As filed with the Securities and Exchange Commission on August 8, 1996
Registration No. 333-04311
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
TELIDENT, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction
of incorporation or organization)
3661
(Primary Standard Industrial
Classification Code Number)
41-1533060
(I.R.S. Employer
Identification No.)
TELIDENT, INC.
ONE MAIN STREET S.E., SUITE 85
MINNEAPOLIS, MINNESOTA 55414
(612) 623-0911
(Name and address, including zip code, and telephone number including area code,
of Registrant's principal executive offices and principal place of business.)
MICHAEL J. MILLER
TELIDENT, INC.
ONE MAIN STREET S.E., SUITE 85
MINNEAPOLIS, MINNESOTA 55414
(612) 623-0911
(Name, address, including zip code, and telephone number,
including, area code, of agent for service of process)
Copies to:
Lindley S. Branson Albert A. Woodward
Jeffrey C. Anderson Philip T. Colton
Gray, Plant, Mooty, Mooty & Bennett, P.A. Maun & Simon, PLC
3400 City Center 2000 Midwest Plaza Building West
33 South Sixth Street 801 Nicollet Mall
Minneapolis, MN 55402 Minneapolis, Minnesota 80202
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |x|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES BE REGISTERED(1) SHARE(1) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.02 par value Shares(2)
Underwriter's Warrant Warrants(3)
Common Stock, $.02 par value Shares(4)
Total $6,275,050 $2,166
</TABLE>
(1) Amount of shares left blank pursuant to Rule 457(o).
(2) Includes shares of Common Stock that the Underwriter has the option to
purchase to cover over-allotments, if any.
(3) To be issued to the Underwriter, no fee is required pursuant to Rule
457(g).
(4) Shares issuable upon exercise of Underwriter's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY
DETERMINE.
TELIDENT, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.........................Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................Inside Front Cover Page
Available Information
3. Summary Information, Risk Factors......................Outside Front Cover Page
Prospectus Summary
Risk Factors
4. Use of Proceeds........................................Use of Proceeds
5. Determination of Offering Price........................Front Cover Page
6. Dilution...............................................*
7. Selling Security Holders...............................*
8. Plan of Distribution...................................Underwriting
9. Legal Proceedings......................................*
10. Directors, Executive Officers, Promoters and
Control Persons........................................Management
11. Security Ownership of Certain Beneficial Owners
and Management.........................................Principal and Selling Shareholders
12. Description of Securities..............................Description of Securities
13. Interest of Named Experts and Counsel..................*
14. Disclosure of Commission Position on
Indemnification For Securities Act Liabilities.........Management
15. Organization Within Last Five Years....................*
16. Description of Business................................Prospectus Summary; Risk Factors; Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property................................Business
19. Certain Relationships and Related
Transactions...........................................Certain Transactions
20. Market For Common Equity and Related Shareholder
Matters................................................Market for Common Stock and Related Shareholder
Matters
21. Executive Compensation.................................Management
22. Financial Statements...................................Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure....................*
</TABLE>
* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION AUGUST 8, 1996
PROSPECTUS [LOGO] TELIDENT, INC.
1,150,000 SHARES OF COMMON STOCK
All of the 1,150,000 shares of Common Stock offered hereby are being sold by
Telident, Inc. ("Telident" or the "Company"). The Company's Common Stock is
traded in the over-the-counter market. On __________, 1996, the reported closing
bid price of the Common Stock, as reported by the National Quotations Bureau,
was $ per share. See "Price Range of Common Stock and Related Shareholder
Matters." Application has been made to have the Common Stock approved for
quotation on the Nasdaq SmallCap Market under the symbol "TLDT" upon completion
of this offering.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share $ $ $
Total (3) $ $ $
</TABLE>
(1) The Company has agreed to pay R. J. Steichen & Company, the Underwriter,
a nonaccountable expense allowance equal to 2.5% of the gross proceeds to
the Company. The Company has also agreed to sell to the Underwriter for
nominal consideration a five-year warrant to purchase up to 115,000
shares of Common Stock exercisable at 120% of the Price to Public per
share (the "Underwriter's Warrants"). In addition, the Company has agreed
to indemnify the Underwriter against certain liabilities. See
"Underwriting."
(2) Before deducting estimated offering expenses, including the nonaccountable
expense allowance described in Note l above, payable by the Company of $ .
(3) Assumes no exercise of the 30-day option granted to the Underwriter to
purchase up to 172,500 additional shares solely to cover over-allotments,
if any. If this option is exercised in full, the total Price to Public
will be $ , the total Underwriting Discount will be $
and the total Proceeds to Company will be $ . See "Underwriting."
The shares of Common Stock are offered by the Underwriter on a "firm commitment"
basis, subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, and are subject to various prior conditions uncluding their right
to withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the certificates for the shares of Common
Stock will be made against payment therefor in Minneapolis, Minnesota, on or
about , 1996.
[LOGO] R.J. STEICHEN & COMPANY
The date of this Prospectus is ________________, 1996
[GRAPHIC]
Flow Chart:
DORMITORY A \ DORMITORY B \ DORMITORY C
123 ----- 234 ----- 345
OAK ST. / OAK ST. / OAK ST.
|
|
| MEDICAL BUILDING A
\|/ ----- 200 MAPLE STREET
BUSINESS \ STATE UNIV. |
BUILDING ----- MAIN ----- |
100 ELM ST / ADMINISTRATION |
BUILDING ----- MEDICAL BUILDING B
500 PINE BLVD. 300 MAPLE STREET
|
|
|
PBX PHONE
EXCHANGE
|
|
TELIDENT 911 PRODUCTS
|
|
| \ STATE UNIV. DORMITORY A
--------------------- ROOM 6211 3RD FLOOR
/ EXT. 211
E-911 DISPATCH CENTER
If a fire broke out in a multi-building complex with a PBX telephone system, and
someone dialed 9-1-1 from the burning building, the E-911 dispatch center would
show the building address of the corporate headquarters (or the main billing
address).
The Telident 9-1-1 STS(tm), with its patented technology, transmits the precise
location of the call, thereby shortening the response time, reducing costs
associated with responses to incorrect locations and improving the safety of
individuals within a PBX telephone system.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. ALL INFORMATION PRESENTED HEREIN ASSUMES THE UNDERWRITER'S
OVER-ALLOTMENT OPTION IS NOT EXERCISED. EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A ONE-FOR-TWO
REVERSE SPLIT OF THE COMMON STOCK AND PREFERRED STOCK EFFECTIVE JUNE 4, 1996.
Telident designs, manufactures and markets proprietary hardware and software
systems which provide the exact location of a 911 telephone call to the
emergency dispatcher who receives the call. The Company's systems provide
information which can shorten the response time to a 911 call, reduce the costs
associated with responses to incorrect locations and improve the safety of
individuals within a private branch exchange ("PBX") telephone system. In
addition, the Company manufactures and markets network hardware that provides
switching, selective routing and data interfacing capabilities to public and
private telephone networks and city, county and state government agencies.
Telident also provides these customers with a variety of emergency information
processing and management software systems.
The Company's products utilize existing Enhanced 911 ("E-911") technology which
automatically transmits both the callers telephone number and address to the
nearest emergency dispatcher or public safety answering point ("PSAP").
Currently over two-thirds of the telephone systems in the U.S. have access to
E-911 service. However, the E-911 service generally does not have the ability to
pinpoint a caller's location within a PBX system without equipment such as that
offered by the Company. Consequently, calls originating within a PBX transmit
only the main PBX telephone number and main address where the PBX is physically
located. Presently five states across the U.S. have adopted legislation or
enacted regulations mandating the modification of PBX systems to make them fully
compatible with the E-911 system. Telident's patented systems create and manage
a sophisticated database of information to monitor 911 calls within a PBX system
and transmit the precise location, and generally the caller's name, to the PSAP
through the existing E-911 system.
The primary markets for Telident's systems and services include a wide variety
of PBX telephone system owners such as:
* Medium to Large Corporations * Apartment/Condominium buildings
* Colleges and Universities * Nursing/Retirement Homes
* City, County and State * Hotels and Motels
Governments * Hospitals and Clinics
* Public Schools
According to Dataquest Inc., there are approximately 204,000 private telephone
systems in the U.S. with approximately 58,000 of those systems having more than
100 separate telephone lines. A January 1996 survey of the National Emergency
Number Association ("NENA") and the Association of Public Communications
Officers ("APCO") concludes that 5% of all 911 calls or approximately eight
million calls per year originate within a PBX system.
Telident is a Minnesota corporation with its executive offices located at One
Main Street S.E., Suite 85, Minneapolis, Minnesota 55414, telephone number
(612) 623-0911.
THE OFFERING
Common Stock Offered .............. 1,150,000 shares
Common Stock to Be Outstanding
After This Offering ............... 6,053,110 shares(1)
Use of Proceeds ................... Payment of outstanding bridge
loans, sales and marketing expenses,
research and development activities,
redemption of Preferred Stock and general
corporate purposes.
Risk Factors ...................... Prospective investors should review
carefully and consider the factors described
under "RISK FACTORS," including the
Company's operating losses.
Proposed Nasdaq SmallCap
Market Symbol ..................... TLDT
(1) Does not include (i) 1,229,631 shares reserved for issuance upon the
exercise of stock purchase warrants and options or the conversion of the
Company's outstanding convertible debentures and Preferred Stock; (ii) an
undetermined number of shares reserved for issuance upon conversion of the
Bridge Notes; and (iii) 115,000 shares subject to the Underwriter's Warrant.
See "Management -- Stock Option Plan;" "Principal Shareholders;"
"Description of Securities;" "Description of Bridge Financing;" and
"Underwriting."
SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
9 MONTHS ENDED MARCH 31, YEARS ENDED JUNE 30,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales $ 1,786,958 $1,203,398 $2,283,959 $ 1,191,661 $ 772,923
Cost of sales 531,175 376,061 677,689 416,029 316,835
Gross profit 1,255,783 827,337 1,606,270 775,632 456,088
Total operating expense 2,119,166 1,560,195 2,148,313 2,051,954 2,071,797
Loss from operations (863,383) (732,858) (542,043) (1,276,322) (1,615,709)
Interest expense (279,813) (261,038) (377,289) (355,427) (120,088)
Net loss $(1,143,196) $ (993,896) $ (919,332) $(1,631,749) $(1,735,797)
Net loss per common share $ (.28) $ (.30) $ (.28) $ (.52) $ (.58)
Weighted average number of
common shares outstanding 4,256,602 3,578,510 3,630,442 3,140,901 3,037,981
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31, 1996
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Current assets $ 1,429,785
Total assets 2,187,290
Current liabilities 1,629,161
Total liabilities 2,214,161
Accumulated deficit (8,633,720)
Shareholders' deficit (26,871)
Working capital (deficit) (199,376)
</TABLE>
(1) Adjusted to give effect to the bridge financing in May 1996, the sale of
1,150,000 shares offered hereby by the Company and the application of the
estimated net proceeds therefrom. See "Use of Proceeds," "Capitalization"
and "Description of Bridge Financing."
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE. IN
ADDITION TO CONSIDERING THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
EVALUATING AN INVESTMENT IN THE COMPANY.
OPERATING LOSSES; GOING CONCERN CONSIDERATIONS; INDEPENDENT AUDITORS REPORT
The Company has incurred losses from operations since inception. Based on
current expense levels, the Company needs approximately $1,100,000 per quarter
in sales to break even. There can be no assurance that the Company will be able
to operate at a profit in the future. At March 31, 1996, the Company had an
accumulated deficit of $8,633,720. The independent auditor's report on the
Company's consolidated financial statements for the years ended June 30, 1995
and 1994, includes an explanatory paragraph relating to the Company's ability to
continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ADDITIONAL CAPITAL
At March 31, 1996, the Company had a working capital deficit of $199,376 and
currently has outstanding $998,000 in 10% convertible debentures due July 15,
1997 (the "Debentures") and $1,250,000 in bridge notes due the earlier of 20
days after the effective date of this offering or six months after the date of
the Bridge Notes (the "Bridge Notes"). The Company has historically supported
its operations through placement of Debentures and notes and sales of its Common
Stock. The Company believes that the net proceeds of this offering together with
cash from operations will be adequate to fund the Company's capital requirements
through at least June 30, 1997. There is no assurance that the Company will not
need to obtain additional funding and, if needed, that any such funding will be
available, or, if available, that it will be available on terms favorable to the
Company and its shareholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY CUSTOMERS
Sales to two of the Company's customers amounted to 25% and 20% of total product
sales for the fiscal year ended June 30, 1995. These customers also accounted
for 24% and 19%, respectively, of the Company's accounts receivable as of June
30, 1995. Similarly, in fiscal 1994, sales to two other customers amounted to
19% and 11% of total product sales, respectively, and accounted for 21% and 14%
of the Company's accounts receivable as of June 30, 1994. In the first nine
months of fiscal 1996, only one customer amounted to more than 10% of sales and
this customer amounted to 20% of total product sales and accounted for 5% of
accounts receivable as of March 31, 1996. Although this customer has an
agreement with the Company that provides for purchases of approximately
$2,400,000 during the period from April 1995 to June 1998 (approximately
$650,000 of which had been purchased as of April 30, 1996), there can be no
assurance that this customer will continue to purchase the Company's products,
or as to the volume of those purchases. See "Business -- Marketing;
Distribution."
QUARTERLY FLUCTUATIONS
Generally, the Company's business is not considered to be seasonal; however, a
significant percentage of the Company's sales are to value added resellers such
as companies that sell PBX equipment and not to the end users of the Company's
equipment. Although it is difficult to predict the actual impact, the Company
believes this may result in variations in quarter to quarter operating results.
The Company's quarterly operating results may fluctuate as a result of a variety
of factors, including the timing of orders from and shipments to customers, the
length of the sales cycle, new product introductions by the Company or its
competitors, as well as due to general economic conditions.
COLLECTION OF ACCOUNTS RECEIVABLE; EFFECTS OF NON-COLLECTION
As of June 30, 1996, 20% of the Company's accounts receivable were over 180 days
past due. While the Company has historically collected more than 99% of its
accounts receivable, the Company's failure to collect substantially all of its
accounts receivable would adversely affect future earnings and working capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
USE OF PROCEEDS; USE OF SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBT
A substantial portion of the net proceeds of this offering will be used to pay
principal and interest under the Bridge Notes issued in the bridge financing
which are not converted following this offering and redemption of Preferred
Stock. As a result, the Company will have only a portion of the proceeds from
this offering to meet its ongoing operating results and expansion plans. The
balance of the offering proceeds may be allocated to such uses as the Company
deems appropriate under the circumstances. See "Use of Proceeds" and
"Description of Bridge Financing."
MANAGEMENT'S DISCRETION IN USE OF PROCEEDS
Although the Company has developed a plan for the use of net proceeds of this
offering, the Company's management is granted broad discretion to deviate from
these planned uses. The Company's plan for the use of the offering proceeds is
based upon management's assumptions concerning marketing, sales, development,
financial and other matters that may affect the Company in the future.
Management may be required to alter the planned uses of the offering proceeds if
these assumptions are inaccurate or are altered by circumstances outside the
control of the Company. See "Use of Proceeds."
DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES
In general, the communication products industry is subject to rapid and
significant technological changes and frequent introduction of new competitive
products. To respond to these expected changes and to improve or sustain the
marketability of its products, the Company will be required to commit
substantial investments in product improvement and development in order to
periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the marketplace
and meet necessary regulatory requirements. See "Business -- Product
Development."
DEPENDENCE ON KEY PERSONNEL
The development and operation of the Company have depended and will continue to
depend on the efforts and skills of key management personnel. Michael J. Miller,
the Company's President and Chief Executive Officer, has been instrumental to
the Company's development and growth since September 1993. The loss of his
services, for any reason, would have a material adverse effect on the Company's
operations. The Company is dependent on the efforts and skills of Mr. Miller and
other key management personnel as well as its ability to attract and retain
other key employees in the future. The Company has not entered into noncompete
or employment agreements with, or purchased life insurance on, any of its
employees. The Company, however, has begun discussions with Mr. Miller regarding
an employment contract that provides for a one-year non-compete agreement and
severance payments upon termination without cause and in the event of a change
in control. See "Management."
COMPETITION
Although competition to the Company's products is presently limited, there are
many companies that provide equipment and services to the telecommunication
industry that are potential competitors of the Company. These companies have
substantially greater financial and marketing resources than the Company. If any
of these potential competitors began competing in the E-911 business, the
Company's prospects and profitability could be adversely affected. See "Business
- -- Competition."
PRODUCT LIABILITY
The Company's business may expose it to potential liability inherent in the
manufacture of communication equipment. While the Company has $5,000,000 of
product liability insurance, there can be no assurance that this insurance will
ultimately prove adequate or that it can be maintained on an economical basis.
Product liability claims against the Company could have a material adverse
effect on the Company. The Company has never been named in a product liability
claim, and it is not aware of any threatened product liability claims.
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies upon trade secrets and patents to protect its proprietary
technology. The Company requires its employees to execute nondisclosure
agreements to preserve its trade secrets. The Company's success may depend on
its ability to preserve its intellectual property and no assurance can be
given that others will not independently develop or acquire substantially
equivalent technologies or gain access to the Company's trade secrets.
Furthermore, there can be no assurance that the Company will ultimately be able
to protect meaningful rights to its trade secrets or that the scope of its
patent protection will exclude competitors or provide competitive advantages to
the Company. See "Business -- Patents and Proprietary Information."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock or the future ability of the Company to raise capital through
an offering of its equity securities. Of the 6,053,110 shares of Common Stock to
be outstanding upon completion of this offering, 2,346,231 shares will be
eligible for immediate sale in the public market without restriction. In
addition, an aggregate of 3,131,842 of the outstanding shares are eligible for
immediate sale in the public market pursuant to existing effective registration
statements or Rule 144 under the Securities Act of 1933 (the "Securities Act").
Holders of 600,238 of these 3,131,842 shares of Common Stock have agreed that
they will not sell, directly or indirectly, any Common Stock without the prior
written consent of the Underwriter for a period of 180 days from the date of
this Prospectus. Certain security holders have the right, subject to certain
conditions, to participate in future Company registrations and to cause the
Company to register certain shares of Common Stock owned by them. See "Shares
Eligible for Future Sale."
LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK; APPLICABILITY OF
"PENNY STOCK" RULES
Federal regulations under the Securities and Exchange Act of 1934, as amended,
(the "Exchange Act") regulate the trading of so-called "penny stocks" (the
"Penny Stock" Rules), which are generally defined as any security not listed on
a national securities exchange or Nasdaq, priced at less than $5.00 per share
and offered by an issuer with limited net tangible assets and revenues. In
addition, equity securities listed on Nasdaq which are priced at less than $5.00
are deemed penny stocks for the limited purpose of Section 15(b)(6) of the
Exchange Act. Therefore, if, during the time in which the Common Stock is quoted
on the Nasdaq SmallCap Market, the Common Stock is priced below $5.00 per share,
trading of the Common Stock will be subject to the provisions of Section
15(b)(6) of the Exchange Act which make it unlawful for any broker-dealer to
participate in a distribution of any penny stock without the consent of the
Securities and Exchange Commission if, in the exercise of reasonable care, the
broker-dealer is aware of or should have been aware of the participation of a
previously sanctioned person. In such event, it may be more difficult for
broker-dealers to sell the Common Stock and purchasers of the shares of Common
Stock offered hereby may have difficulty in selling their shares in the future
in the secondary trading market.
In the event that the Company's Common Stock is delisted from the Nasdaq
SmallCap Market and the Company fails other relevant criteria, trading, if any,
of the Common Stock would be subject to the full range of the Penny Stock Rules.
Under these rules, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include: (i) obtaining financial and investment
information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and (iii) providing
the investor a written identification of the shares being offered and in what
quantity. If the Penny Stock Rules are not followed by the broker-dealer the
investor has no obligation to purchase the shares. Accordingly, delisting from
the Nasdaq SmallCap Market and the application of the comprehensive Penny Stock
Rules may make it more difficult for broker-dealers to sell the Company's Common
Stock and purchasers of the shares of Common Stock in the Offering may have
difficulty in selling their shares in the future in the secondary trading
market.
DILUTION
The net tangible book value per share of the Company's Common Stock as of March
31, 1996, as adjusted to reflect the reverse stock split on June 4, 1996, and
the issuance of the Bridge Notes, the payment of Debentures with a portion of
the proceeds thereof, and the conversion of Debentures, was $ per share.
Purchasers of the shares of Common Stock offered hereby will incur immediate
substantial dilution in net tangible book value of approximately $ per share, or
approximately % in the net tangible book value of their investment in Common
Stock.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURES, BRIDGE NOTES AND PREFERRED STOCK
There are 1,229,631 shares of Common Stock reserved for issuance upon the
exercise of stock purchase warrants, options or the conversion of the
Debentures and Preferred Stock, at exercise or conversion prices currently
ranging from $1.00 to $6.62 per share. In addition, up to 50% of the Bridge
Notes are convertible into Common Stock within 15 days of this offering at a
price equal to 80% of the Price to Public in this offering. To the extent the
trading price of the Company's Common Stock at the time of exercise or
conversion of any such securities exceeds the exercise or conversion prices, any
such exercise or conversion will have a dilutive effect on the Company's
shareholders and could adversely affect the market price of the Company's Common
Stock. See "Description of Securities;" and "Description of Bridge Financing."
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
Telident is authorized to issue up to 2,500,000 shares of Preferred Stock. The
Board of Directors has the power to establish the dividend rates, liquidation
preferences, voting rights, redemption and conversion terms and privileges with
respect to any series of Preferred Stock. The issuance of any shares of
Preferred Stock having rights superior to those of Telident's Common Stock may
result in a decrease in the value or market price of the Common Stock and could
further be used by the Board as a device to prevent a change in control of
Telident. The Board's ability to issue Preferred Stock could also deter parties
from making a bid to acquire the Company and could result in shareholders not
receiving a premium for their shares. Holders of Preferred Stock may have the
right to receive dividends, certain preferences in liquidation and conversion
rights. As of July 3l, 1996, there were 187,500 shares of Series I Preferred
Stock issued and outstanding. Series I Preferred Stock has voting rights equal
to the Company's Common Stock, except as may be otherwise required by law. The
Company does not have any present intention to issue any other shares of
Preferred Stock. See "Description of Securities -- Preferred Stock."
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
The number of record holders of the Company's Common Stock on June 30, 1996, was
310. The high and low bid prices for the Company's Common Stock as reported by
the National Quotation Bureau for the period from January 1, 1994, are shown in
the table below and have been adjusted to reflect a one-for-two reverse stock
split of the Common Stock effective June 4, 1996. These quotations represent
prices between dealers, and do not include retail markups, markdowns or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
BID ASKED BID ASKED
<S> <C> <C> <C> <C>
1994
Quarter ended March 31 $3-1/4 $4 $2-1/2 $3-1/2
Quarter ended June 30 2-3/4 3-1/2 2 3
Quarter ended September 30 4-1/2 4-3/4 2-3/4 3-1/4
Quarter ended December 31 2-5/8 3-1/2 2-1/8 3
1995
Quarter ended March 31 2 2-5/8 1-5/8 2
Quarter ended June 30 4-1/2 5-1/4 3-1/2 4
Quarter ended September 30 4-1/2 5-1/2 3-1/2 4
Quarter ended December 31 9 9-3/4 3-7/8 4-1/8
1996
Quarter ended March 31 7-1/2 8 4-1/2 4-3/4
Quarter ended June 30 5-7/8 6-3/8 3-7/8 4-1/8
July 1 -- August 1 3-7/8 4-1/8 3-1/8 3-3/8
</TABLE>
The Company has never paid a cash dividend on its Common Stock. The payments of
dividends, if any, in the future rest with the discretion of the Board of
Directors and will depend, among other things, upon the Company's earnings,
capital requirements, and financial condition.
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares offered hereby are
estimated to be $____________ ($___________ if the Underwriter's over-allotment
option is exercised in full), after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company currently
intends to apply these proceeds approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Repayment of Bridge Notes and related interest $1,280,000
Sales and Marketing 600,000
Research and Development 450,000
Inventory 300,000
Redemption of Preferred Stock and related
dividends 120,000
Working capital
----------
Total $
==========
</TABLE>
PAYMENT OF BRIDGE NOTES AND INTEREST.
Approximately $1,280,000 of the net proceeds will be used to pay principal and
interest on the Bridge Notes, assuming none of the Bridge Notes are converted
into Common Stock. If some of the Bridge Notes are converted, the net proceeds
that would have been used to repay indebtedness under such Bridge Notes will be
used for general working capital purposes. The outstanding principal and accrued
interest on the Bridge Notes will be due and payable within 20 days after the
date of this Prospectus and bear interest at the rate of 10% per annum. Up to
50% of the principal amount of the Bridge Notes are convertible for a period of
15 days after the date of this Prospectus, at the option of the holder thereof,
into the Company's Common Stock at a conversion price of 80% of the Price to
Public. The proceeds from the Bridge Notes are being used to market and continue
development of the Company's products, for general working capital purposes and
to repay approximately $100,000 of indebtedness. See "Description of Bridge
Financing."
SALES AND MARKETING.
Approximately $600,000 of the net proceeds will be used for sales and marketing
purposes, including salaries for additional direct sales personnel, continued
marketing activity related to the Company's existing products, and the
development of regional sales offices.
RESEARCH AND DEVELOPMENT.
Approximately $450,000 of the net proceeds will be used for research and
development expenditures, including salaries for increased staffing, software
development to be performed by third parties, and other research and development
products and projects.
INVENTORY.
A significant portion of Telident's sales are to customers that resell the
Company's equipment in conjunction with their own PBX equipment. In order
to comply with the expectations of its customers, Telident is required to
maintain sufficient inventories of raw materials and finished goods to enable it
to fill orders within a relatively short period of time. The Company expects,
therefore, to commit approximately $300,000 of the net proceeds to inventory
purchases.
REDEMPTION OF PREFERRED STOCK.
On June 30, 1994, Willis K. Drake, Richard L. Hencley and Warren S. Tyler,
directors of the Company, were issued a combined total of 250,000 voting shares
of Series I Convertible Preferred Stock ("Preferred Stock") at $4.00 per share.
The proceeds of the issuance of the Preferred Stock were utilized to pay off an
existing bank line of credit. While the Company is not required to do so, the
Company commenced redeeming shares of the Preferred Stock on May 31, 1995. It is
the Company's intent to use approximately $120,000 of the net proceeds of this
offering to redeem approximately 12,500 shares of Preferred Stock and pay
related dividends on the Preferred Stock. In the event that the Company should
determine not to redeem the Preferred Stock, the net proceeds that would have
been used to redeem the Preferred Stock will be used for general working capital
purposes. See "Description of Securities Preferred Stock."
WORKING CAPITAL.
Approximately $ of the net proceeds will be used for general
working capital purposes, including the payment of salaries, and general and
administrative activities.
Pending the use of the net proceeds, the Company intends to invest such funds in
interest-bearing money market funds, short-term certificates of deposit and
United States governmental obligations. The described use of proceeds is based
upon management's assumptions concerning certain marketing, selling,
development, financial and other matters which may affect the Company in the
future. Proceeds from the sale of any shares pursuant to any exercise of the
Underwriter's over-allotment option will be used for general working capital
purposes.
CAPITALIZATION
The following table sets forth the (i) unaudited short-term debt and
capitalization of the Company as of March 3l, 1996, (ii) pro forma short-term
debt and capitalization of the Company at March 31, 1996, as adjusted to give
effect to the issuance of the Bridge Notes, the payment of Debentures and
related interest with a portion of the net proceeds thereof, and the conversion
or extension of Debentures, and (iii) pro forma short-term debt and
capitalization of the Company at March 31, 1996, as further adjusted to reflect
the sale of the shares of Common Stock offered hereby and the application of net
proceeds therefrom (including the payment of all Bridge Notes):
<TABLE>
<CAPTION>
MARCH 31, 1996
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
<S> <C> <C> <C>
SHORT-TERM DEBT:
Current liabilities (other than Debenture principal) $ 666,161 $ 620,377 $ 620,377
Debentures payable (not including interest) (1) 963,000 -- --
Bridge Notes -- 1,250,000 --
Total short-term debt $ 1,629,161 $ 1,870,377 $ 620,377
LONG-TERM DEBT:
Debentures payable $ 585,000 $ 998,000 $ 998,000
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred Stock, .02 par value;
2,500,000 shares authorized;
200,000 shares outstanding;
175,000 shares pro forma as adjusted(2) 4,000 4,000 3,500
Common Stock, $.02 par value;
10,000,000 shares authorized;
4,727,089 shares issued and outstanding;
4,893,755 shares pro forma; and
6,053,110 shares pro forma as adjusted(1)(2)(3) 94,542 97,876 121,062
Additional paid-in capital 8,508,307 9,004,973
Accumulated deficit (8,633,720) (8,633,720) (8,633,720)
Total shareholders' equity (deficit) (26,871) 473,129
Total capitalization $ 558,129 $ 1,471,129 $
</TABLE>
(1) The holders of the Debentures which were originally due on May l, 1996, were
given the option of either converting their Debentures into Common Stock at
a reduced conversion rate of $3.00 per share or extending the due date
thereof to July 15, 1997, in lieu of having them paid at May l, 1996. Those
Debenture holders who elected to extend the due date of their Debentures
were granted a warrant to purchase one share of Common Stock at $4.00 per
share for each $8.00 principal amount of Debentures extended. The Warrants
expire on July 15, 1997. Holders of $500,000 principal amount of these
Debentures elected to convert their Debentures, holders of $413,000
principal amount agreed to extend the due date of their Debentures and
$50,000 principal amount of these Debentures were redeemed. See "Certain
Transactions."
(2) Adjusted to reflect a one-for-two reverse stock split of the Common Stock
and Preferred Stock effective June 4, 1996.
(3) Excludes an aggregate of _________ shares of Common Stock issuable in
connection with outstanding options, warrants, Debentures and Preferred
Stock, including 51,625 and 125,000 shares of Common Stock issuable upon
exercise of warrants issued in connection with the extension of the
Debentures and the Bridge Financing, respectively, an undetermined number of
shares issuable upon conversion of the Bridge Notes and 115,000 shares
subject to the Underwriter's Warrant. See "Management -- Stock Option Plan";
"Principal Shareholders"; "Description of Securities"; "Description of
Bridge Financing"; and "Underwriting" for additional information regarding
options and warrants.
PRO FORMA FINANCIAL STATEMENTS
On November 22, 1994, Telident acquired through a wholly-owned subsidiary 100%
of the common stock of Cantus Corporation. The total purchase price was $316,000
and consisted of 210,525 shares of Telident Common Stock and warrants
representing the right to purchase 122,808 shares of Telident Common Stock at an
exercise price of $4.00 per share in exchange for $287,000 of property and
equipment, net of $474,000 of liabilities assumed.
Telident accounted for the acquisition under the purchase method whereby the
assets and liabilities of Cantus were recorded at their fair market value as of
the date of acquisition as estimated by management which approximated net book
value. The $503,000 excess purchase price over the fair market value of tangible
assets and liabilities acquired has been recorded as goodwill.
Summarized below are the unaudited pro forma results of operations for the year
ended June 30, 1995, as if the Cantus acquisition had taken place at the
beginning of the year. All adjustments, which in the opinion of management, are
necessary for a fair pro forma presentation have been made in the following pro
forma consolidated financial statements. These financial statements are intended
to present consolidated results of operations for the period presented. Had the
acquisition actually taken place at the beginning of the period, operating
results may have differed from the pro forma results posted below and
accordingly, the pro forma results are not intended to be indicative of future
results.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
TELIDENT CANTUS(1) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $2,283,959 $ 148,173 $ (40,000)(2) $ 2,392,132
Cost of sales 677,689 59,676 (20,000)(2) 717,365
Gross profit 1,606,270 88,497 (20,000) 1,674,767
Operating expenses:
Sales and marketing 738,919 47,215 -- 786,134
Research and development 479,475 40,889 -- 520,364
General and administrative 929,919 42,833 26,000(3) 998,752
Total operating expenses 2,148,313 130,937 26,000 2,305,250
Loss from operations (542,043) (42,440) (46,000) (630,483)
Interest expense (377,289) (58,984) 50,000(4) (386,273)
Net loss $ (919,332) $ (101,424) $ 4,000 $(1,016,756)
Net loss per share, primary and
fully diluted(5) $ (.28) $ (.02) $ 0.00 $ (.30)
Weighted average number of common
shares outstanding(5) 3,630,442 5,195,651 (5,112,822)(6) 3,713,271
</TABLE>
The following notes summarize the pro forma adjustments enumerated in the
unaudited pro forma financial information presented:
(1) For the period July 1, 1994 to November 22, 1994.
(2) Represents the elimination of sale of product by Telident to Cantus.
(3) Represents the amortization of the excess purchase price, assuming the
purchase had occurred at the beginning of the period.
(4) Represents the elimination of interest expense on Cantus shareholder debt,
assuming the conversion of the Cantus shareholder debt to Cantus common
stock had occurred at the beginning of the period.
(5) Telident's net loss per share and weighted average number of shares have
been adjusted to reflect the one-for-two reverse stock split, effective June
4, 1996.
(6) Represents the adjustment in the weighted average number of shares, assuming
the 210,525 shares of Common Stock had been issued at the beginning of the
period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain items from the statements of operations
for the nine-month periods ended March 31, 1996 and 1995, expressed as: (i)
percentages of net sales and (ii) percentage changes between periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31 PERCENTAGE
1996 1995 INCREASE (DECREASE)
<S> <C> <C> <C>
Net sales 100.0% 100.0% 48.5%
Cost of sales 29.7 31.2 41.2
Gross profit 70.3 68.8 51.8
Operating expenses:
Sales and marketing 35.4 43.0 22.1
Research and development 42.8 32.6 95.4
General and
administrative 40.4 54.1 10.9
Total operating
expenses 118.6 129.7 35.8
Loss from operations (48.3) (60.9) 17.8
Interest expense -- net 15.7 21.7 7.2
Net loss (64.0)% (82.6)% 15.0
</TABLE>
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
Revenues for the nine-month period of fiscal 1996 were $1,786,958 compared to
$1,203,398 for the similar 1995 period, an increase of 48.5%. Station
Translation System ("STS") product sales accounted for 72.5% of the sales in the
1996 nine-month period compared to 77.2% in the 1995 period. The Company
acquired Cantus Corporation in November 1994. Revenues attributable to this
acquisition during the nine-month period of fiscal 1996 amounted to 16.9% of
sales compared to 13.8% in the 1995 period. The Company's other products,
including the ANI Control System ("ACS") and the Network Control System ("NCS"),
collectively accounted for 10.6% of sales in the 1996 period compared to 9.0% of
sales in the 1995 period. The increase in total revenues for the 1996 nine-month
period was attributable to the increase in unit sales of the STS products
through Private Branch Exchange ("PBX") manufacturers and value-added resellers
and the contribution from the Cantus acquisition. At March 31, 1996, the Company
had a backlog of orders of two ACS units and thirty-seven STS units
(approximately $478,000 of revenues), which are expected to be shipped in the
fourth quarter of fiscal 1996.
Cost of sales, as a percentage of net sales, were 29.7% in the 1996 period
compared to 31.2% for the 1995 period. Gross margin increased to 70.3% for the
1996 period compared to 68.8% for the 1995 period due primarily to the lower
costs associated with volume purchasing.
Total operating expenses increased $558,971 in the 1996 period compared to the
similar 1995 period. Sales and marketing expenses increased $114,188 in the 1996
period compared to the 1995 period. This increase was due to the addition of
three sales offices in Atlanta, San Francisco and Los Angeles, three sales
personnel and increased marketing materials.
Research and development expenses increased $373,715 in the 1996 period compared
to the 1995 period, due to the addition of a Vice President of Operations, three
software programmers (two as a result of the Cantus acquisition), three
engineers and the increased use of software consultants.
General and administrative expenses for the 1996 period increased $71,068
compared to the similar 1995 period, due primarily to the amortization of
goodwill related to the Cantus acquisition.
Interest expense, net of interest income, increased $18,775 in the 1996 period
compared to the 1995 period. The increase is due to the additional borrowings
required to fund the Company's operations. During the second quarter of fiscal
1996, $684,000 of notes payable were converted into shares of the Company's
Common Stock, resulting in a decrease of $42,894 in interest expense during the
third quarter of fiscal 1996 compared to the third quarter of fiscal 1995. The
Company expects to incur an interest charge of approximately $65,000 in the
fourth quarter of fiscal 1996 in connection with the conversion of Debentures at
a reduced conversion price.
FISCAL YEAR COMPARISONS
The following table sets forth certain items in the statements of operations
expressed as: (i) percentages of net sales for the years indicated and (ii)
percentage changes from the prior year:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
FISCAL YEAR ENDED JUNE 30, (DECREASE)
1995 1994
1995 1994 1993 OVER 1994 OVER 1993
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 91.7% 54.2%
Cost of sales 29.7 34.9 41.0 62.9 31.3
Gross profit 70.3 65.1 59.0 107.1 70.1
Operating expenses:
Sales and marketing 32.3 59.7 105.6 3.9 (12.9)
Research and development 21.0 54.0 90.5 (25.5) (8.0)
General and
administrative
expenses 40.7 58.5 71.9 33.2 25.5
Total operating
expenses 94.0 172.2 268.0 4.7 (1.0)
Loss from operations (23.7) (107.1) (209.0) (57.5) (21.0)
Interest expense, net 16.5 29.8 15.5 6.2 196.0
Net loss (40.2)% (136.9)% (224.5)% (43.7) (6.0)
</TABLE>
FISCAL 1995 COMPARED TO 1994
The Company generated net sales in fiscal 1995 of $2,283,959 compared with
$1,191,661 for fiscal 1994, an increase of 91.7%. The increase in sales was
attributable to an increase in the volume of units sold, primarily through PBX
manufacturers and value added resellers and the Cantus acquisition. The STS
products accounted for 73% of revenue in 1995 and 49% of revenues in 1994.
Fiscal 1995 revenues attributable to the acquisition of Cantus Corporation in
November of 1994 amounted to $414,288, or 18% of revenue for the 1995 period.
The Company's other products, including the ACS and NCS accounted for 9% of
revenue in fiscal 1995 compared to 51% in fiscal 1994.
Cost of sales increased from $416,029 in fiscal 1994 to $677,689 during fiscal
1995, or a 62.9% increase. This was primarily attributable to the increase in
sales. Gross profit increased to 70.3% of sales in fiscal 1995 from 65.1% in
1994 due to the higher percentage of sales of the STS product, which has a
higher profit margin than ACS and NCS products. In addition, the Company has
been able to lower costs through increased volume purchasing.
Operating expenses increased from $2,051,957 in fiscal 1994 to $2,148,313 during
fiscal 1995, an increase of $96,356 or 4.7%. Sales and marketing expenses
increased $28,064 in fiscal 1995, a 3.9% increase, due primarily to additional
commission expenses and the opening of a regional sales office in Texas.
Research and development expenses decreased by $163,777 in fiscal 1995, a 25.5%
decrease, due to a reduction in the use of engineering consultants. General and
administrative expenses for fiscal 1995 increased $232,072 compared to fiscal
1994, a 33.2% increase. The increase in administrative expenses is comprised
primarily of goodwill amortization from the Cantus acquisition ($73,000),
miscellaneous ($40,000), legal and accounting fees ($28,000), increases in
administrative salaries ($34,000), board of director fees ($20,000), additional
depreciation from new purchases ($15,000), increased rent ($8,000) and increased
insurance premiums ($14,000).
Net interest expense increased in 1995 by $21,862 due to higher average
borrowings required to fund operations, as a result of continuing operating
losses.
FISCAL 1994 COMPARED TO 1993
The Company generated net sales in fiscal 1994 of $1,191,661 compared with
$772,923 for fiscal 1993, an increase of 54%. While there was a slight price
increase during the year, the increase in sales was attributable to an increase
in the volume of units sold. The STS product accounted for 49% of the sales in
fiscal 1994 and 44% of the sales in fiscal 1993. All other sales in 1994 and
1993 consisted of the NCS and ACS products.
Cost of sales increased to $416,029 during fiscal 1994, from $316,835 in fiscal
1993 or a 31.3% increase. This was primarily attributable to the increase in
sales. Gross profit increased to 65.1% in fiscal 1994 from 59.0% in 1993 due to
the higher percentage of sales of the STS product, which has a higher profit
margin than NCS and ACS products.
Operating expenses decreased to $2,051,954 during fiscal 1994, from $2,071,797
in fiscal 1993 a decrease of $19,843 or 1.0%. Sales and marketing expenses
decreased $105,411 in fiscal 1994, a 12.9% decrease, due primarily to a
reduction in international sales and marketing activities.
Research and development expenses decreased by $56,184 in fiscal 1994, an 8.0%
decrease, due to a reduction in the use of engineering consultants. General and
administrative expenses for fiscal 1994 increased $141,752 compared to fiscal
1993, a 25.5% increase. The increase in administrative expenses relates
primarily to new management personnel and increased travel expenses. In fiscal
1994, the Company enhanced its management capabilities by hiring a President and
Vice President experienced in the telecommunications industry, in order to
facilitate the marketing and sales of its products.
Net interest expense increased in 1994 by $235,339 due to higher average
borrowings required to fund its operations, as a result of its operating losses.
INFLATION
Inflation has not had a material impact on the Company's net sales or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had cash of $150,765 and accounts receivable of
approximately $570,000. For the period ended March 31, 1996, net cash used in
the Company's operating activities was approximately $999,000, consisting
primarily of the Company's loss from operations ($1,143,000), an increase in
inventories ($197,000) and a reduction of trade accounts payable and accrued
expenses ($435,000), offset by a decrease in accounts receivable ($670,000). The
Company invested approximately $185,000 in additional office equipment and
computers for the period ended March 31, 1996 in anticipation of the expansion
of both its sales offices and its operational facilities. Funds required to
finance the Company's operations, investments and payments of debt during the
first nine months of fiscal 1996, were provided by the sale of 699,580 shares of
its Common Stock, resulting in net proceeds of $2,236,139. In addition, $684,000
of notes payable (including $50,000 held by a director of the Company) were
converted into Common Stock at $3.00 to $4.00 per share, resulting in the
issuance of 209,068 shares. In February 1995, the Company obtained a revolving
line of credit with a bank providing advances up to $750,000. Advances under the
agreement are limited to 75% of eligible receivables ($254,117 at March 31,
1996). The loan agreement also contains provisions requiring compliance with
certain financial covenants. The line of credit agreement was renewed on
February 3, 1996, and will expire on February 3, 1997, when all outstanding
amounts are due and payable. The agreement bears interest at the bank's prime
rate plus 7.5%. The note is secured by all of the Company's assets. The Company
has relied on debt and equity capital to fund its operating losses during the
first nine months of fiscal 1996 and prior periods.
As of June 30, 1996, 20% of the Company's accounts receivable were over 180 days
past due. The Company generally has not had difficulty collecting its accounts
receivable, historically collecting more than 99% of its receivables. Failure to
collect substantially all of the Company's accounts receivable would adversely
affect future earnings and working capital.
In May 1996, the Company raised $1,160,000, after payment of related
expenses, in the Bridge Financing, which consisted of Bridge Notes and Bridge
Warrants. See "Description of Bridge Financing."
Based on projected revenues and expenses, the Company believes that the net
proceeds of this offering together with cash from operations will be adequate to
fund the Company's working capital requirements through at least June 30, 1997.
However, current working capital levels are not adequate to enable the Company
to fund its operations, pay outstanding obligations or to cover a decrease in
projected revenues in the event that the Company's sales are less than
anticipated. There can be no assurance that additional funds will be available,
or, if available, available on terms acceptable to the Company. At March 31,
1996, the Company had an accumulated deficit of $8,633,720 and a shareholders'
deficit of $26,871. The Company has no material commitments for capital
expenditures.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued Statement No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
is effective for the Company's year ending June 30, 1997. SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. The Company does not expect the application of SFAS 121 to have a
material affect on its financial statements for fiscal 1997.
In addition, the FASB has issued Statement No. 123 (SFAS 123), ACCOUNTING FOR
STOCK-BASED COMPENSATION. This statement is effective for the Company's year
ending June 30, 1996. SFAS 123 establishes a fair value-based method of
accounting for stock-based compensation plans and encourages, but does not
require, entities to adopt that method in place of APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, which uses an intrinsic value-based
accounting method. The Company does not intend to adopt SFAS 123 in measuring
expenses. However, the Company must present pro forma net income (loss) and
related per share amounts as if SFAS 123 had been adopted, and such pro forma
amounts are expected to reflect higher amounts of expenses than amounts reported
in the financial statements.
BUSINESS
INTRODUCTION
Telident designs, manufactures and markets proprietary hardware and software
systems which provide the exact location of a 911 telephone call to the
emergency dispatcher who receives the call. The Company's systems provide
information which can speed the response time to a 911 call, reduce the costs
associated with responses to incorrect locations and improve the safety of
individuals within a private branch exchange ("PBX") telephone system. In
addition, the Company manufactures and markets network hardware that provides
switching, selective routing and data interfacing capabilities to public and
private telephone networks and city, county and state government agencies.
Telident also provides these customers with a variety of emergency information
processing and management software systems.
The Company's products utilize existing Enhanced 911 ("E-911") technology which
automatically transmits both the caller's telephone number and address to the
nearest emergency dispatcher or public safety answering point ("PSAP").
Currently over two-thirds of the telephone systems in the U.S. have access to
E-911 service. However, the E-911 service generally does not have the ability to
pinpoint a caller's location within a PBX system without equipment such as that
offered by the Company. Consequently, calls originating within a PBX transmit
only the main PBX telephone number and main address where the PBX is physically
located. Presently five states across the U.S. have adopted legislation
mandating the modification of PBX systems to make them fully compatible with the
E-911 system. Telident's patented systems create and manage a sophisticated
database of information to monitor 911 calls within a PBX system and transmit
the precise location, and generally the caller's name, to the PSAP through the
existing E-911 system.
MARKET OVERVIEW
The development of the emergency response telephone network, 911, began in the
late 1960's under the direction of AT&T in conjunction with Bell Labs. The 911
network was designed using the fundamental theory that each caller could be
identified by the specific pair of wires connecting the caller with the
telephone company. This design theory mirrored the long distance routing network
that AT&T had previously developed. This design theory has created the 911
incompatibility problem that exists with PBX systems today. PBX systems share
multiple connections (pairs of wires), and the ability to pinpoint the caller
behind a business telephone system is lost to the network. The designers of the
Enhanced 911 network may not have envisioned the popularity and deployment of
PBX systems in the United States. Throughout the 1970's, 911 systems were
deployed with voice transmission only. In response to public demand for more
precise information as to the callers location, development of the Enhanced 911
network began in the early 1980's. However, widespread use of PBX systems did
not begin until after the breakup of AT&T in 1983.
According to Dataquest, Inc. it is estimated that there are approximately
204,000 private telephone systems installed in the United States today. The line
size composition of the installed base of the private business telephone system
is illustrated as follows:
<TABLE>
<CAPTION>
NUMBER OF LINES PER NUMBER OF
PRIVATE TELEPHONE INSTALLED
SYSTEM BASE SYSTEMS MARKET SHARE
<S> <C> <C>
1 - 8 7,300 3.6%
9 - 24 8,700 4.3
25 - 48 50,000 24.4
49 - 100 80,700 39.4
101 - 400 48,800 23.8
401 - 1000 6,100 3.0
1000+ 3,100 1.5
204,700 100.0%
</TABLE>
Generally, the greater number of lines found within the PBX, the more likely the
occurrence of a 911 event. The Company believes that systems greater than 100
lines are the best prospects for the Telident STS product. This market segment
represents approximately 28% of the installed base of systems or approximately
58,000 systems. Factors other than line size affecting a buying decision
include, the application of the system (i.e. residential facilities, multiple
floors, multiple buildings) and the presence of detached workgroups. Detached
workgroups are departments within the company that use the private business
telephone service that are physically located apart from the main location.
The target market for Telident's NCS and ACS products are counties and cities
that have basic 911 (voice only) or no 911 capability. Telident believes that
these characteristics are most commonly found in counties with populations of
less than one million and cities with populations of less than one hundred
thousand.
STRATEGY
The Company was formed in 1983 to develop and market electronic equipment for
the telephone communications industry. Between 1983-85, Telident developed the
Status Recognition Unit System I (the "SRU1"), a system which permits operating
telephone companies to increase dedicated phone services capabilities. Based on
a review of the market for the SRU1, Telident determined that there was a
significant market opportunity for products, based on the technology of the
SRU1, which could expand the capabilities, safety and reliability of emergency
911 service systems. Since 1989, the Company's goal has been to become a leading
designer of systems which enable precise identification of the location of 911
callers within a PBX system and state-of-the-art hardware and software for the
911 public safety market.
To achieve this goal, the Company provides its customers with a total E-911
solution, providing the hardware, software and service components to meet their
emergency 911 information needs. For example, the Company provides PBX users:
(i) equipment (the STS) required to enable the PBX to be compatible with E-911
service; (ii) software and services, ShadowMAX(tm) and the ALI SERVICE BUREAU,
which enable PBX users to maintain the required database; and (iii) additional
products, such as the TraxOSN(tm) software which expands the capabilities of a
PBX system utilizing the STS so that it automatically provides the precise
location of the caller within the network to both the appropriate PSAP and to
on-site personnel, such as security guards.
To distribute its products, Telident's strategy is to develop national
distribution capabilities designed to provide sales support for its E-911
products and services and future products as they may be developed or acquired
and to develop distribution relationships with major distributors of PBX
equipment and services and telephone companies. The Company currently has
offices in: Minneapolis, Minnesota; Chicago, Illinois; Dallas, Texas; Atlanta,
Georgia; and San Francisco and Los Angeles, California. Telident has
distribution agreements with Fujitsu Business Communications Systems, Ericsson
GE Mobile Communications, Inc., Siemens-Rolm, Intecom and Sprint/United
Telephone and has joint marketing agreements with Pacific Bell and BellSouth.
PRODUCTS
911 STS (STATION TRANSLATION SYSTEM)
The 911 STS(tm) is a product designed for use with PBX systems. A PBX is a
switching center maintained by an organization, such as an apartment complex,
university, office building or government office complex, where calls to and
from phone locations are routed to their destination. The 911 STS is designed to
provide for the automatic identification for 911 purposes of the location of all
callers within the PBX area. The STS provides automatic identification to the
PSAP of the location of the caller within a PBX system. The Company has
satisfactorily tested the compatibility of the STS with the PBX equipment of
nine manufacturers, who account for over 90% of domestic PBX sales. Over 600 STS
units have been sold in a total of 32 states and one province in Canada.
Suggested retail price of a system is between $11,000 and $25,000.
The Company has developed a software program to enhance the 911 STS, called Trax
OSN(tm) With Trax OSN, the STS will provide automatic identification to the PSAP
of the location of the caller within a PBX system and simultaneously will
provide "on-site notification" of the call to a location within the
organization, such as a security desk. To date, the Company has sold more than
25 Trax OSN systems. Suggested retail price of this software is $3,500 per
system.
In 1995 Telident, in conjunction with Unimax Systems Corporation, introduced a
new database maintenance product for Windows, called ShadowMAX(tm). ShadowMAX
eases the process of database updates by looking at daily changes and comparing
them to the previous day's database. This process generates a list of
transactions which are packaged and sent to the ALI (Automatic Location
Identification) database and STS database for updates. To date, the Company has
sold more than 25 ShadowMAX systems. Suggested retail price of this software is
approximately $5,000 per system.
The Company also offers a service called ALI SERVICE BUREAU, whereby Telident
establishes and maintains the database required for a PBX user to provide E-911
service utilizing the STS. The Company is currently providing this service to
more than 25 customers who pay set-up and monthly maintenance fees based on the
size and complexity of the database.
911 NCS (NETWORK CONTROL SYSTEM)
During 1989, Telident began development of the 911 NCS(tm). The NCS is a
microprocessor- based unit that selectively routes a 911 call originated from
any station in the 911 service area to the correct PSAP designated to serve the
originating station. Because NCS units can be distributed throughout the
telephone network, Telident believes trunking costs can be minimized for the
telephone operating company and Enhanced 911 service which is often taken for
granted in large metropolitan areas may more readily be made available to rural
America.
Today, the 911 selective routing function generally is accomplished within
switch equipment which is not dedicated to 911 and which is typically located in
large metropolitan areas. Enhanced 911 service to rural America is difficult to
provide due to the network trunking routes from the rural area to the selective
router (the switch equipment) and back. In rural areas, the Company believes the
lower cost of the NCS compared to the cost of software upgrades for central
switches or installing new digital central office switches, and the ability to
reduce trunking cost by distributing the selective router (the NCS) throughout
the network should enable rural telcos (telephone companies) to expand E-911
services to all of their customers.
The NCS may also be used to enable central office switches to interface with one
another in order to direct 911 calls from one central switch area to another
while maintaining the ability to automatically identify the address or location
of the caller for the PSAP operator. The Telident NCS is compatible with both
the central office switch equipment and the PSAP equipment generally in place
today. The NCS has been designed to accommodate future enhancements within the
911 network. There are 31 NCS units in operation providing E-911 service to over
two million people in 41 counties.
The basic NCS system, which sells for approximately $45,000, is comprised of 16
input trunk interface circuits and 8 output trunk interface circuits. Equipment
prices do not include special applications software and do not include
installation. The system is expandable through modules of one circuit
increments. The Company has expanded the port capacity of the basic 16 input x 8
output NCS to an optional size of 32 input x 15 output for larger systems.
911 ACS (ANI CONTROL SYSTEM)
The 911 ACS(tm), or ANI Control System, located at the PSAP, will take an
incoming 911 call and deliver the voice portion of the call to the PSAP
operator's telephone and the telephone signaling portion (which contains the
incoming caller's telephone number) to a database where the caller's location
can be obtained and relayed to the PSAP operator. The Company currently has 57
units in operation. Suggested retail price of a basic 911 ACS is between $5,000
and $10,000.
PUBLIC SAFETY ANSWERING POINT SOFTWARE
The Company designs, develops and provides PSAP systems and solutions for the
911 environment and Computer Aided Dispatch software to improve the efficiency
of the entire dispatch operation. In addition, the Company has developed video
imaging software and systems. To date, the Company has sold more than 150
packages of such software. Suggested retail price for these software packages is
between $15,000 and $50,000.
BUSINESS ACQUISITION
In fiscal 1994, Telident decided to expand its focus from a product company to a
solution company, selling not only hardware, but software and service components
to meet the emergency information needs of its growing customer base. By
offering a total solution approach, Telident has positioned itself as a leader
in providing 911 solutions to the marketplace. To enhance its software
capabilities, Telident acquired Cantus Corporation, a software development
company, during November 1994, and integrated Cantus's 911 software products
into Telident's product lines. At the time of the acquisition, Cantus's assets
totaled $275,000, including approximately $112,000 of accounts receivable,
$60,000 in work in progress, $41,000 in inventory and $47,000 in bid deposits.
Telident also acquired Cantus's proprietary software products. For additional
information regarding the terms of this acquisition, see Note 10 of the Notes to
Consolidated Financial Statements for the year ended June 30, 1995.
MARKETING; DISTRIBUTION
The Company markets its 911 products through distribution agreements with major
PBX manufacturers; PBX distributors; local, state and national public safety
agencies; service providers, including certain of the regional Bell operating
companies and major independent telcos; major telephone equipment manufacturers;
and manufacturers' representatives. Potential customers for these products
include the PBX manufacturers, public service agencies, colleges and
universities, businesses with multi-story or multi-building facilities, regional
Bell operating companies, the military, computer-aided dispatch manufacturers,
system integrators, independent telcos, telco consulting and engineering firms,
government agencies, and telephone switch manufacturers. To date, the Company
has sold approximately 700 units nationwide through distributors or directly.
End users of the Company's products include:
* Aegon, USA * Sun City West, Arizona
* Mercer Island, Washington School * Eddie Bauer
District * Telluride Ski Resort
* Arizona State University * GE-Rescom
* City of Aurora, Colorado * City of Tempe, Arizona
* City of Minneapolis, Minnesota * Keystone Ski Resort
* Bloomington, Minnesota School * Texas A&M University
District * Mare Island Navel Yard, California
* North Memorial Medical Center, * University of British Columbia
Minneapolis, Minnesota * Ecolab, Inc.
A knowledge of existing telephone system central office switching equipment and
operations is required in the development of applications for the Company's
products. Therefore, the Company's sales persons need technical support from
senior application engineers to properly evaluate customer requirements. As of
the date of this prospectus, the Company employs a Vice President of Sales and
Marketing, and eight sales personnel, all of whom have significant prior
employment experience in the telephone industry.
E-911 regulatory issues, such as the actions of the Federal Communications
Commission (FCC), and the Public Utilities Commission (PUC) in the 50 states and
other various state legislatures affect potential markets for the Company's
products, particularly its NCS and STS products. For example, Colorado, Texas,
Illinois, Washington and Mississippi have passed state laws or enacted
regulations mandating (to various degrees) the modification of PBX systems to
make them fully compatible with the E-911 system. These actions favorably impact
the market for the STS product. Similarly, in September 1994, the FCC issued a
Notice of Proposed Rule Making (the publication for comment of a rule the FCC
intends to promulgate), the original comment period for which ended in March
1995, which, if implemented, could mandate that every new PBX sold nationwide
and certain existing PBX's comply with E-911 system requirements.
The market for the NCS product is sensitive to the structure of telephone
company tariffs (rates approved by state agencies) for E-911 services, which
vary from state to state. It is also sensitive to various state funding
mechanisms for E-911 services. There are 15 states where payment for E-911
network services are at the county level. Counties usually experience a
significant financial advantage by purchasing the NCS. Therefore, NCS marketing
will continue to concentrate on those states where the tariff and funding
mechanisms are more favorable.
The Company has made significant efforts to develop marketing relationships
with, and is selling products to, major telephone companies as well as the
principal PBX manufacturers. The Company has currently signed distribution
agreements with Fujitsu Business Communications Systems, Ericsson GE Mobile
Communications, Inc., Siemens-Rolm, Intecom, and Sprint/United Telephone. The
Company also has joint marketing agreements with Pacific Bell and BellSouth. The
Company's distributors generally provide service for the Company's equipment
which they sell. The Company intends to continue to further develop these and
other distribution relationships.
Fujitsu Business Communications Systems of Anaheim, California, a leading
supplier of private business telephone systems throughout the world, with sales
offices in most major cities in the United States, has an agreement with the
Company that provides for the purchase of 600 STS units for approximately
$2,400,000 between April 1995 and June 1998 (approximately $650,000 of which had
been purchased as of April 30, 1996). The Ericsson GE Mobile Communication,
Inc., Siemens-Rolm, Intecom and Sprint Local Telecommunication Division
agreements do not require any minimum purchases.
The Company provides product sales and service literature, conducts direct
mailings and engages in an active public relations campaign to generate public
and buyer awareness of its products, in order to help pull sales through the PBX
suppliers. A network of sales branch offices is being developed in high
potential markets where PBX suppliers have a strong presence. The Company
currently has offices in Minneapolis, Minnesota, Chicago, Illinois, Dallas,
Texas, Atlanta, Georgia and San Francisco and Los Angeles, California and has an
agreement with an independent manufacturers' representative whose territory
covers Oregon and Washington.
Net sales to Fujitsu Business Communications accounted for 20% of total sales in
the first nine months of fiscal 1996. Net sales in fiscal 1995 to Digital
Techniques, Inc. and Fujitsu Business Communications amounted to 25% and 20%,
respectively, of total product sales. Net sales in fiscal 1994 to Emergitech,
Inc. and 9-1-1 Systems, Inc. amounted to 19% and 11%, respectively, of total
product sales. The loss of Fujitsu Business Communications could have a material
adverse affect on the Company's business.
PRODUCT DEVELOPMENT
The Company maintains an engineering department to design and develop new
products for the telephone industry and to support developments of new
application software to broaden applications of its products. As of the date of
this prospectus, the Company employs Vice Presidents of Advanced Engineering,
Customer Support and Operations, a materials manager, two electrical engineers,
three manufacturing technicians and two software programmers. During the nine
months ended March 31, 1996 and fiscal 1995 and 1994, the Company spent
$765,527, $479,475 and $643,252, respectively, on Company sponsored research and
product development.
As applications are developed for the product lines, new operating
specifications for these applications will require the Company to design new
interface boards. In addition, each application will require that a set of
computer software be developed to satisfy that specific application. Portions of
these programs are expected to form a library which can be used in a number of
applications.
MANUFACTURING
Telident conducts final assembly and testing along with receiving and shipping
of its products. The Company subcontracts all of its equipment subassembly
fabrication to local manufacturers and assembly houses who are equipped and
qualified to perform this work and produce high quality printed circuit board
assembly products. The Company is not dependent on any one of its
subcontractors. The component electronic parts required for assembly of the
Company's products are available from a number of different sources. Due to
anticipated future growth, the Company is currently considering a turnkey
assembly for cost-effective and efficient deliveries of product.
COMPETITION
The Company is aware of two competitors, which market a product which competes
with the Company's STS product. The competitive products are more expensive than
the STS product and the Company believes they are only compatible with AT&T and
Northern Telecom PBX equipment. The Company's STS product is compatible with
over 90% of the equipment for PBX vendors in the United States. The Company's
NCS and ACS products are designed to be competitive with more costly solutions
offered by other manufacturers. There are many equipment companies serving the
telecommunication industry, such as AT&T and Northern Telecom, which are
well-established in the marketplace and which have substantially greater access
to financial, technical and personnel resources than the Company, which are
potential competitors of the Company. In addition, the telecommunications
industry is subject to rapid technological change and there can be no assurance
that the Company will be able to react and adapt to these changes, or that
developments by competitors will not render the Company's products obsolete.
The Company competes on the basis of product features and cost. The
attractiveness of the Company's products to end users depends, to some extent,
on the tariffs filed by local or regional telcos. In addition, Telident and its
customers depend upon the good faith cooperation of local telcos in the
installation and operation of Telident's products. If the local tariff
environment is not favorable to the Company's products or the local telcos are
uncooperative, sale of the Company's products will be impaired.
PATENTS AND PROPRIETARY INFORMATION
The Company has obtained United States patents on its STS, and SRU1 designs
which expire on August 10, 2010 and December 12, 2005, respectively. The Company
has applied for international patents with respect to the STS design. However,
there can be no assurance as to the degree of protection which the patents will
afford the Company. The Company intends to continue to seek patents on its
products when appropriate. In addition, the Company protects its trade secrets
by, among other things, maintaining nondisclosure and confidentiality agreements
with its employees.
REGULATIONS
The United States Federal Communications Commission ("FCC") requires that
certain communication devices be tested by a certified facility prior to
receiving FCC approval. Testing is designed to demonstrate that devices will not
cause harmful interference to telephone communications. In addition, certain
jurisdictions may require that the Company's products meet Underwriters'
Laboratory ("UL") requirements. The Company's equipment meets both FCC and UL
requirements.
EMPLOYEES
At March 31, 1996, the Company had 31 employees, including six administrative,
nine sales and marketing, nine operations, and seven research and development
personnel.
PROPERTIES
The Company leases approximately 12,000 square feet of office and final assembly
space at a monthly rental of approximately $12,000. The lease expires on March
3l, 1998. The Company considers these offices suitable for its needs for the
duration of the lease term.
MANAGEMENT
The directors and executive officers of Telident are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE POSITIONS WITH THE COMPANY
<S> <C> <C> <C>
Mark W. Sheffert 1990 49 Chairman of the Board of Directors
Michael J. Miller 1993 46 President and Director
Kevin B. Erdman -- 41 Vice President Sales and Marketing
Thomas P. Jensen -- 44 Vice President Customer Support
John F. Kromer -- 34 Vice President Finance and Chief Financial Officer
Martin D. Moody -- 48 Vice President Advanced Engineering
Scott R. Anderson June 1995 56 Director
Willis K. Drake 1988 73 Director
Richard L. Hencley 1988 69 Director
Robert N. Kisch 1990 73 Director
John Sagan 1990 75 Director
Warren S. Tyler 1988 65 Director
</TABLE>
MARK W. SHEFFERT -- Mr. Sheffert has been Chairman of the Board of Directors of
the Company since May 1994. He is President of Manchester Companies, Inc., a
private investment and management consulting firm formed in 1993. From 1990 to
1993, he served as managing partner of Sheffert & Wein, Inc., a management
consulting firm. From September, 1982, to October, 1989, Mr. Sheffert served in
various executive positions with First Bank System, Minneapolis, Minnesota,
including Chairman and CEO, First Trust Company, FBS Mortgage Company, FBS Card
Services, Inc., and FBS Insurance. Mr. Sheffert currently is serving on the
board of directors of Kahler Corporation, Periscope Communications, Inc.,
Combined Financial Group, Inc., Triad Financial Services, Inc., and Children's
Heartlink.
MICHAEL J. MILLER -- Mr. Miller became President and CEO of Telident on
September l, 1993. Prior to that time, he served for five years as President and
CEO of Information and Communications Services, Inc. (ICSI), a wholly owned
subsidiary of Hickory Tech Corporation based in Mankato, Minnesota. ICSI is a
multifaceted telecommunications holding company which has business
telecommunications systems distribution, software development, and
telecommunication product manufacturing. Mr. Miller has a bachelor's degree in
finance and accounting, a master's degree in business administration, and is a
certified public accountant. He was invited to sit as a Visiting Fellow with the
Aspen Institute, a long-range planning and strategy consortium in the
communications industry.
KEVIN B. ERDMAN -- Mr. Erdman was named Vice President of Sales and Marketing in
March 1995. He joined Telident in July l994 as National Director of STS Sales,
responsible for marketing and selling the STS solution into the public and
private PBX markets. From 1991 to 1993, Mr. Erdman was responsible for business
development and strategic planning for Dataserv, Inc., a $150 million computer
network services and software development subsidiary of Bell South. After
leaving Dataserv, and prior to joining the Company, Mr. Erdman was
self-employed. From 1988 until 1991, Mr. Erdman was employed by the Clifton
Group, a financial services company.
THOMAS P. JENSEN -- Mr. Jensen was named Vice President of Customer Support in
March 1995. He was Director of Product Management from July 1994 to March 1995,
and National Sales Manager from March 1993 to July 1994. Mr. Jensen has 20 years
of experience in telecommunications, including working for an equipment
manufacturer, ADC Telecommunications (1980 to 1987), MCI (1987 to 1990), and
operations manager for a county government Dakota County, Minnesota (1990 to
1992), and Fujitsu Business Communication Systems (1992 to March 1993). He
received a bachelor's degree in Engineering from the University of Minnesota and
a master's degree in Business Administration -- Finance and Marketing, from the
University of St. Thomas. In addition, he is on the Board of Directors for the
Minnesota Telecommunications Association, Board of Advisors for Dakota County
Technical College, Technology Council for Minnesota School Districts, and is an
adjunct lecturer at the University of St. Thomas.
JOHN F. KROMER -- Mr. Kromer was named Vice-President and Chief Financial
Officer of Telident in October of 1994. He was the Controller of the Company
from June 1992 to October 1994. From August 1988 to June 1992, he worked in the
transportation industry for Transport Corporation of America, Inc., a company
with revenues of approximately $100 million. He was responsible for overseeing
the accounting functions and management reporting of the company. He is a
licensed CPA in the state of Minnesota and is a member of both the American
Institute of Certified Public Accountants and the Minnesota Society of CPA's.
MARTIN D. MOODY -- Mr. Moody has been a Vice President of Telident since
August 1989. He was the Director of Engineering of the Company from November
1988 to August 1989. Prior to November 1988, Mr. Moody was Vice President of
Operations of Aetrium, Inc., a manufacturer of integrated circuit handling
equipment. Mr. Moody was responsible for Aetrium's operations and new product
introductions. Mr. Moody developed a system of concurrent engineering, which
allowed all divisions to interface during product development and
implementation, as well as implementing a Quality Assurance Program. Mr.
Moody held the position of Product Manager, Special Engineering at Micro
Component Technology, Inc. from 1982 to 1986. Prior to that he was engineer
in charge of telecommunications for Control Data at the NASA/Langley site in
Virginia.
SCOTT R. ANDERSON -- Mr. Anderson joined the Telident Board of Directors in
July, 1995. Mr. Anderson is President and Chief Executive Officer of North
Memorial Health Care in Robbinsdale, Minnesota. He has been associated with
North Memorial since August of 1964, serving 17 years as Executive Vice
President, and since 1981 in the position of President and Chief Executive
Officer. During his career he has served as a member of many committees and
boards, both locally and nationally, and has served as chairman of the board of
the following organizations: Metropolitan Healthcare Council (Council of
Hospital Corporations), Health Employers, Inc., Healthcare Education and
Research Foundation and Medical Alley. He currently serves as a director of
EMPI, Inc.
WILLIS K. DRAKE -- Mr. Drake has been a private investor over the last seven
years. He served as Chairman of the Board of Directors of Telident from 1989
to August 1993. Mr. Drake spent the early years of his career with Univac in
a sales and marketing capacity. He later became a founder of Control Data
Corporation. In 1969, he became founder, Chairman and President of Data Card
Corporation, a manufacturer of high-performance embossing/encoding equipment
for the plastic card industry. When he retired in 1983. DataCard had sales in
excess of $100 million. Since his retirement, Mr. Drake has used his
entrepreneurial, management, marketing and technical experiences to assist a
variety of companies. He serves as a director of Analysts International
Corporation, Digi International, U-Ship, Inc. and Innovex, Inc.
RICHARD L. HENCLEY -- Mr. Hencley has been a private investor since May l994. He
served as Chairman of the Board of Telident from August 1993 to May 1994. Prior
to that, he served as President and CEO of the Company from February 1989 to
August 1993, and as Vice President of Operations from 1988 to February 1989.
Prior to that time, Mr. Hencley was Senior Vice President and a member of the
Board of Directors of Micro Component Technology, Inc. ("MCT"), a manufacturer
of integrated circuit testing and handling equipment, which position he held for
more than five years. Prior to joining MCT, Mr. Hencley was Senior Vice
President of Corporate Programs and one of the founders of Data Card
Corporation. Mr. Hencley serves as a member of the Board of Directors of Turtle
Mountain Corporation, Teleproducts Corporation, and Minnesota Project
Innovation.
ROBERT N. KISCH -- Mr. Kisch has been a private investor since 1966. Mr.
Kisch began his management career as a Senior Design Engineer for Engineering
Research Associates, the predecessor to Univac and Control Data. In 1957, Mr.
Kisch was among the founding group of engineers who formed Control Data. Mr.
Kisch retired in 1966 from the position of Vice President and General Manager
of the Computer Division.
JOHN SAGAN -- Mr. Sagan is a private investor and since 1986 has been President
of John Sagan Associates, a financial planning group. Prior to that time, Mr.
Sagan was Vice President and Treasurer of Ford Motor Company. He is also past
Chairman of the Board of the Federal Reserve Bank of Chicago and past Chairman
of the Board of Trustees of Ohio Wesleyan University. Mr. Sagan is a member of
the boards of directors for SBCM Derivative Products, LTD, and Chartwell
Reinsurance Co. He is also a trustee of the YMCA Foundation of Detroit, the
United Methodist Foundation, the Fund for Henry Ford Hospital and Oakwood
Hospital of Dearborn, Michigan.
WARREN S. TYLER -- Mr. Tyler was Senior Vice President of Finance and
Administration of the Company from 1988 to November 1994. From 1983 to the
present, Mr. Tyler has been President of Incor Corporation (formerly Renartler,
Inc.), a management consulting firm specializing in capitalizing and financing
businesses. From 1973 to 1982, Mr. Tyler served as Vice President of Inn
Management, Inc., a management firm for the hospitality industry, responsible
for the operations of up to 26 motels/hotels operated privately and through
various franchises. Mr. Tyler was responsible for financing the acquisition of
new properties, as well as financing operations of the parent corporation.
John Sagan, Scott Anderson, Willis Drake, and Robert Kisch serve on the Board's
Compensation Committee; and John Sagan, Richard Hencley, Mark Sheffert, and
Warren Tyler serve on the Board's Audit Committee.
DIRECTOR COMPENSATION
All directors of the Company are elected for a term of one year and hold office
until the next Annual Meeting of Shareholders. The officers of the Company, who
are elected at the Annual Meeting of the Board of Directors, hold office until
their successors are chosen and qualified or until death, resignation or
removal. Directors who are not employees of the Company are paid director's fees
of $750 per quarter plus $500 for each meeting attended and issued a 1,000 share
stock option with an exercise price equal to the mean between the bid and ask
price of the Common Stock as of the annual meeting date. The Chairman of the
Board is paid $1,000 per month for services performed in that function , and the
Chairman of the Audit and Compensation Committees are each paid $1,000 annually.
In addition, the Chairman of the Board is issued a 10,000 share stock option
with an exercise price equal to the mean between the bid and ask price of the
Common Stock as of the annual meeting. Directors can elect to take the fee in
cash or in shares of the Company's Common Stock. The directors' quarterly fee,
the Chairman of the Board's monthly fee and the annual fee for the Chairman of
the Audit and Compensation Committees will each be doubled when the Company's
operations are profitable.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the compensation for Michael J. Miller, the
only officer of the Company who received compensation of $100,000 or more
during each of Telident's last three fiscal years. Mr. Miller's employment
with the Company began on September 1, 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Miller 1994 $125,000 $10,000 -- -- 105,000 -- --
President and CEO 1995 $125,000 -- -- -- 7,500 -- --
1996 132,875 14,000 -- -- -- -- --
</TABLE>
The Board of Directors of the Company intends to adopt an executive compensation
plan for fiscal 1997 which will be based on the Company's performance compared
to the operating budget to be adopted for the year. The plan, as currently being
considered, would provide for cash bonuses of up to 50% of base compensation and
for stock option awards.
In addition, the Company has begun discussions with Mr. Miller regarding an
employment contract that provides for a one-year, non-compete agreement and
severance payments upon termination without cause and in the event of a change
in control.
STOCK OPTION PLAN
The Telident, Inc. Stock Option Plan (the "Plan"), as amended, provides for the
granting of stock options for up to 675,000 shares of Common Stock to certain
employees, officers and directors of the Company. Options that qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 and options that do not qualify as such "incentive stock
options" ("nonstatutory stock options") may be granted under the Plan. The Plan
is administered by the Board of Directors, which determines the employees,
officers and directors who are to receive options, the type of option to be
granted, and the number of shares subject to each option. Options may not be
granted under the Plan after December 12, 1998. Incentive stock options may not
be granted with a purchase price less than the fair market value of the Common
Stock on the dates the options are granted (or, for persons who own more than
10% of the Company's outstanding voting stock, with a purchase price less then
110% of such fair market value). Nonstatutory stock options may not be granted
with a purchase price less than 85% of the fair market value for the Common
Stock on the dates the options are granted. Aside from the maximum number of
shares of Common Stock reserved for issuance under the Plan, there is no minimum
or maximum number of shares which may be subject to options granted to an
individual under the Plan. However, the aggregate fair market value (determined
as of the time the option is granted) of shares of Common Stock with respect to
which incentive stock options become exercisable for the first time by the
optionee under the Plan during any calendar year may not exceed $100,000.
Options may not be transferred other than by will or the laws of descent and
distribution and during the lifetime of an optionee may be exercised only by the
optionee.
The term of each option, which is fixed by the Board of Directors, may not
exceed ten years from the date the option is granted (except that the term may
not exceed five years for incentive stock options granted to persons who own
more than 10% of the Company's outstanding voting stock). As of July 31, 1996
options for an aggregate of 410,702 shares at exercise prices from $1.00 to
$6.62 per share had been granted under the Plan. The following table sets forth
information regarding option exercises in fiscal 1996 to Michael J. Miller, the
only officer of the Company who received compensation of $100,000 or more during
the year.
OPTION EXERCISES IN FISCAL 1996 AND OPTION VALUES AT JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS AT OPTIONS AT
EXERCISE JUNE 30, 1996 JUNE 30, 1996
(NO. OF VALUE (EXERCISABLE/ (EXERCISABLE/
NAME SHARES) REALIZED UNEXERCISABLE) UNEXERCISABLE)
<S> <C> <C> <C> <C>
Michael J. Miller, CEO* 9,000 $25,900 39,000/ $48,750/
73,500 $85,125
</TABLE>
*On July 23, 1996, Mr. Miller was granted an option to purchase 37,900 shares
at an exercise price of $3.50 per share and a term ending July 22, 2003.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of its directors to
the fullest extent permitted by the Minnesota Business Corporation Act.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of fiduciary duty as directors, except liability for
(i) any breach of the duty of loyalty to the Company or its shareholders, (ii)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) dividends or other distributions of corporate
assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain Minnesota securities laws, or (v) any
transaction from which the director derives an improper personal benefit.
Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.52l contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
CERTAIN TRANSACTIONS
During fiscal 1993, the following directors participated in a 10% Convertible
Debenture offering by the Company: Willis K. Drake -- $100,000; and John Sagan
- -- $25,000. These Debentures had an original due date of October 1, 1995. On
September 30, 1995, Mr. Drake and Mr. Sagan agreed to extend the due date for
their Debentures to July 15, 1997. In consideration for this extension, Mr.
Drake received Warrants to purchase 12,500 shares of Common Stock exercisable at
$4.00 per share until July 15, 1997, and 2,500 shares of Common Stock, and Mr.
Sagan received Warrants to purchase 3,125 shares of Common Stock exercisable at
$4.00 per share until July 15, 1997, and 625 shares of Common Stock. As of
February 5, 1996, Mr. Drake had exercised his warrants through $50,000 of debt
reduction. Mr. Sagan also exercised his warrants resulting in $12,500 of
proceeds to the Company. The Debentures are convertible into Common Stock at the
rate of $3.96 per share.
During fiscal 1994, the Company issued 1,100 units of its securities, each unit
consisting of $100 principal amount of its 10% Convertible Debentures due May 1,
1996 and one stock purchase warrant representing the right to purchase 25 shares
of Common Stock at $6.00 per share during the three-year period ending May 1,
1996. The following directors participated in this Debenture offering: Willis K.
Drake -- $75,000; and John Sagan -- $25,000. In addition, Mssrs. Drake and Sagan
received 18,750 and 6,250 stock purchase warrants. As of February 6, 1996, Mr.
Drake had exercised his warrants through $75,000 of debt reduction. Mr. Sagan
also exercised his warrants resulting in $25,000 of proceeds to the Company. On
April 4, 1996, the Company offered these Debenture holders the option to extend
the Debentures until July 15, 1997. As an incentive to extend, the Debenture
holders were offered additional warrants to purchase Common Stock at $4.00 per
share until July 15, 1997. As of April 30, 1996, Mr. Drake and Mr. Sagan had
extended their Debentures until July 15, 1997, and received Warrants to purchase
9,375 and 3,125 shares of Common Stock, respectively.
During fiscal 1994 and 1995, the following directors loaned the Company an
aggregate of $498,500 and $120,000, respectively: Willis K. Drake -- $473,500 in
1994 and $45,000 in 1995; Warren S. Tyler -- $25,000 in 1994; John Sagan $50,000
in 1995; and Robert N. Kisch -- $25,000 in 1995. The loans paid interest at 10%
per annum. At the beginning of fiscal 1994, Mr. Drake and Mr. Tyler also had
outstanding loans to the Company of $275,000 and $65,000, respectively. Mr.
Drake's $45,000 loan in 1995 was made in connection with a note financing by the
Company in the aggregate principal amount of $240,000. As part of this
financing, the note holders were issued an aggregate of 30,000 shares of Common
Stock, 5,625 shares of which were issued to Mr. Drake, as additional
consideration for the making of such loans.
As of the date of this Prospectus, all of the above loans have been repaid as
follows: Mr. Drake -- $756,834 during fiscal 1994, 1995 and the first nine
months of fiscal 1996 by issuance of an aggregate of 189,209 shares of Common
Stock at $4.00 per share and payment of $36,666 in fiscal 1996; Mr. Tyler --
$25,000 in fiscal 1994 through the exercise of a stock option for 22,500 shares
of Common Stock at $1.00 per share and payment of $2,500 and $65,000 on June 30,
1994, by issuance of 16,250 shares of Common Stock at $4.00 per share; Mr. Sagan
- -- $50,000 in fiscal 1995; and Mr. Kisch -- $25,000 in fiscal 1995 by issuance
of 6,250 shares of Common Stock at $4.00 per share.
On June 30, 1994, Willis K. Drake, Richard L. Hencley, and Warren S. Tyler,
directors of the Company, were issued a combined total of 250,000 (83,333 1/3
each) voting shares of Series I convertible cumulative preferred stock at $4.00
per share, resulting in proceeds to the Company of $1,000,000, which was
utilized to pay off the existing bank line of credit. These shares pay a yearly
dividend at the rate of 1% over the prime rate from time to time of National
City Bank of Minneapolis and are redeemable at the Company's option. The prime
rate of National City Bank of Minneapolis was 8-1/4 % on March 31, 1996. On each
of May 31, September 20 and November 30, 1995, February 29, 1996 and May 31,
1996, the Company redeemed 12,500 shares of Preferred Stock pro rata from these
shareholders. In addition, these individuals received dividend payments in the
aggregate of $95,899 and $65,187 for the fiscal year ended June 30, 1995 and the
nine months ended March 31, 1996, respectively.
As of June 30, 1994, Manchester Financial, an investment banking firm, of which
Mark Sheffert, Chairman of the Board, is president, was paid $50,000 and was
granted stock purchase warrants representing the right to acquire 50,000 shares
of Common Stock at an exercise price of $2.00 per share, for services related to
the restructuring of the Company's bank debt, related party debt, issuance of
preferred stock, and development of a warrant exercise program.
It is Telident's policy that any transaction involving the Company and an
affiliated party be ratified by a majority of independent outside members of the
Company's Board of Directors who do not have an interest in the transaction and
that any such transaction be on terms no less favorable to the Company or its
affiliates than those that are generally available from an unaffiliated party.
The Company's Board of Directors believes that each of the foregoing
transactions were on as favorable terms to the Company as could have been
obtained from unaffiliated persons.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 31, 1996, the number of shares of the
Company's Common Stock and the percentage of the outstanding Common Stock owned
by all shareholders who own beneficially five percent or more of the outstanding
shares of Common Stock, by each director of the Company, and by all officers and
directors as a group. Unless otherwise indicated, each named beneficial owner
has sole or joint with spouse voting and investment power with respect to all
shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL
OWNER, AMOUNT PERCENTAGE
NAME OF DIRECTOR, IDENTITY OF BENEFICIALLY BEFORE AFTER
GROUP(2) OWNED(1) OFFERING OFFERING
<S> <C> <C> <C>
Drake, Willis K. 527,446 10.5% 8.5%
Okabena Partnership K 336,333 6.9 5.5
Tyler, Warren S. 218,515 4.4 3.6
Hencley, Richard L. 217,218 4.4 3.6
Sheffert, Mark 65,406 1.3 1.1
Sagan, John 64,060 1.3 1.1
Kisch, Robert N. 67,835 1.4 1.1
Miller, Michael J. 49,000 1.0 .8
Anderson, Scott R. 2,500 * *
All Officers and Directors
as a group (13 persons) 1,296,129 21.1 17.8
</TABLE>
*Less than 1/10 of one percent.
(1) Includes options, warrants and convertible securities representing the
right to acquire within 60 days of the date of this Prospectus shares of
the Company's Common Stock as follows: Mr. Drake -- 129,692 shares; Mr.
Tyler -- 62,750 shares; Mr. Hencley -- 62,750 shares; Mr. Sheffert 56,125
shares; Mr. Sagan -- 22,376 shares; Mr. R.N. Kisch -- 6,125 shares; Mr.
Miller -- 39,000 shares; and all officers and directors as group (13
persons) -- 440,318 shares. Messrs. Drake, Hencley and Tyler each own
62,500 shares or 33-1/3 % of the Series I Convertible Preferred Stock.
(2) Address of Messrs. Drake, Tyler and Hencley is 4530 West 77th Street,
Suite 198, Minneapolis, Minnesota 55435. Address of Okabena Partnership K
is 5140 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota
55402. Address of Mr. Sheffert is IDS Center, Suite 3650, Minneapolis,
Minnesota 55402. Address of Mr. Sagan is 22149 Long Boulevard, Dearborn,
Michigan 48124. Address of Mr. Kisch is P.O. Box 22701, Robbinsdale,
Minnesota 55422. Address of Mr. Miller is the Company's address. Address
of Mr. Anderson is 3300 Oakdale Avenue North, Robbinsdale, Minnesota
55422.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares of Common Stock, $.02
par value. As of June 30, 1996, 4,903,110 shares of Common Stock were issued and
outstanding. All shares of Common Stock have equal voting rights and, when
validly issued and outstanding, have one vote per share in all matters to be
voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as fully
paid and nonassessable shares. Cumulative voting in the election of directors is
not allowed, which means that the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able to
elect all the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors. On liquidation
of the Company each common shareholder is entitled to receive a pro rata share
of the Company's assets available for distribution to common shareholders.
Holders of shares of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Company has not paid any dividends on its Common Stock and intends to retain
earnings, if any, to finance the development and expansion of its business.
Future dividend policy is subject to the discretion of the Board of Directors
and will depend upon a number of factors, including earnings, capital
requirements and the financial condition of the Company.
OPTIONS AND WARRANTS
The Company has issued options and warrants in addition to the Bridge Warrants
which grant to the holders thereof the right to purchase an aggregate of 666,373
shares of the Common Stock at a weighted average exercise price of $3.39 per
share. These options and warrants are exercisable at various times through July
2003. In connection with the Bridge Financing described below, the Company
issued Bridge Warrants representing the right to acquire up to 125,000 shares of
Common Stock at a price equal to 80% of the Price to Public. These warrants
expire in May 2001. An aggregate of 553,650 shares subject to outstanding
options and warrants are subject to effective registration statements under the
Securities Act and the additional 125,000 shares subject to the Bridge Warrants
have registration rights.
The number of shares issuable upon exercise of the options and warrants and the
exercise prices are subject to equitable adjustment upon the occurrence of
certain events such as stock splits, stock dividends and recapitalizations. The
Company may redeem the warrants representing the right
to acquire up to 255,671 of the shares subject to the warrants upon payment to
the holders thereof of $.10 per warrant to be redeemed; provided, however, that
the fair market value of the Company's Common Stock is at the time of the giving
of notice of such redemption at least $7.00 per share. The Company must give
written notice of the date set by the Company for such redemption at least 30
days prior to such date.
CONVERTIBLE DEBENTURES
At May 21, 1996, $998,000 principal amount of the Company's 10% Convertible
Debentures due July 15, 1997, was outstanding. The Debentures are convertible
into shares of Common Stock at $3.96 per share.
PREFERRED STOCK
The Company is authorized to issue up to 2,500,000 shares of Preferred Stock in
series to be designated by the Board of Directors. There currently are 187,500
shares of Series I Convertible Preferred Stock, $.02 per share par value, issued
and outstanding. The Series I Convertible Preferred Stock is convertible into an
equal number of shares of Common Stock at the option of the holder and is
redeemable at the option of the Company at $4.00 per share plus accrued
dividends. Dividends on the Preferred Stock are cumulative and the dividend rate
is 1% over the prime rate from time to time of National City Bank of
Minneapolis. This Preferred Stock has voting rights equal to the Company's
Common Stock except as may be otherwise required by law. These shares of
Preferred Stock have no preemptive or subscription rights.
No additional shares of Preferred Stock are expected to be issued by the Company
in the immediate future; however, the Board may use its authority to issue
Preferred Stock to effect the business purposes of the Company. Material
provisions concerning the terms of any series of Preferred Stock such as
dividend rate, conversion features and voting rights, will be determined by the
Board of Directors of the Company at the time of such issuance. The ability of
the Board to issue Preferred Stock also could be used by the Company as a means
of resisting a change of control of the Company and, therefore, could be
considered an "anti-takeover" device.
MINNESOTA ANTITAKEOVER LAW
Section 302A.671 of the Minnesota Business Corporation Act applies, with certain
exceptions, to any acquisition of voting stock of the Company (from a person
other than the Company, and other than in connection with certain mergers and
exchanges to which the Company is a party) resulting in the beneficial ownership
of 20% or more of the voting stock of the shareholders of the Company prior to
its consummation. In general, shares acquired in the absence of such approval
are denied voting rights and are redeemable at their then market value by the
Company within 30 days after the acquiring person has failed to give a timely
information statement to the Company or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally prohibits
any business combination by the Company, or any subsidiary of the Company, with
any shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all the disinterested members of the board of
directors of the Company before the interested shareholder's share acquisition
date.
The foregoing provisions may have the effect of preventing a change in control
of the Company, thereby denying shareholders the opportunity to sell shares in
such transactions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank of
Minnesota, N.A.
DESCRIPTION OF BRIDGE FINANCING
In May 1996, the Company completed a Bridge Financing consisting of the issuance
of 50 Bridge Units. Each Bridge Unit consisted of a $25,000 principal amount
Bridge Notes and Bridge Warrants to purchase 2,500 shares of the Company's
Common Stock. The Bridge Financing resulted in $1,250,000 of principal amount of
Bridge Notes outstanding and the issuance of Bridge Warrants to purchase 125,000
shares of Common Stock.
BRIDGE NOTES
The Bridge Notes were not issued pursuant to an indenture, and no trustee was
retained to enforce any of the obligations represented by the Bridge Notes. The
Bridge Notes bear interest from the date of issue at ten percent annually,
payable at maturity. The Bridge Notes are payable in full, with interest, at the
earlier of 20 days after the date of this Prospectus or six months after the
date of the Bridge Notes.
The Bridge Notes are unsecured debt obligations of the Company. Accordingly,
holders of a security interest in the Company's assets would have prior claim to
such assets in the event of the dissolution or liquidation of the Company.
Principal and interest payments on the Bridge Notes are subordinated to the
prior payment of any obligations of the Company to financial institutions
representing indebtedness for borrowed money.
A maximum of $625,000, representing 50% of the principal amount of the Bridge
Notes, is convertible, at the option of the holders thereof, into the Company's
Common Stock for a period of l5 days after the effective date of this offering.
The conversion price is equal to 80% of the Price to Public.
BRIDGE WARRANTS
Each Bridge Warrant entitles the holders thereof to purchase one share of Common
Stock beginning with the completion of this offering, but, in any case, not
later than 12 months after issuance of the Bridge Notes. The Bridge Warrants
expire in May 2001. The initial exercise price of the Bridge Warrants will be
equal to 80% of the Price to Public.
The Bridge Warrants provide for the automatic adjustment of the number of shares
issuable upon exercise of the Warrants, and of the exercise price, in certain
events, including stock dividends, stock splits, distributions of Common Stock,
reorganizations, reclassifications, subdivisions and combinations of the Common
Stock, and the merger, consolidation or sale of all or substantially all of the
assets of the Company.
REGISTRATION RIGHTS
The bridge loan agreements pursuant to which the Bridge Notes and Bridge
Warrants were issued (the "Bridge Loan Agreements") provide that the Company is
obligated to register the resale of the stock issued upon conversion of the
Bridge Notes and exercise of Bridge Warrants pursuant to the Securities Act
within 12 months of the issuance of the Bridge Notes or one month after the
Warrants become exercisable, whichever is later. The holders of such securities
also have the right to include conversion stock and warrant stock in certain
registration statements filed by the Company.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, R.J. Steichen
& Company (the "Underwriter") has agreed to purchase an aggregate of 1,150,000
shares of the Common Stock from the Company at the Price to Public set forth on
the cover page of this Prospectus, less the underwriting discount.
The Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter will purchase
all of the shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Underwriter that the Underwriter proposes to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriter may
allow, and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the initial public offering, the offering price
and other selling terms may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable not later than
30 days after the date of this Prospectus, to purchase up to 172,500 additional
shares of Common Stock at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriter may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby. If purchased, the Underwriter will offer
such additional shares on the same terms as those on which the 1,150,000 shares
are being offered.
The Company has agreed to pay, the Underwriter a nonaccountable expense
allowance of 2.5% of the aggregate offering price of the shares offered hereby,
as well as any shares purchased pursuant to the over-allotment option.
The Company has agreed to issue to the Underwriter, for nominal consideration, a
warrant (the "Underwriter's Warrant") to purchase 115,000 shares of Common Stock
of the Company at a price per share equal to 120% of the Price to Public. The
Underwriter's Warrant is exercisable commencing one year from the date of this
Prospectus until five years after such date. The Underwriter's Warrant also
provides certain demand and participatory rights to require registration under
the Securities Act of the shares purchasable upon exercise of the Underwriter's
Warrant. The Underwriter's Warrant is not transferable except in accordance with
NASD and federal and state securities regulations. Any profits realized by the
Underwriter upon the sale of the Underwriter's Warrant or the Common Stock
issuable upon exercise thereof may be deemed to constitute additional
underwriting compensation.
The Company and the Underwriter have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
such indemnification provisions, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Shareholders of the Company, holding in the aggregate 855,811 shares of Common
Stock (600,238 of which may be immediately sold) and holders of options,
warrants, Debentures and Preferred Stock to purchase or convert into an
additional 440,318 shares have agreed not to offer, sell or otherwise dispose,
or directly or indirectly cause or permit the offer, sale or other disposition,
of any Common Stock of the Company owned of record or beneficially and of which
such shareholder has the power to control the disposition for a period of 180
days after the date of this Prospectus without the prior consent of the
Underwriter. See "Shares Eligible for Future Sale."
The Underwriter has advised the Company that it does not intend to confirm sales
to any account over which it exercises discretionary authority.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have 6,053,110 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options
or warrants or conversion of any of the Bridge Notes, Preferred Stock or
Debentures. Of these shares, 2,346,231 shares may be freely traded without
restriction or further registration under the Securities Act, unless held by an
"affiliate" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 3,706,879 shares held by existing shareholders
were issued and sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act ("Restricted Shares"). The
Restricted Shares may be sold in the public market only if registered, or
pursuant to an exemption from registrations such as Rule 144 or 144(k) under the
Securities Act. As of the date of this Prospectus, 3,131,842 Restricted Shares
were included in existing registration statements under the Securities Act or
had been held for at least two years and were subject to resale pursuant to Rule
144 and such Restricted Shares are eligible for immediate sale. Holders of
600,238 of such Restricted Shares have entered into lock-up agreements under
which they have agreed not to offer, sell or otherwise dispose, or directly or
indirectly cause or permit the offer, sale or other disposition, of any Common
Stock of the Company owned of record or beneficially and of which such
shareholder has the power to control the disposition for a period of 180 days
after the date of this Prospectus, without the prior written consent of the
Underwriter (the "Lock-Up Agreement"). In addition, shares of Common Stock
subject to outstanding options, warrants, Debentures, Preferred Stock or Bridge
Notes and Bridge Warrants were subject to effective registration statements
under the Securities Act or had certain registration rights. Of these shares,
440,318 shares were subject to the Lock-Up Agreement.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least two years
(including the holding period of any prior owner, except an affiliate) is
entitled to sell in "a broker's transaction" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 60,531 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modification will have a material effect on
the time when shares of the Company's Common Stock become eligible for resale.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby will
be passed upon for the Company and the Selling Shareholders by the firm of Gray,
Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. Certain legal
matters will be passed upon for the Underwriter by Maun & Simon, PLC,
Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company for the fiscal years ended June 30, 1995
and 1994 and the financial statements of Cantus Corporation for the year ended
December 31, 1993 included in this Prospectus and elsewhere in the Registration
Statement have been audited by McGladrey & Pullen, LLP, independent accountants,
as set forth in their reports which are included elsewhere in this Prospectus
and in the Registration Statement upon the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Reports and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and inspected at
the Commission's regional offices at Room 7 World Trade Center, New York, New
York 10048 and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street N.W., Washington, D.C. 20549, at prescribed
rates.
The Company has filed with the Securities and Exchange Commission a Registration
Statement on Form SB-2 under the Securities Act of 1933, with respect to the
securities offered hereby. This Prospectus omits certain information included in
such Registration Statement. For further information about the Company and its
securities, reference is made to such Registration Statement and to the exhibits
filed as part thereof or otherwise incorporated therein. Each summary in this
Prospectus of information included in the Registration Statement or any exhibit
thereto is qualified in its entirety by this reference to such information or
exhibit.
The Company furnishes to its shareholders annual reports containing financial
statements audited by an independent public accounting firm after the end of
each fiscal year. In addition, the Company will furnish to its shareholders
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial and other information after the end of each fiscal quarter,
upon written request to the Vice President-Finance of the Company.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
TELIDENT, INC. AND CONSOLIDATED SUBSIDIARIES
MARCH 31, 1996
Consolidated Balance Sheet as of March 31, 1996 F-2 Consolidated Statements of
Operations for the nine-month periods ended March 31,
1996 and 1995 F-3
Consolidated Statements of Shareholders' Deficit for the nine-month period ended
March 31, 1996 F-4
Consolidated Statements of Cash Flows for the nine-month periods ended March 31,
1996 and 1995 F-5
Notes to Interim Consolidated Financial Statements (Unaudited) F-6
JUNE 30, 1995 AND 1994
Independent Auditor's Report F-7
Consolidated Balance Sheets F-8
Consolidated Statements of Operations F-9
Consolidated Statements of Shareholders' Deficit F-10
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-12
CANTUS CORPORATION (A PREDECESSOR COMPANY)
Independent Auditor's Report F-21 Balance Sheets as of December 31, 1993 and as
of September 30, 1994 and 1993 F-22 Statements of Operations for the year ended
December 31, 1993 and for the
nine-month periods ended September 30, 1994 and 1993 F-23
Statements of Shareholders' Deficit for the year ended December 31, 1992 and 1993
and for the nine-month period ended September 30, 1994 F-24
Statements of Cash Flows for the year ended December 31, 1993 and for the
nine-month periods ended September 30, 1994 and 1993 F-25
Notes to financial statements F-26
</TABLE>
TELIDENT, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 150,765
Trade accounts receivable, net of allowance for doubtful
accounts of $40,000:
Billed 556,331
Unbilled 13,798
Inventories, net of reserve for obsolescence of $15,000 643,391
Other 65,500
Total current assets 1,429,785
Furniture and office equipment, less accumulated depreciation
of $111,047 259,837
Patents, less accumulated amortization of $50,015 51,703
Other assets 85,742
Goodwill, net of accumulated amortization of $142,409 360,223
$ 2,187,290
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 347,803
Accrued expenses 144,189
Deferred revenue 14,757
Notes payable -- bank 63,708
Notes payable -- related parties 4,223
Notes payable -- others 45,697
Debentures and interest payable -- related parties 117,160
Debentures and interest payable -- others 891,624
Total current liabilities 1,629,161
Debentures payable -- related parties 125,000
Debentures payable -- others 460,000
Total liabilities 2,214,161
COMMITMENTS
SHAREHOLDERS' DEFICIT:
Preferred stock, $.02 par value, convertible into common stock at the
rate of one common share for each preferred share, 2,500,000 shares
authorized, 200,000 shares outstanding 4,000
Common stock, $.02 par value, 10,000,000 shares authorized,
4,727,089 shares outstanding 94,542
Additional paid-in capital 8,508,307
Accumulated deficit (8,633,720)
(26,871)
$ 2,187,290
</TABLE>
See accompanying notes to interim consolidated financial statements.
TELIDENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1996 1995
<S> <C> <C>
NET SALES $1,786,958 $1,203,398
COST OF SALES 531,175 376,061
Gross profit 1,255,783 827,337
OPERATING EXPENSES:
Sales and marketing 631,664 517,476
Research and development 765,527 391,812
General and administrative 721,975 650,907
Total operating expenses 2,119,166 1,560,195
Loss from operations (863,383) (732,858)
INTEREST EXPENSE -- others (239,956) (233,871)
INTEREST EXPENSE -- related parties (39,857) (27,167)
Net loss ($1,143,196) $ (993,896)
NET LOSS PER COMMON SHARE, primary and fully
diluted $ (.28) $ (.30)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,256,602 3,578,510
</TABLE>
See accompanying notes to interim consolidated financial statements.
TELIDENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER AMOUNT OF
PRICE PER OF SHARES PREFERRED
SHARE ISSUED STOCK
<S> <C> <C> <C>
BALANCE June 30, 1995 4,050,950 $4,750
July, 1995 -- exercise of options $ 2.88 9,000 --
July, 1995 -- exercise of warrants $ 4.00 7,500 --
August, 1995 -- conversion of debt $ 4.00 35,167 --
August, 1995 -- exercise of options $ 3.50 38,750 --
September, 1995 -- exercise of warrants $ 4.00 10,750 --
September, 1995 -- exercise of options $ 1.00 23,750 --
September, 1995 -- preferred stock redemption $ 4.00 (12,500) (250)
October, 1995 -- common stock issued in connection
with notes payable $2.50-4.00 9,875 --
October, 1995 -- exercise of options $ 1.00 14,668 --
October, 1995 -- conversion of debt $3.00-4.00 141,250 --
October, 1995 -- issuance of common stock $ 3.00 200,000 --
October, 1995 -- exercise of warrants $ 4.00 106,250 --
November, 1995 -- preferred stock redemption $ 4.00 (12,500) (250)
Common stock issued to directors for services $4.00-5.00 4,991 --
Jan, 1996 -- conversion of debt $3.96-4.00 32,651 --
Jan, 1996 -- conversion of warrants, net of expenses of
$45,139 $4.00-5.32 261,294 --
Feb, 1996 -- exercise of preemptive rights $3.00-4.00 7,243 --
Feb, 1996 -- exercise of options $2.00-4.38 10,500 --
Feb, 1996 -- preferred stock redemption $ 4.00 (12,500) (250)
Preferred stock dividends -- --
Net loss -- --
BALANCE March 31, 1996 4,927,089 $4,000
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AMOUNT OF ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT
<S> <C> <C> <C>
BALANCE June 30, 1995 $76,269 $5,804,629 $(7,490,524)
July, 1995 -- exercise of options 180 25,740 --
July, 1995 -- exercise of warrants 150 29,850 --
August, 1995 -- conversion of debt 703 123,296 --
August, 1995 -- exercise of options 775 134,850 --
September, 1995 -- exercise of warrants 215 42,785 --
September, 1995 -- exercise of options 475 23,275 --
September, 1995 -- preferred stock redemption -- (49,750) --
October, 1995 -- common stock issued in connection
with notes payable 198 28,052 --
October, 1995 -- exercise of options 293 14,375 --
October, 1995 -- conversion of debt 2,825 427,175 --
October, 1995 -- issuance of common stock 4,000 596,000 --
October, 1995 -- exercise of warrants 2,125 422,875 --
November, 1995 -- preferred stock redemption -- (49,750) --
Common stock issued to directors for services 100 16,150 --
Jan, 1996 -- conversion of debt 653 129,347 --
Jan, 1996 -- conversion of warrants, net of expenses of
$45,139 5,226 854,022 --
Feb, 1996 -- exercise of preemptive rights 145 22,533 --
Feb, 1996 -- exercise of options 210 27,790 --
Feb, 1996 -- preferred stock redemption -- (49,750) --
Preferred stock dividends -- (65,187)
Net loss -- -- (1,143,196)
BALANCE March 31, 1996 $94,542 $8,508,307 $(8,633,720)
</TABLE>
See accompanying notes to interim consolidated financial statements.
TELIDENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 1,143,196) ($ 993,896)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense 38,166 19,275
Amortization expense 141,756 93,251
Common stock issued for services 16,250 44,000
Common Stock issued in connection with notes
payable and recorded as interest expense -- 36,000
Changes in assets and liabilities:
Decrease in receivables 670,564 5,014
(Increase) decrease in inventory (196,915) 96,091
Increase in other assets (90,322) (3,873)
Decrease in trade accounts payable (254,622) (13,542)
Increase (decrease) in accrued expenses (180,576) 68,965
Net cash used in operating activities (998,895) (648,715)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for patent costs (9,701) (7,304)
Purchase of furniture and office equipment (184,936) (47,592)
Acquisition of Cantus (cash acquired) -- 11,321
Net cash used in investing activities (194,637) (43,575)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on related party borrowing (98,827) (66,281)
Borrowings from related parties -- 95,000
Payments on notes payable-bank (2,287,143) (264,773)
Borrowings from notes payable-bank 1,698,716 350,427
Payments on borrowings from others (171,145) (3,276)
Borrowings from others -- 201,000
Proceeds from issuance of common stock 2,236,139 406,504
Preferred stock dividends (65,187) (62,425)
Preferred stock redemption (150,000) --
Issuance of debentures -- others -- 33,000
Net cash provided by financing activities 1,162,553 689,176
Net decrease in cash for the period (30,979) (3,114)
CASH, beginning of period 181,744 7,107
CASH, end of period $ 150,765 $ 3,993
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Conversion of notes payable to common stock $ 684,000 $ 194,195
Common stock issued for services $ 16,250 $ 44,000
Common stock issued for Business acquisition $ -- $ 315,788
</TABLE>
See accompanying notes to interim consolidated financial statements.
TELIDENT, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
INTERIM REPORTING
The interim consolidated financial statements are unaudited; however, in the
opinion of the Company, the interim statements include all adjustments,
consisting of normal recurring adjustments, necessary for the fair statement of
the results and balances for the interim periods. The consolidated results of
operations for the nine-month period ended March 31, 1996, do not necessarily
indicate the results to be expected for the full year.
INVENTORIES
Inventories are stated at the lower of cost or market using the first in, first
out method, and consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1995
<S> <C>
Raw materials $391,913
Work in progress 169,440
Finished goods 97,038
Inventory reserve (15,000)
$643,391
</TABLE>
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss (less the preferred
stock dividend) by the weighted average number of shares of Common Stock
outstanding during the year. Common Stock equivalents such as options or
warrants were not included in the calculation as their effect on amounts
reported would be antidilutive.
MAJOR CUSTOMERS
Sales during the first nine months of fiscal 1996, to one of the Company's
customers amounted to 19.7% of total product sales. Sales during the first nine
months of fiscal 1995, to two of the Company's customers amounted to 18% and 15%
of total product sales.
SUBSEQUENT EVENTS
Subsequent to March 31, 1996, holders of $500,000 principal amount of the
Company's 10% Convertible Debentures due May 1, 1996 have elected to convert
their Debentures into 166,666 shares of the Company's Common Stock, holders of
$413,000 principal amount of such Debentures have agreed to extend the due date
of their Debentures to July 15, 1997, and holders of $50,000 principal amount of
such Debentures have indicated that they want their Debentures paid on the due
date. As an incentive to cause the Debentures to be converted or to have the due
date extended to July 15, 1997, the Company temporarily reduced the conversion
price of the Debentures from $3.96 to $3.00 per share and agreed to issue a
warrant representing the right to acquire one share of Common Stock at a warrant
exercise price of $4.00 per share for every $8.00 principal amount of the
Debentures so extended. The Company expects to incur an interest charge of
approximately $65,000 in the fourth quarter of fiscal 1996 in connection with
the conversion of Debentures at a reduced conversion rate.
In May 1996, the Company raised $1,160,000, after payment of related expenses,
in the Bridge Financing, which consisted of Bridge Notes and Bridge Warrants.
The Company approved a one-for-two reverse stock split for all common and
preferred shares effective June 4, 1996. The effect of this reverse stock split
has been retroactively reflected in the financial statements and notes for all
periods presented. Amounts restated included shares, prices and net loss per
share amounts.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of
Telident, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Telident, Inc.
and subsidiaries, as of June 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telident, Inc. and
subsidiaries, as of June 30, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has convertible debentures
payable totaling approximately $2.1 Million, which are due during fiscal 1996.
While the Company believes it has sufficient working capital and financing
available to fund operations, the Company does not currently have sufficient
working capital or existing sources of financing to retire these obligations if
they are not converted by the debenture holders. In addition, there is no
assurance that the holders will convert the debentures into common stock. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are discussed in
Note 1. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
August 11, 1995 (May 14, 1996
as to Notes 8 and 11)
TELIDENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1995 1994
<S> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS:
Cash $ 181,744 $ 7,107
Trade accounts receivable, net of allowance for doubtful
accounts of $40,000 and $20,000, respectively (Note 9):
Billed 1,050,998 580,933
Unbilled 189,695 153,380
Inventories, net of reserve for obsolescence of $15,000 and
$10,000, respectively 446,476 392,251
Other 54,170 25,447
Total current assets 1,923,083 1,159,118
Furniture and office equipment, less accumulated depreciation
of $73,103 and $44,790, respectively 113,067 89,893
Patents, less accumulated amortization of $41,015 and
$25,602, respectively 51,002 59,111
Other assets 64,113 161,343
Goodwill, net of accumulated amortization of $67,016
(Note 10) 435,616 --
$ 2,586,881 $ 1,469,465
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 602,425 $ 501,338
Accrued expenses 227,739 206,309
Deferred revenue 61,167 --
Notes payable -- bank (Note 5) 652,135 --
Notes payable -- related parties (Note 3) 178,050 260,867
Notes payable -- others (Note 5) 340,841 --
Debentures and interest payable -- related parties (Note 3) 246,770 9,240
Debentures and interest payable -- others (Notes 6 and 8) 1,882,630 64,175
Total current liabilities 4,191,757 1,041,929
Debentures payable -- related parties (Notes 3 and 6) -- 235,000
Debentures payable -- others (Notes 6 and 8) -- 1,760,000
Total liabilities 4,191,757 3,036,929
COMMITMENTS (Note 4)
SHAREHOLDERS' DEFICIT (Notes 3 and 8):
Preferred stock, $.02 par value, convertible into common
stock at the rate of one common share for each preferred
share, 2,500,000 shares authorized, 237,500 and 250,000
shares outstanding, respectively 4,750 5,000
Common stock, $.02 par value, 10,000,000 shares authorized,
3,813,450 and 3,344,748 shares outstanding, respectively 76,269 66,895
Additional paid-in capital 5,804,629 4,931,833
Accumulated deficit (7,490,524) (6,571,192)
(1,604,876) (1,567,464)
$ 2,586,881 $ 1,469,465
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TELIDENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994
<S> <C> <C>
NET SALES (Note 9) $2,283,959 $ 1,191,661
COST OF SALES 677,689 416,029
Gross profit 1,606,270 775,632
OPERATING EXPENSES:
Sales and marketing 738,919 710,855
Research and development 479,475 643,252
General and administrative 929,919 697,847
Total operating expenses 2,148,313 2,051,954
Loss from operations (542,043) (1,276,322)
INTEREST EXPENSE -- related parties (41,933) (56,615)
INTEREST EXPENSE -- others (335,356) (298,812)
Net loss $ (919,332) ($ 1,631,749)
NET LOSS PER COMMON SHARE $ (.28) $ (.52)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,630,442 3,140,901
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TELIDENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NUMBER AMOUNT OF
PRICE OF SHARES PREFERRED
PER SHARE ISSUED STOCK
<S> <C> <C> <C>
Balance, June 30, 1993 6,251,165 $ --
Retroactive restatement of a 1 for 2 reverse stock split
(Note 11) (3,125,582) --
Common stock issued to directors for services $3.10-4.26 1,328 --
Common stock issued for services $ 2.60 15,000 --
March, 1994 -- exercise of options $ 1.00 22,000 --
April, 1994 -- exercise of warrants $1.00-1.20 27,462 --
June, 1994 -- conversion of debt $ 4.00 153,375 --
June, 1994 -- preferred stock issued to directors $ 4.00 250,000 5,000
Net loss -- --
Balance, June 30, 1994 3,594,748 5,000
Common stock issued to directors for services $2.12-4.38 13,594 --
Common stock issued for services $ 2.00 5,000 --
July, 1994 -- exercise of warrants $ 1.20 16,666 --
August, 1994 -- exercise of warrants
(including conversion of $158,334 of
related party debt to exercise warrants
for 39,584 shares of common stock) net
of expenses of $50,000 $ 4.00 148,585 --
November, 1994 -- Business acquisition $ 1.50 210,525 --
January, 1995 -- common stock issued in connection with
notes payable $ 1.20 30,000 --
January, 1995 -- conversion of debt $ 2.24 16,250 --
April, 1995 -- exercise of options $ 1.00 26,832 --
May, 1995 -- preferred stock redemption $ 4.00 (12,500) (250)
June, 1995 -- exercise of warrants $ 4.00 1,250 --
Preferred stock dividends -- --
Net loss -- --
Balance, June 30, 1995 4,050,950 $ 4,750
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OF ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT
<S> <C> <C> <C>
Balance, June 30, 1993 $ 62,512 $ 3,291,716 $(4,939,443)
Retroactive restatement of a 1 for 2 reverse stock split
(Note 11) -- -- --
Common stock issued to directors for services 26 4,974 --
Common stock issued for services 300 38,700 --
March, 1994 -- exercise of options 440 21,560 --
April, 1994 -- exercise of warrants 549 9,451 --
June, 1994 -- conversion of debt 3,068 610,432 --
June, 1994 -- preferred stock issued to directors -- 955,000 --
Net loss -- -- (1,631,749)
Balance, June 30, 1994 66,895 4,931,833 (6,571,192)
Common stock issued to directors for services 272 33,728 --
Common stock issued for services 100 9,900 --
July, 1994 -- exercise of warrants 333 19,667 --
August, 1994 -- exercise of warrants
(including conversion of $158,334 of
related party debt to exercise warrants
for 39,584 shares of common stock) net
of expenses of $50,000 2,972 541,366 --
November, 1994 -- Business acquisition 4,211 311,577 --
January, 1995 -- common stock issued in connection with
notes payable 600 35,400 --
January, 1995 -- conversion of debt 325 35,536 --
April, 1995 -- exercise of options 536 26,296 --
May, 1995 -- preferred stock redemption -- (49,750) --
June, 1995 -- exercise of warrants 25 4,975 --
Preferred stock dividends -- (95,899) --
Net loss -- -- (919,332)
Balance, June 30, 1995 $ 76,269 $ 5,804,629 $(7,490,524)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TELIDENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (919,332) ($ 1,631,749)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense 32,419 17,400
Amortization expense 150,447 67,579
Common stock issued for services 44,000 44,000
Common stock issued in connection with notes payable and recorded as
interest expense 36,000 --
Changes in assets and liabilities, net of effects of Cantus
acquisition:
(Increase) in trade accounts receivable (401,170) (354,599)
(Increase) decrease in inventories (12,021) 218,518
(Increase) in other assets (2,998) (109,091)
Increase (decrease) in trade accounts payable (47,392) 60,013
Increase in accrued expenses and deferred revenue 83,091 149,465
Net cash used in operating activities (1,036,956) (1,538,464)
Cash flows from investing activities:
Payments of patent costs (7,304) (33,304)
Purchases of furniture and office equipment (46,634) (45,700)
Acquisition of Cantus (cash acquired) (Note 10) 11,321 --
Net cash used in investing activities (42,617) (79,004)
Cash flows from financing activities:
Borrowings from related party debt 120,000 498,500
Payments on related party borrowing (60,000) --
Borrowings from others 223,074 --
Payments on borrowings from others (5,936) --
Net proceeds from issuance of preferred stock -- 960,000
Preferred stock redemption (50,000) --
Preferred stock dividends (95,899) --
Proceeds from issuance of common stock 437,836 32,000
Issuance of debentures -- related parties -- 110,000
Issuance of debentures -- others 33,000 985,000
Net borrowings (payments) on bank line of credit 652,135 (1,000,000)
Net cash provided by financing activities 1,254,210 1,585,500
Net increase (decrease) in cash for the year 174,637 (31,968)
Cash, beginning of year 7,107 39,075
Cash, end of year $ 181,744 $ 7,107
Supplemental disclosure of cash flow information:
Interest paid $ 324,738 $ 196,443
Supplemental schedule of non-cash investing and
financing activities:
Common stock issued for services $ 44,000 $ 44,000
Conversion of notes payable to common stock $ 35,861 $ 613,500
Conversion of notes payable to common stock through warrants $ 158,334 $ --
Common stock issued in connection with Cantus Acquisition $ 315,788 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TELIDENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS ACTIVITIES/GOING CONCERN:
Telident, Inc. (the Company) was organized in July 1983. The Company is a
designer and manufacturer of hardware and software for the Enhanced 911 (E-911)
marketplace. The Company provides enhancements to telephone systems (PBX's), as
well as providing Public Safety Answering Point systems and alternative
selective routing equipment for the 911 marketplace throughout the United
States. In addition, the Company provides ongoing support services to its
customers under separate hardware and software maintenance agreements.
The consolidated financial statements were prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. In 1995, the Company had a net loss of
$919,332 and at June 30, 1995, had a shareholders' deficit of $1,604,876. While
the Company believes it has sufficient working capital and financing available
for operations, continuation as a going concern is dependent upon the Company's
ability to retire the convertible debentures payable or convert them into common
stock as these debentures become due during the Company's year ending June 30,
1996.
The Company, throughout fiscal 1995, continued to address its capital needs, and
was able to:
* Generate a 92% increase in sales over 1994, while holding expenses virtually
constant.
* Generate $411,000 through the exercise of warrants.
* Convert $194,000 of debt into common stock.
* Generate significant sales growth during the fourth quarter of its fiscal
year ended June 30, 1995. o Improve annual gross profit margins from 65% to
70% of sales.
* Establish a $750,000 revolving line of credit for working capital needs.
* Establish several significant multi-year distribution agreements.
The Company, subsequent to its fiscal year ended June 30, 1995, has been
actively negotiating with debenture holders regarding conversion or extension of
the debentures. If the debenture holders are unable or unwilling to convert or
extend the debentures payable, the Company will be required to obtain additional
debt or equity capital. However, there is no assurance that the Company will be
able to raise such additional capital. Therefore, there continues to be
substantial doubt about its ability to continue as a going concern.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Telident Europe, LTD, and Cantus Corporation.
During fiscal years 1995 and 1994, Telident Europe, LTD had no significant
activity. All intercompany balances and transactions have been eliminated in
consolidation.
CASH
The Company maintains cash in bank accounts which at times may exceed federally
insured limits. The Company has not experienced any losses in such accounts.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out method), or
market, and consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1994
<S> <C> <C>
Raw materials $236,014 $145,781
Work in progress 136,529 151,413
Finished goods 88,933 105,057
Reserve for inventory obsolescence (15,000) (10,000)
$446,476 $392,251
</TABLE>
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost. Depreciation is provided
using the straight-line method over estimated useful lives of seven years.
PATENTS
Patents consist of unamortized registration costs for protection of the
Company's technology. The Company amortizes the patent costs on a straight-line
basis over its estimated useful life of five years.
OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1994
<S> <C> <C>
Deferred costs on discounted warrant
offering $ -- $ 50,000
Deferred financing costs, net 62,713 98,543
Other, net 1,400 12,800
$64,113 $161,343
</TABLE>
Deferred costs consist of fees related to a discounted warrant offering, which
were netted against the proceeds of the warrant exercise in fiscal 1995.
Financing costs consist of unamortized fees related to debt offerings. The
Company amortizes financing costs over the estimated life of the related debt
instruments.
GOODWILL
Cost in excess of assets acquired, is being amortized over its estimated life of
five years using the straight-line method. The Company reviews its goodwill
periodically to determine potential impairment by comparing the carrying value
of the goodwill with expected future net cash flows provided by operating
activities of the business. Should the sum of the expected future net cash flows
be less than the carrying value, the Company would determine whether an
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the goodwill. To date, management has determined
that no impairment of goodwill exists.
WARRANTY LIABILITY
The Company guarantees that products sold shall meet published specifications.
The Company will repair or replace, at its own expense, any such products that
fail to meet specifications. The warranty period is generally 12 months from
date of shipment by the Company. Management has estimated the cost of such
warranty work and recognizes the expense when the accompanying revenue is
recognized.
POSTRETIREMENT BENEFITS
The Company does not currently provide postretirement benefits.
REVENUE RECOGNITION
The Company recognizes product revenue upon shipment or, when applicable,
installation. Unbilled receivables represent amounts due to the Company for
equipment shipped, which due to billing terms, has not been invoiced to the
customer.
DEFERRED REVENUE
Deferred revenue primarily represents payments received for ongoing customer
support to be provided by the Company. These revenues are recognized over the
period for which the related services are provided.
RESEARCH AND DEVELOPMENT
The costs of Company-sponsored research and development are expensed as
incurred.
INCOME TAXES
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences, and operating
loss or tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the variances between
the amounts of assets and liabilities recorded for income tax and financial
reporting purposes. Deferred tax assets are reduced by a valuation allowance to
reflect the possibility that some portion or all of the deferred tax assets may
not be realized.
A valuation allowance has been established to fully offset the net deferred tax
asset of approximately $3.1 Million, and $2.7 Million at June 30, 1995 and 1994,
respectively. The deferred tax asset at June 30, 1995 is comprised of the
following components: net operating loss carryforwards and tax credits of
$3,030,000; goodwill amortization of $20,000; and other of $50,000. The deferred
tax asset of June 30, 1994 is comprised of the following components: net
operating loss carry forwards and tax credits of $2,700,000. The valuation
allowance of $3.1 Million at June 30, 1995 increased by $400,000 during fiscal
1995 and $700,000 during fiscal 1994. Upon achieving profitability and
demonstrating that the realization of existing loss carryforwards and deferred
tax assets is more likely than not, an asset equal to all or a portion of the
estimated tax benefit of existing loss carryforwards and other temporary
differences may be recognized on the Company's balance sheet. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. No income tax expense was incurred in the fiscal
years ending June 30, 1995 or 1994.
LOSS PER COMMON SHARE AND SUPPLEMENTARY LOSS PER SHARE
Loss per common share is computed by dividing the net loss (less the preferred
stock dividend) by the weighted average number of shares of common stock
outstanding during the year. Common stock equivalents such as options or
warrants were not included in this calculation as their effect on amounts
reported would be antidilutive.
Assuming the June, 1994 conversion of debt had taken place at the beginning of
fiscal 1994, the Company would have had a primary loss per share of $(.48) for
the year ended June 30, 1994.
Assuming the conversion of debt during fiscal 1995 had taken place at the
beginning of fiscal 1995, the Company's primary loss per share would have
remained unchanged.
NOTE 3 -- RELATED PARTY TRANSACTIONS:
During fiscal 1994 and 1993, certain board members purchased $110,000 and
$125,000, respectively, of the 10% convertible debentures through a private
offering. These debentures mature during fiscal 1996. At June 30, 1995 and 1994,
these debentures, and associated accrued interest in the aggregate were $246,770
and $244,240, respectively.
During fiscal 1995 and 1994, certain board members loaned the Company $120,000
and $498,500, respectively. These demand notes are secured by all of the
Company's assets and subordinated to the bank's security interest. The
underlying notes bear interest at the bank base rate plus 1.5%. On June 30,
1994, $613,500 of the notes payable were converted into common stock at $4.00
per share, resulting in the issuance of 153,375 shares. On September 30, 1994,
$158,334 of the notes payable were converted into common stock at $4.00 per
share, resulting in the issuance of 39,584 shares. At June 30, 1995 and 1994,
remaining demand notes payable and related accrued interest were $178,050 and
$260,867, respectively.
During fiscal 1995 and 1994, certain members of the Company's Board of Directors
received shares of the Company's common stock in lieu of cash remuneration for
Director services, resulting in the issuance of 13,595 and 1,328 shares,
respectively. The fair market values assigned to these shares at issuance were
$34,000 and $5,000, respectively, and were charged to expense in the respective
years.
During fiscal 1995 and 1994, the Company paid $31,780 and $28,832, respectively,
for office rent and office expenses for certain of its directors. The Company
was directly reimbursed for these amounts by the directors.
On June 30, 1994, three of the Company's officers/directors were issued 250,000
voting shares of Series I convertible cumulative preferred stock at $4.00 per
share, resulting in proceeds to the Company of $1,000,000, which was utilized to
pay off the bank line of credit. These shares pay a yearly dividend at 1% over
the prime rate and are redeemable at the Company's option at $4.00 per share.
During fiscal 1995, the Company redeemed 12,500 shares. All dividends due with
respect to the preferred stock have been paid in full as of June 30, 1995.
An investment banking firm, of which a Company director is a principal, earned
$50,000 and was granted stock purchase warrants representing the right to
acquire 50,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share for services related to the restructuring of the Company's bank
and related party debt, issuance of preferred stock, and the development of a
warrant exercise program. See Note 2 -- Other assets.
NOTE 4 -- LEASE COMMITMENTS:
The Company leases its office space. The following is a schedule of the minimum
lease payments under the lease for the years ending June 30:
1996 $81,000
1997 81,000
1998 61,000
Rent expense incurred was $73,800 and $66,200, respectively, during the years
ended June 30, 1995 and 1994.
NOTE 5 -- NOTES PAYABLE:
NOTES PAYABLE -- BANK
In February, 1995, the Company obtained a revolving line of credit with a bank
providing advances up to $750,000. Advances under the agreement are limited to
75% of eligible receivables ($657,000 at June 30, 1995). The loan agreement also
contains provisions requiring compliance with certain financial covenants. The
line of credit agreement expires on February 3, 1996, when all outstanding
amounts are due and payable. Borrowings under this agreement were $652,135 as of
June 30, 1995. The agreement bears interest at the bank's base rate plus 7.5%.
The note is secured by all of the Company's assets.
During 1994, the Company had a line of credit with a bank providing for advances
up to $1,000,000. Borrowings outstanding under this agreement were $1,000,000
for all of fiscal 1994. The effective interest rate during 1994 was 8.6%. On
June 30, 1994, the Company paid off the $1,000,000 line of credit in connection
with the issuance of preferred stock. Accordingly the line of credit agreement
was terminated.
NOTES PAYABLE -- OTHERS
During fiscal 1995, the Company generated $195,000 from the issuance of notes
payable. The unsecured notes have a maturity of six months and bear interest at
the rate of 10% annually. As of August 11, 1995 $145,000 of the debt was
converted into 36,250 shares of common stock and $50,000 has been repaid. In
November 1994, the Company assumed $187,666 of notes payable related to a
business acquisition. The notes bear interest at the rate of 9% annually and are
due in fiscal 1996. At June 30, 1995, notes payable-others and related accrued
interest were $340,841.
NOTE 6 -- DEBENTURES PAYABLE:
Debentures payable including accrued interest consisted of the following:
JUNE 30,
1995 1994
10% debentures:
Principal payable $ 2,028,000 $1,995,000
Accrued interest payable 101,400 73,415
$ 2,129,400 $2,068,415
Less current maturities (2,129,400) (73,415)
Long-term maturities $ -- $1,995,000
The debentures have a maturity schedule as follows:
October 1995 $ 585,000
May 1996 1,443,000
Total $2,028,000
In October 1992, the Company issued 5,850 units of 10% convertible debentures,
each unit consisting of $100 principal amount due October 1, 1995 and one stock
purchase warrant representing the right to purchase 25 shares of common stock at
$6.00 per share during the three-year period ending October 1, 1995. The 10%
debentures are convertible into common stock of the Company until maturity,
unless previously redeemed at the option of the Company, at a conversion price
of $4.00 per share. After January 15, 1993, interest is payable semi-annually.
If the Company fails to make a semi-annual interest payment, 25% of the holders
may declare the debentures as due and payable.
In May, 1993, the Company issued, via a private placement, 7,500 units of 10%
Series B convertible debentures. Each unit consisted of $100 principal amount
due May 1, 1996 and one stock purchase warrant representing the right to
purchase 25 shares of common stock at $6.00 per share during the three-year
period ending May 1, 1996. The 10% debentures are convertible into common stock
of the Company until maturity, unless previously redeemed at the option of the
Company, at a conversion price of $4.00 per share. After July 15, 1993, interest
is payable semi-annually. If the Company fails to make a semi-annual interest
payment, 25% of the holders may declare the debentures as due and payable. As of
June 30, 1995, the Company had issued the 7,500 units available in addition to
the overallotment of 2,500 units, resulting in total proceeds of $1,000,000.
In August, 1993, and July, 1994, the Company issued, via a private placement,
4,100 units and 330 units, respectively, of 10% Series B-1 convertible
debentures, each unit consisting of $100 principal amount due May 1, 1996 and
one stock purchase warrant representing the right to purchase 25 shares of
common stock at $6.00 per share during the three-year period ending May 1, 1996.
The 10% debentures are convertible into common stock of the Company until
maturity, unless previously redeemed at the option of the Company, at a
conversion price of $4.00 per share. After January 1, 1994, interest is payable
semi-annually. If the Company fails to make a semi-annual interest payment, 25%
of the holders may declare the debentures as due and payable. The warrants may
be redeemed by the Company at $.10 per warrant at the Company's option, anytime
after the market value of the Company's stock exceeds $7.00 per share.
NOTE 7 -- INCOME TAXES AND CARRYFORWARDS:
At June 30, 1995, the Company has available net operating loss (NOL) and
research and development tax credit carryforwards. Realization of these
carryforwards may be subject to provisions of IRC Section 382, which limits the
utilization of net operating losses if more than 50 percent of the Company's
ownership changes within a three year period. These NOL's expire as follows:
<TABLE>
<CAPTION>
NET OPERATING TAX CREDIT
<S> <C> <C>
Expiration Dates Loss
1999-2004 $ 429,500 $ 9,900
2005 620,000 16,900
2006 1,065,000 37,000
2007 954,500 35,000
2008 1,629,500 46,000
2009 1,623,800 47,000
2010 900,000 25,000
$7,222,300 $216,800
</TABLE>
NOTE 8 -- STOCK ISSUANCE ARRANGEMENTS:
The Company has sold, via a private placement, a total of 20,280 debenture units
at $100 per unit. See Note 6 -- Debentures Payable. Each unit consisted of $100
principal of a convertible debenture and a common stock purchase warrant which
entitled the holder to purchase 25 shares of common stock at $6.00 per share.
The warrants may be redeemed by the Company at a price of $.10 per warrant at
the Company's option, any time after the market value of the Company's common
stock exceeds $7.00 per share.
During fiscal 1994, a consultant earned 15,000 shares of common stock for
services performed throughout fiscal 1994. The estimated fair value of common
stock at the time services were provided of $39,000 was recorded as an expense
and an increase of $150 to common stock and $38,850 to additional paid-in
capital.
During fiscal 1995, an officer and director of the Company earned 5,000 shares
of common stock as a bonus for services performed throughout fiscal 1995. The
estimated fair value of common stock at the date of the award was $10,000, and
was recorded as an expense and an increase of $50 to common stock and $9,950 to
additional paid-in capital. In September 1994, and June 1994, $158,334 and
$613,500 of notes payable to related parties were converted into common stock at
$4.00 per share; resulting in the issuance of 39,584 and 153,375 shares,
respectively.
In November, 1994, the Company acquired all of the outstanding shares of common
stock of Cantus Corporation. The Cantus stockholders, in exchange for all the
outstanding stock of Cantus Corporation, received 210,525 shares of Telident
common stock and warrants representing the right to acquire 122,808 shares of
Telident common stock at an exercise price of $4 per share. See Note 10 --
Business Acquisition.
During fiscal 1995, the Company generated $240,000 from the issuance of notes
payable. The notes have a maturity of six months and pay interest at the rate of
10% annually. As additional consideration, recorded as interest expense in
fiscal 1995, the Company issued 30,000 shares of common stock to the note
holders. A director participated in the note issuance and also received 5,625
shares of common stock.
A summary of the Company's outstanding common stock warrants as of June 30, 1995
is as follows:
<TABLE>
<CAPTION>
COMMON STOCK NUMBER OF PRICE PER EXPIRATION
WARRANTS SHARES SHARE DATE
<S> <C> <C> <C> <C>
Outstanding at June 30, 1993 410,295 $1.00-6.00 May, 1996
Warrants issued in May, 1993 private
placement 6,850(1) 171,250 6.00 May, 1996
Warrants issued in August, 1993 private
placement 4,100(1) 102,500 6.00 May, 1996
Warrants exercised (27,462) (27,462) 1.00-1.20
Warrants canceled (8,998) (8,998) 1.00
Warrants issued for June, 1994
investment banking fee 50,000 50,000 2.00 Jul, 1997
Outstanding at June 30, 1994 697,585 1.00-6.00
Warrants issued in July, 1994 private
placement 330(1) 8,250 6.00 May, 1996
Warrants exercised (166,501) 1.00-1.20
Warrants canceled (84,334) (84,334) 1.00
Warrants issued for November, 1994
Acquisition 122,808 122,808 4.00 Jan, 1997
Outstanding at June 30, 1995 577,808 $1.00-6.00
</TABLE>
(1) Each warrant in debenture offering entitles holder to purchase 25 shares of
common stock.
The Company has a stock option plan, which provides for the granting of options
to certain employees, officers and directors of the Company to purchase up to a
maximum of 675,000 shares of common stock. The options vest over a five year
period and expire seven years after being granted, except in the case of
directors who vest 50% on the date of grant and the remainder over a two year
period. Canceled options are available for future grant under the plan.
A summary of the changes in shares under option is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE OPTIONS
<S> <C> <C>
Outstanding at June 30, 1993 $1.00-5.00 286,500
Granted 3.50-4.76 219,500
Canceled 1.00-4.76 (68,500)
Exercised 1.00 (22,000)
Outstanding at June 30, 1994 $1.00-5.00 415,500
Granted 2.00-4.38 97,250
Canceled 1.00-4.76 (59,500)
Exercised 1.00 (26,832)
Outstanding at June 30, 1995 $1.00-5.00 426,418
Exercisable at June 30, 1995 $1.00-5.00 179,350
</TABLE>
NOTE 9 -- MAJOR CUSTOMERS:
Sales in fiscal 1995 to two of the Company's customers amounted to 24.6% and
19.6% of total product sales and accounted for 23.7% and 19%, respectively, of
accounts receivable as of June 30, 1995.
Sales in fiscal 1994 to two of the Company's customers amounted to 19.4% and
11.0% of total product sales and accounted for 21% and 14%, respectively, of
accounts receivable as of June 30, 1994.
NOTE 10 -- BUSINESS ACQUISITION:
On November 22, 1994, pursuant to an acquisition agreement, the Company acquired
all of the outstanding shares of common stock of Cantus Corporation, a company
engaged in the development of software which provides customer specific
solutions for communication needs. The Cantus stockholders, in exchange for all
the outstanding stock of Cantus, received 210,525 shares of Telident common
stock and warrants representing the right to acquire 122,808 shares of Telident
common stock at an exercise price of $4 per share. The acquisition has been
accounted for as a purchase, and the results of Cantus' operations since the
date of acquisition are included in the financial statements.
The purchase price of the Cantus common stock exceeded the net Cantus
liabilities assumed by $502,632, which has been treated as excess cost
(goodwill). A summary of the net assets acquired and liabilities assumed in
connection with the acquisition is as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired:
Current assets $ 278,483
Furniture and equipment 8,959
Fair value of assets acquired $ 287,442
Less liabilities assumed:
Accounts payable and accruals $(170,377)
Deferred revenue (116,242)
Long-term debt (187,666)
Net liabilities assumed at fair value (186,844)
Excess of cost over net liabilities assumed
(goodwill) 502,632
Total net acquisition cost -- value assigned
to Telident common stock issued $ 315,788
</TABLE>
The following unaudited, condensed pro forma results of operations for the
fiscal years ended June 30, 1995 and 1994 were derived by combining the
operations of Telident, Inc. and Cantus Corporation. The pro forma information
assumes the acquisition occurred as of the beginning of the respective periods
after giving effect to certain adjustments, including write-down of goodwill and
the elimination of intercompany sales transactions. The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the combination
been in effect on the dates indicated or which may occur in the future.
<TABLE>
<CAPTION>
PROFORMA (UNAUDITED)
1995 1994
<S> <C> <C>
Net revenues $ 2,392,132 $ 1,501,394
Net loss (1,016,756) (2,109,894)
Loss per common
share $ (.30) $ (.62)
</TABLE>
NOTE 11 -- REVERSE STOCK SPLIT:
On May 14, 1996, the Company's Board of Directors approved a 1 for 2 reverse
stock split for all common and preferred shares, effective as of June 4, 1996.
The effect of this reverse stock split has been retroactively reflected in the
financial statements and notes for all periods presented. Amounts restated
included shares, prices and shares in stock issuance arrangements (Note 8) and
net loss per share amounts.
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Cantus Corporation
Bloomington, Minnesota
We have audited the accompanying balance sheet of Cantus Corporation as of
December 31, 1993, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cantus Corporation as of
December 31, 1993, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
January 10, 1995
CANTUS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 18,316 $ 6,058 $ 6,119
Accounts receivable, net of allowance for
doubtful accounts of $20,000 88,350 82,908 99,422
Notes receivable from shareholders 6,967 -- --
Inventories 23,541 41,029 13,019
Other assets 3,473 60,035 20,547
Bid deposits 30,995 46,643 64,825
Total current assets 171,642 236,673 203,932
Furniture and equipment, net of accumulated
depreciation of $77,100, $83,148 and
$74,812, respectively 13,048 9,634 15,337
$ 184,690 $ 246,307 $ 219,269
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Demand notes payable to shareholders
(Note 3) $ 1,566,642 $ 1,795,012 $ 1,487,471
Other demand notes payable (Note 4) 54,579 49,561 59,579
Accounts payable 103,533 163,157 92,950
Accrued interest on demand notes payable to
shareholders 580,335 737,756 532,582
Other 17,952 27,664 26,338
Deferred revenue 88,806 111,028 73,981
Total current liabilities 2,411,847 2,884,178 2,272,901
COMMITMENTS (Note 5)
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value; 6,500,000
shares authorized; 5,195,651 shares
outstanding
(Note 6) 51,957 51,957 51,957
Additional paid-in capital 394,440 394,440 394,440
Accumulated deficit (2,673,554) (3,084,268) (2,500,029)
Total shareholders' deficit (2,227,157) (2,637,871) (2,053,632)
Total liabilities and shareholders' deficit $ 184,690 $ 246,307 $ 219,269
</TABLE>
See notes to financial statements.
CANTUS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C>
SALES $ 457,849 $ 350,639 $ 415,907
COSTS AND EXPENSES:
Cost of sales 228,820 170,606 174,347
Research and development 108,686 115,208 99,395
Marketing, general and
administrative 361,769 309,307 243,989
699,275 595,121 517,731
Operating loss (241,426) (244,482) (101,824)
INTEREST EXPENSE:
Stockholders (Note 3) 181,966 161,473 133,313
Other 10,028 4,759 4,926
191,994 166,232 138,239
Net loss $ (433,420) $ (410,714) ($ 240,063)
NET LOSS PER SHARE $ (0.08) $ (0.08) $ (0.05)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,195,651 5,195,651 5,195,651
</TABLE>
See notes to financial statements.
CANTUS CORPORATION
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1992 5,195,651 $51,957 $394,440 $(2,240,134) $(1,793,737)
Net loss -- -- -- (433,420) (433,420)
Balances, December 31, 1993 5,195,651 51,957 394,440 (2,673,554) (2,227,157)
Net loss (unaudited) -- -- -- (410,714) (410,714)
Balances, September 30, 1994
(unaudited) 5,195,651 $51,957 $394,440 $(3,084,268) $(2,637,871)
</TABLE>
See notes to financial statements.
CANTUS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994 1993
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(433,420) $(410,714) $(240,063)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 9,155 6,047 6,866
Changes in assets and liabilities:
Decrease in receivables 113,565 12,409 40,413
Increase in inventories (15,891) (17,488) (5,369)
(Increase) decrease in prepaid expenses
and other current assets 29,941 (72,210) 26,118
Increase in accounts payable and accrued
expenses 182,486 226,757 127,704
Increase (decrease) in deferred revenue (6,591) 22,222 (21,417)
Net cash used in operating activities (120,755) (232,977) (65,748)
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable advances (6,967) -- --
Purchase of furniture and equipment -- (2,633) --
Net cash used in investing activities (6,967) (2,633) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from demand notes payable to
shareholders 150,239 228,352 71,068
Net payments on demand notes payable (5,000) (5,000) --
Net cash provided by financing
activities 145,239 223,352 71,068
Net increase (decrease) in cash 17,517 (12,258) 5,320
CASH:
Beginning 799 18,316 799
Ending $ 18,316 $ 6,058 $ 6,119
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ -- $ -- $ --
</TABLE>
See notes to financial statements.
CANTUS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING: The interim financial statements are unaudited; however, in
the opinion of the Company, the interim statements include all adjustments,
consisting of normal recurring adjustments, necessary for the fair statement of
the results and balances for the interim periods. The statements of operations
for the nine-month periods ended September 30, 1994 and 1993 do not necessarily
indicate the results to be expected from the full year. These statements should
be read in conjunction with the Company's December 31, 1993 audited financial
statements and notes thereto, contained elsewhere in this prospectus.
NATURE OF BUSINESS: Cantus Corporation (the Company) was organized in March of
1985. The Company develops, manufactures and provides public safety management
and automation solutions primarily involving 911 systems and other computer
telecommunication systems. The Company sells its products primarily to public
safety agencies throughout the United States. In addition, the Company also
provides ongoing support services to its customers under separate maintenance
agreements.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories are comprised primarily of purchased components.
BID DEPOSITS: In connection with proposing on certain projects, the Company is
required to post performance bonds. Accordingly, the Company records the
deposits associated with these performance bonds as assets. Upon completion of
the proposal process or completion of the project, the deposits are returned to
the Company.
FURNITURE AND EQUIPMENT: Furniture and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of five to seven years.
DEFERRED REVENUE: Deferred revenue represents billings and customer
prepayments for services to be performed by the Company. These revenues are
recognized as income in the period in which the services are completed.
REVENUE RECOGNITION: The Company recognizes product revenue on the later of
the date of shipment or upon completion of installation.
WARRANTY LIABILITY: The Company guarantees that products sold shall meet
published specifications. The Company will repair or replace, at its own
expense, any such products that fail to meet specifications. The warranty period
is generally 12 months from date of shipment by the Company. Management has
estimated the cost of such warranty work and recognizes the expense when the
related revenue is recognized.
LOSS PER COMMON SHARE: Loss per common share is computed by dividing the net
loss by the weighted average number of shares of common stock outstanding during
the period.
INCOME TAXES: The Company has elected to be taxed under sections of the federal
(Subchapter S) and state income tax laws, which provide that in lieu of
corporation income taxes, the shareholders separately account for their pro rata
shares of the Company's items of income, deductions, losses and credits. As a
result of this election, no income taxes have been recognized in the
accompanying financial statements.
No pro forma tax provisions have been presented as the net losses would not be
affected if the Company was subject to corporate income taxes.
NOTE 2 -- GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared on a going-concern
basis. However, as of December 31, 1993, the Company had suffered losses which
aggregate $2,673,554. In addition, the Company had incurred substantial
reductions in working capital during 1993, and at December 31, 1993, the Company
had a working capital deficit of $2,240,205. Furthermore, the Company had a
shareholders' deficit of $2,227,157 and was insolvent. In order for the Company
to realize its investments in its assets and meet its obligations when due, it
must obtain additional capital, arrange for adequate financing or attain a level
of operation which will provide a sustained positive cash flow.
During 1994, the Company continued to incur significant losses and was unable to
generate any positive cash flow from operations. To fund its working capital
needs, the Company continued to borrow additional funds from its major
shareholder under a demand note agreement as described in Note 3. In the opinion
of management, these resources were adequate to allow the Company to continue as
a going concern through November 22, 1994, the date the Company was acquired by
Telident, Inc. (Telident) as described in Note 6.
NOTE 3 -- TRANSACTIONS WITH SHAREHOLDERS
The Company has entered into five separate demand note agreements with
shareholders under which the Company had borrowed a total of $1,487,471,
$1,566,642 and $1,795,012 as of September 30, 1993, December 31, 1993 and
September 30, 1994, respectively. The agreement with the majority shareholder is
secured by substantially all assets of the Company and bears interest at 9
percent per annum. The Company may, at the discretion of the majority
shareholder, borrow additional funds. At September 30, 1993, December 31, 1993
and September 30, 1994, the Company had $1,381,737, $1,460,908, and $1,689,279
respectively, outstanding under the majority shareholder agreement. The
remaining agreements are unsecured and bear interest ranging from 12 to 13
percent per annum.
NOTE 4 -- DEMAND NOTE PAYABLE
The Company also has unsecured demand notes agreements with four other
individuals which are personally guaranteed by the shareholders of the Company.
These agreements bear interest ranging from 9.25 to 12 percent per annum.
NOTE 5 -- COMMITMENTS
The Company leases its office and manufacturing facility under a three-year
operating lease. Future annual minimum lease commitments under this lease are
approximately $21,600 in fiscal years 1994 and 1995, and $5,400 in fiscal year
1996. Total rent expense was $23,487 for fiscal year 1993.
NOTE 6 -- SALE OF THE COMPANY
On November 22, 1994, pursuant to an acquisition agreement, Telident acquired
all of the outstanding shares of common stock of the Company. The agreement
required that all the Company's shareholder debt, as well as accrued interest
(together totaling approximately $2,450,000), be converted to Company common
stock at the time of closing. Accordingly, approximately 16,700,600 shares of
Company common stock were issued to the shareholders. The Company's common
shareholders received 210,525 shares of Telident common stock and warrants
representing the right to acquire 122,808 shares of Telident common stock at an
exercise price of $4 per share for all the Company's outstanding stock.
NO DEALER, SALESMAN, SELLING SHAREHOLDER, OR ANY OTHER PERSON HAS BEEN
AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE UNDERWRITER OR THE SELLING SHAREHOLDER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
CIRCUMSTANCES OF THE COMPANY OR THE FACTS SET FORTH HEREIN SINCE THE DATE HEREOF
OR THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary 3
Risk Factors 5
Market for the Company's Common Stock
and Related Shareholder Matters 9
Use of Proceeds 9
Capitalization 11
Pro forma Financial Statements 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Business 17
Management 23
Certain Transactions 27
Principal Shareholders 29
Description of Securities 29
Description of Bridge Financing 31
Underwriting 32
Shares Eligible for Future Sale 33
Legal Matters 34
Experts 34
Available Information 34
Index to Financial Statements F-1
</TABLE>
1,150,000 SHARES
OF
COMMON STOCK
[LOGO] TELIDENT, INC.
PROSPECTUS
R. J. STEICHEN & COMPANY
_______________ , 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Article IX of the Company's Restated Articles of Incorporation eliminates
certain personal liability of the director of the Company for monetary damages
for certain breaches of directors' fiduciary duties.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
PAYABLE BY
COMPANY
SEC registration fee $ 2,166
NASD fee 1,000
Nasdaq listing fee 10,000
Blue Sky filing fees, legal fees and expenses 20,000
Printing expenses 50,000
Underwriter's non-accountable expense allowance 90,000
Fees and expenses of counsel for the Company 50,000
Fees and expenses of accountants for the Company 40,000
Transfer Agent and Registrar fees 5,000
Miscellaneous 10,834
Total $279,000
All of the above expenses other than the SEC, NASD and Nasdaq fees, are
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1993 and August 1993, the Company sold in a private placement to 20
accredited and 6 nonaccredited investors 14,100 debenture units at $100 per unit
for total consideration of $1,410,000. Each unit consisted of $100 principal of
a convertible debenture, bearing interest at 10% and due May 1, 1996, and a
common stock purchase warrant which entitled the holder to purchase 25 shares of
Common Stock of the Company at $6.00 per share. The securities, which were taken
for investment and were subject to appropriate transfer restrictions, were not
registered under the Securities Act of 1933, as amended (the "Act) in reliance
upon Section 4(2) thereof and Regulation D promulgated thereunder.
In November 1993, the Company issued to a consultant for services performed
between July 1, 1993 and November of 1993, 15,000 shares of Common Stock. These
services were valued at $39,000. The shares, which were taken for investment and
were subject to appropriate transfer restrictions, were not registered under the
Act in reliance upon Section 4(2) thereof.
In April 1994 and July 1994, the Company issued a total of 44,128 shares of
Common Stock upon the exercise of outstanding warrants for total consideration
of $30,000. The shares, which were taken for investment and were subject to
appropriate transfer restrictions, were not registered under the Act in reliance
upon Section 4(2) thereof.
In June, 1994, the Company issued warrants to purchase up to 50,000 shares of
the Company's Common Stock to one accredited investor in exchange for investment
banking services at an exercise price of $2.00 per share. The securities, which
were taken for investment and were subject to appropriate transfer restrictions,
were not registered under the Act in reliance upon Section 4(2) thereof.
In June, 1994, the Company sold 250,000 shares of Series I Convertible Preferred
Stock to three accredited investors for total consideration of $1,000,000. The
Company has subsequently redeemed 50,000 shares of this Preferred Stock at $4.00
per share. The shares, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Act in reliance upon Section 4(2) thereof.
On June 30, 1994, the Company issued to two accredited investors 153,375 shares
of the Company's Common Stock upon conversion of certain outstanding
indebtedness totaling $613,500. On September 30, 1994, one of these investors
converted additional indebtedness in the amount of $158,334 resulting in the
issuance of an additional 39,583 shares of Common Stock. The shares, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Act in reliance upon Section 4(2) thereof.
Between August 1994 and October 1995, holders of warrants that comprised part of
the debenture units exercised those warrants to purchase 274,335 shares of the
Company's Common Stock at the reduced exercise price of $4.00 per share. The
Company received total consideration of $1,097,338 (less $50,000 of expenses)
including debt reduction of $158,334. The shares, which were taken for
investment and were subject to appropriate transfer restrictions, were not
registered under the Act in reliance upon Section 4(2) thereof.
In November 1994, the Company issued 210,525 shares of its Common Stock and
warrants to purchase an additional 122,808 shares of the Company's Common Stock
to the stockholders of Cantus Corporation (10 persons) in connection with the
acquisition of all of the outstanding capital stock of Cantus Corporation by the
Company. The shares were acquired for investment purposes and were subject to
appropriate transfer restrictions and were issued without registration under the
Act in reliance upon Section 4(2) thereof.
In January 1995, the Company issued 30,000 shares of Common Stock to 7
accredited and 3 nonaccredited investors as additional consideration for making
certain short-term loans totaling $240,000 to the Company. In August of 1995,
holders of $124,000 of this debt converted it to Common Stock of the Company at
$4.00 per share, resulting in the issuance of 35,167 shares of Common Stock. The
shares, which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Act in reliance upon
Section 4(2) thereof.
In January, 1995, the Company issued 16,250 shares of its Common Stock to a
creditor in satisfaction of a $35,861 account payable. The shares, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Act in reliance upon Section 4(2) thereof.
On June 30, 1995, 5,000 shares of the Company's Common Stock were issued to one
officer and director as a bonus for services rendered. The shares, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Act in reliance upon Section 4(2) thereof.
During fiscal 1996, 1995, 1994, and 1993 certain members of the Company's Board
of Directors received shares of the Company's Common Stock in lieu of cash
remuneration for Director services of $36,250, $34,000, $5,000 and $5,500
respectively, resulting in the issuance of 6,774, 13,594, 1,328, and 1,381
shares, respectively. The shares, which were taken for investment and were
subject to appropriate transfer restrictions, were not registered under the Act
in reliance upon Section 4(2) thereof.
Effective October 1, 1995, Debentures which were originally due on October 1,
1995 were given the option of either converting their Debentures into Common
Stock at a reduced conversion rate of $3.00 per share or extending the due date
thereof to July 15, 1997 in lieu of having them paid at October 1, 1995. In
consideration for extending their Debentures, debenture holders were granted a
warrant to purchase one share of Common Stock at $4.00 per share for each $8.00
principal amount of Debentures extended, at the purchase price of the Warrants
issued in connection with the placement of such Debentures reduced to $4.00 per
share and, for those Debenture holders who had previously exercised their
Warrants, issuance of additional shares of Common Stock (aggregating 4,250
shares). The securities were taken for investment and were subject to
appropriate transfer restrictions, were not registered under the Act in reliance
upon Section 4(2) thereof.
On October 13, 1995, the Company sold, in a private placement to a single
accredited investor, a Unit consisting of 200,000 shares of the Company's Common
Stock and a Series C, Common Stock Purchase Warrant to purchase up to 150,000
shares of the Company's Common Stock at $4.00 per share for aggregate
consideration of $600,000. In addition, this investor was the holder of $400,000
of 10% convertible debentures which were converted into Common Stock of the
Company at $3.00 per share, resulting in the issuance of 133,333 shares of
Common Stock. The securities, which were taken for investment and were subject
to appropriate transfer restrictions, were not registered under the Act in
reliance upon Section 4(2) thereof and Regulation D promulgated thereunder.
On January 4, 1996, the Company gave notice of redemption for 476,433
outstanding Common Stock warrants. 261,294 warrants were exercised, resulting in
$904,387 in proceeds. In addition, a director exercised 12,500 warrants through
$50,000 of debt reduction. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were not registered under the
Securities Act of 1933, as amended (the "Act") in reliance upon Section 4(2)
thereof.
The holders of the Debentures which were originally due on May 1, 1996, were
given the option of either converting their Debentures into Common Stock at a
reduced conversion rate of $3.00 per share or extending the due date thereof to
July 15, 1997, in lieu of having them paid at May 1, 1996. Those Debenture
holders who elected to extend the due date of their Debentures were granted a
Warrant to purchase one share of Common Stock at $4.00 per share for each $8.00
principal amount of Debentures extended. The Warrants expire on July 15, 1997.
Holders of $500,000 principal amount of these Debentures elected to convert
their Debentures and holders of $413,000 principal amount agreed to extend the
due date of their Debentures. The securities, which were taken for investment
and were subject to appropriate transfer restrictions, were not registered under
the Act in reliance upon Section 4(2) thereof.
During May 1996, the Company sold 50 Units of its securities, each Unit
consisting of $25,000 principal amount of unsecured Bridge Notes with Warrants
to purchase 2,500 shares of Common Stock. The Units were sold to an aggregate of
32 accredited investors. Commission of 6% and a non-accountable expense
allowance of $5,000 was paid to R.J. Steichen & Company in connection with the
placement of the Units. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Act in reliance upon Section 4(2) thereof and Regulation D promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement -- filed herewith
* 1.2 Form of Selected Dealer Agreement
* 3.1 Articles of Incorporation, as amended, of the Company
3.2 Bylaws, as amended, of the Company (2)
* 4.1 Specimen form of the Company's Common Stock certificate
4.2 Form of Warrant issued pursuant to October, 1992 Unit offering (2)
4.2 Form of Debenture issued pursuant to October, 1992 Unit offering (2)
4.3 Form of Warrant issued pursuant to May, 1993 Unit offering (2)
4.4 Form of Debenture issued pursuant to May, 1993 Unit offering (2)
4.5 Subscription and Purchase Agreement dated as of August 23, 1993 between
Registrant and Okabena Partnership K (2)
4.6 Conversion, Exercise, Subscription and Purchase Agreement dated as of
October 13, 1995 between Registrant and Okabena Partnership K(5)
4.7 Form of Warrant issued pursuant to October 1995 Unit offering (5)
4.8 Certificate of Designation of Series I Convertible Preferred Stock (2)
4.9 Promissory Note and Security Agreement dated January 11, 1993 between
Registrant and Willis K. Drake (2)
4.10 Promissory Note and Security Agreement dated February 3, 1995 between
Registrant and Norwest Credit, Inc.(3)
* 4.11 Form of Bridge Loan Agreement, including form of Promissory Note and
Warrant Agreement
4.12 Telident, Inc. Stock Option Plan of 1988, Form of Incentive Stock Option
Agreement and Form of Nonstatutory Stock Option Agreement (1)
* 4.13 Form of Warrant Issued pursuant to May 1996 Debenture Extension
4.14 Form of Underwriter's Warrant -- filed herewith
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. -- filed herewith
10.1 Fujitsu Business Communications Distributor Agreement (3)
10.2 Cantus Corporation Acquisition Agreement (4)
21 Subsidiaries of the Company (3)
*23.1 Consent of McGladrey & Pullen, LLP.
*23.2 Consent of McGladrey & Pullen LLP
23.3 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. -- See Exhibit 5.1
*24.1 Power of Attorney
*27 Financial Data Schedule
</TABLE>
* Previously Filed
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-18 Reg. No. 33-25922C.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1994.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1995.
(4) Incorporated herein by reference to the Company's Current Report on Form 8-K
dated December 6, 1994.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form SB-2 Reg. No. 33-99054.
ITEM 28. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The issuer will:
(1) File, during any period in which it offers or sells securities, a
post effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(c) The issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Amendment No. 1 to Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, on August 8,
1996.
TELIDENT, INC.
By /S/ MICHAEL J. MILLER
Michael J. Miller, President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement was signed by the following
persons in the capacities indicated on August 8, 1996:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/S/ MICHAEL J. MILLER President and Director (Principal
Michael J. Miller Executive Officer)
/S/ JOHN F. KROMER Vice President Finance and Chief
John F. Kromer Financial Officer (Principal Financial and
Principal Accounting Officer)
* Director
Mark W. Sheffert
* Director
Scott R. Anderson
* Director
Willis K. Drake
* Director
Richard L. Hencley
* Director
Robert N. Kisch
* Director
John Sagan
* Director
Warren S. Tyler
* By
/S/ MICHAEL J. MILLER
Michael J. Miller
Attorney-In-Fact
</TABLE>
TELIDENT INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF EXHIBIT PAGE
<S> <C> <C>
1.1 Form of Underwriting Agreement -- filed herewith
* 1.2 Form of Selected Dealer Agreement
* 3.1 Articles of Incorporation, as amended, of the Company
3.2 Bylaws, as amended, of the Company (2)
* 4.1 Specimen form of the Company's Common Stock certificate
4.2 Form of Warrant issued pursuant to October, 1992 Unit offering (2)
4.2 Form of Debenture issued pursuant to October, 1992 Unit offering (2)
4.3 Form of Warrant issued pursuant to May, 1993 Unit offering (2)
4.4 Form of Debenture issued pursuant to May, 1993 Unit offering (2)
4.5 Subscription and Purchase Agreement dated as of August 23, 1993 between Registrant and
Okabena Partnership K (2)
4.6 Conversion, Exercise, Subscription and Purchase Agreement dated as of October 13, 1995
between Registrant and Okabena Partnership K (5)
4.7 Form of Warrant issued pursuant to October 1995 Unit offering (5)
4.8 Certificate of Designation of Series I Convertible Preferred Stock (2)
4.9 Promissory Note and Security Agreement dated January 11, 1993 between Registrant and
Willis K. Drake (2)
4.10 Promissory Note and Security Agreement dated February 3, 1995 between Registrant and
Norwest Credit, Inc. (3)
* 4.11 Form of Bridge Loan Agreement, including form of Promissory Note and Warrant
4.12 Telident, Inc. Stock Option Plan of 1988, Form of Incentive Stock Option Agreement and
Form of Nonstatutory Stock Option Agreement (1)
* 4.13 Form of Warrant Issued pursuant to May 1996 Debenture Extention
4.14 Form of Underwriter's Warrant -- filed herewith
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. -- filed herewith
10.1 Fujitsu Business Communications Distributor Agreement (3)
10.2 Cantus Corporation Acquisition Agreement (4)
21 Subsidiaries of the Company (3)
*23.1 Consent of McGladrey & Pullen, LLP.
*23.2 Consent of McGladrey & Pullen LLP
23.3 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. -- See Exhibit 5.1
*24.1 Power of Attorney
*27 Financial Data Schedule
</TABLE>
* Previously Filed
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-18 Reg. No. 33-25922C.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1994.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1995.
(4) Incorporated herein by reference to the Company's Current Report on Form 8-K
dated December 6, 1994.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form SB-2 Reg. No. 33-99054.
1,150,000 SHARES COMMON STOCK
TELIDENT, INC.
UNDERWRITING AGREEMENT
August ___, 1996
R.J. Steichen & Company
1100 Midwest Plaza East
800 Marquette Avenue
Minneapolis, Minnesota 55402
Dear Ladies and Gentlemen:
Telident, Inc., a Minnesota corporation (the "Company") hereby confirms
its agreement to issue and sell to R.J. Steichen & Company (the "Underwriter"),
an aggregate of 1,150,000 shares of authorized common stock, $.02 par value per
share, of the Company (the "Common Stock"). Such 1,150,000 shares of Common
Stock are collectively referred to in this Agreement as the "Firm Shares." The
Company also hereby confirms its agreement to sell to the Underwriter an
aggregate of up to 172,500 additional shares of Common Stock upon the request of
the Underwriter solely for the purpose of covering overallotments. Such
additional shares are referred to in this Agreement as the "Option Shares." The
Firm Shares and the Option Shares are collectively referred to herein as the
"Shares." Further, the Company hereby confirms its agreement to issue to the
Underwriter warrants for the purchase of 115,000 shares as described in Section
6 hereof (the "Underwriter's Warrants"), assuming purchase by the Underwriter of
the Firm Shares. The shares issuable upon exercise of the Underwriter's Warrants
are referred to as the "Warrant Shares."
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with the Underwriter as follows:
(a) A registration statement on Form SB-2 with respect to the
Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act")
and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "SEC") thereunder and has been
filed with the SEC under the 1933 Act. The Company has filed such
amendments to the registration statement and such amended preliminary
prospectuses as may have been required to be filed to the date hereof.
If the Company has elected not to rely upon Rule 430A, the Company has
prepared and will promptly file an amendment to the registration
statement and an amended prospectus (provided the Underwriter has
consented to such filing). If the Company has elected to rely upon Rule
430A, it will prepare and timely file a prospectus pursuant to Rule
424(b) that discloses the information previously omitted from the
prospectus in reliance upon Rule 430A. Copies of such registration
statement and each pre-effective amendment thereto, and each related
preliminary prospectus have been delivered by the Company to the
Underwriter. Such registration statement, as amended or supplemented,
including all prospectuses included as a part thereof, financial
schedules, exhibits, the information (if any) deemed to be part thereof
pursuant to Rules 430A and 434 under the 1933 Act and any registration
statement filed pursuant to Rule 462 under the 1933 Act, is herein
referred to as the "Registration Statement." The term "Prospectus" as
used herein shall mean the final prospectus, as amended or
supplemented, included as a part of the Registration Statement on file
with the SEC when it becomes effective; provided, however, that if a
prospectus is filed by the Company pursuant to Rules 424(b) and 430A or
a term sheet is filed by the Company pursuant to Rule 434 under the
1933 Act, the term "Prospectus" as used herein shall mean the
prospectus so filed pursuant to Rules 424(b) and 430A and the term
sheet so filed pursuant to Rule 434. The term "Preliminary Prospectus"
as used herein means any prospectus, as amended or supplemented, used
prior to the Effective Date (as defined in Section 4(a) hereof) and
included as a part of the Registration Statement, including any
prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has
issued any order preventing or suspending the use of any Preliminary
Prospectus, or issued a stop order with respect to the offering of the
Shares or requiring the recirculation of a Preliminary Prospectus and,
to the best knowledge of the Company, no proceeding for any such
purpose has been initiated or threatened. Each part of the Registration
Statement, when such part became or becomes effective, each Preliminary
Prospectus, on the date of filing with the SEC, and the Prospectus and
any amendment or supplement thereto, on the date of filing thereof with
the SEC and on any Closing Date (as defined in Section 3 hereof), as
the case may be, conformed or will conform in all material respects
with the requirements of the 1933 Act and the Rules and Regulations and
the securities laws ("Blue Sky laws") of the states where the Shares
are to be sold (the "States") and contained or will contain all
statements that are required to be stated therein in accordance with
the 1933 Act, the Rules and Regulations and the Blue Sky laws of the
States. When the Registration Statement became or becomes effective and
when any post-effective amendments thereto shall become effective, the
Registration Statement did not and will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Neither any Preliminary Prospectus, on the date of filing thereof with
the SEC, nor the Prospectus or any amendment or supplement thereto, on
the date of filing thereof with the SEC and on the First and Second
Closing Dates, contained or will contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that none of the
representations and warranties in this Subsection 1(b) shall apply to
statements in, or omissions from, the Registration Statement,
Preliminary Prospectus or the Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information furnished to the Company by the Underwriter, as identified
in Section 12 herein, specifically for use in the preparation of the
Registration Statement, Preliminary Prospectus or the Prospectus, or
any amendment or supplement thereto. There is no contract or other
document of the Company of a character required by the 1933 Act or the
Rules and Regulations to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit to the Registration Statement,
that has not been described or filed as required. The descriptions of
all such contracts and documents or references thereto are correct and
include the information required under the 1933 Act and the Rules and
Regulations.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with full corporate power and authority, to own, lease
and operate its properties and conduct its business as described in the
Registration Statement and Prospectus. The Company is duly qualified to
do business as a foreign corporation in good standing in each
jurisdiction in which the ownership or lease of its properties, or the
conduct of its business, requires such qualification and in which the
failure to be qualified or in good standing would have a material
adverse effect on the business of the Company. The Company has all
necessary and material authorizations, approvals and orders of and from
all governmental regulatory officials and bodies to own its properties
and to conduct its business as described in the Registration Statement
and Prospectus, and is conducting its business in substantial
compliance with all applicable material laws, rules and regulations of
the jurisdictions in which it is conducting business. The Company holds
all material licenses, certificates, permits, authorizations, approvals
and orders of and from all state, federal and other governmental
regulatory officials and bodies necessary to own its properties and to
conduct its business as described in the Registration Statement and
Prospectus, or has obtained waivers from any such applicable
requirements from the appropriate state, federal or other regulatory
authorities. All such licenses, permits, approvals, certificates,
consents, orders and other authorizations are in full force and effect,
and the Company has not received notice of any proceeding or action
relating to the revocation or modification of any such license, permit,
approval, certificate, consent, order or other authorization which,
individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might materially and adversely affect the
conduct of the business or the condition, financial or otherwise, or
the earnings, affairs or business prospects of the Company.
(d) The Company has no subsidiaries and is not affiliated with
any other Company or business entity, except as disclosed in the
Prospectus.
(e) The Company is not in violation of its Articles of
Incorporation or Bylaws. The Company is not in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
joint venture or other agreement or instrument to which the Company is
a party or by which the Company or its properties are bound, and there
does not exist any state of facts which constitutes an event of default
on the part of the Company or which, with notice or lapse of time or
both, would constitute such an event of default. The Company is not, to
the best of its knowledge, in violation of any law, order, rule,
regulation, writ, injunction or decree of any government, governmental
instrumentality or court, domestic or foreign, which violation is
material to the business of the Company.
(f) The Company has full requisite power and authority to
enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company and will be a valid and binding
agreement on the part of the Company, enforceable in accordance with
its terms, if and when this Agreement shall have become effective in
accordance with Section 9, except as enforceability may be limited by
the application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations
on the right of specific performance and except as the enforceability
of the indemnification or contribution provisions hereof may be
affected by applicable federal or state securities laws. The
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note,
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument to which the Company is a party or by which the
property or assets of the Company is bound, (ii) the Company's Articles
of Incorporation or Bylaws or (iii) any statute or any order, rule or
regulation of any court, governmental agency or body having
jurisdiction over the Company. No consent, approval, authorization or
order of any court, governmental agency or body is required for the
consummation by the Company of the transactions on its part herein
contemplated, except such as may be required under the 1933 Act, the
Rules and Regulations, the Blue Sky laws, the rules and regulations of
the National Association of Securities Dealers, Inc. ("NASD") and the
rules and regulations of Nasdaq.
(g) Except as is otherwise expressly stated in the
Registration Statement or Prospectus, there are no actions, suits or
proceedings pending before any court or governmental agency, authority
or body to which the Company is a party or of which the business or
property of the Company is the subject which might result in any
material adverse change in the condition (financial or otherwise),
business or prospects of the Company, materially and adversely affect
its properties or assets or prevent consummation of the transactions
contemplated by this Agreement; and, to the best of the Company's
knowledge, no such actions, suits or proceedings are threatened except
as is otherwise expressly stated in the Registration Statement or
Prospectus. The Company is not aware of any facts which would form the
basis for the assertion of any material claim or liability which are
not disclosed in the Registration Statement or the Prospectus or
adequately reserved for in the financial statements which are a part
thereof, except for such claims or liabilities which are not currently
expected to have a material adverse effect on the condition (financial
or otherwise) or the earnings, affairs or business prospects of the
Company. All pending legal or governmental proceedings to which the
Company is a party or to which any of its property is subject, which
are not described in the Registration Statement and the Prospectus,
including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material to the Company.
(h) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus and the reverse stock
split described in the Prospectus has occurred. The outstanding Common
Stock of the Company is duly authorized, validly issued, fully paid and
nonassessable. The Shares conform in substance to all statements
relating thereto contained in the Registration Statement and
Prospectus. The Shares to be sold by the Company hereunder have been
duly authorized and, when issued and delivered pursuant to this
Agreement, will be validly issued, fully paid and nonassessable and
will conform to the description thereof contained in the Prospectus. No
preemptive rights or similar rights of any security holders of the
Company exist with respect to the issuance and sale of the Shares by
the Company. Except as disclosed in the Prospectus, the Company has no
agreement with any security holder which gives such security holder the
right to require the Company to register under the 1933 Act any
securities of any nature owned or held by such person either in
connection with the transactions contemplated by this Agreement or
after a demand for registration by such holder. Upon payment for and
delivery of the Shares pursuant to this Agreement, the Underwriter will
acquire the Shares, free and clear of all liens, encumbrances or
claims. The certificates evidencing the Shares will comply as to form
with all applicable provisions of the laws of the State of Minnesota.
Except as set forth in any part of the Registration Statement, the
Company does not have outstanding any options to purchase, or any
rights or warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, any
Common Stock or other securities of the Company, or any such warrants,
convertible securities or obligations.
(i) The Underwriter's Warrants and the Warrant Shares have
been duly authorized. The Underwriter's Warrants, when issued and
delivered to the Underwriter, will constitute valid and binding
obligations of the Company in accordance with their terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally and by judicial limitations on the right of
specific performance. The Warrant Shares when issued in accordance with
the terms of this Agreement and pursuant to the Underwriter's Warrants,
will be validly issued, fully paid and nonassessable and subject to no
preemptive rights or similar rights on the part of an person or entity.
A sufficient number of shares of Common Stock of the Company have been
reserved for issuance by the Company upon exercise of the Underwriter's
Warrants.
(j) McGladrey & Pullen, LLP, whose reports appear in the
Registration Statement and Prospectus, are independent accountants
within the meaning of the 1933 Act and the Rules and Regulations. The
financial statements of the Company, together with the related notes,
forming part of the Registration Statement and Prospectus (the
"Financial Statements"), fairly present the financial position and the
results of operations of the Company at the respective dates and for
the respective periods to which they apply. The Financial Statements
are accurate, complete and correct and have been prepared in accordance
with the 1933 Act, the Rules and Regulations and generally accepted
accounting principles ("GAAP"), consistently applied throughout the
periods involved, except as may be otherwise stated therein. The
summaries of the Financial Statements and the other financial and
statistical data and related notes set forth in the Registration
Statement and the Prospectus are (i) accurate and correct and fairly
present the information purported to be shown thereby as of the dates
and for the periods indicated on a basis consistent with the audited
financial statements of the Company and (ii) in compliance in all
material respects with the requirements of the 1933 Act and the Rules
and Regulations. The Financial Statements are based upon and consistent
with the financial statements and other reports filed by the Company
with the SEC, except for inconsistencies attributable solely to
differences between GAAP and regulatory accounting principles.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and at any
Closing Date, except as is otherwise disclosed in the Registration
Statement or Prospectus, there has not been:
(i) any change in the capital stock or long-term debt
(including any capitalized lease obligation), or except in the
ordinary course of business increase in the short-term debt of
the Company;
(ii) any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock of
the Company;
(iii) any material adverse change, or any development
involving a material adverse change, in or affecting the
business, business prospects, properties, assets, patents or
patent applications (including those of the Company and those
relating to devices or technologies licensed to the Company),
management, financial position, stockholders' equity, results
of operations or general condition of the Company;
(iv) any material transaction entered into by the
Company;
(v) any material obligation, direct or contingent,
incurred by the Company, except obligations incurred in the
ordinary course of business that, in the aggregate, are not
material; or
(vi) any dividend or distribution of any kind
declared, paid or made on the Company's capital stock.
(l) Except as is otherwise disclosed in the Registration
Statement or Prospectus, the Company has good and marketable title to
all of the property, real and personal, described in the Registration
Statement or Prospectus as being owned by the Company, free and clear
of all liens, encumbrances, equities, charges or claims, except as do
not materially interfere with the uses made and to be made by the
Company of such property or as disclosed in the Financial Statements.
Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has valid and binding leases to the real and
personal property described in the Registration Statement or Prospectus
as being under lease to the Company, except as to those leases which
are not material to the Company or the lack of enforceability of which
would not materially interfere with the use made and to be made by the
Company of such leased property.
(m) The Company has filed all necessary federal and state
income and franchise tax returns and paid all taxes shown as due
thereon. The Company is not in default in the payment of any taxes and
has no knowledge of any tax deficiency which might be asserted against
it which would materially and adversely affect the Company's business
or properties.
(n) No labor disturbance by the employees of the Company
exists or, to the best of the Company's knowledge, is imminent which
could reasonably be expected to have a material adverse effect on the
conduct of the business, operations, financial condition or income of
the Company.
(o) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the unrestricted
rights to use all patents, copyrights, trademarks, trade
secrets and proprietary rights or information necessary for
the development, manufacture, operation and sale of all
products and services sold or proposed to be sold by the
Company and for the conduct of its present or intended
business as described in the Prospectus. There are no pending
legal, governmental or administrative proceedings relating to
patents, copyrights, trademarks or proprietary rights or
information to which the Company is a party or to which any
property of the Company is subject and no such proceedings
are, to the best of the Company's knowledge, threatened or
contemplated against the Company by any governmental agency or
authority or others. The Company has not received any notice
of conflict with asserted rights of others. The Company is not
using any confidential information or trade secrets of any
third party without such party's consent.
(ii) The Company does not infringe upon the right or
claimed rights of any person under or with respect to any of
the intangible rights listed in the preceding subsection. The
Company is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to
any owner of, licensor of, or other claimant to, any patent,
trademark, trade name, copyright or other intangible asset,
with respect to the use thereof or in connection with the
conduct of its business or otherwise, except as disclosed in
the Registration Statement.
(p) The Company intends to apply the proceeds from the sale of
the Shares by it to the purposes and substantially in the manner set
forth in the Prospectus.
(q) The Company has no defined benefit pension plan or other
pension benefit plan, except for its 401(K) Plan which has no benefit
obligations and has not been funded, which is intended to comply with
the provisions of the Employee Retirement Income Security Act of 1974
as amended from time to time, except as disclosed in the Registration
Statement.
(r) To the best of the Company's knowledge, no person is
entitled, directly or indirectly, to compensation from the Company or
the Underwriter for services as a finder in connection with the
transactions contemplated by this Agreement.
(s) The conditions for use of a Registration Statement on Form
SB-2 for the distribution of the Shares have been satisfied with
respect to the Company.
(t) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its
directors, officers, stockholders, or others) which has constituted or
is designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation, as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act") or otherwise, of the
price of any security of the Company to facilitate the sale or resale
of the Shares.
(u) The Company has not sold any securities in violation of
Section 5(a) of the 1933 Act.
(v) The Company maintains insurance, which is in full force
and effect, of the types and in the amounts adequate for its business
and in line with the insurance maintained by similar companies and
businesses.
(w) The Company hereby represents that it has complied and
will comply with all provisions of Florida Statutes Section 517.075
(Ch. 92-198 and Rule 3EER92-1 of the Rules of the Florida Department of
Banking and Finance, Division of Securities) copies of which are
attached hereto. Neither the issuer, nor any affiliate thereof, does
business with the government of Cuba or with any person or affiliate
located in Cuba.
(x) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations and (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP.
(y) All material transactions between the Company and its
shareholders who beneficially own more than 5% of any class of the
Company's voting securities have been accurately disclosed in the
Prospectus, and the terms of each such transaction are fair to the
Company and no less favorable to the Company than the terms that could
have been obtained from unrelated parties.
(z) The Company has obtained a written agreement from each of
the officers and directors of the Company and certain other
shareholders of the Company determined by the Underwriter that such
person will not, without the prior written consent of the Underwriter,
during the 180-day period commencing on the effective date of the
Registration Statement (the "Lockup Period) (i) sell, transfer or
otherwise dispose of, or agree to sell, transfer or otherwise dispose
of any shares of Common Stock of the Company beneficially held by the
officer or director during the Lockup Period, (ii) sell, transfer or
otherwise dispose of or agree to sell, transfer or otherwise dispose of
any options, rights, warrants or other securities exercisable or
convertible into shares of Common Stock of the Company beneficially
held by the officer or director during the Lockup Period, or (iii) sell
or grant, or agree to sell or grant, options, rights, warrants or other
securities exercisable or convertible into any such shares of Common
Stock; provided, however, that the foregoing does not prohibit gifts by
donees who agree to be bound by the restrictions set forth in the
lockup agreement or transfers by will or the laws of descent.
(aa) The Common Stock of the Company has been approved by
Nasdaq for trading on its SmallCap MarketSM following effectiveness of
the Registration Statement subject to official notice of issuance.
(ab) The Company has timely filed all documents and amendments
to previously filed documents required to be filed by it pursuant to
the 1934 Act and the rules and regulations of the SEC thereunder. Each
such document conformed in all material respects with the requirements
of the 1934 Act and contained all information required to be stated
therein in accordance with the 1934 Act. No part of any such document
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. True copies of each of the documents
incorporated by reference, if any, into each Preliminary Prospectus and
the Prospectus have been delivered by the Company to the
Representative. To the best of the Company's knowledge, the executive
officers and directors of the Company and stockholders who hold more
than 5% of the Company's outstanding Common Stock, have made, and are
current with, all filings, if any, that are required under the 1934
Act.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to issue and sell to the
Underwriter, and the Underwriter agrees, to purchase from the Company,
the Firm Shares at $____________ per Share. The obligation of the
Underwriter to the Company shall be to purchase from the Company
1,150,000 Firm Shares which are to be sold by the Company as set forth
herein.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth,
the Company hereby grants an option to the Underwriter to purchase the
Option Shares (not to exceed an aggregate of fifteen percent (15%) of
the total number of Firm Shares) at the same purchase price as the Firm
Shares for use solely in covering any overallotments made by the
Underwriter in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once)
within thirty (30) days after the Effective Date (as defined in Section
4(a) hereof) upon notice (confirmed in writing) by the Underwriter to
the Company setting forth the aggregate number of Option Shares as to
which the Underwriter is exercising the option and the date on which
certificates for such Option Shares are to be delivered. The option
granted hereby may be canceled by the Underwriter as to the Option
Shares for which the option is unexercised at any time prior to the
expiration of the 30-day period upon notice to the Company.
(c) The Company will deliver the Firm Shares to the
Underwriter at the offices of Maun & Simon, PLC, unless some other
place is agreed upon, at 10:00 A.M., Minneapolis time, against payment
of the purchase price at the same place, on the third full business day
after trading the Shares has commenced (but not more than ten (10) full
business days after the date the Registration Statement is declared
effective), or such earlier time as may be agreed upon between the
Underwriter and the Company. Such time and place is herein referred to
as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased
by the Underwriter to the Underwriter at the offices of Maun & Simon,
PLC, set forth in Section 2(c) above, unless some other place is agreed
upon, at 10:00 A.M., Minneapolis time, against payment of the purchase
price at the same place, on the date determined by the Underwriter and
of which the Company has received notice as provided in Section 2(b),
which shall not be earlier than two nor later than three (3) full
business days after the exercise of the option as set forth in Section
2(b), or at such other time not later than ten (10) full business days
thereafter as may be agreed upon by the Underwriter and the Company,
such time and date being herein referred to as the "Second Closing
Date." The First and Second Closing Dates are collectively referred to
herein as the "Closing Date."
(e) Certificates for the Shares to be delivered will be
registered in such names and issued in such denominations as the
Underwriter shall request of the Company at least two (2) full business
days prior to the First Closing Date or the Second Closing Date, as the
case may be. The certificates will be made available to the Underwriter
in definitive form for the purpose of inspection and packaging at least
24 hours prior to each respective Closing Date.
(f) Payment for the Shares shall be made, against delivery to
the Underwriter or its designated agent, of certificates for the Shares
by wire transfer to a designated account of the Company.
(g) The Underwriter will make a public offering of the Shares
directly to the public (which may include selected dealers who are
members in good standing with the NASD or foreign dealers not eligible
for membership in the NASD but who have agreed to abide by the
interpretation of the NASD's Board of Governor's with respect to
free-riding and withholding) as soon as the Underwriter deem
practicable after the Registration Statement becomes effective at the
Price to Public set forth in Section 2(a) above, subject to the terms
and conditions of this Agreement and in accordance with the Prospectus.
Such concessions from the public offering price may be allowed selected
dealers of the NASD as the Underwriter determines, and the Underwriter
will furnish the Company with such information about the distribution
arrangements as may be necessary for inclusion in the Registration
Statement. It is understood that the public offering price and
concessions may vary after the initial public offering. The Underwriter
shall offer and sell the Shares only in jurisdictions in which the
offering of Shares has been duly registered or qualified, or is exempt
from registration or qualification, and shall take reasonable measures
to effect compliance with applicable state and local securities laws.
(h) On the First Closing Date, the Company shall issue and
deliver to the Underwriter the Underwriter Warrants against payment by
the Underwriter of the purchase price therefor of $50.
3. Further Agreements of the Company. The Company hereby covenants and
agrees with the Underwriter as follows:
(a) If the Registration Statement has not become effective
prior to the date hereof, the Company will use its best efforts to
cause the Registration Statement and any subsequent amendments thereto
to become effective as promptly as possible. The Company will notify
the Underwriter promptly, after the Company shall receive notice
thereof, of the time when the Registration Statement, or any subsequent
amendment thereto, has become effective or any supplement to the
Prospectus has been filed. Following the execution and delivery of this
Agreement, the Company will prepare, and timely file or transmit for
filing with the SEC in accordance with Rules 430A, 424(b) and 434, as
applicable, copies of the Prospectus, or, if necessary, a
post-effective amendment to the Registration Statement (including the
Prospectus), in which event, the Company will take all necessary action
to have such post-effective amendment declared effective as soon as
possible. The Company will notify the Underwriter promptly upon the
Company's obtaining knowledge of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceedings for that purpose and will
use its best efforts to prevent the issuance of any stop order and, if
a stop order is issued, to obtain as soon as possible the withdrawal or
lifting thereof. The Company will promptly prepare and file at its own
expense with the SEC any amendments of, or supplements to, the
Registration Statement or the Prospectus which may be necessary in
connection with the distribution of the Shares by the Underwriter.
During the period when a Prospectus relating to the Shares is required
to be delivered under the 1933 Act, the Company will promptly file any
amendments of, or supplements to, the Registration Statement or the
Prospectus which may be necessary to correct any untrue statement of a
material fact or any omission to state any material fact necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company will notify the Underwriter
promptly of the receipt of any comments from the SEC regarding the
Registration Statement or Prospectus or request by the SEC for any
amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement
to, the Registration Statement or Prospectus, whether prior to or after
the Effective Date, which shall not previously have been submitted to
the Underwriter and its counsel a reasonable time prior to the proposed
filing or to which the Underwriter shall have reasonably objected.
(b) The Company has used and will continue to use its best
efforts to register or qualify the Shares for sale under the securities
laws of such jurisdictions as the Underwriter may designate and the
Company will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration
or qualification. In each jurisdiction in which the Shares shall have
been registered or qualified as above provided, the Company will
continue such registrations or qualifications in effect for so long as
may be required for purposes of the distribution of the Shares;
provided, however, that in no event shall the Company be obligated to
qualify to do business as a foreign corporation in any jurisdiction in
which it is not now so qualified or to take any action which would
subject it to the service of process in suits, other than those arising
out of the offering or sale of the Shares in any jurisdiction where it
is not now so subject. In each jurisdiction where any of the Shares
shall have been so qualified, the Company will file such statements and
reports as are or may be reasonably required by the laws of such
jurisdiction to continue such qualification in effect. The Company will
notify the Underwriter immediately of, and confirm in writing, the
suspension of qualification of the Shares or the threat of such action
in any jurisdiction. The Company will use its best efforts to qualify
or register its Common Stock for sale in nonissuer transactions under
(or obtain exemptions from the application of) the securities laws of
such states designated by the Underwriter (and thereby permit
market-making transactions and secondary trading in its Common Stock in
such states), and will comply with such securities laws and will
continue such qualifications, registrations and exemptions in effect
for a period of five (5) years after the date hereof.
(c) The Company will furnish to the Underwriter, as soon as
available, copies of the Registration Statement (one of which will be
signed and which shall include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such
documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the 1933 Act, all in such quantities as the
Underwriter may from time to time reasonably request prior to the
printing of each such document. The Company specifically authorizes the
Underwriter and all dealers to whom any of the Shares may be sold by
the Underwriter to use and distribute copies of such Preliminary
Prospectuses and Prospectuses in connection with the sale of the Shares
as and to the extent permitted by the federal and applicable state and
local securities laws.
(d) For as long as the Company has more than 100 beneficial
owners, but in no event more than five (5) years after the Effective
Date, the Company will mail as soon as practicable to the holders of
its Common Stock substantially the following documents, which documents
shall be in compliance with this Section if they are in the form
prescribed by the 1934 Act:
(i) within sixty (60) days after the end of the first
three quarters of each fiscal year, copies of the quarterly
unaudited statement of profit and loss and quarterly unaudited
balance sheets of the Company and any material subsidiaries;
and
(ii) within one hundred twenty (120) days after the
close of each fiscal year, appropriate financial statements as
of the close of such fiscal year for the Company and any
material subsidiary which shall be certified to by a
nationally recognized firm of independent certified public
accountants in such form as to disclose the Company's
financial condition and the results of its operations for such
fiscal year.
(e) For as long as the Company has more than 100 beneficial
owners, but in no event more than five (5) years after the Effective
Date, the Company will furnish to the Underwriter (i) concurrently with
furnishing such reports to its shareholders, the reports described in
Section 4(d) hereof; (ii) as soon as they are available, copies of all
other reports (financial or otherwise) mailed to security holders; and
(iii) as soon as they are available, copies of all reports and
financial statements furnished to, or filed with, the SEC, the NASD,
any securities exchange or any state securities commission by the
Company. During such period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the
Company and any subsidiary or subsidiaries are consolidated and shall
be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(f) The Company will not, without the prior written consent of
the Underwriter, which consent shall not be unreasonably withheld, sell
or otherwise dispose of any capital stock or securities convertible or
exercisable into capital stock of the Company (other than pursuant to
existing option plans, director compensation plans or currently
outstanding options and warrants) during the 180-day period following
the Effective Date. Prior to the Closing Date, the Company will not
repurchase or otherwise acquire any of its capital stock or declare or
pay any dividend or make any distribution on any class of its capital
stock.
(g) Subject to the proviso set forth below, the Company shall
be responsible for and pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement
including, without limiting the generality of the foregoing, (i) all
costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements
and exhibits), Preliminary Prospectuses and the Prospectus and any
amendments thereof or supplements to any of the foregoing; (ii) the
issuance and delivery of the Shares, including taxes, if any; (iii) the
cost of all certificates representing the Shares; (iv) the fees and
expenses of the Transfer Agent for the Shares; (v) the fees and
disbursements of counsel for the Company; (vi) all fees and other
charges of the independent public accountants of the Company; (vii) the
cost of furnishing and delivering to the Underwriter and dealers
participating in the offering copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectuses, the
Prospectus and any amendments of, or supplements to, any of the
foregoing; (viii) the NASD filing and quotation fees; and (ix) the fees
and disbursements, including filing fees and all accountable fees and
expenses of counsel for the Company incurred in registering or
qualifying the Shares for sale under the laws of such jurisdictions
upon which the Underwriter and the Company may agree; and (x) the
non-accountable expenses of the Underwriter in an amount equal to 2.5%
of the gross proceeds of the Offering. The Underwriter hereby
acknowledges receipt of a $10,000 advance from the Company against the
Underwriter's non-accountable expense allowance referred to in the
preceding sentence. In the event this Agreement is terminated by the
Underwriter pursuant to Section 9 or for any reason beyond the
Underwriter's control or through no fault of the Underwriter or by the
Company, the Company shall be obligated to pay, to the Underwriter the
greater of the $10,000 deposit paid at the time of the execution of the
letter of intent or all of its actual accountable out-of-pocket
expenses, including fees of its counsel, not to exceed $20,000. In the
event this Agreement is terminated by the Underwriter for any reason
within its control, including but not limited to, an opinion of the
NASD regarding the compensation arrangement of the Underwriter, the
Company shall be obligated to pay the Underwriter only the $10,000
deposit paid at the time of the execution of the letter of intent.
(h) The Company will not take, and will use its best efforts
to cause each of its officers and directors not to take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Shares.
(i) The Company will use its best efforts to obtain and
maintain the quotation of its Common Stock on the Nasdaq SmallCap
MarketSM.
(j) For a period of at least three (3) years after the
Effective Date, the Company will continue to file with the SEC all
reports and other documents as may be required by the 1933 Act, the
Rules and Regulations and the 1934 Act.
(k) The Company will apply the proceeds from the sale of the
Shares substantially in the manner set forth in the Prospectus.
(l) Prior to or as of the First Closing Date, the Company
shall have performed each condition to closing required to be performed
by it pursuant to Section 4 hereof.
(m) Other than as permitted by the 1933 Act and the Rules and
Regulations, the Company will not distribute any prospectus or other
offering material in connection with the Offering.
4. Conditions of the Underwriter's Obligations. The obligation of the
Underwriter to purchase and pay for the Shares as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Shares as of the date hereof and the First Closing Date (as
if made on and as of the First Closing Date) and in the case of the Option
Shares, as of the date hereof and the Second Closing Date (as if made on and as
of the Second Closing Date), to the performance by the Company of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. Minneapolis time, on the first full business day
following the date of this Agreement, or such later date as shall be
consented to in writing by the Underwriter (the "Effective Date"). If
the Company has elected to rely upon Rule 430A, the information
concerning the price of the Shares and price-related information
previously omitted from the effective Registration Statement pursuant
to Rule 430A shall have been transmitted to the SEC for filing pursuant
to Rule 424(b) within the prescribed time period, and prior to the
Closing Date the Company shall have provided evidence satisfactory to
the Underwriter of such timely filing (or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the 1933 Act and the Rules and
Regulations). No stop order suspending the effectiveness thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or the Underwriter,
threatened by the SEC or any state securities commission or similar
regulatory body. Any request of the SEC for additional information (to
be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Underwriter and their legal counsel. The NASD, upon review of the terms
of the Offering, shall not have objected to the terms of the
Underwriter's participation in the Offering.
(b) The Underwriter shall not have advised the Company that
the Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to
be stated therein or is necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this Section 5(b) shall not apply
to statements in, or omissions from, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, which are
based upon and conform to written information furnished to the Company
by the Underwriter specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the date as of which information is given
the Registration Statement and Prospectus, there shall not have
occurred any change, or any development involving a prospective change,
which materially and adversely affects the business or properties of
the Company and which, in the reasonable opinion of the Underwriter,
materially and adversely affects the market for the Shares.
(d) The Underwriter shall have received the opinion of Gray,
Plant, Mooty, Mooty & Bennett, P.A., counsel for the Company, dated as
of such respective Closing Date and satisfactory in form and substance
to the Underwriter and its counsel, to the effect that:
(i) The Company has been duly incorporated and is
validly existing in good standing under the laws of the State
of Minnesota with the requisite corporate power to own, lease
and operate its properties and conduct its business as
described in the Prospectus; and is duly qualified to do
business as a foreign corporation in good standing in all
jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification and
in which the failure to be so qualified or in good standing
would have a material adverse effect on its business and the
activities of the Company. The Company has no active
subsidiaries.
(ii) The number of authorized and, to the best of
such counsel's knowledge, the number of issued and outstanding
shares of capital stock of the Company are as set forth in the
Prospectus, the reverse stock split described in the
Prospectus was effected in accordance with law and all such
capital stock has been duly authorized and is validly issued,
fully paid and nonassessable. Upon delivery of and payment for
the Shares hereunder, the Underwriter will acquire the Shares
free and clear of all liens, encumbrances or claims. To the
best knowledge of such counsel's knowledge, no preemptive
rights, contractual or otherwise, of securities holders of the
Company exist with respect to the issuance or sale of the
Shares by the Company pursuant to this Agreement or to the
issuance of Warrant Shares upon exercise of the Underwriter's
Warrants. To the best of such counsel's knowledge, no rights
to require registration of shares of Common Stock or other
securities of the Company exist which may be exercised in
connection with the filing of the Registration Statement. The
Shares, Underwriter's Warrants and Warrant Shares conform as
to matters of law in all material respects to the description
of these securities made in the Prospectus and such
description accurately sets forth the material legal
provisions thereof required to be set forth in the Prospectus.
(iii) The Shares have been duly authorized and, upon
delivery to the Underwriter against payment therefor, will be
validly issued, fully paid and nonassessable.
(iv) The certificates evidencing the Shares comply as
to form with the applicable provisions of the laws of the
State of Minnesota.
(v) The Underwriter's Warrants have been duly
authorized, executed and delivered by the Company and are the
valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability may be
limited by the application of bankruptcy, insolvency,
moratorium, or other laws of general application affecting the
rights of creditors generally and by judicial limitations on
the right of specific performance and other equitable
remedies, and except as the enforceability of indemnification
or contribution provisions hereof may be limited by federal or
state securities laws. The Warrant Shares when issued in
accordance with the terms of this Agreement and pursuant to
the Underwriter's Warrants will be validly issued, fully paid
and nonassessable. A sufficient number of shares of Common
Stock has been reserved for issuance upon exercise of the
Underwriter's Warrants.
(vi) The Registration Statement has become and is
effective under the 1933 Act, the Prospectus has been filed as
required by Rule 424(b), if necessary and, to the best
knowledge of such counsel, no stop orders suspending the
effectiveness of the Registration Statement have been issued
and no proceedings for that purpose have been instituted or
are pending or contemplated under the 1933 Act.
(vii) To the best of such counsel's knowledge, there
are no material legal or governmental proceedings of a
character required by the 1933 Act and the Rules and
Regulations to be described or referred to in the Registration
Statement or Prospectus that are not described or referred to
therein. All pending legal or governmental proceedings, if
any, to which the Company is a party or to which any of its
property is subject which are not described in the
Registration Statement and the Prospectus, including ordinary
routine litigation incidental to the business, are, considered
in the aggregate, not material to the Company.
(viii) No authorization, approval or consent of any
governmental authority or agency is necessary in connection
with the issuance and sale of the Shares as contemplated under
this Agreement, except such as may be required and obtained
under the 1933 Act or under state or other securities laws in
connection with the purchase and distribution of the Shares by
the Underwriter.
(ix) The Registration Statement, when it became
effective, the Prospectus and any amendments thereof or
supplements thereto, (other than the financial statements and
supporting financial and statistical data included or
incorporated therein, as to which such counsel need express no
opinion) on the date of filing or the date thereof, complied
as to form in all material respects with the requirements of
the 1933 Act and the Rules and Regulations.
(x) This Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except as
enforceability may be limited by the application of
bankruptcy, insolvency, moratorium or similar laws affecting
the rights of creditors generally and judicial limitations on
the right of specific performance and except as the
enforceability of indemnification or contribution provisions
hereof may be limited by federal or state securities laws.
(xi) To the best of such counsel's knowledge, the
execution, delivery and performance of this Agreement and the
consummation of the transactions described herein will not
result in a violation of, or a default under, the terms or
provisions of (A) any material bond, debenture, note,
contract, lease, license, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument
to which the Company is a party or by which the Company or any
of its properties are bound, or (B) any material law, order,
rule, regulation, writ, injunction, or decree known to such
counsel of any government, governmental agency or court having
jurisdiction over the Company or any of its properties.
In expressing the foregoing opinion, as to matters of fact
relevant to conclusions of law, counsel may rely, to the extent that
they deem proper, upon certificates of public officials and of the
officers of the Company, provided that copies of such officers'
certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall
also include a statement to the effect that, although such counsel
cannot guarantee the accuracy, completeness or fairness of any of the
statements contained in the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto in connection with such
counsel's representation, investigation and due inquiry of the Company
in the preparation of the Registration Statement, Prospectus and any
amendment thereof or supplement thereto, nothing has come to the
attention of such counsel which causes them to believe that the
Registration Statement, Prospectus, or any amendment thereof or
supplement thereto (other than the financial statements and supporting
financial and statistical data included or incorporated therein, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
provided, however, that such opinion of counsel does not require any
statement concerning statements in, or omissions from, the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto,
which are based upon and conform to written information furnished to
the Company by the Underwriter specifically for use in the preparation
of the Registration Statement, Prospectus, or any such amendment or
supplement.
(e) The Underwriter shall have received from Maun & Simon,
PLC, its counsel, such opinion or opinions as the Underwriter may
reasonably require, dated as of each closing date and satisfactory in
form and substance to the Underwriter, with respect to the sufficiency
of corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby, and the Company
shall have furnished to said counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
In connection with such opinion, as to matters of fact relevant to
conclusions of law, such counsel may rely, to the extent that they deem
proper, upon representations or certificates of public officials and of
responsible officers of the Company.
(f) The Underwriter and the Company shall have received
letters, dated the date hereof and as of each Closing Date, from
McGladrey & Pullen, LLP, independent public accountants, substantially
similar to the form set forth in Appendix A hereto.
(g) The Underwriter shall have received from the Company a
certificate, dated as of each closing date, of the principal executive
officer and the principal financial or accounting officer of the
Company to the effect that:
(i) The representations and warranties of the Company
in this Agreement are true and correct as if made on and as of
each closing date. The Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at, or prior to, such date.
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or to the
best knowledge of such officers contemplated under the 1933
Act.
(iii) Neither the Registration Statement nor the
Prospectus nor any amendment thereof or supplement thereto
included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, and,
since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended
or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from,
the Registration Statement or Prospectus, or any amendment
thereof or supplement thereto, which are based upon and
conform to written information, as identified in Section 12
herein, furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration
Statement or the Prospectus, or any such amendment or
supplement.
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as contemplated or referred to in the
Prospectus, no event has occurred that should have been set
forth in an amendment or supplement to Registration Statement
or the Prospectus which has not been so set forth and the
Company has not incurred any direct or contingent liabilities
or obligations material to the Company, or entered into any
material transactions, except liabilities, obligations or
transactions in the ordinary course of business, and there has
not been any change in the capital stock or long-term debt of
the Company, (including any capitalized lease obligations),
any material increase in the short-term debt of the Company,
any material adverse change in the financial position, net
worth or results of operations of the Company or declaration
or payment of any dividend.
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, the Company has not sustained any material loss
of, or damage to, its properties, whether or not insured.
(vi) Except as is otherwise expressly stated in the
Registration Statement and Prospectus, there are no material
actions, suits or proceedings pending before any court or
governmental agency, authority or body, or, to the best of
their knowledge, threatened, to which the Company is a party
or of which the business or property of the Company is the
subject.
(h) The Underwriter shall have received, dated as of each
closing date, from the Secretary of the Company a certificate of
incumbency certifying the names, titles and signatures of the officers
authorized to execute the resolutions of the Board of Directors of the
Company authorizing and approving the execution, delivery and
performance of this Agreement, a copy of such resolutions to be
attached to such certificate, certifying that such resolutions and the
Articles of Incorporation of the Company and the Bylaws of the Company
have been validly adopted and have not been amended or modified.
(i) In addition, at each closing, the Company shall have
delivered to the Underwriter an opinion, satisfactory to the
Underwriter, of Navrocki Rooney Sivertson, P.A., special intellectual
property counsel for the Company, dated as such respective Closing
Date, and satisfactory in form and substance to the Underwriter and its
counsel, to the effect that:
(i) To the best of such counsel's knowledge, except
as described in the Prospectus, there are no United States
patents of third parties which are infringed by the
manufacture, use or sale of the products or processes
currently made, used or sold by the Company.
(ii) To the best of such counsel's knowledge, and
except as stated below, there are no legal, governmental or
administrative proceedings pending or threatened against the
Company that relate to patents, trademarks or other
intellectual property, except for pending or proposed United
States and foreign patent applications.
(iii) To the best of such counsel's knowledge, after
due inquiry, the Company has not received any notice of
conflict with the asserted rights of others in respect of any
trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets, patents, patent
applications, know-how, or similar rights, nor of any
threatened actions with respect thereto, which, if determined
adversely to the Company, would individually or in the
aggregate have a material adverse effect on the general
affairs, financial position, net worth or results of
operations of the Company.
(iv) To the best of such counsel's knowledge, after
due inquiry, the Company owns, possesses or is licensed under
all such material trademarks, trademark applications,
trademark registrations, service marks, service mark
registrations, copyrights, patents, patent applications and
licenses as are described in the Prospectus and which are
necessary for the Company's present or planned future business
as described in the Prospectus.
In expressing the foregoing opinion, as to matters of fact
relevant to conclusions of law, counsel may rely, to the extent that
they deem proper, upon certificates of public officials and of the
officers of the Company, provided that copies of such officers'
certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall
also include a statement to the effect that, although such counsel
cannot guarantee the accuracy, completeness or fairness of any of the
statements regarding intellectual property matters contained in the
Registration Statement, Prospectus, or any amendment thereof or
supplement thereto in connection with such counsel's representation of
the Company in connection with intellectual property matters and in
preparation of the intellectual property portions of the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto,
nothing has come to the attention of such counsel which causes them to
believe that the intellectual property portions of the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto
(other than the financial statements and supporting financial and
statistical data included or incorporated therein, as to which such
counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided,
however, that such opinion of counsel does not require any statement
concerning statements in, or omissions from, the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto,
which are based upon and conform to written information furnished to
the Company by the Underwriter specifically for use in the preparation
of the Registration Statement, Prospectus, or any such amendment or
supplement.
(j) The Underwriter shall have received a written agreement
from each of the officers and directors of the Company and certain
other shareholders of the Company determined by the Underwriter that
such person will not, without the prior written consent of the
Underwriter during the Lockup Period (i) sell, transfer or otherwise
dispose of, or agree to sell, transfer or otherwise dispose of any
shares of Common Stock of the Company beneficially held by the officer
or director during the Lockup Period, (ii) sell, transfer or otherwise
dispose of or agree to sell, transfer or otherwise dispose of any
options, rights, warrants or other securities exercisable or
convertible into shares of Common Stock of the Company beneficially
held by the officer or director during the Lockup Period, or (iii) sell
or grant, or agree to sell or grant, options, rights, warrants or other
securities exercisable or convertible into to any such shares of Common
Stock; provided, however, that the foregoing does not prohibit gifts to
donees who agree to be bound by the restrictions set forth in the
lockup agreement or transfers by will or the laws of descent, and the
Underwriter will not unreasonably withhold consent to a sale of shares
of Common Stock if necessary to pay federal or state taxes.
(k) The Company shall not have failed to have performed any of
its agreements herein contained and required to be performed at or
prior to the First Closing Date or the Second Closing Date, as the case
may be.
(l) The Shares shall have been registered or qualified for
sale or exempt from such registration or qualification under the
securities laws of such jurisdictions as designated by the Underwriter
such qualifications or exemptions shall continue in effect to and
including the First Closing Date or the Second Closing Date, as the
case may be.
(m) The Company shall have furnished to the Underwriter, dated
as of the date of the Closing Date, such further certificates and
documents as the Underwriter shall have reasonably required.
(n) All such opinions, certificates, letters and documents
will be in compliance with the provisions hereof only if they are
reasonably satisfactory to the Underwriter and its legal counsel. All
statements contained in any certificate, letter, or other document
delivered pursuant hereto by, or on behalf of, the Company shall be
deemed to constitute representations and warranties of the Company.
(o) The Underwriter may waive in writing the performance of
any one or more of the conditions specified in this Section 4 or extend
the time for their performance.
(p) If any of the conditions specified in this Section 4 shall
not have been fulfilled when and as required by this Agreement to be
fulfilled, this Agreement and all obligations of the Underwriter
hereunder may be canceled at, or at any time prior to, each Closing
Date by the Underwriter. Any such cancellation shall be without
liability of the Underwriter to the Company and shall not relieve the
Company of its obligations under Section 3(g) hereof. Notice of such
cancellation shall be given to the Company at the address specified in
Section 11 hereof in writing, or by telegraph or telephone confirmed in
writing.
5. [THIS SECTION IS INTENTIONALLY LEFT BLANK.]
6. Underwriter's Warrants. On the First Closing Date, the Company shall
sell to the Underwriter for $50 the Underwriter's Warrants, which shall first
become exercisable one year after the Effective Date and shall remain
exercisable for a period of four (4) years thereafter. The Underwriter's
Warrants shall be subject to certain transfer restrictions and shall be in
substantially the form filed as an exhibit to the Registration Statement and
attached as Appendix B hereto.
7. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the 1933 Act against any losses,
claims, damages or liabilities, joint or several, to which the
Underwriter or each such controlling person may become subject, under
the 1933 Act, the 1934 Act, the common law or otherwise, insofar as
such losses, claims, damages or liabilities (or judicial or
governmental actions or proceedings in respect thereof) arise out of,
or are based upon, (i) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any
amendment thereof, or the omission or alleged omission to state in the
Registration Statement or any amendment thereof a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus if used prior to
the Effective Date of the Registration Statement or in the Prospectus
(as amended or as supplemented, if the Company shall have filed with
the SEC any amendment thereof or supplement thereto), or the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading;
or (iii) any untrue statement or alleged untrue statement of a material
fact contained in any application or other statement executed by the
Company or based upon written information furnished by the Company
filed in any jurisdiction in order to qualify the Shares under, or
exempt the Shares or the sale thereof from qualification under, the
securities laws of such jurisdiction, or the omission or alleged
omission to state in such application or statement a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and the Company will reimburse the Underwriter, and each
such controlling person for any legal or other expenses reasonably
incurred by the Underwriter, or controlling person (subject to the
limitation set forth in Section 6(c) hereof) in connection with
investigating or defending against any such loss, claim, damage,
liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage
or liability arises out of, or is based upon, an untrue statement, or
alleged untrue statement, omission or alleged omission, made in
reliance upon and in conformity with written information furnished to
the Company by, or on behalf of, the Underwriter specifically for use
in the preparation of the Registration Statement or any such
post-effective amendment thereof, any such Preliminary Prospectus or
the Prospectus or any such amendment thereof or supplement thereto, or
in any application or other statement executed by the Company or the
Underwriter filed in any jurisdiction in order to qualify the Shares
under, or exempt the Shares or the sale thereof from qualification
under, the securities laws of such jurisdiction; and provided further
that the foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any untrue statement, alleged untrue
statement, omission or alleged omission made in any Preliminary
Prospectus but eliminated or remedied in the Prospectus, such indemnity
agreement shall not inure to the benefit of the Underwriter if the
person asserting any loss, claim, damage or liability purchased the
Shares from the Underwriter which are the subject thereof (or to the
benefit of any person who controls the Underwriter), if a copy of the
Prospectus was not sent or given to such person with, or prior to, the
written confirmation of the sale of such Shares to such person. This
indemnity agreement is in addition to any liability which the Company
may otherwise have.
(b) The Underwriter severally, but not jointly, agrees to
indemnify and hold harmless the Company, each of the Company's
directors, each of the Company's officers who has signed the
Registration Statement and each person who controls the Company within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject, under the 1933 Act,
the 1934 Act, the common law, or otherwise, insofar as such losses,
claims, damages, or liabilities (or judicial or governmental actions or
proceedings in respect thereof) arise out of, or are based upon, (i)
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, or
the omission or alleged omission to state in the Registration Statement
or any amendment thereof, a material fact required to be stated therein
or necessary to make the statements therein not misleading; (ii) any
untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus if used prior to the Effective
Date of the Registration Statement or in the Prospectus (as amended or
as supplemented, if the Company shall have filed with the SEC any
amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact
contained in any application or other statement executed by the Company
or by the Underwriter and filed in any jurisdiction in order to qualify
the Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; in each case to the extent, but only the extent,
that such untrue statement, alleged untrue statement, omission or
alleged omission, was made in reliance upon and in conformity with
written information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof
or supplement thereto, or in any application or other statement
executed by the Company or by the Underwriter and filed in any
jurisdiction; and the Underwriter will reimburse any legal or other
expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or
defending against any such loss, claim, damage, liability or action.
This indemnity agreement is in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7, notify in writing the
indemnifying party of the commencement thereof. The omission so to
notify the indemnifying party will not relieve it from any liability
under this Section 7 as to the particular item for which
indemnification is then being sought, unless such omission so to notify
prejudices the indemnifying party's ability to defend such action. In
case any such action is brought against any indemnified party and the
indemnified party notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein
and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under
this Section 7 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that if, in
the reasonable judgment of the indemnified party, it is advisable for
such parties and controlling persons to be represented by separate
counsel, any indemnified party shall have the right to employ separate
counsel to represent it and all other parties and their controlling
persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Underwriter against the
Company or by the Company against the Underwriter hereunder, in which
event the fees and expenses of such separate counsel shall be borne by
the indemnifying party and paid as incurred. Any such indemnifying
party shall not be liable to any such indemnified party on account of
any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
8. Contribution.
(a) If the indemnification provided for in Section 7 is
unavailable under applicable law to any indemnified party in respect of
any losses, claims, damages or liabilities referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriter from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Underwriter in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The Company and the
Underwriter agree that contribution determined by per capita allocation
would not be equitable. The respective relative benefits received by
the Company, on the one hand, and the Underwriter, on the other hand,
shall be deemed to be in the same proportion (A) in the case of the
Company, as the total price paid to the Company for the Shares by the
Underwriter (net of underwriting discount received but before deducting
expenses) bears to the aggregate public offering price of the Shares,
(B) in the case of the Underwriter, as the aggregate underwriting
discount received by them bears to the aggregate public offering price
of the Shares, in each case as reflected in the Prospectus. The
relative fault of the Company and the Underwriter shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company
or by the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. Notwithstanding the provisions of this
Section 8, the Underwriter shall not be required to contribute any
amount in excess of the amount by which the total price at which the
Shares underwritten by it were offered to the public exceeds the amount
of any damages which the Underwriter has otherwise been required to pay
by reason of any untrue or alleged untrue statement or omission or
alleged omission in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 8, each person who controls the Underwriter
within the meaning of the 1933 Act or the 1934 Act shall have the same
rights to contribution as the Underwriter, each person who controls the
Company within the meaning of the 1933 Act or the 1934 Act shall have
the same rights to contribution as the Company and each officer of the
Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as
the Company.
(b) Promptly after receipt by a party to this Agreement of
notice of the commencement of any action, suit or proceeding, such
person will, if a claim for contribution in respect thereof is to be
made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to
notify the Contributing Party will not relieve the Contributing Party
from any liability which it may have to any party other than under this
Section 8, unless such omission so to notify prejudices the
Contributing Party's ability to defend such action. Any notice given
pursuant to Section 7 hereof shall be deemed to be like notice
hereunder. In case any such action, suit or proceeding is brought
against any party, and such person notifies a Contributing Party of the
commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
9. Effective Date of This Agreement and Termination.
(a) This Agreement shall become effective when the Underwriter
releases the initial public offering of the Firm Shares for sale to the
public. The Underwriter shall notify the Company immediately after any
action has been taken which causes this Agreement to become effective.
Until this Agreement is effective, it may be terminated by the Company
or the Underwriter by giving notice as hereinafter provided, except
that the provisions of Section 3(g) and Sections 7, 8 and 9 shall at
all times be effective. For purposes of this Agreement, the release of
the initial public offering of the Firm Shares for sale to the public
shall be deemed to have been made when the Underwriter releases, by
facsimile or otherwise, firm offers of the Firm Shares to securities
dealers or release for publication a newspaper advertisement relating
to the Firm Shares, whichever occurs first.
(b) Until the First Closing Date, this Agreement may be
terminated by the Underwriter, at its option, by giving notice to the
Company, if (i) the Company shall have sustained a loss by fire, flood,
accident or other calamity which is material with respect to the
business of the Company; the Company shall have become a party to
material litigation, not disclosed in the Registration Statement or the
Prospectus; or the business or financial condition of the Company shall
have become the subject of any material litigation, not disclosed in
the Registration Statement or the Prospectus; or there shall have been,
since the respective dates as of which information is given in the
Registration Statement or the Prospectus, any material adverse change
in the general affairs, business, key personnel, capitalization,
financial position or net worth of the Company, whether or not arising
in the ordinary course of business, which loss or change, in the
reasonable judgment of the Underwriter, shall render it inadvisable to
proceed with the delivery of the Shares, whether or not such loss shall
have been insured; (ii) trading in securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq
SmallCap Market or the over-the-counter market shall have been
suspended or minimum prices shall have been established on such
exchange by the SEC or by such exchanges or markets; (iii) a general
banking moratorium shall have been declared by federal, New York or
Minnesota authorities; (iv) there shall have been such a material
adverse change in general economic, monetary, political or financial
conditions, or the effect of international conditions on the financial
markets in the United States shall be such that, in the judgment of the
Underwriter, makes it inadvisable to proceed with the delivery of the
Shares; (v) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of either of
any court or other governmental authority which, in the judgment of the
Underwriter, materially and adversely affects or will materially and
adversely affect the business or operations of the Company; (vi) there
shall be a material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the
United States and any foreign power, or a formal declaration of war by
the United States of America shall have occurred; (vii) the Company
shall have failed to comply with any of the provisions of this
Agreement on its part to be performed on or prior to such date or if
any of the conditions, agreements, representations or warranties of the
Company shall not have been fulfilled within the respective times
provided for in this Agreement; or (viii) the Company is no longer
registered under the 1934 Act. Any such termination shall be without
liability of any party to any other party, except as provided in
Sections 7 and 8 hereof; provided, however, that the Company shall
remain obligated to pay costs and expenses to the extent provided in
Section 3(g) hereof.
(c) If the Underwriter elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 8, it shall notify the Company promptly by telegram or
telephone, confirmed by letter sent to the address specified in Section
11 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Underwriter promptly by
telegram or telephone, confirmed by letter sent to the address
specified in Section 11 hereof.
10. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8, respectively, the
representations and warranties of the Company set forth in Sections 1 hereof
respectively and the covenants of the Company set forth in Section 3 hereof
shall remain operative and in full force and effect, regardless of any
investigation made by, or on behalf of, the Underwriter, the Company, any of its
officers and directors, or any controlling person referred to in Sections 7 and
8, and shall survive the delivery of and payment for the Shares. The aforesaid
indemnity and contribution agreements shall also survive any termination or
cancellation of this Agreement. Any successor of any party or of any such
controlling person, or any legal representative of such controlling person as
the case may be, shall be entitled to the benefit of the respective indemnity
and contribution agreements.
11. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to Underwriter
or any of the Underwriter, shall be mailed, delivered or telegraphed and
confirmed, to R.J. Steichen & Company, 1100 Midwest Plaza West, 801 Nicollet
Mall, Suite 700, Minneapolis, Minnesota 55402 Attention: Patrick M. Sidders,
Senior Vice President and Managing Director, with a copy to Philip T. Colton,
Esq., Maun & Simon, PLC, 2000 Midwest Plaza Building West, 801 Nicollet Mall,
Minneapolis, Minnesota 55402; or, if sent to the Company, shall be mailed,
delivered or telegraphed and confirmed, to Telident, Inc., One Main Street S.E.,
Suite 85, Minneapolis, Minnesota 55414, Attention: Michael J. Miller,
President/CEO, with a copy to Lindley S. Branson, Esq., Gray, Plant, Mooty,
Mooty & Bennett, P.A., 3400 City Center, 33 South Sixth Street, Minneapolis,
Minnesota 55402-3796.
12. Information Furnished by the Underwriter. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover and the statements under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the only written
information furnished by, or on behalf of, the Underwriter specifically for use
with reference to the Underwriter referred to in Section 1(b) and Section 7
hereof.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriter and the Company, their respective successors and
assigns, and the officers, directors and controlling persons referred to in
Sections 7 and 8. Nothing expressed in this Agreement is intended or shall be
construed to give any person or corporation, other than the parties hereto,
their respective successors and assigns, and the controlling persons, officers
and directors referred to in Sections 7 and 8 any legal or equitable right,
remedy, or claim under, or in respect of, this Agreement or any provision herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors, assigns and
such controlling persons, officers and directors, and for the benefit of no
other person or corporation. No purchaser of any Shares from the Underwriter
shall be construed a successor or assign merely by reason of such purchase.
14. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
15. Counterparts. This Agreement may be execute in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one Agreement.
If the foregoing is in accordance with the Underwriter's understanding
of this agreement, kindly sign and return to the Company the enclosed
counterpart of this Agreement, whereupon it will become a binding agreement
between the Company and the Underwriter in accordance with its terms.
Very truly yours,
TELIDENT, INC.
By:
Its:
Confirmed as of the date hereof
at Minneapolis, Minnesota
R.J. STEICHEN & COMPANY
By: __________________________________________
Patrick M. Sidders
Its: Senior Vice President & Managing Director
APPENDIX A
FORM OF COMFORT LETTER OF MCGLADREY & PULLEN, LLP
(1) They are independent public accountants with respect to the Company
within the meaning of the Securities Act of 1933, as amended (the "1933 Act").
(2) In their opinion, the financial statements of the Company included
in the Registration Statement which are stated therein to have been examined by
them comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the related published rules and regulations.
(3) On the basis of specified procedures (but not an audit in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company responsible for financial and accounting matters
as to transactions and events subsequent to the date of the financial statements
included in the Prospectus, a reading of minutes of meetings of the stockholders
and directors of the Company since the date of the financial statements included
in the Prospectus and other procedures as specified in such letter, nothing came
to their attention which caused them to believe that (a) at a specified date not
more than five (5) days prior to the date thereof in the case of the first
letter and not more than two (2) business days prior to the date thereof in the
case of the second and third letters, there was any change in the capital stock,
long-term debt, or short-term debt (other than normal payments) of the Company,
or any material decrease in net current assets or stockholders' equity, as
compared with amounts shown on the latest balance sheet of the Company included
in the Registration Statement; or (b) for the period from the date of such
balance sheet to a date not more than five (5) days prior to the date thereof in
the case of the first letter and not more than two (2) business days prior to
the date thereof in the case of the second letter, there were any material
decreases in working capital, long-term debt or total stockholders' equity,
except for changes or decreases which the Prospectus discloses, have occurred or
may occur, or which are set forth in such letter.
(4) They have carried out specified procedures, which have been agreed
to by the Underwriter, with respect to certain information in the Prospectus
specified by the Underwriter, and on the basis of such procedures, they have
found such information to be in agreement with the accounting records of the
Company or with material derived from such records.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED
FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
WARRANT
TO PURCHASE 115,000 SHARES OF COMMON STOCK
OF
TELIDENT, INC.
THIS CERTIFIES THAT, for good and valuable consideration, R.J. Steichen
& Company (the "Underwriter"), or its registered assigns, is entitled to
subscribe for and purchase from Telident, Inc., a Minnesota corporation (the
"Company"), at any time after ________________, 1997, to and including
______________, 2001, One Hundred Fifteen Thousand (115,000) fully paid and
nonassessable shares of the Common Stock of the Company at the price of
$____________ (120% of the Public Offering Price) per share (the "Warrant
Exercise Price"), subject to the antidilution provisions of this Warrant.
Reference is made to this Warrant in the Underwriting Agreement dated August
___, 1996, by and between the Company and the Underwriter. The shares which may
be acquired upon exercise of this Warrant are referred to herein as the "Warrant
Shares." As used herein, the term "Holder" means the Underwriter, any party who
acquires all or a part of this Warrant as a registered transferee of the
Underwriter, or any record holder or holders of the Warrant Shares issued upon
exercise, whether in whole or in part, of the Warrant. As used herein, the term
"Common Stock" means and includes the Company's presently authorized common
stock $.02 par value, and shall also include any capital stock of any class of
the Company hereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the Holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution, or winding up of the Company.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise: Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock), by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for such shares.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred, other than by will or pursuant to
operation of law, except to a person who is an employee or both an officer and
shareholder of the Underwriter.
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be delivered to
the Holder within a reasonable time, not exceeding fifteen (15) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the right to purchase the
number of Warrant Shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Such Holder shall also provide the Company with written representations from the
Holder and the proposed transferee satisfactory to the Company regarding the
transfer or, at the election of the Company, an opinion of counsel reasonably
satisfactory to the Company to the effect that the proposed transfer of this
Warrant or disposition of shares may be effected without registration or
qualification (under any Federal or State law) of this Warrant or the Warrant
Shares. Upon receipt of such written notice and either such representations or
opinion by the Company, such Holder shall be entitled to transfer this Warrant,
or to exercise this Warrant in accordance with its terms and dispose of the
Warrant Shares, all in accordance with the terms of the notice delivered by such
Holder to the Company, provided that an appropriate legend, if any, respecting
the aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for the Warrant Shares. Nothing herein, however,
shall obligate the Company to effect registrations under federal or state
securities laws, except as provided in Section 9. If registrations are not in
effect and if exemptions are not available when the Holder seeks to exercise the
Warrant, the Warrant exercise period will be extended, if need be, to prevent
the Warrant from expiring, until such time as either registrations become
effective or exemptions are available, and the Warrant shall then remain
exercisable for a period of at least 30 calendar days from the date the Company
delivers to the Holder written notice of the availability of such registrations
or exemptions. The Holder agrees to execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company, or the registrations made, for
the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof except for all taxes, liens and changes imposed by the Holder. The
Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
(iii) combine outstanding shares of Common Stock, by reclassification
or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this Subsection shall be made to the
nearest cent or to the nearest 1/100 of a share, as the case may be. In the
event that at any time as a result of an adjustment made pursuant to this
Subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
Upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section 5.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), there shall be no adjustment under Subsection (a)
of this Section above but the Holder of each Warrant then outstanding shall have
the right thereafter to convert such Warrant into the kind and amount of shares
of stock and other securities and property which such Holder would have owned or
have been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale, or conveyance had such Warrant been converted
immediately prior to the effective date of such consolidation, merger, statutory
exchange, sale, or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set forth in this
Section with respect to the rights and interests thereafter of any Holders of
the Warrant, to the end that the provisions set forth in this Section shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock and other securities and property thereafter
deliverable on the exercise of the Warrant. The provisions of this Subsection
shall similarly apply to successive consolidations, mergers, statutory
exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel to the Company and
satisfactory to the Company to prevent further transfers which would be in
violation of Section 5 of the Securities Act of 1933, as amended (the "1933
Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company for the transfer or disposition
of the Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of both such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the closing sale price reported by Nasdaq National Market or any national
securities exchange or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in Nasdaq
SmallCap Market, or if not listed on a national securities exchange or quoted in
Nasdaq SmallCap Market, the average of the last reported closing bid and asked
prices as reported by Metro Data Company, Inc. from quotations by market makers
in such Common Stock on the Minneapolis-St. Paul local over-the-counter market.
9. Registration Rights.
(a) If at any time after ___________________, 1997 and prior to the end
of the two-year period following complete exercise of this Warrant or
_______________, 2003, whichever occurs earlier, the Company proposes to
register under the 1933 Act (except by a Form S-4 or Form S-8 Registration
Statement or any successor forms thereto) or qualify for a public distribution
under Section 3(b) of the 1933 Act, any of its securities, it will give written
notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2
and/or Section 3(a) hereof, and any Warrant Shares of its intention to do so
and, on the written request of any such Holder given within twenty (20) days
after receipt of any such notice (which request shall specify the interest in
this Warrant or the Warrant Shares intended to be sold or disposed of by such
Holder and describe the nature of any proposed sale or other disposition
thereof), the Company will use its best efforts to cause all such Warrant
Shares, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement proposed to
be filed by the Company; provided, however, that nothing herein shall prevent
the Company from, at any time, abandoning or delaying any registration. If any
registration pursuant to this Section 9(a) is underwritten in whole or in part,
the Company may require that the Warrant Shares requested for inclusion pursuant
to this Section 9(a) be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. If a
greater number of Warrant Shares is offered for participation in the proposed
offering than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the proposed
offering, then the amount of Warrant Shares proposed to be offered by such
Holders for registration, as well as the number of securities of any other
selling shareholders participating in the registration, shall be proportionately
reduced to a number deemed satisfactory by the managing underwriter.
(b) Further, on a one-time basis during the four-year period commencing
___________________, 1997, upon request by the Holder or Holders of a majority
in interest of this Warrant, of any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and of any Warrant Shares, the Company will promptly take
all necessary steps to register or qualify, under the 1933 Act and the
securities laws of such states as the Holders may reasonably request, such
number of Warrant Shares issued and to be issued upon conversion of the Warrants
requested by such Holders in their request to the Company, provided, however,
that the Company shall not for any purpose be required to execute a general
consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified. In addition,
upon the receipt of such request, the Company shall promptly give written notice
to all other record Holders of the Warrant Shares not theretofore registered
under the Securities Act and sold that such registration is to be effected. The
Company shall include in such registration statement such Warrant Shares for
which it has received written requests to register by such other record Holders
within 30 days after the delivery of the Company's written notice to such other
record Holders. The Company shall be obligated to prepare, file and cause to
become effective only one registration statement pursuant to this Section 9(b)
and to pay all costs and expenses associated with such registration statement as
provided in Section 9(c). The Company shall keep effective and maintain any
registration, qualification, notification, or approval specified in this
Paragraph (b) for a period of one hundred twenty (120) days.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
and any other expenses relating to the sale of securities by the selling Holders
not expressly included above shall be borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant
and of any Warrant Shares, and the officers and directors, if any, who control
such Holders, within the meaning of Section 15 of the 1933 Act, against all
losses, claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any amendments thereof or supplements thereto), any Preliminary
Prospectus or any state securities law filings; (2) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as such
losses, claims, damages, or liabilities are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its officers who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the 1933 Act, with
respect to losses, claims, damages, or liabilities which are caused by any
untrue statement or alleged untrue statement, omission or alleged omission
contained in information furnished in writing to the Company by such Holder
expressly for use therein.
10. Additional Right to Convert Warrant.
(a) The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this Section 10. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the Holder (without payment by
the Holder of any Warrant Exercise Price) that number of shares of Company
Common Stock equal to the quotient obtained by dividing (x) the Conversion Value
(as defined herein) by (y) the Fair Market Value (as defined in paragraph (d)
below) of one share of Company Common Stock immediately prior to the exercise of
the Conversion Right. The "Conversion Value" of the Converted Warrant Shares
shall be determined by subtracting the aggregate Warrant Exercise Price of the
Converted Warrant Shares from the aggregate fair market value (as defined in
paragraph (d) below) of the Converted Warrant Shares. Notwithstanding anything
in this paragraph 10 to the contrary, the Conversion Right cannot be exercised
with respect to a number of Converted Warrant Shares having a Conversion Value
below $100. No fractional shares shall be issuable upon exercise of the
Conversion Right, and if the number of shares to be issued in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder of this Warrant an amount in cash equal to the fair market value of the
resulting fractional share.
(b) The Conversion Right may be exercised by the Holder, at any time or
from time to time after it is exercisable, prior to its expiration, on any
business day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares of Common stock
the Holder will purchase pursuant to such conversion and (ii) a place and date
not less than one or more than 20 business days from the date of the Conversion
Notice for the closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the Nasdaq National Market, then the average closing or
last sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date,
(ii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market but is traded on the Nasdaq
SmallCap Market or other over-the-counter market, then the average
closing bid and asked prices reported for the ten (10) business days
immediately preceding the Determination Date, and
(iii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market, Nasdaq SmallCap Market or
other over-the-counter market, then the price established in good faith
by the Board of Directors.
(e) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a material change to the Company's earnings for
financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment and an opinion of such independent certified
public accountants, in a form reasonably satisfactory to such holder, as to such
adverse accounting treatment.
IN WITNESS WHEREOF, Telident, Inc. has caused this Warrant to be signed
by its duly authorized officer and this Warrant to be dated __________________,
1996.
"Company"
Telident, Inc.
By________________________________________
Its_______________________________________
TO: TELIDENT, INC.
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder
- ----------------------------- in Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, __________________ of the shares issuable upon the exercise
of such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
------------------------------------------
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_____________) Address:
------------------------------------------
------------------------------------------
Date: ____________ __________________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto _______________________________ the right to purchase the
securities of Telident, Inc. to which the within Warrant relates and appoints
______________________, attorney, to transfer said right on the books of
Telident, Inc. with full power of substitution in the premises.
Dated:___________ ______________________________
(Signature)
Address:
______________________________
______________________________
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: TELIDENT, INC.
The undersigned hereby irrevocably elects a cashless exercise of the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder, _______________ shares of Common Stock, as provided for in
Section 10 therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name__________________________
(Please print name)
Address___________________________________
Social Security No.________________
Signature__________________________________
NOTE: The above signature should correspond exactly with the name on
the first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable
under the within Warrant Certificate, a new Warrant Certificate is to be issued
in the name of said undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher number of shares.
EXHIBIT 5.1
GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
3400 City Center, 33 South Sixth Street
Minneapolis, Minnesota 55402-3796
JEFFREY C. ANDERSON
612 343-2866
August 8, 1996
Telident, Inc.
One Main Street SE, Suite 85
Minneapolis, MN 55414
RE: TELIDENT, INC.
REGISTRATION STATEMENT ON FORM SB-2
OUR FILE NO. 328790/66373
Dear Sir or Madam:
We are securities counsel for Telident, Inc., a Minnesota corporation
(the "Company") in connection with the filing with the Commission of a
Registration Statement on Form SB-2, No. 333-04311 (the "Registration
Statement") for registration of shares of common stock of the Company, $0.02 par
value ("Common Stock") and underwriter's warrants for the purchase of Common
Stock ("Warrants").
We are admitted to practice only in the State of Minnesota and have
examined and are familiar with such documents and corporate records of the
Company as we have deemed necessary and appropriate for the purpose of rendering
the following opinion. Based on the foregoing, we are of the opinion that:
When the shares of Common Stock and the Warrants are issued by the
Company pursuant to the Registration Statement, such securities will,
when sold pursuant to the Registration Statement, be validly issued,
fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and Prospectus.
Very truly yours,
GRAY, PLANT, MOOTY,
MOOTY & BENNETT, PA
By /s/ Jeffrey C. Anderson
Jeffrey C. Anderson
