------------------------------------------------------------------------
Total sales revenue $ 3,281,451 $ 2,178,731 $ 1,689,165 $ 4,829,210 $ 5,195,149 $ 5,956,002
--------------------------------------------------------------------------------------------------------------------------
Operating profits $ 2,392,744 $ 1,599,698 $ 1,644,696 $ 1,602,026 $ 276,390 $ 1,386,142
--------------------------------------------------------------------------------------------------------------------------
General corporate expenses
Interest
Loss on write down of capital lease
Net income (loss)
--------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 12,194,499 $ 10,404,753 $ 9,537,808 $ 7,377,940 $ 4,839,672 $ 6,601,518
--------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 7,837 16,501 $ 18,558 $ -- $ 5,746 $ 69,847
--------------------------------------------------------------------------------------------------------------------------
Amortization of capital assets $ 13,832 29,159 $ 30,915 $ 56,640 $ 105,981 $ 152,942
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Elimination Consolidated
1997 1996 1995 1997 1996 1995
(6 MONTHS) (12 Months) (12 Months) (6 MONTHS) (12 Months) (12 Months)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers $ -- $ -- $ -- $ 6,758,954 $ 6,041,173 $ 5,961,586
Sales between the segments (1,351,707) (1,332,707) (1,683,581) -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Total sales revenue $ (1,351,707) $(1,332,707) $(1,683,581) $ 6,758,954 $ 6,041,173 $ 5,961,586
-----------------------------------------------------------------------------------------------------------------------------
Operating profits $ -- $ 14,886 $208,335 $ 3,994,770 $ 1,890,974 $ 3,239,173
------------------------------------------------------------------------------------
General corporate expenses (1,913,413) (3,556,465) (3,723,436)
Interest (27,845) (71,166) (7,044)
Loss on write down of capital lease -- -- (550,735)
-------------------------------------
Net income (loss) $ 2,053,512 $(1,736,657) $(1,042,042
-----------------------------------------------------------------------------------------------------------------------------
Identifiable assets $(11,413,006) $(9,786,797) $(9,193,891) $ 8,159,433 $ 5,457,628 $ 6,945,435
-----------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ -- $ -- $ -- $ 7,837 $ 22,247 $ 88,405
-----------------------------------------------------------------------------------------------------------------------------
Amortization of capital assets $ -- $ -- $ -- $ 70,472 $ 135,140 $ 183,857
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 73
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN UNITED
STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING
PRINCIPLES
These consolidated financial
statements are prepared in accordance
with accounting principles generally
accepted in Canada. Any differences
in United States accounting
principles as they pertain to the
accompanying consolidated financial
statements are not material except as
follows:
a) COMPENSATION EXPENSE
Under accounting principles generally
accepted in the United States, there
is a compensation expense associated
with the release of escrowed shares
of the company, as those shares
become eligible for release. No
compensation expense is applied under
accounting principles generally
accepted in Canada.
b) FINANCIAL STATEMENT RECONCILIATION
<TABLE>
<CAPTION>
SIX MONTHS Year Year Year
ENDED Ended Ended Ended
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
i) Share capital - Canadian basis $ 9,374,197 $ 9,374,197 $ 9,138,775 $ 8,926,460
Add: Escrow share compensation expense
- prior years 3,194,621 3,194,621 3,194,621 3,194,621
- ----------------------------------------------------------------------------------------------------------------------------
Share capital - U.S. basis $ 12,568,818 $ 12,568,818 $ 12,333,396 $ 12,121,081
- ----------------------------------------------------------------------------------------------------------------------------
ii) Deficit - Canadian basis $ (3,397,853) $ (5,451,365) $ (3,714,708) $ (2,672,666)
Less: Escrow share compensation expense
- prior years (3,194,621) (3,194,621) (3,194,621) (3,194,621)
- ----------------------------------------------------------------------------------------------------------------------------
Deficit - U.S. basis $ (6,592,474) $ (8,645,986) $ (6,909,329) $ (5,867,287)
- ----------------------------------------------------------------------------------------------------------------------------
iii) Canadian GAAP consolidated statement of
shareholders' equity
Common Shares
Shares Amount Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 31 December 1993 - Canadian basis 13,527,237 $ 8,419,336 $ (1,164,452) $ 7,254,884
Escrow share compensation expense - prior years -- 3,194,621 (3,194,621) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 31 December 1993 - U.S. basis 13,527,237 11,613,957 (4,359,073) 7,254,884
Issuance of shares for name and operating assets
of Lynro Manufacturing Corporation
($1.74 per share) 250,000 434,626 -- 434,626
Issuance of shares for expenses
($0.83 per share) 58,334 48,594 -- 48,594
Issuance of shares on exercise of options
($0.48 per share) 50,000 23,904 -- 23,904
Loss for the year -- -- (1,508,214) (1,508,214)
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 31 December 1994 - U.S. basis 13,885,571 12,121,081 (5,867,287) 6,253,794
Issuance of shares on exercise of warrants
($0.77 per share) 203,869 156,538 -- 156,538
Issuance of shares on exercise of options
($0.56 per share) 100,000 55,777 -- 55,777
Loss for the year -- -- (1,042,042) (1,042,042)
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 31 December 1995 - U.S. basis 14,189,440 12,333,396 (6,909,329) 5,424,067
Issuance of shares on exercise of options
($0.47 per share) 500,000 235,422 -- 235,422
Loss for the year -- -- (1,736,657) (1,736,657)
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 31 December 1996 - U.S. basis 14,689,440 12,568,818 (8,645,986) 3,922,832
Net income for the period -- -- 2,053,512 2,053,512
- ----------------------------------------------------------------------------------------------------------------------------
Balance - 30 June 1997 - U.S. basis 14,689,440 $ 12,568,818 $ (6,592,474) $ 5,976,344
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 74
GLOBAL ELECTION SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995
U.S. Funds
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN UNITED
STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING
PRINCIPLES - Continued c) EARNINGS PER SHARE - BASIC OR PRIMARY
Under accounting principles generally
accepted in the United States, stock
options and stock warrants are
treated as common stock equivalents
in the determination of basic or
primary earnings per share if they
would have a dilutive effect. Stock
options and stock warrants are not
treated as common stock equivalents
in the determination of basic or
primary earnings per share in Canada.
Reconciliation of Canadian to U.S.
basis - Basic Earnings Per Share:
<TABLE>
<CAPTION>
SIX MONTHS Year Year Year
ENDED Ended Ended Ended
30 JUNE 31 December 31 December 31 December
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighed average number of common shares
outstanding - Canadian basis 14,689,440 14,242,865 14,104,530 13,850,090
Add: Dilutive stock options 250,000 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - U.S. basis 14,939,440 14,242,865 14,104,530 13,850,090
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) for the period $ 2,053,512 $ (1,736,657) $ (1,042,042) $ (1,508,214)
===============================================================================================================
Basic earnings (loss) per share
- U.S. basis $ 0.14 $ (0.12) $ (0.07) $ (0.11)
- ---------------------------------------------------------------------------------------------------------------
- Canadian basis $ 0.14 $ (0.12) $ (0.07) $ (0.11)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 75
GLOBAL ELECTION SYSTEMS INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
UNAUDITED - SEE NOTICE TO READER
U.S. FUNDS
STALEY, OKADA, CHANDLER & SCOTT
Chartered Accountants
<PAGE> 76
NOTICE TO READER
- --------------------------------------------------------------------------------
We have compiled the interim consolidated balance sheet of Global Election
Systems Inc. as at 31 March 1998 and the interim consolidated statements of
changes in shareholders' equity, income and cash flow for the nine months then
ended from information provided by management. We have not audited, reviewed or
otherwise attempted to verify the accuracy or completeness of such information.
Readers are cautioned that these statements may not be appropriate for their
purposes.
Burnaby, B.C. STALEY, OKADA, CHANDLER & SCOTT
25 June 1998 CHARTERED ACCOUNTANTS
- --------------------------------------------------------------------------------
<PAGE> 77
GLOBAL ELECTION SYSTEMS INC. Statement 1
INTERIM CONSOLIDATED BALANCE SHEET
AS AT 31 MARCH
U.S. Funds
Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT
Cash and short term deposits $ 1,120,041 $ 503,716
Accounts receivable 7,166,869 3,015,552
Deposits and prepaid expenses 126,621 63,731
Inventory (Note 3) 3,598,180 1,631,585
Current portion of loan receivable 447,129 498,837
------------ ------------
12,458,840 5,713,421
AGREEMENTS RECEIVABLE (Note 4) 480,430 871,170
CAPITAL ASSETS (Note 5) 435,857 198,531
OTHER ASSETS (Note 6) 1,209,498 152,930
------------ ------------
$ 14,584,625 $ 6,936,052
============ ============
LIABILITIES
- --------------------------------------------------------------------------------------------------------------
CURRENT
Bank loan (Note 7) $ 370,000 $ 190,538
Accounts payable and accrued liabilities 2,688,408 1,274,615
Deferred revenue 164,172 312,884
Current portion of loans payable 2,179,410 156,680
------------ ------------
5,401,990 1,934,717
------------ ------------
LOANS PAYABLE (Note 8) 55,912 212,750
------------ ------------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
SHARE CAPITAL
Authorized:
100,000,000 common voting shares, without par value
20,000,000 convertible voting preferred shares, without par value
Issued and fully paid:
18,457,440 common shares (1997 - 14,689,440) 10,104,539 9,374,197
DEFICIT - Statement 2 (977,816) (4,585,612)
------------ ------------
9,126,723 4,788,585
------------ ------------
$ 14,584,625 $ 6,936,052
============ ============
</TABLE>
ON BEHALF OF THE BOARD:
, Director
- -------------------
, Director
- -------------------
- See Accompanying Notes -
<PAGE> 78
GLOBAL ELECTION SYSTEMS INC. Statement 2
INTERIM CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
U.S. Funds
Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
Common Shares
Shares Amount Deficit Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - 31 December 1993 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884
Issuance of shares for name and operating assets
of Lynro Manufacturing Corporation ($1.74 per
share) 250,000 434,626 -- 434,626
Issuance of shares for expenses ($0.83 per share) 58,334 48,594 -- 48,594
Issuance of shares on exercise of options ($0.48 per
share) 50,000 23,904 -- 23,904
Loss for the year -- -- (1,508,214) (1,508,214)
----------- ----------- ----------- -----------
Balance - 31 December 1994 13,885,571 8,926,460 (2,672,666) 6,253,794
Issuance of shares on exercise of warrants ($0.77
per share) 203,869 156,538 -- 156,538
Issuance of shares on exercise of options ($0.56
per share) 100,000 55,777 -- 55,777
Loss for the year -- -- (1,042,042) (1,042,042)
----------- ----------- ----------- -----------
Balance - 31 December 1995 14,189,440 9,138,775 (3,714,708) 5,424,067
Issuance of shares on exercise of options ($0.47
per share) 500,000 235,422 -- 235,422
Loss for the year -- -- (1,736,657) (1,736,657)
----------- ----------- ----------- -----------
Balance - 31 December 1996 14,689,440 9,374,197 (5,451,365) 3,922,832
Net income for the period -- -- 2,053,512 2,053,512
----------- ----------- ----------- -----------
Balance - 30 June 1997 (Note 1a) 14,689,440 9,374,197 (3,397,853) 5,976,344
Issuance of shares for name and operating assets
of I-Mark Systems, Inc. ($0.55 per share) 1,000,000 548,148 -- 548,148
Issuance of performance shares from escrow ($0.06
per share) 2,738,000 155,562 -- 155,562
Issuance of shares on exercise of options ($0.89
per share) 30,000 26,632 -- 26,632
Net income for the period - Statement 3 -- -- 2,420,037 2,420,037
----------- ----------- ----------- -----------
Balance - 31 March 1998 18,457,440 $10,104,539 $ (977,816) $ 9,126,723
=========== =========== =========== ===========
</TABLE>
- See Accompanying Notes -
<PAGE> 79
GLOBAL ELECTION SYSTEMS INC. Statement 3
INTERIM CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED 31 MARCH
U.S. Funds
Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Sales and operating revenues $12,086,413 $ 7,083,753
Other income 90,606 47,835
----------- -----------
12,177,019 7,131,588
----------- -----------
COSTS AND EXPENSES
Costs of sales and operating expenses 5,764,909 4,135,740
Selling, administrative and general expenses 3,344,678 2,374,736
Research and development expenses 311,464 356,469
Amortization 263,461 86,919
Interest 72,470 66,996
Other expenses -- 1,104
----------- -----------
9,756,982 7,021,964
----------- -----------
NET INCOME FOR THE PERIOD $ 2,420,037 $ 109,624
=========== ===========
EARNINGS PER SHARE
Basic $ 0.14 $ 0.01
Fully diluted $ 0.13 $ 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 16,766,344 14,689,440
Fully diluted 18,114,677 17,478,810
=========== ===========
</TABLE>
- See Accompanying Notes -
<PAGE> 80
GLOBAL ELECTION SYSTEMS INC. Statement 4
INTERIM CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED 31 MARCH
U.S. Funds
Unaudited - See Notice to Reader
<TABLE>
<CAPTION>
CASH RESOURCES PROVIDED BY (USED IN) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income for the period $ 2,420,037 $ 109,624
Item not affected by cash
Amortization 263,461 86,919
----------- -----------
2,683,498 196,543
Changes in non-cash working capital (3,114,094) 634,756
----------- -----------
(430,596) 831,299
----------- -----------
INVESTING ACTIVITIES
Capital assets acquired (483,058) (9,678)
Other assets acquired, net (682,506) --
Proceeds on sale of capital assets 125,375 --
Agreements receivable 383,870 (526,231)
----------- -----------
(656,319) (535,909)
----------- -----------
FINANCING ACTIVITIES
Bank loan 80,000 (396,526)
Loans payable 1,866,932 369,430
Common shares issued 182,194 235,422
----------- -----------
2,129,126 208,326
----------- -----------
NET INCREASE IN CASH 1,042,211 503,716
Cash position - Beginning of period 77,830 --
----------- -----------
CASH POSITION - END OF PERIOD $ 1,120,041 $ 503,716
=========== ===========
</TABLE>
- See Accompanying Notes -
<PAGE> 81
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared using
generally accepted accounting principles of Canada as follows:
a) PERIOD OF OPERATIONS
The company adopted a new year-end of 30 June which resulted in a six
month period of operations for the period ended 30 June 1997.
These interim consolidated financial statements are for the nine month
period of operations to 31 March 1998. The comparative figures have
been compiled from the records of the company and cover the operations
of the company for the nine months ended 31 March 1997.
b) NATURE OF OPERATIONS
The company markets a complete electronic voting system which includes
vote tally and voter registration software.
c) CONSOLIDATION
These interim consolidated financial statements include the accounts
of the company and its wholly-owned subsidiary, Global Election
Systems, Inc., a company incorporated in Delaware and operating in New
Mexico, U.S.A. The purchase method of accounting has been applied to
this acquisition.
d) FOREIGN CURRENCY TRANSLATION
The accounts of the company were prepared in Canadian funds through to
30 June 1997 as follows:
o Monetary assets and liabilities at year-end rates,
o All other assets and liabilities at historical rates, and
o Revenue and expense items at the average rate of exchange
prevailing during the year.
Exchange gains and losses arising from these transactions were
reflected in income or expense in the year.
Subsequent to 30 June 1997, the company adopted the U.S. currency as
its reporting currency and accordingly, has prepared its financial
statements on that basis. Accordingly, all prior years' figures are
recast in the U.S. currency through a "translation of convenience"
whereby all amounts appearing are restated from Canadian to U.S.
currency using the exchange rate prevailing at 30 June 1997.
e) INVENTORY
Inventory of finished goods and work-in-progress is valued at the
lower of cost and net realizable value as estimated by management. Raw
materials, which consist of parts and components, are valued at
average cost less any allowances for obsolescence. Inventory of goods
taken in trade is valued at the lesser of trade-in value and net
realizable value as estimated by management.
<PAGE> 82
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - Continued
f) AMORTIZATION
Capital assets are recorded at cost and the company provides for
amortization on the following basis:
Demonstration and computer equipment - 20% to 30% declining balance
method Manufacturing equipment - 20% declining balance method
Furniture and equipment - 20% declining balance method Leasehold
improvements - straight-line over 5 years
One-half of the rate is applied in the year of acquisition.
g) PATENTS
Patents are recorded at cost and the company provides for amortization
on a straight-line basis over 10 years.
h) GOODWILL
Goodwill is recorded at cost and the company provides for amortization
on a straight-line basis over 5 years.
i) REVENUE RECOGNITION
Revenue from sales of products and supplies is recognized at the time
of shipment of products and supplies to customers. Revenue from sales
of services is recognized on completion of the related services. The
company defers a portion of revenue received related to contracted
future services to match against management's estimate of the future
costs of providing these services to customers.
j) WARRANTY RESERVE
Provisions for future estimated warranty costs are recorded in the
accounts based upon historical maintenance records. Management
periodically reviews the warranty reserve to determine the adequacy of
the provision.
k) RESEARCH AND DEVELOPMENT TAX CREDITS
Research and development tax credits are applied against research and
development expenses in the period in which the tax credit is
received.
l) EARNINGS PER SHARE
Basic earnings per share computations are based on the weighted
average number of shares outstanding during the year. Fully diluted
earnings per share are based on the actual number of shares
outstanding at the end of the year plus performance shares, and share
purchase options and warrants as if they had been issued as at the
beginning of the year.
- --------------------------------------------------------------------------------
<PAGE> 83
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and short term deposits, accounts receivable,
deposits, loans receivable, bank loans, accounts payable and customer
deposits approximates their fair value due to their short term maturity or
capacity of prompt liquidation.
- --------------------------------------------------------------------------------
3. INVENTORY
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Supplies $ 769,259 $1,313,367
Work-in-progress 25,320 18,639
Trade-in goods 1,491,240 227,431
Finished goods 1,312,361 72,148
---------- ----------
$3,598,180 $1,631,585
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
4. AGREEMENTS RECEIVABLE
Details of amounts receivable from customers are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales agreement receivable with interest at 5% per annum,
repayable in 60 equal monthly payments commencing 15
December 1995, secured by the underlying goods (i) $ 488,080 $ 658,863
Sales agreement receivable with interest at 10% per annum
commencing 1 June 1997 and due in full by 31 December 1998 78,020 78,020
Sales agreement receivable with interest at 5% per annum
commencing 20 November 1996, repayable on 20 November 1998
(ii) 250,000 500,000
Sales agreement receivable with interest at 9% per annum
commencing 25 June 1996, repayable at $33,646 per annum for
principal and interest on 1 July 1997 to 1 July 2001 (ii) 111,459 133,124
----------- -----------
927,559 1,370,007
Less: Current portion (447,129) (498,837)
----------- -----------
$ 480,430 $ 871,170
----------- -----------
</TABLE>
(i) The sales agreement receivable has been pledged as security for the
bank loan (Note 7).
(ii) The sales agreement receivable has been pledged as security for the
related loan payable (Note 8).
<PAGE> 84
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
4. AGREEMENTS RECEIVABLE - Continued
Scheduled principal repayments on the sales agreements receivable are as
follows:
<TABLE>
<S> <C>
31 March 1999 $447,129
31 March 2000 287,130
31 March 2001 182,779
31 March 2002 10,521
--------
$927,559
--------
</TABLE>
- --------------------------------------------------------------------------------
5. CAPITAL ASSETS
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
Accumulated NET BOOK Net Book
Cost Amortization VALUE Value
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
Demonstration and $539,418 $292,477 $246,941 $106,581
computer equipment
Manufacturing equipment 95,278 69,441 25,837 58,461
Furniture and equipment 242,779 84,510 158,269 32,298
Leasehold improvements 18,361 13,551 4,810 1,191
-------- -------- -------- --------
$895,836 $459,979 $435,857 $198,531
-------- -------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
6. OTHER ASSETS
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
Accumulated NET BOOK Net Book
Cost Amortization VALUE Value
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Patents $ 165,000 $ 103,125 $ 61,875 $ 78,375
Goodwill 1,450,960 303,337 1,147,623 74,555
---------- ---------- ---------- ----------
$1,615,960 $ 406,462 $1,209,498 $ 152,930
---------- ---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
7. BANK LOAN
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Line of credit, bearing interest at bank prime, interest
payments due quarterly beginning 6 January 1998, due in full by 6
January 1999, secured by the $488,080 agreement receivable (Note 4) $ 370,000 $190,538
--------- --------
</TABLE>
The maximum approved line of credit is U.S. $371,450
- --------------------------------------------------------------------------------
<PAGE> 85
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
8. LOANS PAYABLE
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note payable, bearing interest at bank prime, repayable in full $ 137,602 $ 275,204
on 15 November 1998, secured by the $250,000 sales
agreement receivable (Note 4)
Note payable, bearing interest at bank prime payable quarterly 74,550 94,226
commencing 12 December 1996, repayable at $18,637 per annum
commencing 1 July 1997, secured by the $111,459 sales
agreement receivable (Note 4)
Note payable, bearing interest at bank prime plus 1%, repayable 770,000 --
at $632,100 plus interest on 11 June 1998 and the balance
due in full on 15 November 1998, secured by a blanket
assignment of accounts receivable
Note payable, bearing interest at bank prime plus 1%, repayable 570,000 --
in full plus interest on 28 April 1998, secured by a
blanket assignment of accounts receivable
Note payable, bearing interest at 8% per annum, repayable by 31 341,585 --
March 1999 plus bonus interest of $15,713, secured by an
accounts security agreement covering all assets of the
company
Note payable, bearing interest at 8% per annum, repayable by 31 341,585 --
March 1999 plus bonus interest to a minimum of $15,713, secured by an
accounts security agreement covering all assets of the company
----------- -----------
2,235,322 369,430
Less: Current portion (2,179,410) (156,680)
----------- -----------
$ 55,912 $ 212,750
----------- -----------
Scheduled principal repayments on the loans payable are as follows:
31 March 1999 $ 2,179,410
31 March 2000 18,637
31 March 2001 18,637
31 March 2002 18,638
-----------
$ 2,235,322
-----------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 86
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
9. SHARE CAPITAL
a) The authorized share capital is 120,000,000 shares divided into
100,000,000 voting common shares without par value and 20,000,000
convertible voting preferred shares without par value.
The issued and outstanding share capital consists of:
<TABLE>
<CAPTION>
Common Unit
Shares Value Amount
---------- ----- -----------
<S> <C> <C> <C>
Balance - 31 December 1993 13,527,237 $ 8,419,336
Acquisition of name and operating assets 250,000 $1.74 434,626
of Lynro Manufacturing Corporation
Fiscal agency fees 58,334 $0.83 48,594
Options exercised 50,000 $0.48 23,904
----------- ----- -----------
Balance - 31 December 1994 13,885,571 8,926,460
Warrants exercised 203,869 $0.77 156,538
Options exercised 100,000 $0.56 55,777
----------- ----- -----------
Balance - 31 December 1995 14,189,440 9,138,775
Options exercised 500,000 $0.47 235,422
----------- ----- -----------
Balance - 31 December 1996 and 30 June 1997 14,689,440 9,374,197
Acquisition of name and operating assets 1,000,000 $0.53 548,148
of I-Mark Systems, Inc.
Issuance of performance shares 2,738,000 $0.06 155,562
Options exercised 30,000 $0.89 26,632
----------- ----- -----------
Balance - 31 March 1998 18,457,440 $10,104,539
----------- ----- -----------
</TABLE>
b) By agreement dated 22 November 1991, the company reserved for issuance
4,150,000 treasury shares. These shares were to be issued at $0.06 per
share, and upon issuance, were to be held in escrow and released on
the basis of "cumulative cash flow" (as defined). Two of the original
allottees are no longer employees nor directors of the company and
therefore have ceased to be eligible for performance shares and
accordingly 270,000 of the original shares reserved for issuance have
been cancelled leaving a balance of 3,880,000 shares reserved for
issuance.
During 1996, the directors passed a resolution to cancel 1,142,000 of
the allotted but unissued performance shares and to extend the
earn-out period on the remaining 2,738,000 performance shares from 17
January 1997 to 17 January 2000. The resolution was then passed by the
shareholders at an extraordinary general meeting on 6 December 1996
and subsequently approved by the regulatory authorities. On 6 December
1996, the company entered into an Amended and Restated Performance
Shares Allotment Agreement on the remaining 2,738,000 allotted but
unissued treasury shares under the same release provisions as the
original 22 November 1991 agreement.
Based upon the "cumulative cash flow" of the company to 30 June 1997,
the 2,738,000 performance shares were approved for release by the
regulatory authorities and were issued on 27 January 1998 upon receipt
of $155,562 from the holders of the performance shares.
<PAGE> 87
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
9. SHARE CAPITAL - Continued
c) STOCK OPTION PLAN
The company has a stock option plan which covers its officers and
directors. The options are granted for varying terms ranging from
three to five years and are immediately vested upon grant. The
following is a schedule of the activity pursuant to this stock option
plan:
<TABLE>
<CAPTION>
Price per
Number of Share
Shares (CDN $) Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
500,000 $0.65 22 November 1996
30,000 $0.75 04 February 1997
100,000 $2.30 22 April 1997
200,000 $0.77 09 February 1998
200,000 $2.40 17 September 1998
100,000 $3.10 15 November 1998
150,000 $1.89 20 September 1999
100,000 $1.33 01 November 1999
- ----------------------------------------------------------------------------------------------------------
Balance - 31 December 1994 1,380,000 $0.65 to $ 3.10
Options exercised (100,000) $0.77 09 February 1998
Options expired (100,000) $0.77 09 February 1998
Options expired (80,000) $3.10 15 November 1998
Options expired (20,000) $1.89 20 September 1999
New options granted 100,000 $1.35 22 February 2000
New options granted 100,000 $1.00 17 August 2000
- ----------------------------------------------------------------------------------------------------------
Balance - 31 December 1995 1,280,000 $0.65 to $ 3.10
Options exercised (500,000) $0.65 22 November 1996
Options expired (200,000) $2.40 17 September 1998
Options expired (100,000) $1.00 17 August 2000
- ----------------------------------------------------------------------------------------------------------
Balance - 31 December 1996 480,000 $1.33 to $ 3.10
Options expired (30,000) $0.75 04 February 1997
Options expired (100,000) $1.35 22 February 2000
Options expired (100,000) $2.30 22 April 1997
- ----------------------------------------------------------------------------------------------------------
Balance - 30 June 1997 250,000 $1.33 to $ 3.10
New options granted 1,075,000 $1.25 22 August 2002
New options granted 50,000 $1.49 17 December 2002
New options granted 100,000 $1.80 07 January 2003
Options cancelled (20,000) $3.10 15 November 1998
Options cancelled (130,000) $1.89 20 September 1999
Options exercised (30,000) $1.25 22 August 2002
- ----------------------------------------------------------------------------------------------------------
Balance - 31 March 1998 1,295,000 $1.25 - $1.80
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 88
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
9. SHARE CAPITAL - Continued
d) STOCK PURCHASE WARRANTS
During the period ended 31 March 1998 the company granted stock
purchase warrants as an incentive to arrange short-term financing as
follows:
<TABLE>
<CAPTION>
Price per
Number of Share Expiration Date
Shares (CDN $)
------------------ --------- --------- ---------------
<S> <C> <C> <C>
166,667 $ 1.88 31 March 2001
------------------ -------- ------- --------------
</TABLE>
- --------------------------------------------------------------------------------
10. INCOME TAXES
a) A summary of the taxable income of the company for the nine months
ended 31 March 1998 is as follows:
<TABLE>
<CAPTION>
Canadian Parent U.S. Subsidiary Total
--------------- --------------- -----------
<S> <C> <C> <C>
Net income (loss) before taxes per $ (186,905) $ 2,606,942 $ 2,420,037
financial statements
Application of losses carried forward -- (2,606,942) (2,606,942)
- ------------------------------------------- ----------- ----------- -----------
Taxable income (loss) $ (186,905) $ -- $ (186,905)
- ------------------------------------------- ----------- ----------- -----------
</TABLE>
Accordingly, no provision for income taxes has been recorded in these
interim consolidated financial statements.
b) The company has unclaimed scientific research and experimental
development deductions, for Canadian tax purposes, in the amount of
$104,000 which may be carried forward to be applied against future
taxable income. The future tax benefits, if any, of these deductions
have not been recognized in the accounts.
c) The company has unclaimed investment tax credits, for Canadian tax
purposes, arising from its research and development activities in the
amount of $425,000 which may be carried forward to be applied against
future federal taxes payable. The future tax benefits, if any, of
these tax credits have not been recognized in the accounts and expire
as follows:
<PAGE> 89
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
10. INCOME TAXES - Continued
c) Continued
<TABLE>
<S> <C>
1998 $109,000
1999 85,000
2000 37,000
2003 68,000
2004 126,000
--------
$425,000
--------
</TABLE>
d) The company has tax losses, for Canadian tax purposes, of
approximately $186,905 which may be carried forward to be applied
against future taxable income. The future benefits, if any, of these
tax losses have not been recognized in the accounts of the company and
expire in 2005.
e) The company's subsidiary has tax losses, for U.S. tax purposes, of
approximately $1,482,000 which may be carried forward to be applied
against future taxable income. The future benefits, if any, of these
tax losses have not been recognized in the accounts of the company and
expire in 2010.
- --------------------------------------------------------------------------------
11. COMMITMENTS
a) By way of a management services agreement, the company has secured the
services of a key employee for a term expiring 30 September 1998. The
contract contains fixed annual compensation totalling $100,000 per
annum plus a bonus of:
i) 3% of Canadian sales; and
ii) 1% of the net profits before taxes for all sales (excluding those
in Canada) of the company.
b) Under the terms of a lease agreement dated 1 May 1993, the company is
committed to minimum annual lease payments of $37,668 plus its share
of common area costs. The lease was for a five year term to 30 April
1998 and the lease has been extended for an additional 8 month term to
31 December 1998 on the same terms representing a lease commitment of
$28,251 for the 12 month period ending 31 March 1999.
<PAGE> 90
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
11. COMMITMENTS - Continued
c) By an agreement dated 4 March 1997, the company's United States
subsidiary has agreed to lease 13,050 square feet of general office
and warehouse space in McKinney, Texas for five years from 1 July
1997. The annual lease amount is $110,272 representing a minimum lease
commitment of:
<TABLE>
<S> <C>
31 March 1999 $ 110,272
31 March 2000 110,272
31 March 2001 110,272
31 March 2002 110,272
31 March 2003 27,568
---------
$ 468,656
---------
</TABLE>
The lease may be extended for two additional terms of five years with
the rate to be the current base rental plus the lesser of a consumer
price adjustment or a fair rental value adjustment.
- --------------------------------------------------------------------------------
12. CONTINGENCY
By an agreement dated 25 November 1991, the company retained Overseas
Management Services, Inc. ("OMS") as its exclusive sales and marketing
representative for Venezuela for an initial term of 5 years. OMS was to
receive a 20% commission on all sales of the product within Venezuela and
was responsible for its own out-of-pocket costs.
Management believes OMS breached certain conditions of its agreement with
the company and has given OMS the required 30 day notice of cancellation.
OMS collected approximately U.S. $96,000 of the U.S. $209,700 commission it
has claimed on the Consejo capital lease. The balance of the commission
payable to OMS has not been recorded in these consolidated financial
statements due to the alleged breach of contract.
The company has initiated a lawsuit against OMS for damages resulting from
the alleged breaches by OMS of the 25 November 1991 agreement. The outcome
of this case and the amount of damages to be received by the company, if
any, cannot be reasonably determined at this time.
OMS has filed a counter-claim against the company in New Hampshire
alleging, interalia, a claim for future commissions on the capital lease.
- --------------------------------------------------------------------------------
<PAGE> 91
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS
In addition to items disclosed elsewhere in these consolidated financial
statements, the company conducted the following transactions with related
parties:
a) EXPENDITURES
Details are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Paid/accrued salaries and fees to four directors all of $382,712 $257,254
whom are officers of the company
Paid rent for premises to a company controlled by a 5,765 17,294
director
Paid rent (at fair market value) to a company controlled 75,000 75,000
by a former director
-------- --------
$463,477 $349,548
-------- --------
</TABLE>
b) SHARE CAPITAL
During the nine months ended 31 March 1998, the company issued
2,558,056 shares to directors of the 2,738,000 performance shares
issued in the period for cash in the amount of $145,338.
During the nine months ended 31 March 1998, the company granted
directors 350,000 share purchase options at exercise prices ranging
from $1.25 to $1.80 and option expiry dates ranging from 22 August
2002 to 7 January 2003.
- --------------------------------------------------------------------------------
14. I-MARK SYSTEMS, INC.
By an agreement dated 31 July 1997, the company acquired the assets,
business and the name of I-Mark Systems, Inc., a Nebraska corporation.
Consideration for the acquisition was $1,000,000 cash (paid) and 1,000,000
common shares of the company (issued at a deemed amount of $548,148).
The consideration given was allocated to the net identifiable assets
acquired as follows:
<TABLE>
<S> <C> <C>
Capital assets o Furniture and fixtures $ 68,148
o Demonstration and computer equipment 280,000
Goodwill 1,200,000
-----------
$ 1,548,148
-----------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 92
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
15. SALES AND OPERATING INCOME
Details of sales and operating income generated from customers which
account for more than 10% of that period's consolidated sales and operating
income are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Number of large customers 1 1
----------- -----------
Amount of sales to large customers $ 2,024,080 $ 1,090,233
----------- -----------
Total consolidated sales and operating income $12,086,413 $ 7,083,753
----------- -----------
Total percentage of consolidated sales and operating income
generated from large customers 16.7% 15.4%
----------- -----------
</TABLE>
Due to the nature of the company's business, large sales to individual
customers are generated on a non-recurring basis. As a result, the company
is not dependent on any single customer or small group of customers such
that the loss of any of these would have a material adverse effect on the
future results of the company.
- --------------------------------------------------------------------------------
<PAGE> 93
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
16. SEGMENT INFORMATION
The company operated in only one industry segment in Canada and the United
States as follows:
<TABLE>
<CAPTION>
Canada United States
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to customers $ 466,212 $ 1,860,590 $11,620,202 $ 5,223,163
Sales between the segments 802,880 327,376 3,095,970 1,470,248
----------- ----------- ----------- -----------
Total sales revenue $ 1,269,092 $ 2,187,966 $14,716,172 $ 6,693,411
----------- ----------- ----------- -----------
Operating profits $ 269,660 $ 202,695 $ 5,567,536 $ 2,793,153
----------- ----------- ----------- -----------
General corporate expenses
Interest
Net income
Identifiable assets $ 1,088,312 $ 2,919,743 $13,518,920 $ 4,038,916
----------- ----------- ----------- -----------
Capital expenditures $ 15,696 $ -- $ 1,698,016 $ 9,678
----------- ----------- ----------- -----------
Amortization of capital and other
assets $ 20,071 $ 6,954 $ 243,390 $ 79,965
----------- ----------- ----------- -----------
<CAPTION>
Elimination Consolidated
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to customers $ -- $ -- $12,086,414 $ 7,083,753
Sales between the segments (3,898,850) (1,797,624) -- --
----------- ----------- ----------- -----------
Total sales revenue $(3,898,850) $(1,797,624) $12,086,414 $ 7,083,753
----------- ----------- ----------- -----------
Operating profits $ -- $ -- 5,837,196 2,995,848
----------- -----------
General corporate expenses 3,344,678 2,819,228
Interest 72,480 66,996
----------- -----------
Net income $ 2,420,038 $ 109,624
----------- -----------
Identifiable assets $ (22,607) $ (22,607) $14,584,625 $ 6,936,052
----------- ----------- ----------- -----------
Capital expenditures $ -- $ -- $ 1,713,712 $ 9,678
----------- ----------- ----------- -----------
Amortization of capital and other
assets $ -- $ -- $ 263,461 $ 86,919
----------- ----------- ----------- -----------
</TABLE>
<PAGE> 94
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These interim consolidated financial statements are prepared in accordance
with accounting principles generally accepted in Canada. Any differences in
United States accounting principles as they pertain to the accompanying
interim consolidated financial statements are not material except as
follows:
a) COMPENSATION EXPENSE
Under accounting principles generally accepted in the United States,
there is a compensation expense associated with the release of
escrowed shares of the company, as those shares become eligible for
release. No compensation expense is applied under accounting
principles generally accepted in Canada.
b) FINANCIAL STATEMENT RECONCILIATION
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
i) Share capital - Canadian basis $ 10,104,539 $ 9,374,197
Add: Escrow share compensation expense - prior years 3,194,621 3,194,621
------------ ------------
Share capital - U.S. basis $ 13,299,160 $ 12,568,818
------------ ------------
ii) Deficit - Canadian basis $ (977,816) $ (4,185,612)
Less: Escrow share compensation expense - prior years (3,194,621) (3,194,621)
------------ ------------
Deficit - U.S. basis $ (4,172,437) $ (7,380,233)
------------ ------------
</TABLE>
<PAGE> 95
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - Continued
b) FINANCIAL STATEMENT RECONCILIATION - Continued
iii) U.S. GAAP consolidated statement of shareholders' equity
<TABLE>
<CAPTION>
Common Shares
Shares Amount Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - 31 December 1993 - Canadian 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884
basis
Escrow share compensation expense - -- 3,194,621 (3,194,621) --
prior years
----------- ----------- ----------- -----------
Balance - 31 December 1993 - U.S. basis 13,527,237 11,613,957 (4,359,073) 7,254,884
Issuance of shares for name and 250,000 434,626 -- 434,626
operating assets of Lynro
Manufacturing Corporation ($1.74 per
share)
Issuance of shares for expenses ($0.83 58,334 48,594 -- 48,594
per share)
Issuance of shares on exercise of
options ($0.48 per share) 50,000 23,904 -- 23,904
Loss for the year -- -- (1,508,214) (1,508,214)
----------- ----------- ----------- -----------
Balance - 31 December 1994 - U.S. basis 13,885,571 12,121,081 (5,867,287) 6,253,794
Issuance of shares on exercise of 203,869 156,538 -- 156,538
warrants ($0.77 per share)
Issuance of shares on exercise of 100,000 55,777 -- 55,777
options ($0.56 per share)
Loss for the year -- -- (1,042,042) (1,042,042)
----------- ----------- ----------- -----------
Balance - 31 December 1995 - U.S. basis 14,189,440 12,333,396 (6,909,329) 5,424,067
Issuance of shares on exercise of
options ($0.47 per share) 500,000 235,422 -- 235,422
Loss for the year -- -- (1,736,657) (1,736,657)
----------- ----------- ----------- -----------
Balance - 31 December 1996 - U.S. basis 14,689,440 12,568,818 (8,645,986) 3,922,832
Net income for the period -- -- 2,053,512 2,053,512
----------- ----------- ----------- -----------
Balance - 30 June 1997 - U.S. basis 14,689,440 12,568,818 (6,592,474) 5,976,344
Issuance of shares for name and
operating assets of I-Mark Systems,
Inc. ($0.55 per share) 1,000,000 548,148 -- 548,148
Issuance of performance shares from
escrow ($0.06 per share) 2,738,000 155,562 -- 155,562
Issuance of shares on exercise of
options ($0.89 per share) 30,000 26,632 -- 26,632
Net income for the period -- -- 2,420,037 2,420,037
----------- ----------- ----------- -----------
Balance -31 March 1998 - U.S. basis 18,457,440 $13,299,160 $(4,172,437) $ 9,126,723
----------- ----------- ----------- -----------
</TABLE>
c) EARNINGS PER SHARE - BASIC OR PRIMARY
Under accounting principles generally accepted in the United States,
stock options and stock warrants are treated as common stock
equivalents in the determination of basic or primary earnings per
share if they would have a dilutive effect. Stock options and stock
warrants are not treated as common stock equivalents in the
determination of basic or primary earnings per share in Canada.
<PAGE> 96
GLOBAL ELECTION SYSTEMS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1998
U.S. Funds
Unaudited - See Notice to Reader
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - Continued
c) EARNINGS PER SHARE - BASIC OR PRIMARY - Continued
Reconciliation of Canadian to U.S. basis - Basic Earnings per Share:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Weighted average number of common shares outstanding - 16,766,344 14,689,440
Canadian basis
Add: Dilutive stock options 1,348,333 250,000
----------- -----------
Weighted average number of common shares outstanding - U.S. 18,114,677 14,939,440
basis
----------- -----------
Net income for the period $ 2,420,037 $ 109,624
----------- -----------
Primary earnings per share $ 0.13 $ 0.01
- U.S. basis
----------- -----------
- Canadian basis $ 0.14 $ 0.01
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2(1) Memorandum and Articles of Incorporation, as amended.*
3 Instruments Defining the Rights of Security Holders *
3(1) Parts 7, 10, 12 and 27 of the Registrant's Memorandum and Articles of
Incorporation, as amended, set forth in Exhibit 2(1) *
6 Material Contracts
6(1)(i) Employment Agreement with Howard Van Pelt dated August 1, 1997 *
(ii) Employment Agreement, dated October 1, 1996, with Clinton H.
Richards*
(iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997*
6(2) Amended and Restated Performance Share Allotment Agreement dated December
6, 1996 *
6(3)(i) Lease (Vancouver, British Columbia)*
(ii) Lease (McKinney, Texas)*
(iii) Lease (Omaha, Nebraska)(to be filed by Amendment)*
6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated
July 31, 1997*
6(5) Promissory Notes and associated Accounts Security Agreements and Stock
Purchase Warrants, all dated March 31, 1998, to each of David Ross and
Victoria Ross. Termination of each Promissory Note.*
6(6) Option agreements:
(i) Form of Option Agreement with employees*
(ii) Option Agreement dated August 22, 1997 between the Company and Howard
T. Van Pelt*
(iii) Option Agreement dated August 22, 1997 between the Company and
Clinton H. Rickards*
(iv) Option Agreement dated August 22, 1997 between the Company and Larry
Ensminger*
(v) Option Agreement dated August 22, 1997 between the Company and
Maurice E. Sokulski*
(vi) Option Agreement dated August 22, 1997 between the Company and Robert
Urosevich*
6(7) Other material agreements
(i) Promissory Note to Western Bank Albuquerque for $770,000.*
(ii) Promissory Note to Western Bank Albuquerque for $600,000.*
10 Consent of Staley, Okada, Chandler & Scott Chartered Accountants.
13 Form F-X*
</TABLE>
* Incorporated by reference to the Registrant's Form 10-SB filed July 31,
1998.
<PAGE> 1
EXHIBIT 10
[STALEY, OKADA, CHANDLER & SCOTT LETTERHEAD]
16 July 1998
Global Election Systems Inc.
1611 Wilmeth Road
McKinney, Texas
U.S.A. 75069-8259
Dear Sirs:
RE: Global Election Systems Inc.
Consent for 10-SB Filing
We refer to the form 10-SB Registration Statement of Global Election Systems
Inc. (the "Company") filed pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended.
We hereby consent to the filing of our report titled "Auditors' Report" dated
8 August 1997 pertaining to the audited financial statements for the period
ended 30 June 1997 and the years ended 31 December 1996 and 1995, of the Company
as part of the aforementioned Registration Statement.
We hereby consent to the filing of our Notice to Reader dated 25 June 1998
pertaining to the unaudited interim consolidated financial statements for the
nine months ended 31 March 1998, of the Company as part of the aforementioned
Registration Statement.
Yours truly,
Staley, Okada, Chandler & Scott
/s/ STALEY, OKADA, CHANDLER & SCOTT
per K.A. Scott, C.A.
KAS/rmp
