U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1998
COMMISSION FILE NUMBER 0-20887
TELIDENT, INC.
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(Name of small business issuer in its charter.)
MINNESOTA 41-1533060
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TEN SECOND STREET N.E., SUITE 212
MINNEAPOLIS, MINNESOTA 55413
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 623-0911
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.08 par value
Check whether the issuer has: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes _____ No __X__.
State registrant's revenues for its most recent fiscal year: $2,269,000
Aggregate market value of voting stock held by non-affiliates of registrant as
of August 3, 1998: Approximately $5,226,328.
Number of shares outstanding as of August 3, 1998; 2,787,297 shares of Common
Stock, par value $.08 per share, and 37,500 shares of Preferred Convertible
Stock, par value $.08.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders, a definitive copy of which will be filed with the SEC within 120
days of June 30, 1998, is incorporated by reference into Items 9, 10, 11 and 12
of Part III.
Transitional Small Business Disclosure format: Yes _____ No __X__.
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TABLE OF CONTENTS
PART I ......................................................................2
ITEM 1. DESCRIPTION OF BUSINESS...............................................2
ITEM 2. DESCRIPTION OF PROPERTIES.............................................6
ITEM 3. LEGAL PROCEEDINGS.....................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................6
PART II ......................................................................7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION..................................................9
ITEM 7. FINANCIAL STATEMENTS.................................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................25
PART III .....................................................................26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT....................26
ITEM 10. EXECUTIVE COMPENSATION...............................................26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................23
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K..............................26
SIGNATURES ...................................................................29
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PART I
Unless the context indicates otherwise, all references to the "Company" and
"Registrant" in this Annual Report on Form 10-KSB relate to Telident, Inc.
ITEM 1. DESCRIPTION OF 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 at the public safety answering point (PSAP) 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.
The Company's products utilize existing Enhanced 911 (E911) technology which
automatically transmits both the caller's telephone number and address to the
nearest emergency dispatcher or PSAP. Currently over two-thirds of the telephone
systems in the U.S. have access to E911 service. However, the E911 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. 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 E911 system. Presently five
states across the U.S. have adopted legislation mandating the modification of
PBX systems to make them fully compatible with the E911 system.
HISTORY
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 the specific pair of
wires connecting the caller with the telephone company could identify each
caller. 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 caller's 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.
STRATEGY
The Company was incorporated in Minnesota in July 1983 to develop and market
electronic equipment for the telephone communications industry. From 1983 to
1985, Telident developed the Status Recognition Unit System I (the SRU(1)), a
system which permits operating telephone companies to increase dedicated phone
services capabilities. Based on a review of the market for the SRU(1), Telident
determined that there was a significant market opportunity for products, based
on the technology of the SRU(1), 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.
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To achieve this goal, the Company provides its customers with a total E911
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 Station Translation System) required to enable the PBX to be
compatible with E911 service; (ii) software and services which enable PBX users
to maintain the required database; and (iii) additional products, such as the
TRAX OSN(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.
Telident has developed a national distribution network to provide sales support
for its products and services through relationships with major distributors of
PBX equipment and services and telephone companies. Telident has distribution
agreements with Fujitsu Business Communications Systems, Ericsson GE Mobile
Communications, Inc., Mitel, Northern Telecom, Siemens-Rolm, Intecom, Shared
Technologies Fairchild, and Sprint/United Telephone and has joint marketing
agreements with Pacific Bell, Bell Atlantic, and BellSouth, among others.
Furthermore, the Company has established a telephone sales and sales support
organization to assist its distribution partners and to provide direct support
to certain national account customers.
PRIMARY PRODUCTS
9-1-1 STS (STATION TRANSLATION SYSTEM)
The 9-1-1 STS(TM) (STS) 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 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 eleven
manufacturers, who account for over 90% of domestic PBX sales. The Company has
more than 1,000 STS installations in the United States and Canada.
DATABASE MANAGEMENT SOFTWARE is a collection of software programs, which assist
in the development, and maintenance of a customer's location information
database. A database collection tool is included to collect the data necessary
to create the initial database. A database maintenance program is included to
allow users to maintain their data and send updates to the telephone company.
TRAX OSN(TM) (ON-SITE NOTIFICATION) is a software program to enhance the STS.
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, reception or first-aid station.
SITE ALERT(TM) is a high quality, low cost PBX/911 on-site notification system
that provides security personnel, console attendants and other individuals
responsible for identifying the location of emergency calls with the time and
extension number of 911 calls simultaneously to those calls being received at
the public safety answering point (PSAP).
These products are variously packaged in "bundles" of hardware and software to
create total "9-1-1 SOLUTIONS(TM)". These packages are simple to install and
maintain, are sold directly by Telident or through its distribution channels,
and are available with optional installation, applications consulting, and
maintenance programs.
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9-1-1 ACS (ANI CONTROL SYSTEM)
The 9-1-1 ACS(TM), or ANI Control System, takes an incoming 911 call and
delivers the voice portion of the call to the emergency 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 emergency operator. The ACS is used in public 911 and private emergency
response applications.
9-1-1 NCS (NETWORK CONTROL SYSTEM)
The 9-1-1 NCS(TM) (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.
MARKETING AND DISTRIBUTION
The Company markets its 911 products through distribution agreements which
include major PBX manufacturers and distributors; local, state and national
public safety agencies; service providers, including certain of the regional
Bell operating companies and major independent telcos; and manufacturers'
representatives. Customers for these products include businesses, PBX
manufacturers, colleges and universities, public and private school systems,
banks, the healthcare industry, hotels and motels, businesses with multi-story
or multi-building facilities, regional Bell operating companies, the military,
system integrators, and government agencies.
Telident instituted a new plan for growth during fiscal 1998 by closing its
three regional sales offices and employing inside sales representatives to
market directly to its prospects. These seasoned telephone sales representatives
are focused on selling to select customers within the Company's target markets
that meet pre-determined criteria such as business type and telecommunications
equipment on site. The Company's products have been bundled into complete
user-friendly packages of hardware and software that can be installed by the
customer or their system's integrator. These changes have made a direct positive
impact on Telident's sales efforts.
E911 regulatory issues, such as the actions of the Federal Communications
Commission (FCC) and the Public Utilities Commissions (PUCs) in the 50 states
affect potential markets for the Company's 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 E911 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 ended in March 1995, and
which, if implemented, could mandate that every new PBX sold nationwide and
certain existing PBXs comply with E911 system requirements.
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. The Company
employed one electrical engineer during fiscal 1998 to manage projects performed
by outside contract development companies. The research and development portion
of the Company's development expenditures for fiscal 1998 and 1997 were $94,021
and $262,725, respectively. New research and development projects will be
initiated and funded as customer requirements and commitments are realized. The
Company intends to expand its development capabilities during fiscal year 1999
by hiring additional
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experts. Future products will continue to be developed by a combination of
in-house talent and outside contract development companies.
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 that 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. As unit
volumes increase, the Company will evaluate and qualify contract manufacturers
as part of a transition to complete outsourced turnkey manufacturing.
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 have a more limited compatibility
with available PBXs than the Company's offering. Furthermore, several PBX
manufacturers now provide a basic 911 translation capability through new PBX
hardware and software releases. The Company believes that these products are
more limited in capability than the Company's solutions and are not appropriate
for a large number of installed PBXs. The Company's STS product is compatible
with over 90% of the PBXs in the United States, and offer PBX owners and
distributors a single comprehensive solution, independent of PBX type. The
Company's NCS and ACS products are designed to be competitive with more costly
solutions offered by other manufacturers.
PATENTS AND PROPRIETARY INFORMATION
The Company has obtained United States patents on its STS, and SRU(1) 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. 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 contractors,
distributors, employees, and other individuals and companies, who are provided
with the Company's proprietary information. The Company's trademarks are as
follows: 9-1-1 STS(TM), TRAX OSN(TM), FEU-2(TM), 9-1-1 NCS(TM), 9-1-1 ACS(TM),
Site-Alert(TM), Tel-Alert(TM), and 911 Solutions(TM).
REGULATION
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 June 30, 1998, the Company had 19 employees, including two administrative,
seven sales and marketing, and ten operations and development personnel. At
various times, the Company employs from two to seven contract employees to
fulfill customer requirements.
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ITEM 2. DESCRIPTION OF PROPERTIES.
The Company currently leases 6,000 square feet of office and final assembly
space at a monthly rental of approximately $8,200. The leases expires in
September 1999. The Company considers the office suitable for its needs for the
duration of the lease term. The Company's headquarters are located at Ten Second
Street NE, Suite 212, Minneapolis, Minnesota 55413.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock trades on the Nasdaq SmallCap Market under the symbol
TLDT. The following table shows the range of high and low bid prices for the
Company's common stock as reported by the National Quotation Bureau for the
period from July 1, 1996, to August 12, 1996 and as reported by the Nasdaq
SmallCap Market thereafter monthly. These quotations represent prices between
dealers, and do not include retail markups, markdowns or commissions, and may
not represent actual transactions. The prices are adjusted for the effect of a
4:1 reverse stock split on January 13, 1998.
Bid Prices
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High Low
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Fiscal 1997
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Quarter ended September 30, 1996 $16.00 $12.00
Quarter ended December 31, 1996 12.50 6.50
Quarter ended March 31, 1997 8.25 4.00
Quarter ended June 30, 1997 5.12 3.37
Fiscal 1998
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Quarter ended September 30, 1997 $ 5.25 $ 3.50
Quarter ended December 31, 1997 4.63 2.25
Quarter ended March 31, 1998 3.56 1.00
Quarter ended June 30, 1998 2.88 2.06
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At June 30, 1998, the number of holders of the Company's common stock was
approximately 2,237 consisting of 137 record holders and approximately 2,100
stockholders whose stock is held by a bank, broker or other nominee.
DIVIDENDS
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, if
any, capital requirements, and financial condition. The Board of Directors
intends to reinvest all earnings into the development of the Company's products
and markets, and as such, no cash dividends are currently contemplated.
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RECENT SALES OF UNREGISTERED SECURITIES
In April 1998, the Company entered into an agreement to obtain 400,000 shares of
Series III Convertible Preferred Stock with two institutional investors in
exchange for $1,000,000. Each share of the Series III Convertible Preferred
Stock is convertible at the option of the holder into common stock. Upon any
such conversion, each share of Series III Preferred Stock shall be converted
into a number of fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of common stock of the Company
equal to the quotient of (x) the Per Share Purchase Price (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected) of such share of Series
III Preferred Stock, divided by (y) the lessor of (i) the Conversion Price (as
defined) and (ii) 80% of the average of the closing bid price for the shares of
common stock on the ten (10) trading days prior to the date that the Company
receives written notice of conversion from a holder of such Series III Preferred
Stock. The value of the beneficial conversion feature, $250,000, will be
recorded as a deemed preferred stock dividend on the date of issuance. These
investors also received in the aggregate warrants to purchase 400,000 shares of
common stock. The warrants are exercisable at $3.125 per share and will expire
two years from the closing date of this transaction. The proceeds from the sale
were released into an escrow account during April 1998. The investors have
certain registration rights. The funds were released to the Company and the
shares were released to the investors in August 1998 upon the Company's
certification to the investors that it complied with all the requirements of the
Nasdaq Smallcap Market. The Company believes the transaction was exempt pursuant
to Section 4(2) under the Securities Act of 1933 and Rule 506 under Regulation
D. The Investors were Family Financial Strategies (FAMCO) and Special
Situations.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
The following table presents the statement of operations data as a percentage of
net sales for the fiscal years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
(DECREASE)
FISCAL YEAR ----------------------------
------------------------------- 1998 1997
1998 1997 1996 OVER 1997 OVER 1996
------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 29.3% (28.5)%
Cost of sales 31.1 32.6 32.2 23.5 (27.9)
Inventory revaluation -- 13.7 -- (100.0) N/A
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Gross profit 68.9 53.7 67.8 65.8 (43.3)
Sales and marketing 33.8 71.2 39.8 (38.7) 27.9
Research and development 25.1 58.6 41.4 (44.5) 1.3
General and administrative 35.3 67.8 41.6 (32.7) 16.3
Restructuring charges -- 22.3 -- (100.0) N/A
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Total operating expenses 94.2 219.9 122.8 (44.6) 28.0
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Operating loss (25.3) (166.2) (55.0) 80.3 115.8
Interest expense, net 1.2 10.4 15.4 (85.0) (51.6)
Debt conversion expense -- 38.8 2.6 (100.0) 973.4
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Net loss (26.5)% (215.4)% (73.0)% 84.1 110.8
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</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales in fiscal 1998 increased 29.3% to $2,269,000 compared to $1,754,451 in
1997. This growth resulted from the Company's new sales and marketing strategies
to promote its hardware and software in bundled packages and to sell through
direct marketing. PBX 911 solutions, including hardware and software packages,
accounted for 97% of sales in 1998 compared to 88% in 1997. The Company's other
products, including maintenance revenues attributable to discontinued Cantus
products, the ANI Control System ("ACS") and the Network Control System ("NCS"),
collectively accounted for 3% of sales in 1998 compared to 12% of sales in 1997.
At June 30, 1998, the Company had a backlog of orders of approximately $675,000.
Operating expenses decreased 44.6% to $2,137,591 in fiscal 1998 compared to
$3,858,300 in fiscal 1997 due to:
* Sales and marketing expenses decreased 38.7% to $766,080 in 1998
compared to $1,248,736 in the 1997 period. During fiscal 1998, the
Company reduced the size of its direct sales force and closed its
offices in California, Texas, and Illinois and replaced them with lower
cost inside sales representatives.
* Research and development expenses decreased 44.5% to $570,795 in 1998
compared to $1,028,464 in the 1997 period. In 1998, the Company reduced
its operations personnel and use of consultants. Furthermore, research
and development spending was limited to projects with fiscal year 1998
and early fiscal year 1999 sales potential.
* General and administrative expenses decreased 32.7% to $800,716 in 1998
compared $1,189,581 in the 1997 period. These decreases were due to
reduced general and administrative personnel, fewer outside professional
services, and lower rent.
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* Restructuring charges of $391,519 were recorded in the third quarter of
fiscal 1997 as a result of a reorganization of the Company's personnel
and certain write downs of other assets.
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Gross margin percentage increased to 68.9% of revenue in 1998 from 53.7% in
1997. Inventory write-downs that had affected gross margin in 1997 were not
incurred in 1998. Furthermore, increased margins were achieved through increased
software sales, improved manufacturing efficiencies, better control over service
costs, and increased sales volumes in software related products.
Interest expense, net of interest income, decreased $155,846 in the 1998 period
compared to the 1997 period. The Company experienced a decrease in interest
expense for fiscal 1998 as a result of decreases in bank borrowings made
possible by a private placement of the Company's preferred stock in July 1997
which generated net proceeds of $1.2 million, and the elimination of $950,000 of
debt through redemption and conversion of debt into the Company's common stock
in June 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company had net sales in fiscal 1997 of $1,754,451 compared with $2,454,807
for 1996, a decrease of 28.5%. The decline in total revenues for fiscal 1997 was
the result of several factors, including a significant reduction in the
Company's workforce, a change in the Company's senior management, the ramp-up
requirements of new sales people and a slowdown in Station Translation System
("STS") shipments to match the Company's new customer fulfillment procedures.
One time charges of approximately $1,551,000 were incurred in the third and
fourth quarters of fiscal 1997, to revalue inventory and other assets, and to
accrue the costs associated with the termination of employees. STS product sales
accounted for 88% of the sales in the 1997 period compared to 80% in the 1996
period. Maintenance revenues attributable to discontinued Cantus products
amounted to 3% of sales in fiscal 1997 compared to 12% in the fiscal 1996
period. The Company's other products, including the ANI Control System ("ACS")
and the Network Control System ("NCS"), collectively accounted for 9% of sales
in the 1997 period compared to 8% of sales in the 1996 period. At June 30, 1997,
the Company had a backlog of orders of approximately $811,000.
Gross profit decreased $720,130 or 43.3% in fiscal 1997, as a result of lower
sales and the $240,245 inventory revaluation. Excluding the revaluation charge,
the gross margin percentage in fiscal 1997 was 67.5% versus 67.8% in fiscal
1996. The revaluation charge is primarily due to inventory items being written
off due to changes in bills-of-materials and the discontinuation of a product
line.
Operating expenses increased from $3,014,005 in fiscal 1996 to $3,858,300 during
fiscal 1997, an increase of $844,295 or 28.0% due to:
* Sales and marketing expenses increased $272,470 in fiscal 1997, a 27.9%
increase. The Company steadily increased its marketing expenses, as well
as the size of its sales and marketing staff, reaching a peak of five
regional sales offices in Atlanta, San Francisco, Los Angeles, Chicago,
and Dallas to assist in the sales by the Company's distributors. The
offices in Atlanta and Los Angeles were closed in April 1997.
* Research and development expenses increased $13,143 or 1.3% in the 1997
period compared to the 1996 period as the Company continued a high level
of investment in research and development.
* General and administrative expenses for fiscal 1997 increased $167,163,
or 16.3% compared to the similar 1996 period. These increases were due
in part to an increase in rent, and professional fees.
* Restructuring charges of $391,519 were recorded in the third quarter of
fiscal 1997 as a result of a reorganization of the Company's personnel
and certain write downs of other assets.
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Interest expense, net of interest income, decreased $195,281 in the 1997 period
compared to the 1996 period. The Company experienced a decrease in interest
expense for fiscal 1997 as a result of reduced bank borrowings made possible by
a public offering of 287,500 shares of the Company's common stock in August of
1996 which generated net proceeds of $2.9 million, and the conversion of debt
into the Company's common stock.
Debt conversion expense relates to the induced conversion of convertible
debentures and accrued interest into 194,950 shares of the Company's common
stock and the issuance of warrants to purchase 97,475 shares of common stock at
$5.64 per share. The debt conversion expense did not impact cash flows.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of $258,875 and
accounts receivable of $508,956. For the period ended June 30, 1998, net cash
used in the Company's operating activities was $540,000, consisting primarily of
the Company's loss from operations of $601,115, an increase in accounts
receivable, and a decrease in accounts payable, partially offset by a decrease
in inventories. Funds required to finance the Company's operations, investments
and payments of debt during fiscal 1998, were provided by net proceeds of
$1,193,627 from the private placement stock offering completed during the first
quarter of fiscal 1998. The Company has relied on debt and equity capital to
fund its operating losses during fiscal 1998 and prior periods.
Based on projected revenues and expenses, the Company believes that the August
1998, $1,000,000 equity transaction (see Note 7 to the financial statements)
together with cash from operations will be adequate to fund the Company's
working capital requirements through June 30, 1999. The Company has no material
commitments for capital expenditures for fiscal 1999. At June 30, 1998, the
Company had shareholders' equity of $1,175,929.
YEAR 2000 COMPLIANCE
All Telident internal operating processes and systems are currently, or will be,
Year 2000 compliant. Telident has conducted a review of its operating software
requirements for Year 2000 compliance. The Company relies on PC's and PC
networks, and related third party software applications for its internal
processes. The Company believes that all Year 2000 dependencies have been
identified and appropriate software upgrades purchased or scheduled for update.
Senior management as well as the Company's Audit Committee has monitored the
Company's progress in this area. Based upon current expenditures and estimates,
the Company does not believe the costs of addressing the Year 2000 issue to be
material to the financial results or operations of the Company.
All products designed and manufactured, and currently marketed by Telident are
fully compliant with the Year 2000. Telident has conducted operational tests to
ensure that hardware and software produced by the Company is designed without
date requirements or, if dates are required, that such products will recognize
4-digit year fields and continue to operate in the Year 2000 and beyond.
Telident does have previously distributed products that are not compliant with
the Year 2000. All such products are no longer marketed. The Company has
programs that enable previously installed non-compliant PBX 911 systems to be
upgraded to Telident's current Year 2000 compliant offerings.
12
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which will be effective for the Company beginning July 1, 1998. SFAS
No. 130 requires the disclosure of comprehensive income and its components in
the general-purpose financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which became effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The Company anticipates the
adoption of SFAS No. 131 will result in the Company continuing to operate in one
segment.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are included herein:
Independent Auditors' Report
Balance Sheets - June 30, 1998 and 1997
Statements of Operations - Years Ended June 30, 1998 and 1997
Statements of Shareholders' Equity (Deficit) - Years Ended June 30, 1998
and 1997
Statements of Cash Flows - Years Ended June 30, 1998 and 1997
Notes to Financial Statements - Years Ended June 30, 1998 and 1997
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Telident, Inc.
We have audited the accompanying balance sheets of Telident, Inc. (the Company)
as of June 30, 1998 and 1997 and the related statements of operations,
shareholders' equity (deficit), and cash flows for the two 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1998 and 1997 and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
MINNEAPOLIS, MINNESOTA
JULY 31, 1998
(AUGUST 18, 1998 as to Note 7)
14
<PAGE>
TELIDENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS (NOTE 2)
CURRENT ASSETS:
Cash and cash equivalents $ 258,875 $ 22,319
Trade accounts receivable, net of allowance for doubtful
accounts of $30,000 and $40,000, respectively 508,956 432,111
Inventories 285,708 430,506
Other 76,088 37,710
------------ ------------
Total current assets 1,129,627 922,646
FURNITURE AND OFFICE EQUIPMENT, less accumulated
depreciation of $291,955 and $198,355, respectively 209,435 264,051
INTANGIBLE ASSETS, less accumulated amortization of
$159,386 and $108,868, respectively 289,672 99,429
OTHER ASSETS 83,055 30,855
------------ ------------
$ 1,711,789 $ 1,316,981
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 2) $ 95,271 $ 101,716
Trade accounts payable 168,069 299,684
Accrued expenses 118,123 121,104
Deferred revenue 21,053 1,950
Current portion of long-term debt (Note 2) 101,519 85,913
------------ ------------
Total current liabilities 504,035 610,367
LONG-TERM DEBT, less current portion (Note 2) 31,825 108,403
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY (Note 4):
Preferred stock, $.08 par value, 2,500,000 and 625,000 shares
authorized, respectively
Series I, Class A, cumulative dividend at an annual rate of
the prime rate plus 1%, convertible into common stock at the
rate of one common share for each preferred share, 37,500
shares outstanding at both dates 3,000 3,000
Common stock, $.08 par value, 10,000,000 and 2,500,000 shares
authorized, 2,786,657 and 1,737,131 shares outstanding,
respectively 222,933 138,971
Additional paid-in capital 14,612,497 13,517,626
Accumulated deficit (13,662,501) (13,061,386)
------------ ------------
Total shareholders' equity 1,175,929 598,211
------------ ------------
$ 1,711,789 $ 1,316,981
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
TELIDENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 2,269,000 $ 1,754,451
COST OF SALES 705,088 571,062
INVENTORY REVALUATION -- 240,245
----------- -----------
Gross profit 1,563,912 943,144
OPERATING EXPENSES:
Sales and marketing 766,080 1,248,736
Research and development 570,795 1,028,464
General and administrative 800,716 1,189,581
Restructuring charges -- 391,519
----------- -----------
Total operating expenses 2,137,591 3,858,300
----------- -----------
Loss from operations (573,679) (2,915,156)
INTEREST INCOME 30,220 36,377
DEBT CONVERSION EXPENSE (Note 2) -- (679,797)
INTEREST EXPENSE (57,656) (219,659)
----------- -----------
NET LOSS (601,115) (3,778,235)
PREFERRED STOCK DIVIDENDS, INCLUDING $449,800 and
$14,450 OF CUMULATIVE DIVIDENDS, RESPECTIVELY (449,800) (62,640)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $(1,050,915) $(3,840,875)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.54) $ (2.56)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES ASSUMED
OUTSTANDING - BASIC AND DILUTED 1,952,520 1,502,266
=========== ===========
</TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PREFERRED AMOUNT OF COMMON AMOUNT OF ADDITIONAL
SHARES PREFERRED SHARES COMMON PAID-IN ACCUMULATED
ISSUED STOCK ISSUED STOCK CAPITAL DEFICIT
----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 46,875 $ 3,750 1,225,777 $ 98,062 $ 9,025,640 $ (9,283,151)
Common stock issued to directors for services -- -- 1,890 152 20,848 --
Common stock issued in public offering net of
offering expenses of $532,077 -- -- 287,500 23,000 2,894,923 --
Common stock issued for conversion of
debentures and related interest -- -- 194,950 15,596 1,541,476 --
Common stock issued for conversion of bridge
financing -- -- 23,889 1,911 227,429 --
Exercise of options -- -- 3,125 250 4,750 --
Preferred stock redemptions (9,375) (750) -- -- (149,250) --
Preferred stock dividends -- -- -- -- (48,190) --
Net loss -- -- -- -- -- (3,778,235)
----------- ---------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1997 37,500 3,000 1,737,131 138,971 13,517,626 (13,061,386)
Preferred stock issued in private placement,
net of offering expenses of $56,373 277,778 22,222 -- -- 1,171,405 --
Common stock offset against note receivable -- -- (2,585) (207) (11,428) --
Conversion of preferred stock to common stock,
net of expenses of $3,022 (277,778) (22,222) 1,052,189 84,175 (64,975) --
Repurchase of fractional shares -- -- (78) (6) (131) --
Net loss -- -- -- -- -- (601,115)
----------- ---------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1998 37,500 $ 3,000 2,786,657 $ 222,933 $ 14,612,497 $(13,662,501)
=========== ========== ============ ========== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
TELIDENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (601,115) $(3,778,235)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 144,118 249,622
Common stock issued for services -- 21,000
Common stock issued for interest -- 41,775
Inventory reserve and revaluation -- 315,245
Noncash restructuring charges -- 307,676
Debt conversion expense -- 679,797
Changes in assets and liabilities:
Trade accounts receivable (76,845) 393,247
Inventories 144,798 (172,665)
Other assets (35,463) 12,903
Trade accounts payable (131,615) 41,178
Accrued expenses and deferred revenue 16,122 (137,049)
----------- -----------
Net cash used in operating activities (540,000) (2,025,506)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of patent and purchased software costs (240,761) (41,674)
Purchases of furniture and office equipment (21,798) (49,112)
----------- -----------
Net cash used in investing activities (262,559) (90,786)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable (6,445) (1,049,572)
Payments of long-term debt (144,908) (76,165)
Preferred stock redemption -- (150,000)
Preferred stock dividends -- (48,190)
Proceeds from issuance of preferred stock 1,193,627 --
Payment of costs relating to conversion of preferred stock to
common stock (3,022) --
Repurchase of fractional shares of common stock (137) --
Proceeds from issuance of common stock -- 3,013,884
----------- -----------
Net cash provided by financing activities 1,039,115 1,689,957
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 236,556 (426,335)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,319 448,654
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 258,875 $ 22,319
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 58,031 $ 183,282
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for office equipment $ 17,186 $ 38,119
Long-term debt incurred for other assets 66,750 --
Common stock offered against note receivable 11,635 --
Conversion of notes payable to common stock -- 1,064,840
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
TELIDENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS ACTIVITIES AND ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS ACTIVITIES
Telident, Inc. (the Company) was organized in July 1983. The Company is a
designer and manufacturer of hardware and software for the Enhanced 911 (E911)
marketplace. The Company provides enhancements to telephone systems (PBXs), 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.
CASH AND CASH EQUIVALENTS
The Company maintains cash and cash equivalents in bank accounts which at times
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company considers investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include the following financial instruments: cash and
cash equivalents; accounts receivable; accounts payable; and notes and
debentures payable. At June 30, 1998 and 1997, no separate comparison of fair
values versus carrying values is presented for the aforementioned financial
instruments since their fair values are not significantly different than their
balance sheet carrying amounts.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out method), or
market, and consisted of the following:
JUNE 30,
---------------------------
1998 1997
---- ----
Raw materials $ 325,804 $ 416,735
Work in progress 1,876 336
Finished goods 48,028 103,435
Reserve for inventory obsolescence (90,000) (90,000)
---------- ----------
$ 285,708 $ 430,506
========== ==========
During fiscal 1997, the Company disposed of inventory due to changes in
bills-of-materials and the discontinuance of a product line, resulting in an
inventory revaluation charge of $240,245.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount. When the
Company determines that asset impairment exists, the loss is recorded based on
the difference between the carrying value of the asset and the estimated fair
value of the asset calculated using discounted cash flows expected to be
generated by the asset.
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to seven years.
INTANGIBLE ASSETS
Intangible assets consisted of the following:
JUNE 30,
---------------------------
1998 1997
---- ----
Patents $ 110,742 $ 110,742
Purchased software development 338,316 97,555
---------- ----------
449,058 208,297
Less accumulated amortization 159,386 108,868
---------- ----------
$ 289,672 $ 99,429
========== ==========
18
<PAGE>
Patents are being amortized over their estimated lives of five years using the
straight line method.
Software development costs are expensed until the point that technological
feasibility and proven marketability of the product are established. Development
of the software after such point will result in capitalized software costs which
are amortized over their estimated life of three years using the straight line
method.
The Company reviews its intangibles periodically to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows expected to be provided by operating activities of the
business or related products. Should the sum of the expected future net cash
flows be less than the carrying value, the Company would determine whether an
impairment loss should be recognized. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair value of the
intangible based on market value which is based on the discounted cash flows
expected to be generated by the asset. During the fiscal year ended June 30,
1997, the Company wrote off the remaining book value ($268,076) of the goodwill
associated with the November 1994 Cantus acquisition due to discontinuance of
the product line. The write-off of goodwill is included in restructuring charges
in the 1997 statement of operations.
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.
REVENUE RECOGNITION
Revenue is recognized on hardware shipment or completion of the service.
RESEARCH AND DEVELOPMENT
The costs of Company-sponsored research and development related to both present
and future products 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.
NET LOSS PER COMMON SHARE
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". Net loss per share
for fiscal 1997 has been restated for the adoption of SFAS No. 128. Basic net
loss per common share is computed by dividing net loss applicable to common
stock (net loss less preferred stock dividends) by the weighted average number
of common shares outstanding. Diluted net loss per share is computed by dividing
net loss applicable to common stock (net loss less preferred stock dividends) by
the weighted average number of common shares outstanding and the exercise of
stock options and warrants using the treasury stock method, if dilutive. Diluted
net loss per share for fiscal 1998 and 1997 are the same as basic net loss per
share due to the antidulutive effect of the assumed exercise of stock options
and warrants.
Fiscal 1998 diluted net loss per common share excludes stock options and
warrants to purchase 775,426 shares of common stock at a weighted average price
of $5.54 per share due their antidilutive effect. Fiscal 1997 diluted net loss
per common share excludes stock option and warrants to purchase 315,451 shares
of common stock at a weighted average price of $9.37 per share due their
antidilutive effect.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is conducted with customers located
within the United States. Accounts receivable transactions are generally
unsecured. A provision for estimated doubtful accounts is provided for accounts
receivable. There are neither concentrations of business transacted with a
particular customer or supplier nor concentrations of revenue from a particular
service or geographic area that could severely impact the Company in the near
future.
USE OF ESTIMATES
19
<PAGE>
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
20
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the presentation adopted in the 1998 financial statements. The
reclassifications had no effect on stockholders' equity or net loss as
previously reported.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income", which will be effective for the Company
beginning July 1, 1998. SFAS No. 130 requires the disclosure of comprehensive
income and its components in the general-purpose financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The Company anticipates the
adoption of SFAS No. 131 will result in the Company continuing to operate in one
segment
NOTE 2: FINANCING ACTIVITIES
NOTES PAYABLE
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. The loan agreement also contains provisions
requiring compliance with certain financial covenants. The Company was in
compliance with the financial convenants at June 30, 1998. The line of credit
agreement expires on February 3, 1999, when all outstanding amounts are due and
payable. Borrowings under this agreement were $95,271 as of June 30, 1998 with
additional availability of $225,488. The agreement bears interest at the bank's
base rate plus 7.5% (16.0% at June 30, 1998). The note is secured by all of the
Company's assets.
In May 1996, the Company completed a bridge financing arrangement consisting of
$1,250,000 in notes payable and warrants to purchase 31,250 shares of common
stock at $9.60 per share. In September 1996, the Company repaid $1,020,660 and
$37,847 of principal and interest payable, respectively. In addition, $229,340
of the remaining principal was converted into 23,889 shares of common stock.
LONG-TERM DEBT
Long-term debt at June 30 consisted of the following:
1998 1997
---- ----
Debentures $ 50,000 $ 157,500
Note payable 48,371 --
Capital lease obligations (see
Note 3) 34,973 36,816
---------- ----------
133,344 194,316
Less current maturities 101,519 85,913
---------- ----------
$ 31,825 $ 108,403
========== ==========
At June 30, 1998, principal payments on the debentures, note payable, and
capital lease obligations in the fiscal years ending June 30 are as follows:
1999 $ 101,519
2000 28,330
2001 3,495
----------
$ 133,344
==========
DEBENTURES
The debentures outstanding at June 30, 1998 were repaid in July 1998.
During June 1997, holders with principal balances and accrued interest of
$835,500 and $41,775, respectively, elected to convert their debentures and
accrued interest into 194,950 shares of common stock. The holders who elected to
convert their debentures and accrued interest into shares of common stock
included two members of the board of directors who converted 100% of their
individual holdings, or $175,000 of debentures. As an incentive to cause the
debenture holders to convert, the Company temporarily reduced the conversion
price from $15.84 to $4.50 per share and issued warrants to purchase 97,475
shares of common stock at $5.64 per share. The warrants will expire on June 30,
1999, and may be called any time after the market value of the Company's common
stock exceeds $7.88 per share for 10 days. The Company recorded a noncash debt
conversion expense of $679,797 during the year ended June 30, 1997 relating to
the induced conversion.
21
<PAGE>
NOTES PAYABLE
During 1998, the Company financed a portion of an insurance policy covering
three years with the proceeds from a note. The note has an interest rate of
8.02% and is due in monthly installments of $3,020 through fiscal 2000.
NOTE 3: COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS The Company leases its office space under an operating lease.
The Company also leases certain office equipment under a capital lease
agreement. The following is a schedule of the minimum rental payments under the
leases for the years ending June 30:
CAPITAL LEASE OPERATING LEASE
------------- ---------------
1999 $ 21,305 $ 98,400
2000 14,172 24,600
2001 3,517 --
---------- -----------
Total minimum lease payments 38,994 $ 123,000
===========
Less amount representing interest 4,021
----------
Present value of net minimum payments 34,973
Less current portion of capital lease 17,948
----------
Long-term portion of capital lease $ 17,025
==========
Rent expense incurred was $97,008 and $139,407 during the years ended June 30,
1998 and 1997, respectively.
Furniture and office equipment includes $63,306 and $46,120 of leased office
equipment at June 30, 1998 and 1997, respectively. Related accumulated
amortization aggregated $46,850 and $4,483 at June 30, 1998, and 1997,
respectively.
CONTINGENCIES
The Company is involved in various legal actions arising in the normal course of
business. Management is of the opinion that any judgement or settlement
resulting from pending or threatened litigation will not have a material adverse
effect on the financial condition or results of operations of the Company.
NOTE 4: EQUITY TRANSACTIONS
REVERSE STOCK SPLIT
In January 1998, the Board of Directors declared a one-for-four reverse stock
split. All references in the financial statements to number of shares and per
share amounts have been restated to reflect the split. In connection with the
reverse stock split, the Company repurchased fractional shares totaling 78
shares for $137.
ISSUANCE OF PREFERRED AND COMMON STOCK
In July 1997, the Company completed an $1.25 million equity transaction upon the
issuance of 277,778 shares of Series II Class A Convertible Preferred Stock with
Family Financial Strategies, Inc. (FAMCO). FAMCO also received warrants to
purchase 364,907 shares of common stock. The warrants are exercisable at $4.83
per share, are currently exercisable, and expire on July 23, 1999. FAMCO
converted the preferred stock into 1,052,189 shares of common stock in April
1998. Assuming the Series II Class A Convertible Preferred Stock conversion had
taken place in July 1997, the Company's basic and diluted loss per share for the
year ended June 30, 1998, would have been $(.24).
The Series II Class A Convertible Preferred Stock contained a beneficial
conversion feature. The value of the beneficial conversion feature, $312,500,
was recorded as a deemed preferred stock dividend at the date of issuance, which
increased the net loss applicable to common stock in the calculation of basic
and diluted net loss per share.
On June 30, 1994, three directors of the Company, were issued a combined total
of 62,500 voting shares of Series I Class A Convertible Cumulative Preferred
Stock at $16.00 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 8.5% on June 30, 1998.
The Company has redeemed 25,000 shares of preferred stock. In addition, the
Company has made dividend payments in the aggregate of $48,190 for the fiscal
year ended June 30, 1997. The Company has not paid dividends since March 31,
1997. At June 30, 1998, there are $68,450 of cumulative undeclared dividends on
the Series I Class A Preferred Stock.
22
<PAGE>
During the year ended June 30, 1997, 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 1,890 shares.
The shares issued were valued based on the market value of the Company's common
stock at issuance ($21,000) and was charged to expense.
In August 1996, the Company completed a secondary public offering for 287,500
shares of common stock at $12.00 per share, resulting in proceeds to the Company
of $2,917,923 after related expenses. The Company's underwriter received 28,750
common stock warrants as part of its compensation. The warrants are exercisable
at $14.40 per share, are fully exercisable after one year from the date of this
offering, and expire on August 15, 2001.
In September 1996, bridge notes holders of $229,340 converted their principal
balances into common stock at $9.60 per share, resulting in the issuance of
23,889 shares of common stock.
WARRANTS
The Company has issued warrants to directors and selling agents, and in
connection with the issuances of debt and equity securities. A summary of the
Company's common stock warrant activity follows:
WEIGHTED
AVERAGE
NUMBER OF SHARES PRICE PER
OF COMMON STOCK SHARE
--------------- ----------
Outstanding at June 30, 1996 95,168 $ 12.85
Warrants issued - public offering 28,750 14.40
Warrants issued - debenture conversion 97,475 5.64
---------
Outstanding at June 30, 1997 221,393 9.88
Warrants issued - directors 112,500 1.56
Warrants issued - equity private placement 364,907 4.83
Warrants expired (13,893) 16.00
---------
Outstanding at June 30, 1998 684,907 $ 5.70
========= =========
Exercisable at June 30, 1998 572,407 $ 6.51
========= =========
STOCK OPTIONS
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 168,750 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% one year from 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 status of the Company's stock options are presented below:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 94,058 $ 8.16 102,676 $12.72
Granted 51,832 3.91 70,750 6.44
Exercised -- -- (3,125) 4.00
Terminated (55,371) 10.31 (76,243) 13.52
-------- --------
Outstanding at end of year 90,519 $ 4.33 94,058 $ 8.16
======== ====== ======== ======
Options exercisable at year end 9,262 $ 5.75 13,144 $12.72
======== ====== ======== ======
Options available for future grants 37,081 33,543
======== ========
</TABLE>
23
<PAGE>
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25 and related interpretations. No compensation cost has been
recognized for options issued under the Plan to employees when the exercise
price of the options granted are at least equal to the fair value of the common
stock on the date of grant to employees. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards in the fiscal years ended June 30, 1998 and 1997, consistent with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", the Company's net loss applicable to
common stock and net loss per share would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss applicable to common stock, as reported $(1,050,915) $(3,840,875)
Net loss applicable to common stock, pro forma (1,095,636) (3,903,929)
Net loss per common share, basic and diluted, as reported $ (.54) $ (2.56)
Net loss per common share, basic and diluted, pro forma (.56) (2.60)
</TABLE>
The fair value of each option grant for the pro forma disclosure required by
SFAS 123 is estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions and results for the grants:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield None None
Expected volatility 79.03% 77.32%
Expected life of option 7 years 7 years
Risk-free interest rate 6.11% 6.76%
Fair value of options on grant date $2.65 $5.02
</TABLE>
The following table summarizes information about stock options at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
--------------- ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.56 - $ 2.00 2,251 6.53 $ 1.83 -- $ --
2.50 - 3.13 13,005 6.78 2.51 -- --
4.00 - 5.37 71,577 6.02 4.44 7,075 4.34
8.00 - 19.00 3,686 3.58 10.15 2,187 10.32
--------- ---------
90,519 6.05 $ 4.33 9,262 $ 5.75
========= ======== ====== ========= ======
</TABLE>
NOTE 5: BENEFIT PLAN
All employees of the Company may participate in a defined contribution plan
established in October 1996, under the provisions of Section 401(k) of the
Internal Revenue Code. The plan provides for a contribution by the employee of
up to 15% of their gross earnings. Currently the Company does not contribute to
the plan.
NOTE 6: INCOME TAXES
The benefit for income taxes has been offset by a valuation allowance for the
years ended June 30, 1998 and 1997, because the Company's net operating losses
could not be carried back and future realization of the net operating loss
carryforwards is uncertain.
A reconciliation between taxes computed at the expected federal income tax rate
and the effective tax rate for the years ended June 30, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax benefit computed at statutory rates $ (210,000) $ (1,322,000)
State taxes, net of federal effect (39,000) (244,000)
Debt conversion costs -- 275,000
Change in valuation allowance 226,000 1,225,000
Other 23,000 66,000
------------ ------------
$ -- $ --
============ ============
</TABLE>
24
<PAGE>
At June 30, 1998, the Company has available net operating loss 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 the Company's ownership changes within a three year period.
These net operating loss and tax credit carryforwards expire as follows:
<TABLE>
<CAPTION>
EXPIRATION DATES NET OPERATING LOSS TAX CREDIT
---------------- ------------------ ----------
<S> <C> <C>
1999-2005 $ 1,049,500 $ 26,800
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
2011 1,497,000 92,000
2012 2,630,000 --
2013 660,000 --
------------ ------------
$ 12,009,300 $ 308,800
============ ============
</TABLE>
The tax effect of the temporary differences, tax carryforwards, and valuation
allowances at June 30, is as follows:
<TABLE>
<CAPTION>
Deferred tax assets 1998 1997
---- ----
<S> <C> <C>
Loss and credit carryforwards $ 5,029,000 $ 4,762,000
Intangible assets 136,000 149,000
Other 96,000 114,000
------------ ------------
5,261,000 5,025,000
Valuation allowance for deferred tax assets (5,261,000) (5,025,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
NOTE 7: SUBSEQUENT EVENT
In April 1998, the Company entered into an agreement to issue 400,000 shares of
Series III Convertible Preferred Stock to two institutional investors in
exchange for $1,000,000. Each share of the Series III Convertible Preferred
Stock is convertible at the option of the holder into common stock. Upon any
such conversion, each share of Series III Preferred Stock shall be converted
into a number of fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of common stock of the Company
equal to the quotient of (x) the Per Share Purchase Price (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected) of such share of Series
III Preferred Stock, divided by (y) the lessor of (i) the Conversion Price (as
defined) and (ii) 80% of the average of the closing bid price for the shares of
common stock on the ten (10) trading days prior to the date that the Company
receives written notice of conversion from a holder of such Series III Preferred
Stock. The value of the beneficial conversion feature, $250,000, will be
recorded as a deemed preferred stock dividend on the date of issuance. These
investors also received in the aggregate warrants to purchase 400,000 shares of
common stock. The warrants are exercisable at $3.125 per share and will expire
two years from the closing date of this transaction. The proceeds from the
proposed sale were released into an escrow account during April 1998. The
investors have certain registration rights. The funds were released to the
Company and the shares were released to the investors in August 1998 upon the
Company's certification to the investors that it complied with all the
requirements of the Nasdaq Smallcap Market. The Company believes the transaction
was exempt pursuant to Section 4(2) under the Securities Act of 1933 and Rule
506 under Regulation D. The Investors were Family Financial Strategies (FAMCO)
and Special Situations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under the headings "Election of Directors", "Executive
Officers of the Company", and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, a definitive copy of which will be filed within 120
days of June 30, 1998, is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1998 Annual Meeting of Shareholders, is hereby incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, is hereby incorporated by reference.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
<TABLE>
<CAPTION>
PAGE NUMBER OR INCORPORATION
NO. DESCRIPTION BY REFERENCE TO
=============================================================== ==================================================
<S> <C>
3.1 Articles of Incorporation, as amended, of the
Company
- --------------------------------------------------------------- --------------------------------------------------
3.2 Bylaws, as amended, of the Company Incorporated herein by reference to the Company's
Registration Statement on Form SB-2 Reg. No.
333-04311.
- --------------------------------------------------------------- --------------------------------------------------
4.1 Specimen form of the Company's Common Stock Incorporated herein by reference to the Company's
certificate Registration Statement on Form SB-2 Reg. No.
333-04311.
- --------------------------------------------------------------- --------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
- --------------------------------------------------------------- --------------------------------------------------
<S> <C>
4.2 Form of Debenture issued pursuant to May, 1993 Unit Incorporated herein by reference to the Company's
offering Annual Report on Form 10-KSB for the year ended
June 30, 1994.
- -------------------------------------------------------------- --------------------------------------------------
4.3 Subscription and Purchase Agreement dated as of Incorporated herein by reference to the Company's
August 23, 1993 between Registrant and Okabena Annual Report on Form 10-KSB for the year ended
Partnership K June 30, 1994.
- --------------------------------------------------------------- --------------------------------------------------
4.4 Conversion, Exercise, Subscription and Purchase Incorporated herein by reference to the Company's
Agreement dated as of October 13, 1995 between Registration Statement on Form SB-2 Reg. No.
Registrant and Okabena Partnership K 33-99054.
- --------------------------------------------------------------- --------------------------------------------------
4.5 Form of Warrant issued pursuant to October 1995 Unit Incorporated herein by reference to the Company's
offering Registration Statement on Form SB-2 Reg. No.
33-99054.
- --------------------------------------------------------------- --------------------------------------------------
4.6 Certificate of Designation of Series I Convertible Reference is made to Exhibit 3.1 herein.
Preferred Stock
- --------------------------------------------------------------- --------------------------------------------------
4.7 Promissory Note and Security Agreement dated Incorporated herein by reference to the Company's
February 3, 1995 between Registrant and Norwest Annual Report on Form 10-KSB for the year ended
Credit, Inc. June 30, 1995.
- --------------------------------------------------------------- --------------------------------------------------
4.8 Form of May 1996 Bridge Loan Agreement, including Incorporated herein by reference to the Company's
form of Promissory Note and Warrant Agreement Registration Statement on Form SB-2 Reg. No.
333-04311.
- --------------------------------------------------------------- --------------------------------------------------
4.9 Telident, Inc. Stock Option Plan of 1988, Form of Incorporated herein by reference to the Company's
Incentive Stock Option Agreement and Form of Registration Statement on Form S-8 Reg. No.
Nonstatutory Stock Option Agreement 33-25922C.
- --------------------------------------------------------------- --------------------------------------------------
4.10 Form of Underwriter's Warrant issued on August 16, Incorporated herein by reference to the Company's
1996 Registration Statement on Form SB-2 Reg. No.
333-04311.
- --------------------------------------------------------------- --------------------------------------------------
4.11 Certificate of Designation of Series III Convertible Reference is made to Exhibit 3.1 herein.
Preferred Stock
- --------------------------------------------------------------- --------------------------------------------------
10.1 Stock Purchase Agreement between the Company and FAMCO
III Limited Liability Company and Special Situations
Private Equity Fund, L.P., dated April 13, 1998
- --------------------------------------------------------------- --------------------------------------------------
10.2 Form of Warrant issued to FAMCO III Limited Liability
Company and Special Situations Private Equity Fund,
L.P., dated April 13, 1998
- --------------------------------------------------------------- --------------------------------------------------
10.3 Form of Warrant issued upon conversion of 10% Series B
Convertible Debentures, dated June 30, 1997
- --------------------------------------------------------------- --------------------------------------------------
16 Letter of McGladrey & Pullen, LLP to the SEC dated Incorporated herein by reference to the Company's
August 8, 1997 Annual Report on Form 10-KSB for the year ended
June 30, 1997.
- --------------------------------------------------------------- --------------------------------------------------
23 Consent of Deloitte and Touche LLP
- --------------------------------------------------------------- --------------------------------------------------
99.1 Pro Forma Balance Sheets
- --------------------------------------------------------------- --------------------------------------------------
27 Financial Data Schedule
- --------------------------------------------------------------- --------------------------------------------------
</TABLE>
27
<PAGE>
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of the period ended
June 30, 1998
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELIDENT, INC.
August 20, 1998 By /s/ W. Edward McConaghay
----------------------------------
W. Edward McConaghay
President and Chief Executive Officer
TELIDENT, INC.
August 20, 1998 By /s/ Carolyn L Wright
----------------------------------
Carolyn L Wright
Controller and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Mark W. Sheffert August 20, 1998
- --------------------------------------------------------
Mark W. Sheffert, Chairman of the Board and Director
/s/ W. Edward McConaghay August 20, 1998
- --------------------------------------------------------
W. Edward McConaghay, President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Scott R. Anderson August 20, 1998
- --------------------------------------------------------
Scott R. Anderson, Director
/s/ Willis K. Drake August 20, 1998
- --------------------------------------------------------
Willis K. Drake, Director
/s/ David F. Durenberger August 20, 1998
- --------------------------------------------------------
David F. Durenberger, Director
/s/ John Sagan August 20, 1998
- --------------------------------------------------------
John Sagan, Director
/s/ John D. Wunsch August 20, 1998
- --------------------------------------------------------
John D. Wunsch, Director
/s/ Mack V. Traynor, III. August 20, 1998
- --------------------------------------------------------
Mack V. Traynor, III., Director
29
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
TELIDENT. INC.
I, the undersigned, as President of Telident, Inc., a Minnesota
corporation, do hereby certify that the shareholders of the corporation have
unanimously resolved to amend and restate the Articles of Incorporation in
accordance with the following resolution:
RESOLVED, That the Articles of Incorporation
of this corporation be amended and restated in their
entirety as follows:
ARTICLE I
The name of this corporation shall be Telident, Inc.
ARTICLE II
The location and address of this corporation's registered office in
this state shall be 4510 West 77th Street, Edina, Minnesota 55435.
ARTICLE III
The total authorized number of shares of this corporation is Ten
Million (10,000,000) shares, all of which shall be shares of common stock of the
par value of one cent ($.01) per share.
ARTICLE IV
Shareholders shall have no rights of cumulative voting.
ARTICLE V
Shareholders shall have no rights, preemptive or otherwise, to
acquire any part of any unissued shares or other securities of this corporation
or of any rights to purchase shares or other securities of this corporation
before the corporation may offer them to other persons.
<PAGE>
ARTICLE VI
The name and address of the incorporator of this corporation is:
Clarence L. Wolfe
4510 West 77th Street
Suite 199
Edina, Minnesota 55435
ARTICLE VII
The Board of Directors of this corporation shall consist of three
directors or such other number of directors as shall be fixed in the manner
provided in the By-Laws of this corporation. A director of the corporation shall
not be personally liable to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for (i) liability
based on a breach of the duty of loyalty to the corporation or the shareholders;
(ii) liability for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) liability based on
the payment of an improper dividend or an improper repurchase of the
corporation's stock under Section 559 of the Minnesota Business Corporation Act
(Minnesota Statutes, Chap. 302A) or; (iv) liability for any transaction from
which the director derived an improper personal benefit. If Chapter 302A, the
Minnesota Business Corporation Act hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Chapter 302A, the Minnesota Business Corporation Act. Any repeal or modification
of this Article by the shareholders of the corporation shall be prospective only
and shall not adversely affect any limitation on the personal liability of a
director of the corporation existing at the time of such repeal or modification.
ARTICLE VIII
Any action required or permitted to be taken at a meeting of the
Board of Directors may be taken by written action signed by all of the directors
then in office, unless the action is one which need not be approved by the
shareholders, in which case such action shall be effective if signed by the
number of directors that would be required to take the same action at a meeting
at which all directors were present.
FURTHER RESOLVED, That Clarence L. Wolfe, the
President of this corporation, be, and hereby is,
authorized and directed to make and execute Articles of
Amendment embracing the foregoing resolution and to cause
such Articles of Amendment to be filed and recorded in the
manner required by law.
I FURTHER CERTIFY that the foregoing Amendment
and Restatement has been adopted pursuant to chapter 302A,
Minnesota Statutes.
2
<PAGE>
IN WITNESS WHEREOF, I have hereunto subscribed my name this 13th day
of December, 1988.
/s/ Clarence L. Wolfe
Clarence L. Wolfe
President
3
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
TELIDENT, INC.
I, the undersigned, as President of Telident, Inc., a Minnesota
corporation, do hereby certify that the shareholders of the corporation have
approved an amendment to the corporation's Articles of Incorporation in
accordance with the following resolutions:
RESOLVED, That Article III of the Articles of
Incorporation of this corporation be amended as follows:
ARTICLE III
The total number of shares of all classes of stock that the
corporation shall be authorized to issue is twenty-five million (25,000,000)
shares, divided into the following: (i) five million (5,000,000) shares of
Preferred Stock, of the par value of $.0l per share; and (ii) twenty million
(20,000,000) shares of Common Stock, of the par value of $.01 per share. A
description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such classes of
stock and the limitations on or denial of the voting rights of the shares of
such classes of stock are as follows:
A. Preferred Stock
l. Issuance in Series. The Preferred Stock may
be divided into and issued in one or more series. The
Board of Directors is hereby vested with authority from
time to time to establish and designate such series and,
within the limitations prescribed by law or set forth
herein, to fix and determine the relative rights and
preferences of the shares of any series so established,
but all shares of Preferred Stock shall be identical
except as to the following relative rights and
preferences, as to which there may be variations between
different series: (a) the rate of dividend; (b) the price
at and the terms and conditions on which shares may be
redeemed; (c) the amount payable upon shares in the event
of involuntary liquidation; (d) the amount payable upon
shares in the event of voluntary liquidation; (e) sinking
fund provisions, if any, for the redemption or purchase of
shares; (f) the terms and conditions on which shares may
be converted, if the shares of any series are issued
<PAGE>
with the privilege of conversion; and (g) voting rights.
The Board of Directors shall exercise such authority by
the adoption of a resolution or resolutions as prescribed
by law.
2. Dividends. The holders of each series of
Preferred Stock at the time outstanding shall be entitled
to receive, when and as declared to be payable by the
Board of Directors, out of any funds legally available for
the payment thereof, dividends at the rate theretofore
fixed by the Board of Directors for such series of
Preferred Stock.
3. Preferred Dividends Cumulative. Dividends
on all Preferred Stock, regardless of series, shall be
cumulative. No dividend shall be declared on any series of
Preferred Stock for any dividend period unless all
dividends accumulated for all prior dividend periods shall
have been declared or shall then be declared at the same
time upon all Preferred Stock then outstanding. No
dividend shall be declared on any series of Preferred
Stock unless a dividend for the same period shall be
declared at the same time upon all Preferred Stock
outstanding at the time of such declaration in like
proportion to the divided rate then declared. No dividend
shall be declared or paid on the Common Stock unless full
dividends on all Preferred Stock then outstanding for all
past dividend periods and for the current dividend period
shall have been declared and the corporation shall have
paid such dividends or shall have set apart a sum
sufficient for the payment thereof.
4. Preferences on Liquidation. In the event of
any dissolution, liquidation or winding up of the
corporation, whether voluntary or involuntary, the holders
of each series of the then outstanding Preferred Stock
shall be entitled to receive the amount fixed for such
purpose in the resolution or resolutions of the Board of
Directors establishing the respective series of Preferred
Stock that might then be outstanding together with a sum
equal to the amount of all accumulated and unpaid
dividends thereon at the dividend rate fixed therefor in
the aforesaid resolution or resolutions. After such
payment to such holders of Preferred Stock, the remaining
assets and funds of the corporation shall be distributed
pro rata among the holders of the Common Stock. A
consolidation, merger or reorganization of the corporation
with any other corporation or corporations or a sale of
all or substantially all of the assets of the corporation
shall not be considered a dissolution, liquidation or
winding up of the corporation within the meaning of these
provisions.
5. Redemption. The whole or any part of the
outstanding Preferred Stock or the whole or any part of
any series thereof may be called for redemption and
redeemed at any time at the option of the corporation,
subject to and in accordance with such terms and
conditions as shall be set forth in the resolutions of the
Board of Directors establishing the respective series of
Preferred Stock. The holders of the particular shares of
the Preferred Stock so to be redeemed shall be entitled to
receive,
2
<PAGE>
at the time of redemption of such shares, the redemption
price fixed for such shares in the resolution or
resolutions of the Board of Directors establishing the
particular series of which such shares are a part together
with a sum equal to the amount of all accumulated and
unpaid dividends thereon to the date fixed for redemption
at the dividend rate fixed for such shares in the
aforesaid resolution or resolutions.
B. Common Stock
1. Dividends. Subject to all the rights of the
Preferred Stock or any series thereof and on the
conditions set forth in Part A of this Article III or in
any resolution of the Board of Directors providing for the
issuance of any referred Stock, the holders of the Common
Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally
available therefor, dividends payable in cash, stock or
otherwise.
2. Voting Rights. Each holder of Common Stock
shall be entitled to one vote for each share held.
3. Issuance. The shares of Common Stock may be
issued from time to time at the option and discretion of
the Board of Directors of the corporation for such
consideration as may be fixed from time to time by the
Board of Directors in compliance with the Minnesota
Business Corporation Act, and shares so issued, the full
consideration for which has been paid or delivered, shall
be deemed fully paid stock and the holder of such shares
shall not be liable for any further payment thereon.
4. Miscellaneous. Each and every share of
Common Stock shall be equal and without preference or
without classification as between such shares of stock,
and none of such shares of stock shall, in the hands of
any person whomsoever, be liable, or render such person
liable, to pay any assessment or any obligation or payment
on account of the debts or obligations of the corporation.
FURTHER RESOLVED, That Michael J. Miller, the
President of this corporation, be, and hereby is,
authorized and directed to make and execute Articles of
Amendment embracing the foregoing resolution and to cause
such Articles of Amendment to be filed with the office of
the Secretary of State of the State of Minnesota.
I FURTHER CERTIFY that the foregoing amendment
has been adopted pursuant to chapter 302A, Minnesota
Statutes.
3
<PAGE>
IN WITNESS WHEREOF, I have hereunto subscribed my name this 30th day
of June, 1994.
/s/ Michael J. Miller
Michael J. Miller
President, Telident, Inc.
4
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
TELIDENT, INC.
The undersigned, Michael J. Miller, as President of Telident, Inc.,
a corporation organized and existing under the laws of the State of Minnesota,
does hereby certify that, pursuant to actions taken by the Board of Directors on
May 14, 1996, pursuant to Sections 302A.139 and 302A.402 of the Minnesota
Business Corporation Act, the following resolutions were duly adopted by the
Board of Directors, amending the first paragraph of Article III of the Articles
of Incorporation of the corporation as follows:
RESOLVED, That the first paragraph of Article
III (Sections A and B thereof not being amended or
otherwise changed) of the Articles of Incorporation of
this corporation be amended (such amendment not adversely
affecting the rights or preferences of the holders of
outstanding shares of any class or series and not
resulting in the percentage of authorized shares of the
corporation which were unissued prior to the change
exceeding the percentage of such shares that are unissued
after the change) to effect a one-for-two reverse stock
split as follows:
ARTICLE III
"The total number of shares of all classes of
stock that the corporation shall be authorized to issue is
twelve million five hundred thousand (12,500,000) shares,
divided into the following: (i) two million five hundred
thousand (2,500,000) shares of Preferred Stock, of the par
value of $.02 per share; and (ii) ten million (10,000,000)
shares of Common Stock, of the par value of $.02 per
share. A description of the respective classes of stock
and a statement of the designations, preferences,
limitations and relative rights of such classes of stock
and the limitations on or denial of the voting rights of
the shares of such classes of stock are as described in
Sections A and B of this Article III.
"Effective June 4, 1996, (i) each two (2)
issued and outstanding shares of Common Stock of this
corporation shall be combined into one (1) share of
validly issued, fully paid and nonassessable share of
Common Stock and (ii) the authorized shares of Series I
Convertible Preferred Stock of this corporation shall be
250,000 shares with a "Stated Value" of $4.00 per share
and each two (2) issued and outstanding shares of the
Series I Convertible Preferred Stock of this corporation
<PAGE>
shall be combined into (1) share of validly issued, fully
paid and nonassessable share of Series I Convertible
Preferred Stock. Each person at that time holding of
record any issued and outstanding share of Common Stock or
Series I Convertible Preferred Stock, as the case may be,
shall receive upon surrender thereof to the corporation's
authorized agency a stock certificate or certificates to
evidence and represent the number of shares of post
reverse stock split Common Stock or Series I Convertible
Preferred Stock to which the stockholder is entitled after
this reverse split; provided, however, that this
corporation shall not issue fractional shares of Common
Stock or Series I Convertible Preferred Stock, as the case
may be, in connection with this reverse stock split, but,
in lieu thereof, this corporation shall make a cash
payment at the rate of $___ for each share (prior to this
reverse stock split) of Common Stock and shall make a cash
payment at the rate of $2.00 for each share (prior to the
reverse stock split) of Series I Convertible Preferred
Stock to the holders thereof who would otherwise be
entitled to receive fractional shares except for the
provisions hereof upon surrender of certificates
representing those shares to the corporation's authorized
agency. The ownership of such fractional interests shall
not entitle the holders thereof to any voting, dividend or
other right except the right to receive payment therefor
as described above."
FURTHER RESOLVED, that the President of the
corporation be, and he hereby is, authorized and directed
to file Articles of Amendment of the Articles of
Incorporation of this corporation embodying the foregoing
resolution and to cause the same to be filed with the
Secretary of State of the State of Minnesota in accordance
with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
as President of the corporation pursuant to the foregoing resolutions this 3rd
day of June, 1996.
TELIDENT, INC.
By /s/ Michael J. Miller
---------------------------
Michael J. Miller
President
2
<PAGE>
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
OF
TELIDENT, INC.
THE UNDERSIGNED, W. Edward McConaghay, the President of Telident,
Inc., a Minnesota corporation (the "Corporation"), for the purposes of amending
the Corporation's Restated Articles of Incorporation under the provisions of
Minnesota Statutes, Section 302A.135, hereby states that:
FIRST: The name of the corporation is Telident, Inc.
SECOND: The first paragraph of Article III of the Restated Articles
of Incorporation is hereby amended to read in its entirety as follows:
ARTICLE III
The total number of shares of all classes of
stock that the corporation shall be authorized to issue is
FIFTY MILLION (50,000,000) shares, divided into the
following: (i) TEN MILLION (10,000,000) shares of
Preferred Stock, of the par value of $.02 per share; and
FORTY MILLION (40,000,000) shares of Common Stock, of the
par value of $.02 per share. A description of the
respective classes of stock and a statement of the
designations, preferences, limitations and relative rights
of such classes and the limitations on or denial of the
voting rights of the shares of such classes of stock are
as described in Sections A and B of this Article III.
THIRD: This amendment to the Restated Articles of Incorporation of
the Corporation was approved by the Directors and the Shareholders of the
Corporation at meetings held on September 11, 1997.
FOURTH: In addition to the foregoing, the Amendments set forth
herein have been adopted pursuant to Minnesota Statutes, Chapter 302A.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment to the Restated Articles of Incorporation at Minneapolis, Minnesota on
November 5, 1997.
/s/ W. Edward McConaghay
--------------------------------------
W. Edward McConaghay
President
2
<PAGE>
THIRD ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
TELIDENT, INC.
The undersigned, Brian D. Wenger, as Secretary of Telident, Inc., a
corporation organized and existing under the laws of the State of Minnesota,
does hereby certify that, pursuant to actions taken by the Board of Directors on
December 30, 1997, pursuant to Chapter 302A and Sections 302A.139 and 302A.402
of the Minnesota Business Corporation Act, the first two paragraphs of Article
III of the Restated Articles of Incorporation of Telident, Inc. are amended and
restated, as of January 13, 1998, to provide as follows:
ARTICLE III
The total number of shares of all classes of
stock that the corporation shall be authorized to issue is
twelve million five hundred thousand (12,500,000) shares,
divided into the following: (i) two million five hundred
thousand (2,500,000) shares preferred stock, of the par
value of $.08 per share (the "Preferred Stock"); and (ii)
ten million (10,000,000) shares of common stock of the par
value of $.08 per share (the "Common Stock"). A
description of the respective classes of stock and a
statement of the designations, preferences, limitations
and relative rights of such classes of stock and the
limitations on or denial of the voting rights of the
shares of such classes of stock are as described in
Sections A and B of this Article III.
Effective January 13, 1998, (i) each four (4)
issued and outstanding shares of Common Stock of this
corporation shall be combined into one (1) share of
validly issued, fully paid and nonassessable share of
Common Stock; (ii) each four (4) issued and outstanding
shares of Series I Convertible Preferred Stock of this
corporation shall be combined into (1) share of validly
issued, fully paid and nonassessable share of Series I
Convertible Preferred Stock; and (iii) each four (4)
issued and outstanding shares of Series II Convertible
Preferred Stock of this corporation shall be combined into
one (1) share of validly issued, fully paid and
nonassessable share of Series II Convertible Preferred
Stock. Each person at that time holding of record any
issued and outstanding share of Common Stock, Series I
Convertible Preferred Stock or Series II Convertible
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Preferred Stock, as the case may be, shall receive upon
surrender thereof to the corporation's authorized agency a
stock certificate or certificates to evidence and
represent the number of shares of post reverse stock split
Common Stock, Series I Convertible Preferred Stock or
Series II Convertible Preferred Stock to which the
stockholder is entitled after this reverse split;
provided, however, that this corporation shall not issue
fractional shares of Common Stock, Series I Convertible
Preferred Stock or Series II Convertible Preferred Stock,
as the case may be, in connection with this reverse stock
split, but, in lieu thereof, this corporation shall make a
cash payment representing the value of such fractional
share based upon the closing price of a share of Common
Stock on January 13, 1998 as reported by the Nasdaq Stock
Market, a cash payment at the rate of $4.00 for each share
(prior to the reverse stock split) of Series I Convertible
Preferred Stock and a cash payment at the rate of $1.125
for each share (prior to the reverse stock split) of
Series II Convertible Preferred Stock to the holders
thereof who would otherwise be entitled to receive
fractional shares except for the provisions hereof upon
surrender of certificates representing those shares to the
corporation's authorized agency. The ownership of such
fractional interests shall not entitle the holders thereof
to any voting, dividend or other right except the right to
receive payment therefor as described above.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
as Secretary of the corporation pursuant to the foregoing resolutions this 7th
day of January, 1998.
TELIDENT, INC.
By /s/ Brian D. Wenger
-----------------------------------
Brian D. Wenger
Secretary
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CERTIFICATE OF DESIGNATION
OF SERIES I CONVERTIBLE PREFERRED STOCK
I, the undersigned, as President of Telident, Inc., a Minnesota
corporation, do hereby certify that the Board of Directors of the Corporation
unanimously resolved, on June 30, 1994, to establish a class of Preferred Stock
as permitted in Article III of the Corporation's Articles of Incorporation, as
amended, in accordance with the following resolutions:
RESOLVED, that the officers of the Company be, and they
hereby are, authorized and directed to issue an aggregate
of 500,000 shares of the Company's Preferred Stock to
Willis Drake, Richard Hencley and Warren Tyler in
consideration for which such individuals shall pay an
aggregate of $1,000,000 (i.e., $2.00 per share, the
"Stated Amount"), such amount to be paid by such
individuals' satisfaction and payment of the Company's
Renewal Revolving Promissory Note for $1,000,000 with the
National City Bank of Minneapolis.
FURTHER RESOLVED, that such shares of Preferred Stock
shall be referred to as the Series I Convertible Preferred
Stock of the Company (the "Series I Preferred Stock") and
shall have the following relative rights and preferences:
A. Rate of Dividend. The holders of the
Series I Preferred Stock shall be entitled to
receive, when and as declared by the Board of
Directors, yearly dividends at the rate of 1%
over the base rate from time to time of the
National City Bank of Minneapolis, Minneapolis,
Minnesota on the Stated Amount outstanding from
time to time and no more, payable monthly on
the first day of each month with proper
adjustment for any dividend period which is
less than a full month. Such dividends shall be
payable before any dividends shall be paid
upon, or set apart for, the Common Stock of the
Company and shall be cumulative, so that if for
any monthly dividend period, dividends at the
rate set forth above shall not have been paid
upon or set apart for the Series I Preferred
Stock, the deficiency
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(but without interest) shall be fully paid or
set apart for payment, before any dividend
shall be paid upon, or set apart, for the
Common Stock.
B Redemption Right. Subject to the terms
hereof, the shares of Series I Preferred Stock
are subject to redemption at the option of the
Company at 100% of the Stated Amount, in each
case together with accrued dividends to the
date fixed for redemption. If less than all of
the Series I Preferred Stock are to be
redeemed, the particular shares of Series I
Preferred Stock to be redeemed shall be
selected not more than 60 days prior to the
Redemption Date by the Company, from the
outstanding Series I Preferred Stock not
previously called for redemption, in such
manner as the Company deems fair and equitable;
provided that any such redemption shall be
substantially on a pro-rata basis. Notice of
redemption shall be given by first-class mail,
postage prepaid, mailed not less than 30 nor
more than 60 days prior to the date selected by
the Company for redemption (the "Redemption
Date"), to each holder of Series I Preferred
Stock. All notices of redemption shall state:
(i) the Redemption Date, (ii) if less than all
outstanding shares of Series I Preferred Stock
are to be redeemed, the identification of the
shares of Series I Preferred Stock to be
redeemed, and (iii) the place where such shares
of Series I Preferred Stock are to be
surrendered for redemption.
C. Right of Conversion. At any time prior
to the redemption of the Series I Preferred
Stock, holders thereof shall have the right to
convert all or a portion of such shares from
time to time into shares of the Common Stock of
the Company at the conversion rate of one share
of Series I Preferred Stock for one share of
such Common Stock; provided that such
conversion rate shall be subject to adjustment
as provided herein. In case the Company shall,
at any time or from time to time, subdivide the
outstanding shares of Common Stock into a
greater number of shares, then with respect to
each such subdivision the number of shares of
Common Stock deliverable upon conversion of
each share of Series I Preferred Stock shall be
increased in proportion to the increase
resulting from such
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subdivision in the number of outstanding shares
of Common Stock; and in case the Company shall,
at any time or from time to time, combine the
outstanding shares of Common Stock into a
smaller number of shares, then with respect to
each such combination the number of shares of
Common Stock deliverable upon the conversion of
each share of Series I Preferred Stock shall be
decreased in proportion to the decrease
resulting from such combination in the number
of outstanding shares of Common Stock. In case
the Company shall, at any time or from time to
time, change the outstanding Common Stock into
the same or a different number of shares of any
other class or classes of stock or shall affect
any other change in the Common Stock pursuant
to a reorganization or merger of the Company or
otherwise, the Board of Directors of the
Company shall take whatever action they deem
necessary in order to protect the conversion
right of the holders of Series I Preferred
Stock so that a holder of such stockshall, upon
conversion, be entitled to receive the number
of shares of stock of the Company or of a
successor corporation which such holder would
have been entitled to receive if the holder
had, prior to such change of the outstanding
Common Stock, converted a number of shares of
Series I Preferred Stock equal to the number so
to be converted by the holder.
D. Liquidation of Assets on Dissolution.
In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the
affairs of the Company, the holders of Series I
Preferred Stock shall be entitled to receive
the Stated Account for such stock in preference
to the holders of Common Stock, plus any
accrued and unpaid dividends to the date of
dissolution before any distribution is made to
the holders of Common Stock, and shall be
entitled to no further distribution. If upon
any dissolution, the assets distributable among
the holders of the shares of Series I Preferred
Stock and all parity stock shall be
insufficient to permit the payment in full to
the holders of the preferential amounts
payable, then the shares of Series I Preferred
Stock and all parity stock shall share ratably
in the distribution of assets in accordance
with the sums which would be payable in the
distribution if all sums payable were
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<PAGE>
discharged in full. Neither the voluntary sale,
conveyance or exchange or transfer (for cash,
shares of stock, securities or other
consideration) of all or substantially all of
the property or assets of the Company, nor the
consolidation or merger of the Company shall be
deemed to be a voluntary or involuntary
dissolution of the Company.
E. Voting Rights. Except as may be
otherwise provided by the Minnesota Business
Corporation Act, the Series I Preferred Stock
and Common Stock shall have equal voting rights
and the holder shall be entitled to one vote in
person or by proxy for each share of stock
held.
FURTHER RESOLVED, that Michael J. Miller, President of the
Company, be, and hereby is, authorized and directed to
make and execute a Certificate of Designation embracing
the foregoing resolutions and to cause such Certificate of
Designation to be filed with the office of the Secretary
of State of the State of Minnesota.
I FURTHER CERTIFY, that the foregoing Certificate of Designation has
been adopted pursuant to Chapter 302A, Minnesota Statutes.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 22nd day
of September, 1994.
/s/ Michael J. Miller
--------------------------------------
Michael J. Miller
President, Telident, Inc.
4
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TELIDENT, INC.
CERTIFICATE OF DESIGNATION
OF SERIES III CONVERTIBLE PREFERRED STOCK
I, the undersigned, as President and Chief Executive Officer of
Telident, Inc., a Minnesota corporation (the "Corporation"), do hereby certify
that the Board of Directors of the Corporation unanimously resolved, on April 8,
1998, to establish a class of Preferred Stock as permitted in Article III of the
Corporation's Articles of Incorporation, as amended, in accordance with the
following resolutions:
RESOLVED, that the officers of the Corporation be, and
they hereby are, authorized and directed to issue 400,000
shares of the Corporation's Preferred Stock and Warrants
to purchase 400,000 shares of Common Stock of the
Corporation to the Purchasers identified in that certain
Stock Purchase Agreement dated April 13, 1998 by and among
the Corporation and the Purchasers named therein (the
"Stock Purchase Agreement"), in consideration for which
the Purchasers shall pay the Corporation $1,000,000.00,
such amount to be paid by wire transfer concurrently with
the issuance of the Corporation's stock certificates
representing said shares and the warrants.
FURTHER RESOLVED, that such shares of Preferred Stock
shall be referred to and designated as the Series III
Convertible Preferred Stock of the Corporation (the
"Series III Preferred Stock") and shall have the following
relative rights and preferences:
ARTICLE I.
TERMS OF THE SERIES III CONVERTIBLE PREFERRED STOCK:
A. Voting Privileges.
1. General. Each holder of Series III Preferred Stock shall have
that number of votes on all matters submitted to the stockholders that is equal
to the number of shares of Common Stock into which such holder's shares of
Series III Preferred Stock are then convertible, as hereinafter provided. Except
as provided herein or as otherwise required by
<PAGE>
agreement or law, all shares of capital stock of the Corporation shall vote as a
single class on all matters submitted to the stockholders.
2. No Cumulative Voting. No holder of shares of Series III Preferred
Stock of the Corporation shall have any cumulative voting rights.
3. Mergers, Consolidations and Dispositions of Assets. Without the
affirmative vote or written consent of the holders (acting together as a class)
of 66.67% of the shares of Series III Preferred Stock at the time outstanding,
the Corporation shall not enter into any agreement or understanding to (i) merge
or consolidate the Corporation into or with another corporation, (ii) merge or
consolidate any other corporation into or with the Corporation, (iii) effectuate
a plan of exchange between the Corporation and any other corporation, (iv) sell,
transfer or dispose of all or substantially all of the assets of the
Corporation; (v) amend this Certificate of Designation; or (vi) issue any shares
of the Corporation's capital stock which have rights and preferences greater
than those of the Series III Preferred Stock.
B. Dividends.
In the event any dividend or distribution is declared or made with
respect to outstanding shares of Common Stock or series I convertible preferred
stock, a comparable dividend or distribution must be simultaneously declared or
made with respect to the outstanding shares of Series III Preferred Stock. In
the event any dividend or distribution is declared or made with respect to the
Common Stock or the series I convertible stock, each holder of shares of Series
III Preferred Stock shall be paid such comparable dividend or receive such
comparable distribution on the basis of the number of shares of Common Stock
into which such holder's shares of such Series III Preferred Stock are then
convertible, as hereinafter provided.
Dividends on shares of capital stock of the Corporation shall be
payable only out of funds legally available therefor.
C. Other Terms of the Series III Preferred Stock.
1. Liquidation Preference. In the event of an involuntary or
voluntary liquidation or dissolution of the Corporation at any time, the holders
of shares of Series III Preferred Stock shall be entitled to receive out of the
assets of the Corporation an amount equal to the Per Share Purchase Price
(appropriately adjusted to reflect stock splits, stock dividends,
reorganizations, consolidations and similar changes hereafter effected), plus
dividends unpaid and accumulated or accrued thereon. In the event of either an
involuntary or a voluntary liquidation or dissolution of the Corporation payment
shall be made to the holders of shares of Series III Preferred Stock in the
amounts herein fixed pari passu with series I
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<PAGE>
convertible preferred stock and before any payment shall be made or any assets
distributed to the holders of the Common Stock or any other class of shares of
the Corporation ranking junior to the Series III Preferred Stock with respect to
payment upon dissolution or liquidation of the Corporation. If upon any
liquidation or dissolution of the Corporation the assets available for
distribution shall be insufficient to pay the holders of all outstanding shares
of Series III Preferred Stock the full amounts to which they respectively shall
be entitled, the holders of such shares shall share pro rata in any such
distribution in proportion to the full amounts to which such holders would
otherwise be entitled.
Nothing hereinabove set forth shall affect in any way the right of
each holder of shares of Series III Preferred Stock to convert such shares at
any time and from time to time in accordance with subparagraph (2) below.
2. Conversion Right. At the option of the holders thereof, all or
any portion of the shares of Series III Preferred Stock shall be convertible, at
the office of the Corporation (or at such other office or offices, if any, as
the Board of Directors may designate). Upon any such conversion, each share of
Series III Preferred Stock which a holder elects to convert shall be converted
into a number of fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of Common Stock of the Corporation
equal to the quotient of (x) the Per Share Purchase Price (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected) of such share of Series
III Preferred Stock, divided by (y) the lesser of (i) the Conversion Price (as
hereinafter defined) or (ii) if the average of the closing bid price for the
shares of Common Stock (appropriately adjusted to reflect stock splits, stock
dividends, reorganizations, consolidations and similar changes hereafter
effected) on the ten (10) trading days prior to the date that the Corporation
receives written notice of conversion from such holder of such Series III
Preferred Stock (the"Average Price") is less than the Per Share Purchase Price
(appropriately adjusted to reflect stock splits, stock dividends,
reorganizations, consolidations and similar changes hereafter effected), then
80% of such Average Price. The initial Conversion Price shall be the Per Share
Purchase Price; such Conversion Price shall be subject to adjustment from time
to time in certain instances as hereinafter provided. The following provisions
shall govern such right of conversion:
a. In order to convert shares of Series III Preferred Stock
into shares of Common Stock of the Corporation, the
holder thereof shall surrender at any office hereinabove
mentioned the certificate or certificates therefor, duly
endorsed to the Corporation or in blank, and give
written notice to the Corporation at such office that
such holder elects to convert such shares. Shares of
Series III Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on
the day of the surrender of such shares for conversion
as herein provided, and the person entitled to receive
the shares of Common
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<PAGE>
Stock of the Corporation issuable upon such conversion
shall be treated for all purposes as the record holder
of such shares of Common Stock at such time. Within two
(2) business days after delivery of a conversion notice,
the Corporation shall issue and deliver or cause to be
issued and delivered to the holder a certificate or
certificates for the number of shares of Common Stock of
the Corporation issuable upon such conversion. If the
holder shall elect to convert only a portion of the
shares of Series III Preferred Stock, the Corporation
shall deliver, within two (2) business days of the
conversion notice, a new stock certificate representing
the balance of the shares represented by the surrendered
certificate which shall not have been converted.
b. Except for (i) options to purchase shares of Common
Stock pursuant to the Corporation's 1988 Stock Option
Plan adopted by the Corporation which are outstanding as
of the date hereof and except for shares of Common Stock
issued upon the exercise of such options granted
pursuant to such plan and (ii) shares of Common Stock
issued upon conversion of the Series III Preferred Stock
or exercise of the Warrants issued to the holders of the
Series III Preferred Stock pursuant to the Stock
Purchase Agreement or other warrants, or rights to
purchase or convert into securities of the Corporation,
outstanding as of the date hereof, if and whenever the
Corporation shall issue or sell any additional shares of
its Common Stock for a consideration per share less than
the Conversion Price in effect immediately prior to the
time of such issue or sale, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced to
such lesser price as is determined by multiplying the
Conversion Price in effect immediately prior thereto by
a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding
immediately prior to the issuance or sale of such
additional shares and the number of shares of Common
Stock which the aggregate consideration received
(determined in accordance with this paragraph 2) for the
issuance or sale of such additional shares would
purchase at the Conversion Price then in effect, and the
denominator of which shall be the number of shares of
Common Stock outstanding immediately after the issuance
or sale of such additional shares.
For the purposes of this subparagraph (b),
the following provisions (1) to (3), inclusive, shall
also be applicable:
(1) In case at any time the Corporation shall
grant (whether directly or by assumption in
a merger or otherwise) any rights to
subscribe for or to purchase, or any options
for the purchase of, (a) Common Stock or (b)
any obligations or any shares of stock of
the Corporation which are
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<PAGE>
convertible into, or exchangeable for,
Common Stock (any of such obligations or
shares of stock being hereinafter called
"Convertible Securities") whether or not
such rights or options or the right to
convert or exchange any such Convertible
Securities are immediately exercisable, and
the price per share for which Common Stock
is issuable upon the exercise of such rights
or options or upon conversion or exchange of
such Convertible Securities (determined by
dividing (x) the total amount, if any,
received or receivable by the Corporation as
consideration for the granting of such
rights or options, plus the minimum
aggregate amount of additional consideration
payable to the Corporation upon the exercise
of such rights or options, plus, in the case
of such rights or options which relate to
Convertible Securities, the minimum
aggregate amount of additional
consideration, if any, payable upon the
issue of such Convertible Securities and
upon the conversion or exchange thereof, by
(y) the total maximum number of shares of
Common Stock issuable upon the exercise of
such rights or options or upon the
conversion or exchange of all such
Convertible Securities issuable upon the
exercise of such rights or options) shall be
less than the Conversion Price in effect
immediately prior to the time of the
granting of such rights or options, then the
total maximum number of shares of Common
Stock issuable upon the exercise of such
rights or options or upon conversion or
exchange of the total maximum amount of such
Convertible Securities issuable upon the
exercise of such rights or options shall (as
of the date of granting of such rights or
options) be deemed to be outstanding and to
have been issued for such price per share.
No further adjustments of the Conversion
Price shall be made upon the actual issue of
such Common Stock or of such Convertible
Securities upon exercise of such rights or
options or upon the actual issue of such
Common Stock upon conversion or exchange of
such Convertible Securities.
(2) In case the Corporation shall issue or sell
(whether directly or by assumption in a
merger or otherwise) any Convertible
Securities, whether or not the rights to
exchange or convert thereunder are
immediately exercisable, and the price per
share for which Common Stock is issuable
upon such conversion or exchange (determined
by dividing (x) the total amount received or
receivable by the Corporation as
consideration for the issue or sale of such
Convertible Securities, plus the minimum
aggregate amount of additional
consideration, if any, payable to the
Corporation upon the conversion or exchange
thereof, by (y) the total maximum number of
shares of Common Stock issuable
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<PAGE>
upon the conversion or exchange of all such
Convertible Securities) shall be less than
the Conversion Price in effect immediately
prior to the time of such issue or sale,
then the total maximum number of shares of
Common Stock issuable upon conversion or
exchange of all such Convertible Securities
shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to
be outstanding and to have been issued for
such price per share, provided that if any
such issue or sale of such Convertible
Securities is made upon exercise of any
rights to subscribe for or to purchase or
any option to purchase any such Convertible
Securities for which adjustments of the
Conversion Price have been or are to be made
pursuant to other provisions of this
subparagraph (b), no further adjustment of
the Conversion Price shall be made by reason
of such issue or sale.
(3) In case any shares of Common Stock or
Convertible Securities or any rights or
options to purchase any such Common Stock or
Convertible Securities shall be issued or
sold for cash, the consideration received
therefor shall be deemed to be the amount
received by the Corporation therefor,
without deducting therefrom any expenses
incurred or any underwriting commissions,
discounts or concessions paid or allowed by
the Corporation in connection therewith. In
case any shares of Common Stock or
Convertible Securities or any rights or
options to purchase any such Common Stock or
Convertible Securities shall be issued or
sold for a consideration other than cash,
the amount of the consideration other than
cash received by the Corporation shall be
deemed to be the fair value of such
consideration as determined by the Board of
Directors of the Corporation, without
deducting therefrom any expenses incurred or
any underwriting commissions, discounts or
concessions paid or allowed by the
Corporation in connection therewith. In case
any shares of Common Stock or Convertible
Securities or any rights or options to
purchase such Common Stock or Convertible
Securities shall be issued in connection
with any merger or consolidation in which
the Corporation is the surviving
corporation, the amount of consideration
therefor shall be deemed to be the fair
value as determined by the Board of
Directors of the Corporation of such portion
of the assets and business of the
non-surviving corporation or corporations as
such Board shall determine to be
attributable to such Common Stock,
Convertible Securities, rights or options,
as the case may be. In the event of any
consolidation or merger of the Corporation
in which the Corporation is not the
surviving corporation or in the event of any
sale of all or substantially all of the
assets of the Corporation for
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<PAGE>
stock or other securities of any other
corporation, the Corporation shall be deemed
to have issued a number of shares of its
Common Stock for stock or securities of the
other corporation computed on the basis of
the actual exchange ratio on which the
transaction was predicated and for a
consideration equal to the fair market value
on the date of such transaction of such
stock or securities of the other
corporation, and if any such calculation
results in adjustment of the Conversion
Price, the determination of the number of
shares of Common Stock issuable upon
conversion immediately prior to such merger,
conversion or sale, for purposes of
subparagraph (f) below, shall be made after
giving effect to such adjustment of the
Conversion Price.
c. In case the Corporation shall (i) declare a dividend
upon the Common Stock payable in Common Stock (other
than a dividend declared to effect a subdivision of the
outstanding shares of Common Stock, as described in
subparagraph (d) below) or Convertible Securities, or in
any rights or options to purchase Common Stock or
Convertible Securities, or (ii) declare any other
dividend or make any other distribution upon the Common
Stock payable otherwise than out of earnings or earned
surplus, then thereafter each holder of shares of Series
III Preferred Stock upon the conversion thereof will be
entitled to receive the number of shares of Common Stock
into which such shares of Series III Preferred Stock
have been converted, and, in addition and without
payment therefor, each dividend described in clause (i)
above and each dividend or distribution described in
clause (ii) above which such holder would have received
by way of dividends or distributions if continuously
since the issuance of such shares of Series III
Preferred Stock, such holder (i) had been the record
holder of the number of shares of Common Stock then
received, and (ii) had retained all dividends or
distributions in stock or securities (including Common
Stock or Convertible Securities, or in any rights or
options to purchase any Common Stock or Convertible
Securities) payable in respect of such Common Stock or
in respect of any stock or securities paid as dividends
or distributions and originating directly or indirectly
from such Common Stock. For the purposes of the
foregoing a dividend or distribution other than in cash
shall be considered payable out of earnings or earned
surplus only to the extent that such earnings or earned
surplus are charged an amount equal to the fair value of
such dividend or distribution as determined by the Board
of Directors of the Corporation.
d. In case the Corporation shall at any time subdivide its
outstanding shares of Common Stock into a greater number
of shares, the Conversion Price in effect immediately
prior to such subdivision shall be proportionately
reduced, and
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<PAGE>
conversely, in case the outstanding shares of Common
Stock of the Corporation shall be combined into a
smaller number of shares, the Conversion Price in effect
immediately prior to such combination shall be
proportionately increased.
e. If (i) the purchase price provided for in any right or
option referred to in clause (1) of subparagraph (b), or
(ii) the additional consideration, if any, payable upon
the conversion or exchange of Convertible Securities
referred to in clause (1) or clause (2) of subparagraph
(b), or (iii) the rate at which any Convertible
Securities referred to in clause (1) or clause (2) of
subparagraph (b) are convertible into or exchangeable
for Common Stock, shall change at any time (other than
under or by reason of provisions designed to protect
against dilution), the Conversion Price then in effect
hereunder shall forthwith be increased or decreased to
such Conversion Price as would have been obtained had
the adjustments made upon the issuance of such rights,
options or Convertible Securities been made upon the
basis of (a) the issuance of the number of shares of
Common Stock theretofore actually delivered upon the
exercise of such options or rights or upon the
conversion or exchange of such Convertible Securities,
and the total consideration received therefor, and (b)
the issuance at the time of such change of any such
options, rights, or Convertible Securities then still
outstanding for the consideration, if any, received by
the Corporation therefor and to be received on the basis
of such changed price; and on the expiration of any such
option or right or the termination of any such right to
convert or exchange such Convertible Securities, the
Conversion Price then in effect hereunder shall
forthwith be increased to such Conversion Price as would
have obtained had the adjustments made upon the issuance
of such rights or options or Convertible Securities been
made upon the basis of the issuance of the shares of
Common Stock theretofore actually delivered (and the
total consideration received therefor) upon the exercise
of such rights or options or upon the conversion or
exchange of such Convertible Securities. If the purchase
price provided for in any right or option referred to in
clause (1) of subparagraph (b), or the rate at which any
Convertible Securities referred to in clause (1) or
clause (2) of subparagraph (b) are convertible into or
exchangeable for Common Stock, shall decrease at any
time under or by reason of provisions with respect
thereto designed to protect against dilution, then in
case of the delivery of Common Stock upon the exercise
of any such right or option or upon conversion or
exchange of any such Convertible Security, the
Conversion Price then in effect hereunder shall
forthwith be decreased to such Conversion Price as would
have obtained had the adjustments made upon the issuance
of such right, option or Convertible Security been made
upon the basis of the issuance of
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(and the total consideration received for) the shares of
Common Stock delivered as aforesaid.
f. If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or
merger of the Corporation with another corporation, or
the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that
the holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger
or sale, lawful and adequate provision shall be made
whereby the holders of Series III Preferred Stock shall
thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in
lieu of the shares of the Common Stock of the
Corporation immediately theretofore receivable upon the
conversion of Series III Preferred Stock, such shares of
stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore
receivable upon the conversion of Series III Preferred
Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, plus all
dividends unpaid and accumulated or accrued thereon to
the date of such reorganization, reclassification,
consolidation, merger or sale, and in any such case
appropriate provision shall be made with respect to the
rights and interests of the holders of Series III
Preferred Stock to the end that the provisions hereof
(including without limitation provisions for adjustments
of the Conversion Price and of the number of shares
receivable upon the conversion of Series III Preferred
Stock) shall thereafter be applicable, as nearly as may
be in relation to any shares of stock, securities or
assets thereafter receivable upon the conversion of
Series III Preferred Stock. The Corporation shall not
effect any such consolidation, merger or sale, unless
prior to the consummation thereof the successor
corporation (if other than the Corporation) resulting
from such consolidation or merger or the corporation
purchasing such assets shall assume by written
instrument executed and mailed to the registered holders
of Series III Preferred Stock, at the last addresses of
such holders appearing on the books of the Corporation,
the obligation to deliver to such holders such shares of
stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to
receive.
g. In case at any time:
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(1) the Corporation shall declare any cash
dividend on its Common Stock at a rate in
excess of the rate of the last cash dividend
theretofore paid;
(2) the Corporation shall pay any dividend
payable in stock upon its Common Stock or
make any distribution (other than regular
cash dividends) to the holders of its Common
Stock;
(3) the Corporation shall offer for subscription
pro rata to the holders of its Common Stock
any additional shares of stock of any class
or other rights;
(4) there shall be any capital reorganization,
or reclassification of the capital stock of
the Corporation, or consolidation or merger
of the Corporation with, or sale of all or
substantially all of its assets to, another
corporation; or
(5) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of
the Corporation;
then, in any one or more of said cases, the Corporation
shall give written notice, by first-class mail, postage
prepaid, addressed to the registered holders of Series
III Preferred Stock at the addresses of such holders as
shown on the books of the Corporation, of the date on
which (a) the books of the Corporation shall close or a
record shall be taken for such dividend, distribution or
subscription rights, or (b) such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place,
as the case may be. Such notice shall also specify the
date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or
subscription rights, or shall be entitled to exchange
their Common Stock for securities or other property
deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation,
or winding up, as the case may be. Such written notice
shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record
date or the date on which the Corporation's transfer
books are closed in respect thereto.
h. If any event occurs as to which in the opinion of the
Board of Directors of the Corporation the other
provisions of this paragraph (2) are not strictly
applicable or if strictly applicable would not fairly
protect the rights of the holders of Series III
Preferred Stock in accordance with the essential intent
and principles of such provisions, then the Board of
Directors shall make an
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adjustment in the application of such provisions, in
accordance with such essential intent and principles, so
as to protect such rights as aforesaid.
i. As used in this paragraph (2) the term "Common Stock"
shall mean and include the Corporation's presently
authorized Common Stock and shall also include any
capital stock of any class of the Corporation 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
Corporation; provided that the shares receivable
pursuant to conversion of shares of Series III Preferred
Stock shall include shares designated as Common Stock of
the Corporation as of the date of issuance of such
shares of Series III Preferred Stock, or, in case of any
reclassification of the outstanding shares thereof, the
stock, securities or assets provided for in subparagraph
(f) above.
j. No fractional shares of Common Stock shall be issued
upon conversion, but, instead of any fraction of a share
which would otherwise be issuable, the Corporation shall
pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the Market Price
per share of Common Stock as of the close of business on
the day of conversion. "Market Price" shall mean if the
Common Stock is traded on a securities exchange, The
NASDAQ National Market or The NASDAQ SmallCap Market,
the closing price of the Common Stock on such exchange,
The NASDAQ National Market or The NASDAQ SmallCap
Market, or, if the Common Stock is otherwise traded in
the over-the-counter market, the closing price, in each
case averaged over a period of 20 consecutive business
days prior to the date as of which "Market Price" is
being determined. If at any time the Common Stock is not
traded on an exchange, The NASDAQ National Market or The
NASDAQ SmallCap Market, or otherwise traded in the
over-the-counter market, the "Market Price" shall be
deemed to be the higher of (i) the book value thereof as
determined by any firm of independent public accountants
of recognized standing selected by the Board of
Directors of the Corporation as of the last day of any
month ending within 60 days preceding the date as of
which the determination is to be made, or (ii) the fair
value thereof determined in good faith by the Board of
Directors of the Corporation as of a date which is
within 15 days of the date as of which the determination
is to be made.
k. The holders of the Series III Preferred Stock shall be
entitled to the registration rights provided for in
Section 11 of the Stock Purchase Agreement.
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l. Whenever the Conversion Price is adjusted, as provided
herein, the Corporation shall promptly, but in no event
more than 3 days following such adjustment, give each
holder of Series III Preferred Stock notice of such
adjustment, certified by the chief financial officer of
the Corporation, setting forth the new Conversion Price,
the computation by which such adjustment was made and a
brief statement of the facts requiring such adjustment.
m. In the event that (i) (A) the Corporation shall fail for
any reason to deliver shares of Common Stock to a holder
upon conversion of the Series III Preferred Stock within
the time period specified in paragraph 2(a), or (B) the
Corporation shall fail to remove any restrictive legend
on any certificates evidencing such shares of Common
Stock as and when required under Section 4.3 of the
Stock Purchase Agreement, and (ii) thereafter, such
holder shall purchase (in an open market transaction or
otherwise) shares of Common Stock to make delivery in
satisfaction of a sale by such holder of (A) all or part
of the shares of Common Stock which such holder
anticipated receiving upon such conversion, or (B) all
or a portion of such unlegended shares of Common Stock,
as the case may be (in each case, the "Sold Shares"),
then the Corporation shall pay to such holder (in
addition to any other remedies available to the holder)
the amount by which (x) such holder's total purchase
price (including brokerage commissions, if any) for the
shares of Common Stock so purchased shall exceed (y) the
net proceeds received by such holder from the sale of
the Sold Shares. The Corporation shall make any payments
required pursuant to this paragraph (m) within five (5)
days after the receipt of written notice from a holder
setting forth the calculation of the amount due
hereunder.
3. Mandatory Conversion. The Series III Preferred Stock shall
automatically be converted into shares of Common Stock of the Corporation,
without any act by the Corporation or the holders of such Preferred Stock,
concurrently with the closing of any public offering by the Corporation of
shares of Common Stock of the Corporation registered under the Securities Act of
1933, as amended, in which (1) the aggregate public offering price of the
securities sold for cash by the Corporation in the offering is at least
$5,000,000 or such lesser amount as may be approved by the holders of at least
66.67% of the shares of Preferred Stock then outstanding, and (2) the public
offering price per share of Common Stock is at least $5.00 (as adjusted from
time to time to reflect stock splits, dividends, recapitalizations, combinations
or the like), or such lower amount as may be approved by the holders of 66.67%
of the shares of Preferred Stock then outstanding.
4. Definition. All capitalized terms not otherwise defined herein
shall have the definition ascribed to them in the Stock Purchase Agreement.
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5. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit a holder's right to pursue
actual damages for any failure by the Corporation to comply with the terms of
this Certificate of Designation. The Corporation acknowledges that a breach by
it of its obligations under this Certificate of Designation shall cause
irreparable harm to the holders of the Series III Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation agrees, in
the event of any such breach or threatened breach, that each holder shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
FURTHER RESOLVED, that W. Edward McConaghay, President of
the Corporation, be, and hereby is, authorized and
directed to make and execute a Certificate of Designation
embracing the foregoing resolutions and to cause such
Certificate of Designation to be filed with the office of
the Secretary of State of the State of Minnesota.
IN WITNESS WHEREOF, this Certificate of Designation is hereby
executed on behalf of the Corporation by W. Edward McConaghay, its President,
this 13th day of April, 1998, pursuant to Chapter 302A, Minnesota Statutes.
TELIDENT, INC.
By /s/ W. Edward McConaghay
------------------------------------------
W. Edward McConaghay
Its: President and Chief Executive Officer
13
EXHIBIT 10.1
TELIDENT, INC.
STOCK PURCHASE AGREEMENT
April 13, 1998
FAMCO III LIMITED LIABILITY COMPANY
600 South Highway 169
St. Louis Park, Minnesota 55426
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
153 East 53rd Street, 51st Floor
New York, New York 10022
Gentlemen:
In consideration of the agreement of FAMCO III LIMITED LIABILITY
COMPANY ("FAMCO") and SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. ("Special
Situations Fund") (collectively, the "Purchasers") to purchase the Preferred
Shares and the Warrants (both as hereinafter defined), as provided for herein,
the undersigned Telident, Inc., a Minnesota corporation (the "Company"), hereby
agrees with the Purchasers as follows:
1. Authorization of Securities. The Company proposes to (i) authorize,
issue and sell to Purchasers 400,000 series III convertible preferred shares, to
be issued pursuant to and be entitled to the benefits of the provisions of a
certificate of designation (the "Certificate of Designation") substantially as
set forth in Exhibit 1 hereto (the "Preferred Shares"), and (ii) authorize and
issue to Purchasers 400,000 warrants to purchase shares of common stock of the
Company, $.08 par value ("Common Stock") substantially in the form of Exhibit 2
hereto (the "Warrants"). The number of Preferred Shares and Warrants to be
issued to each Purchaser shall be set forth opposite their names on Schedule 1
hereto.
The term "Preferred Shares" as used herein shall mean the series III
convertible preferred shares issued to the Purchasers, and all preferred shares
of the Company issued in exchange or substitution therefor. The Preferred Shares
shall be convertible into shares of the Company's Common Stock (such shares of
Common Stock into which the Preferred Shares are convertible and all shares of
Common Stock of the Company issued in exchange or substitution therefor being
hereinafter sometimes referred to as the "Conversion Stock"), all as set forth
in the Certificate of Designation. The Preferred Shares shall be subject in all
respects to all of the provisions of the Certificate of Designation.
<PAGE>
The term "Warrants" as used herein shall mean the warrants issued to
Purchasers, and all warrants issued in exchange or substitution therefor. The
term "Warrant Stock" as used herein shall mean the shares of Common Stock
issuable upon exercise of the Warrants and all shares of Common Stock issued in
exchange or substitution therefor.
2. Sale and Purchase of Securities. Subject to the terms and conditions
hereof, the Company agrees to sell to the Purchasers, and the Purchasers agree
to purchase from the Company, the Preferred Shares at a purchase price of $2.50
per share (the "Per Share Purchase Price"). In addition, Purchasers shall
receive 400,000 Warrants exercisable at a price per share of $3.125 (the
"Warrant Exercise Price"). The aggregate purchase price for the Preferred Shares
and the Warrants shall be $1,000,000.00 (the "Aggregate Purchase Price").
3. Closing. On the date hereof, the parties shall execute and deliver
to the other parties this Agreement, the Escrow Agreement (as defined below) and
the Proceeds Agreement (as defined below). In addition, within one (1) business
day after the date hereof, (i) the Company will deliver to Manchester Companies,
Inc. to be held in escrow the stock certificate representing the Preferred
Shares and the Warrant of FAMCO against confirmation of receipt of the portion
of the Aggregate Purchase Price to be paid by FAMCO by wire transfer into the
escrow account to be held in accordance with the terms of that certain Escrow
Agreement dated April 13, 1998 to be entered into by and among the Company,
FAMCO, and Manchester Companies, Inc. (the "Escrow Agreement"), substantially in
the form of Exhibit 3 attached hereto, and (ii) the Company will deliver to
Hertzog, Calamari & Gleason to be held in escrow the stock certificate
representing the Preferred Shares and the Warrant of Special Situations Fund
against confirmation of receipt of the portion of the Aggregate Purchase Price
to be paid by Special Situations Fund by wire transfer into an escrow account
with Hertzog, Calamari & Gleason to be held in accordance with the terms of that
certain Proceeds Agreement dated April 13, 1998 to be entered into by and among
the Company and such Special Situations Fund (the "Proceeds Agreement"),
substantially in the form of Exhibit 4 attached hereto.
The sale to, and purchase by, the Purchasers of the Preferred Shares
and the Warrants (the "Closing") shall occur one (1) business day after the
satisfaction of all of the conditions of closing set forth in Section 7 hereof,
but not later than May 8, 1998, or such other date as the Purchasers and the
Company shall mutually agree upon (the "Closing Date"). This Agreement shall
terminate on the earlier of (i) failure to satisfy all of such conditions by 5
p.m. New York time on May 8, 1998 or (ii) notification from NASDAQ as defined
below that the Company's Common Stock will not continue to be listed on the
NASDAQ SmallCap Market. Upon any such Closing or termination, the Aggregate
Purchase Price held in escrow pursuant to the Escrow Agreement and the Proceeds
Agreement shall be released as provided therein.
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4. Restriction on Transfer of Securities.
4.1 Restrictions. The Preferred Shares and the Conversion
Stock, and the Warrants and the Warrant Stock, are transferable only (a) if
registered under the Securities Act of 1933, as amended (the "Securities Act"),
(b) pursuant to Rule 144 (or any similar rule then in effect) adopted under the
Securities Act, if such rule is available, and (c) pursuant to any other legally
available exemption from registration.
4.2 (a) Legend. Each certificate representing Preferred Shares
and each of the Warrants shall be endorsed with the following legend:
The securities evidenced hereby may not be transferred
without (i) the opinion of counsel satisfactory to the
Company that such transfer may be lawfully made without
registration under the Federal Securities Act of 1933 and all
applicable state securities laws or (ii) such registration.
Upon the conversion of any Preferred Shares or upon the exercise of any Warrant,
unless the Company receives an opinion of counsel from the holder of such a
security satisfactory to the Company to the effect that a sale, transfer,
assignment, pledge or distribution of the Conversion Stock or Warrant Stock
issuable upon such conversion or exercise may be made without registration, or
unless such Conversion Stock or Warrant Stock is being disposed of pursuant to
registration under the Securities Act and any applicable state act, the same
legend shall be endorsed on the certificate evidencing such Conversion Stock or
Warrant Stock.
(b) Stop Transfer Order. A stop transfer order shall be placed with the
Company's transfer agent preventing transfer of any of the securities referred
to in paragraph (a) above pending compliance with the conditions set forth in
any such legend.
4.3 Removal of Legend. Any legend endorsed on a certificate or
instrument evidencing a security pursuant to Section 4.2 hereof shall be
removed, and the Company shall issue a certificate or instrument without such
legend to the holder of such security, (a) in accordance with Section 4.2(a)
hereof, (b) if such security is being disposed of pursuant to registration under
the Securities Act and any applicable state acts or pursuant to Rule 144 or any
similar rule then in effect, or (c) if such holder provides the Company with an
opinion of counsel satisfactory to the Company to the effect that a sale,
transfer, assignment, offer, pledge or distribution for value of such security
may be made without registration and that such legend is not required to satisfy
the applicable exemption from registration.
4.4 Register of Securities. The Company or its duly appointed agent
shall maintain a separate register for the Preferred Shares and the Warrants in
which it shall register the issuance and transfer of all Preferred Shares and
Warrants. All transfers of
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Preferred Shares and Warrants shall be recorded on the register maintained by
the Company or its agent, and the Company shall be entitled to regard the
registered holder of such securities as the actual owner of the securities so
registered until the Company or its agent is required to record a transfer of
such securities on its register. The Company or its agent shall be required to
record any such transfer when it receives (a) the security to be transferred
duly and properly endorsed by the registered holder thereof or by its attorney
duly authorized in writing, and (b) the opinion of counsel referred to in
Sections 4.2 and 4.3 hereof or evidence of compliance with the registration
provisions referred to in those Sections.
5. Representations and Warranties by Company. Except as disclosed in
Exhibit 5 hereto, the Company represents and warrants to the Purchasers that:
5.1 Organization, Standing etc. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota, and has the requisite corporate power and authority to own
its properties and to carry on its business in all material respects as it is
now being conducted. The Company has no subsidiaries. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to issue the Preferred Shares, the Conversion Stock, the Warrants and the
Warrant Stock, and to otherwise perform its obligations under this Agreement and
the Warrants. The copies of the Articles of Incorporation and Bylaws of the
Company delivered to the Purchasers or their agents prior to the execution of
this Agreement are true and complete copies of the duly and legally adopted
Articles of Incorporation and Bylaws of the Company in effect as of the date of
this Agreement. The Company does not have any direct or indirect equity interest
in any other firm, corporation, partnership, joint venture association or other
business organization.
5.2 Qualification. The Company is duly qualified or licensed
as a foreign corporation in good standing in each jurisdiction wherein the
nature of its activities or of its properties owned or leased makes such
qualification or licensing necessary and failure to be so qualified or licensed
would have a material adverse impact on its business.
5.3 Corporate Acts and Proceedings. This Agreement has been
duly authorized by all necessary corporate action on behalf of the Company, and
will be duly executed and delivered by authorized officers of the Company. All
corporate action necessary for the authorization, creation, issuance and
delivery of the Preferred Shares, the Conversion Stock and the Warrant Stock,
and the execution and delivery of the Warrants, has been taken on the part of
the Company, or will be taken by the Company on or prior to the Closing Date.
This Agreement is, and each of the Warrants when executed and delivered pursuant
to the terms of this Agreement will be, a valid and binding agreement of the
Company enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or
other similar laws
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affecting the enforcement of creditors' rights generally, and except for
judicial limitations on the enforcement of the remedy of specific enforcement
and other equitable remedies.
5.4 Financial Statements. The unaudited balance sheet at
December 31, 1997 together with the related statements of operations,
stockholders' equity and cash flow for the quarter then ended contained in the
Company's 10-QSB Report filed with the Securities and Exchange Commission (the
"Commission") for the fiscal quarter ending December 31, 1997, and the audited
balance sheet at June 30, 1997, together with the related statements of
operations, stockholders' equity and cash flow for the year then ended,
contained in the Company's 10-KSB Report filed with the Commission for the
fiscal year ending June 30, 1997 (i) are in accordance with the books and
records of the Company, (ii) present fairly the financial condition of the
Company at December 31, 1997 and June 30, 1997, respectively, and the results of
its operations for the periods therein specified, and (iii) have, in all
material respects, been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior accounting
periods. Specifically, but not by way of limitation, each balance sheet or notes
thereto disclose all of the debts, liabilities and obligations of any nature
(whether absolute, accrued or contingent and whether due or to become due) of
the Company as of their respective dates which, individually or in the
aggregate, are material and which in accordance with generally accepted
accounting principles would be required to be disclosed in such balance sheet,
and the omission of which would, in the aggregate, have a material adverse
impact on the Company. The December 31, 1997 balance sheet includes appropriate
reserves for all taxes and other liabilities accrued at such date but not yet
payable.
5.5 Tax Returns and Audits. All required federal, state and
local tax returns or appropriate extension requests of the Company have been
filed, and all federal, state and local taxes required to be paid with respect
to such returns have been paid or due provision for the payment thereof has been
made. The Company is not delinquent in the payment of any such tax or in the
payment of any assessment or governmental charge. The Company has not received
notice of any tax deficiency proposed or assessed against it, and has not
executed any waiver of any statute of limitations on the assessment or
collection of any tax. None of the Company's tax returns has been audited by
governmental authorities in a manner to bring such audits to the Company's
attention. The Company does not have any tax liabilities except those reflected
in the financial statements contained in its most recent 10-QSB Report filed
with the Commission for the period ending on December 31, 1997 and those
incurred in the ordinary course of business since December 31, 1997.
5.6 Changes, Dividends, etc. Except for the transactions
contemplated by this Agreement, since December 31, 1997 the Company has not: (a)
incurred any debts, obligations or liabilities, absolute, accrued or contingent
and whether due or to become due, except current liabilities incurred in the
ordinary course of business which (individually or in the aggregate) will not
materially and adversely affect the business, properties or
5
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prospects of the Company; (b) paid any obligation or liability other than, or
discharged or satisfied any liens or encumbrances other than those securing,
current liabilities, in each case in the ordinary course of business; (c)
declared or made any payment or distribution to its stockholders as such, or
purchased or redeemed any of its shares of capital stock or other securities, or
obligated itself to do so; (d) mortgaged, pledged or subjected to lien, charge,
security interest or other encumbrance any of its assets, tangible or
intangible, except in the ordinary course of business; (e) sold, transferred or
leased any of its assets except in the ordinary course of business; (f)
increased the compensation payable to any of its officers or other employees,
consultants or representatives by greater than $10,000; (g) canceled or
compromised any debt or claim, or waived or released any right of material
value; (h) suffered any physical damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the properties,
business or prospects of the Company; (i) entered into any transaction other
than in the ordinary course of business; (j) issued or sold any shares of
capital stock or other securities or granted any options, warrants or other
purchase rights with respect thereto; (k) made any acquisition or disposition of
any material assets or become involved in any other material transaction, other
than for fair value in the ordinary course of business; or (l) agreed to do any
of the foregoing other than pursuant hereto. There has been no material adverse
change in the financial condition, operations, results of operations or business
of the Company since December 31, 1997.
5.7 Title to Properties and Encumbrances. The Company has good
and marketable title to all its owned properties and assets, and the properties
and assets used in the conduct of its business, which properties and assets are
not subject to any mortgage, pledge, lease, lien charge, security interest,
encumbrance or restriction, except Permitted Liens (as hereinafter defined).
"Permitted Liens" shall mean (a) liens for taxes and assessments or governmental
charges or levies not at the time due or in respect of which the validity
thereof shall currently be contested in good faith by appropriate proceedings;
and (b) liens in respect of pledges or deposits under worker's compensation laws
or similar legislation, carriers', warehousemen's, mechanics', laborers' and
materialmen's, landlord's and statutory and similar liens, if the obligations
secured by such liens are not then delinquent or are being contested in good
faith, and liens and encumbrances incidental to the conduct of the business of
the Company or any subsidiary which were not incurred in connection with the
borrowing of money or the obtaining of advances or credits and which do not in
the aggregate materially detract from the value of its property or materially
impair the use thereof in the operation of its business.
5.8 Litigation; Governmental Proceedings. There are no legal
actions, suits, arbitrations or other legal, administrative or governmental
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company, its properties, assets or business. The Company
is not in default with respect to any judgment, order or decree of any court or
any governmental agency or instrumentality.
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5.9 Compliance with Applicable Laws and Other Instruments. The
business and operations of the Company have been and are being conducted in
accordance with all applicable laws, rules and regulations of all governmental
authorities. To the knowledge of the Company, neither the execution nor delivery
of, nor the performance of or compliance with, this Agreement nor the
consummation of the transactions contemplated hereby will conflict with, or,
with or without the giving of notice or passage of time, result in any breach
of, or constitute a default under, or result in the imposition of any lien or
encumbrance upon any asset or property of the Company pursuant to, any
applicable law, administrative regulation or judgment, order or decree of any
court or governmental body, any agreement or other instrument to which the
Company is a party or by which it or any of its properties, assets or rights is
bound or affected, and will not violate the Articles of Incorporation or Bylaws
of the Company. The Company is not in violation of its Articles of Incorporation
or its Bylaws nor, in violation of, or in default under, any lien, indenture,
mortgage, lease, agreement, instrument, commitment or arrangement in any
material respect. To the knowledge of the Company all parties having material
contractual arrangements with the Company are in substantial compliance
therewith and none are in material default in any respect thereunder.
5.10 Preferred Shares and Conversion Stock; Warrant Stock. The
Preferred Shares, when issued and paid for pursuant to the terms of this
Agreement, will be duly authorized, validly issued and outstanding, fully paid,
nonassessable and free and clear of all pledges, liens, encumbrances and
restrictions, except as set forth in Section 4 hereof, and the shares of
Conversion Stock and Warrant Stock issuable upon conversion of the Preferred
Shares or exercise of the Warrants have been reserved for issuance based upon
the initial Conversion Price or Warrant Exercise Price, and when issued upon
conversion or exercise will be duly authorized, validly issued and outstanding,
fully paid, nonassessable and free and clear of all pledges, liens, encumbrances
and restrictions, except as set forth in Section 4 hereof. The certificates
representing the Preferred Shares to be delivered by the Company hereunder, and
the certificates representing the Conversion Stock and Warrant Stock to be
delivered upon the conversion of the Preferred Shares or exercise of the
Warrants, will be genuine, and the Company has no knowledge of any fact which
would impair the validity thereof. "Conversion Price" shall mean such price at
which the Preferred Shares are convertible into Common Stock pursuant to the
Certificate of Designation.
5.11 Governmental Consents. Based in part upon the
representations and warranties contained in Section 6.1 hereof, no consent,
authorization, approval, permit or order of or filing with any governmental or
regulatory authority is required under current laws and regulations in
connection with the execution and delivery of this Agreement or the Warrants or
the offer, issuance, sale or delivery of the Preferred Shares or the offer of
the Conversion Stock or the Warrant Stock other than the qualification thereof,
if required, under applicable state securities laws, which qualification has
been or will be effected as a condition of these sales. Under the circumstances
contemplated hereby, the offer, issuance,
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sale and delivery of the Preferred Shares, the Warrants, the Conversion Stock
and the Warrant Stock will not under current laws and regulations require
compliance with the prospectus delivery or registration requirements of the
Securities Act.
5.12 Capital Stock. The authorized capital stock of the
Company consists of 12,500,000 shares, of which 10,000,000 are designated as
common shares, with a par value of $.08 per share (the "Common Stock"), and
2,500,000 are designated as preferred shares, with a par value of $.08 per share
("Preferred Stock"). Of the 2,500,000 shares of authorized Preferred Stock,
62,500 shares are designated Series I Convertible Preferred Stock ("Series I
Preferred Stock") and 400,000 shares are designated as Series III Convertible
Preferred Stock ("Series III Preferred Stock"). In addition, the Company has
127,600 shares of Common Stock reserved for issuance under its 1988 Stock Option
Plan (the "Plan"). All outstanding shares of Common Stock and Series I Preferred
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. Schedule 5.12A sets forth the Company's currently outstanding,
reserved, and committed capital stock, options, shares reserved for issuance
under the Plan, warrants, and the Company's 10% Convertible Debentures issued in
September 1992 and originally due October 1, 1995, and 10% Series B Debentures
issued May 1993 and originally due May 1, 1996 (collectively, the "Debentures").
Except as set forth in Schedule 5.12A, the Company has no outstanding securities
convertible into or exchangeable for Common Stock or Preferred Stock, no
contracts, rights, options, warrants or other agreements or commitments to
purchase or otherwise acquire any shares of its capital stock or securities
convertible into or exchangeable therefor, or any shares reserved for issuance
under stock option, employee benefit or other plans or otherwise. Except as
provided in the Certificate of Designation or otherwise required by law, all
shares of capital stock of the Company vote as a single class on all matters
submitted to the Company's shareholders. Schedule 5.12B sets forth the Company's
outstanding, reserved, and committed capital stock, options, shares reserved for
issuance under the Plan, warrants, and Debentures after the Closing. There
currently are no shares of Series II Preferred Stock authorized and available
for issuance.
5.13 No Brokers or Finders. No person, firm or corporation has
or will have, as a result of any act or omission of the Company, any right,
interest or valid claim against or upon the Company or any Purchaser for any
commission, fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this Agreement.
The Company will defend and indemnify and hold each Purchaser harmless against
any and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable in connection with
the transactions contemplated by this Agreement.
5.14 Registration Rights. Other than under this Agreement, the
Company has not agreed to register any of its authorized or outstanding
securities under the Securities Act.
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5.15 Registration Statement. To the knowledge of the Company,
there exist no facts or circumstances that would inhibit or delay the
preparation and filing of a registration statement on Form S-3 with respect to
the Preferred Shares, the Conversion Stock and the Warrant Stock.
5.16 NASDAQ. The Company's Common Stock is listed on The
Nasdaq SmallCap Market and, after giving effect to the transactions contemplated
by this Agreement, satisfies all applicable requirements of NASDAQ for such
listing, including, without limitation, all applicable requirements of the
Nasdaq Marketplace Rule 4300 Series (Qualification Requirements for NASDAQ Stock
Market Securities). The Company will use all reasonable efforts to cause the
Common Stock to continue to be so listed.
5.17 SEC Reports. The Company has timely filed all forms,
reports, statements (including proxy statements) and schedules with the
Commission required to be filed pursuant to the Securities and Exchange Act of
1934 (the "Exchange Act") or other federal securities laws (the "SEC Reports").
The SEC Reports complied in all material respects with all applicable
requirements of the Exchange Act or other federal securities laws and did not
(as of their respective filing dates) contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. The audited and unaudited
consolidated financial statements of the Company included (or incorporated by
reference) in the SEC Reports have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis and fairly present
the financial position of the Company as of the dates thereof and the results of
its operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited financial statements, to normal year-end
audit adjustments. The Company has registration statements on file with the
Commission which are set forth on Schedule 5.17.
5.18 Disclosure. The Company has not knowingly withheld from
the Purchasers any material facts relating to the assets, business, operations,
financial condition or prospects of the Company. No representation or warranty
in this Agreement or in any certificate, schedule, statement or other document
furnished or to be furnished to the Purchasers pursuant hereto or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated herein or therein or necessary to make the statements
herein or therein not misleading.
5.19 Consents. All consents, permits and waivers necessary for
the Company to perform its obligations under this Agreement have been obtained
and any necessary filings have been made, except for the filing of the
Certificate of Designation which shall be filed and effective prior to the
Closing.
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5.20 Anti-dilution Shares. The issuance of the Preferred
Shares, the Conversion Stock, the Warrants and the Warrant Stock will not result
in the issuance of any additional shares of the capital stock of the Company or
any triggering of any other rights of first refusal or anti-dilution, preemptive
or similar rights contained in any options, warrants, debentures, other
securities or agreements or commitments of the Company. All rights of first
refusal, anti-dilution or similar rights with respect to the issuance of the
Preferred Shares, the Warrants, the Conversion Stock and the Warrant Stock have
been validly waived.
6. Representations and Warranties of Purchasers. Each of the Purchasers
represents and warrants for itself that:
6.1 Investment Intent. The Preferred Shares being acquired by
each Purchaser hereunder are being purchased, and the Conversion Stock and the
Warrant Stock acquired by each Purchaser upon conversion of such Preferred
Shares or exercise of the Warrants will be acquired, for such Purchaser's own
account and not with the view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, except pursuant to sales that are exempt from the registration requirements
of the Securities Act and/or pursuant to registration as contemplated by Section
11 of this Agreement. Such Purchaser understands that the Preferred Shares and
the Conversion Stock, and the Warrants and the Warrant Stock, have not been
registered under the Securities Act or any applicable state laws by reason of
their issuance or contemplated issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act and such
laws, and that the reliance of the Company upon this exemption is predicated in
part upon this representation and warranty. Such Purchaser further understands
that the Preferred Shares and Conversion Stock, and the Warrants and the Warrant
Stock, may not be transferred or resold without (a) registration under the
Securities Act and any applicable state securities laws, or (b) an exemption
from the requirements of the Securities Act and applicable state securities
laws.
Such Purchaser understands that an exemption from such
registration is not presently available pursuant to Rule 144 promulgated under
the Securities Act, and that in any event such Purchaser may not sell any
securities pursuant to Rule 144 prior to the expiration of a one-year period
after such Purchaser has acquired the securities.
6.2 Location of Principal Office and Access to Company
Records. The state in which each Purchaser's principal office is located is set
forth in Section 14 of this Agreement. Such Purchaser has been provided with
documents requested by it, and access to the Company's executive officers has
been provided to such Purchaser or to such Purchaser's qualified agents.
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6.3 Acts and Proceedings. This Agreement has been duly
authorized by all necessary action on the part of such Purchaser, has been duly
executed and delivered by such Purchaser, and is a valid and binding agreement
upon the part of such Purchaser.
6.4 No Brokers or Finders. No person, firm or corporation has
or will have, as a result of any act or omission by such Purchaser, any right,
interest or valid claim against the Company for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement. Such Purchaser will defend
and indemnify and hold the Company harmless against any and all liability with
respect to any such commission, fee or other compensation which may be payable
or determined to be payable as a result of the actions of such Purchaser in
connection with the transactions contemplated by this Agreement.
7. Conditions of Each Purchaser's Obligation. The obligation to
purchase and pay for the Preferred Shares and the Warrants which each Purchaser
has agreed to purchase on the Closing Date is subject to the fulfillment, or
waiver by each Purchaser, prior to or on the Closing Date of the following
conditions.
7.1 No Errors, Etc. The representations and warranties of the
Company under this Agreement shall be true in all material respects as of the
Closing Date with the same effect as though made on and as of the Closing Date.
7.2 Compliance With Agreement. The Company shall have
performed and complied with all agreements or conditions required by this
Agreement to be performed and complied with by it prior to or as of the Closing
Date.
7.3 Certificate of Officer. The Company shall have delivered
to each Purchaser a certificate, dated as of the Closing Date, executed by the
President of the Company and certifying to the satisfaction of the conditions
specified in Sections 7.1, 7.2, 7.5 and 7.7 hereof.
7.4 Opinion of Company's Counsel. The Company shall have
delivered to each Purchaser an opinion of Briggs and Morgan, P.A., counsel for
the Company, dated as of the Closing Date, to the effect that:
(a) The Company is a duly and validly organized and
existing corporation in good standing under the laws of the
State of Minnesota; has the corporate power and authority to
enter into this Agreement, the Escrow Agreement, the Proceeds
Agreement and the Warrants, to issue and sell the Preferred
Shares, the Warrants, the Conversion Stock and the Warrant
Stock as contemplated by this Agreement, and to carry out the
provisions of this Agreement, the Escrow Agreement and the
Proceeds Agreement; and has the
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corporate power and authority to own and hold its properties
owned and leased and to carry on the business in which it is
engaged.
(b) Neither the execution nor delivery of, nor the
performance of or compliance with, the Agreement, the Escrow
Agreement or the Proceeds Agreement nor the consummation of
the transactions contemplated therein will violate the
Articles of Incorporation or Bylaws of the Company.
(c) To our knowledge, there are no legal actions,
suits, arbitration or other legal, administrative or
governmental proceedings or investigations pending or
threatened against the Company, except for the pending NASDAQ
inquiry into the continued listing of the Company's Common
Stock on the NASDAQ SmallCap Market.
(d) This Agreement, the Warrants, the Escrow
Agreement and the Proceeds Agreement have been duly
authorized, executed and delivered by the Company, and are
legal, valid and binding agreements of the Company enforceable
in accordance with their respective terms, except as the
enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws
affecting the enforcement of creditors' rights generally, and
except for judicial limitations on the enforcement of the
remedy of specific performance and other equitable remedies.
(e) The Certificate of Designation, substantially in
the form set forth as Exhibit 1 hereto, has been duly adopted
by all necessary corporate action, and has been duly filed
with the Secretary of State of the State of Minnesota (no
other or additional filing or recording being necessary in
order to perfect the rights and privileges of the holders of
the Preferred Shares).
(f) The Preferred Shares are entitled to the rights,
preferences and provisions of the Certificate of Designation,
subject to any limitations contained therein.
(g) The Preferred Shares have been duly authorized,
validly issued and delivered by the Company and are fully paid
and nonassessable. The Conversion Stock issuable upon
conversion of the Preferred Shares has been reserved for
issuance, and when issued upon conversion will be duly
authorized, validly issued, fully paid and nonassessable. The
Warrant Stock issuable upon exercise of the Warrants has been
reserved for issuance, and when issued upon exercise will be
duly authorized, validly issued, fully paid and nonassessable.
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(h) All corporate proceedings required by law or by
the provisions of this Agreement, the Escrow Agreement and the
Proceeds Agreement to be taken by the Board of Directors and
the stockholders of the Company on or prior to the Closing
Date in connection with the execution and delivery of this
Agreement, the Escrow Agreement, the Proceeds Agreement and
the Warrants have been duly and validly taken.
(i) Assuming the accuracy of the representations of
the Purchasers set forth in Section 6 hereof, the execution
and delivery of the Warrants, the offer, sale, issuance and
delivery of the Preferred Shares and the Warrants and the
offer of the Conversion Stock and the Warrant Stock to the
Purchasers through conversion or exercise by them of the
Preferred Shares or the Warrants under the circumstances
contemplated by the Certificate of Designation, the Warrants
and this Agreement are exempt from the registration and
prospectus delivery requirements of the Securities Act, and
all registrations, qualifications, permits and approvals, if
any, required under applicable state securities laws for the
lawful execution and delivery of the Warrants and offer, sale,
issuance and delivery of the Preferred Shares, the Warrants,
the Conversion Stock and the Warrant Stock, have been
obtained.
7.5 Qualification Under State Securities Laws. All
registrations, qualifications, permits or approvals required under applicable
state securities laws for the lawful execution and delivery of this Agreement
and the Warrants and the offer, sale, issuance and delivery of the Preferred
Shares and the Warrants shall have been obtained.
7.6 Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transaction shall be satisfactory in
form and substance to each Purchaser and its counsel.
7.7 Consents and Waivers. The Company shall have obtained any
and all authorizations, consents, permits and waivers and made any filings,
including, without limitation, any filings with Nasdaq, necessary or appropriate
for consummation of the transactions contemplated by this Agreement.
7.8 Series II Preferred Stock Certificate of Designation. The
Company shall have filed with the Minnesota Secretary of State a termination of
the Certificate of Designation as to the Series II Preferred Stock which was
filed with the Minnesota Secretary of State on November 2, 1994.
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7.9 Series III Preferred Stock Certificate of Designation. The
Company shall have filed with the Minnesota Secretary of State the Certificate
of Designation and such Certificate of Designation shall have become effective.
7.10 Aggregate Investment. The aggregate number of Preferred
Shares purchased hereunder by all Purchasers shall be 400,000.
7.11 NASDAQ Approval. In connection with the pending NASDAQ
inquiry into the continued listing of the Common Stock, the Company shall have
received and provided to the Purchasers prior to 5 p.m. New York Time on May 8,
1998, written notification from NASDAQ satisfactory to the Purchasers, that the
Company's Common Stock will continue to be listed on the NASDAQ SmallCap Market.
8. Covenants. The Company covenants and agrees that:
8.1 Corporate Existence. The Company will maintain its
corporate existence in good standing, qualify and remain qualified in each
jurisdiction in which failure to so qualify would have a material adverse impact
on the Company or its business or operations, and comply with all applicable
laws and regulations of the United States or of any state or states thereof or
of any political subdivision thereof and of any governmental authority where
failure to so comply would have a material adverse impact on the Company or its
business or operations.
8.2 Books of Account and Reserves. The Company will keep books
of record and account in which full, true and correct entries are made of all of
its and their respective dealings, business and affairs, in accordance with
generally accepted accounting principles. The Company will employ certified
public accountants selected by the Board of Directors of the Company who are
"independent" within the meaning of the accounting regulations of the
Commission, and have annual audits made by such independent public accountants
in the course of which such accountants shall make such examinations, in
accordance with generally accepted auditing standards, as will enable them to
give such reports or opinions with respect to the financial statements of the
Company as will satisfy the requirements of the Commission in effect at such
time with respect to certificates and opinions of accountants.
8.3 Furnishing of Financial Statements and Information. The
Company will deliver to each Purchaser:
(a) all of the Company's 10-QSB Reports as soon as
practicable after the filing of such Reports with the
Commission;
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(b) all of the Company's 10-KSB Reports as soon as
practicable after the filing of such Reports with the
Commission;
(c) as soon as practicable after the submission
thereof to the Company, copies of all reports and
recommendations submitted by independent public accountants in
connection with any annual or interim audit of the accounts of
the Company or any of its subsidiaries made by such
accountants;
(d) as soon as practicable after the transmission
thereof, copies of all reports, proxy statements, registration
statements and notifications filed by it with the Commission
pursuant to any act administered by the Commission or
furnished to stockholders of the Company or to any national
securities exchange or Nasdaq and, as soon as practicable
after the release thereof, copies of all press releases and
other information publicly distributed by the Company; and
(e) as soon as practicable, such other financial data
relating to the business, affairs and financial condition of
the Company and any subsidiaries as is available to the
Company and as from time to time the Purchasers may reasonably
request.
8.4 Application of Proceeds. Unless otherwise approved by the
Purchasers, the Aggregate Purchase Price shall be used for working capital
purposes and expenses related to this transaction.
8.5 Filing of Reports. The Company will file timely all SEC
Reports with the Commission required to be filed pursuant to the Exchange Act or
other federal securities laws. The SEC Reports shall comply in all material
respects with all applicable requirements of the Exchange Act and will not (as
of their respective filing dates) contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
8.6 Reservation of Shares; Authorized Shares. The Company
shall, from and at all times after the Closing, maintain a reserve of authorized
shares of Common Stock sufficient to cover the conversion of the Preferred
Shares and the issuance of the Warrant Stock.
8.7 Nasdaq Requirements. The Company shall use its best
efforts to continue to meet the requirements for the listing of its Common Stock
on The Nasdaq SmallCap Market.
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8.8 Series III Preferred Stock Certificate of Designation. The
Company shall file prior to the Closing with the Minnesota Secretary of State
the Certificate of Designation and take such action to cause the Certificate of
Designation to become effective.
9. The Preferred Shares.
9.1 Conversion of Preferred Shares. Any holder of Preferred
Shares may, at its option, at any time and from time to time, convert such
Preferred Shares, or any thereof, into Conversion Stock at the rate and upon the
terms and conditions and subject to the adjustments set forth in the Certificate
of Designation.
9.2 Stock Fully Paid: Reservation of Shares. The Company
covenants and agrees that all Conversion Stock that may be issued upon
conversion of the Preferred Shares will, upon issuance in accordance with the
terms of the Certificate of Designation, be fully paid and nonassessable, and
that the issuance thereof shall not give rise to any preemptive rights on the
part of any person. The Company further covenants and agrees that the Company
will at all times have authorized and reserved a sufficient number of shares of
its Common Stock for the purpose of issue upon the conversion of the Preferred
Shares.
10. The Warrants.
10.1 Exercise of Warrants. For a period of two (2) years from
the Closing Date, any holder of any Warrants may, at its option, at any time and
from time to time, exercise such Warrants, or any portion thereof, upon the
terms and conditions and subject to the adjustments set forth in the Warrants.
10.2 Stock Fully Paid; Reservation of Shares. The Company
covenants and agrees that all Warrant Stock that may be issued upon the exercise
of the Warrants will, upon issuance in accordance with the terms of the
Warrants, be fully paid and nonassessable, and that the issuance thereof shall
not give rise to any preemptive rights on the part of any person.
11. Registration of Stock.
11.1 Required Registration. Within 30 days of the Closing, the
Company shall prepare and file one registration statement under the Securities
Act (the "Resale Registration Statement") covering all of the shares of
Conversion Stock and Warrant Stock (collectively, the "Registrable Securities")
and shall use its best efforts (i) to cause such Resale Registration Statement
to be declared effective by the Commission for such Registrable Securities as
soon as practicable thereafter and (ii) to keep the Resale Registration
Statement continuously effective until the earliest of (x) the date on which the
Purchasers no longer hold or have the right to acquire any Registrable
Securities or (y) the
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third anniversary of the effective date of the Resale Registration Statement, or
such earlier date at which Rule 144(k) under the Securities Act (or any
successor rule thereto) enables each holder of Registrable Securities to sell
all of its Registrable Securities without restriction under the Securities Act.
11.2 Incidental Registration. Each time the Company shall
determine to proceed with the actual preparation and filing of a registration
statement under the Securities Act in connection with the proposed offer and
sale for cash of any of its securities by it or any of its security holders
(other than a registration statement on a form that does not permit the
inclusion of shares by its security holders), the Company will promptly give
written notice of its determination to all record holders of Purchased Stock (as
hereinafter defined). Upon the written request of a record holder of any shares
of Purchased Stock given within 30 days after receipt of any such notice from
the Company, the Company will, except as herein provided, cause all the shares
of Conversion Stock and Warrant Stock, the Purchasers or record holders of which
have so requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other disposition
by the prospective seller or sellers of the Conversion Stock or Warrant Stock to
be so registered; provided, however, that nothing herein shall prevent the
Company from, at any time, abandoning or delaying any such registration
initiated by it; provided further, however, that if the Company determines not
to proceed with a registration after the registration statement has been filed
with the Commission and the Company's decision not to proceed is primarily based
upon the anticipated public offering price of the securities to be sold by the
Company, the Company shall promptly complete the registration for the benefit of
those selling security holders who wish to proceed with a public offering of
their securities at the Company's expense. If any registration pursuant to this
Section 11.2 shall be underwritten in whole or in part, the Company may require
that the Conversion Stock or Warrant Stock requested for inclusion pursuant to
this Section 11.2 be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. In
the event that the Conversion Stock or Warrant Stock requested for inclusion
pursuant to this Section 11.2 would constitute more than 25 % of the total
number of shares to be included in a proposed underwritten public offering, and
if in the good faith judgment of the managing underwriter of such public
offering the inclusion of all of the Conversion Stock or Warrant Stock
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful marketing
of the shares of stock offered by the Company, the number of shares of
Conversion Stock and Warrant Stock otherwise to be included in the underwritten
public offering may be reduced pro rata (by number of shares) among the holders
thereof requesting such registration, provided, however, that after any such
required reduction the Conversion Stock and Warrant Stock to be included in such
offering shall constitute at least 25% of the total number of shares to be
included in such offering. "Purchased Stock" shall mean the Preferred Shares,
the Conversion Stock, the Warrants, the Warrant Stock, and the stock or other
securities of the Company issued in a stock split or reclassification of, or a
stock dividend or other
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distribution on or in substitution or exchange for, or otherwise in connection
with, any of the foregoing securities, or in a merger or consolidation involving
the Company or a sale of all or substantially all of the Company's assets.
11.3 Registration Procedures. If and whenever the Company is
required by the provisions of Section 11.1 or 11.2 hereof to effect the
registration of Registrable Securities under the Securities Act, the Company
will:
(a) prepare and file with the Commission a
registration statement (a "Registration Statement") with
respect to such Registrable Securities, and use its best
efforts to cause such Registration Statement to become and
remain effective for such period as may be reasonably
necessary to effect the sale of such securities, not to
exceed three years in the case of a registration pursuant to
Section 11.1 and nine months in the case of a registration
pursuant to Section 11.2 (subject to extension as set forth
in the last paragraph of this Section 11.3);
(b) prepare and file with the Commission such
amendments to such Registration Statement and supplements to
such Registration Statement and the Prospectus contained
therein (a "Prospectus") as may be necessary to keep such
Registration Statement effective for such period as may be
reasonably necessary to effect the sale of such securities,
not to exceed three years in the case of a registration
pursuant to Section 11.1 and nine months in the case of a
registration pursuant to Section 11.2, and to comply with the
provision of the Securities Act (subject to extension as set
forth in the last paragraph of this Section 11.3);
(c) use its best efforts to register and qualify the
securities covered by such Registration Statement under such
state securities or blue sky laws of such jurisdictions as
such participating holders may reasonably request in writing
within 20 days following the original filing of such
Registration Statement, except that the Company shall not for
any purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so
qualified;
(d) notify the security holders participating in
such registration, promptly after it shall receive notice
thereof, of the time when such Registration Statement has
become effective or a supplement to any Prospectus forming a
part of such Registration Statement has been filed;
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(e) notify such holders promptly of any request by
the Commission for the amending or supplementing of such
Registration Statement or Prospectus or for additional
information;
(f) prepare and promptly file with the Commission
and promptly notify such holders of the filing of such
amendment or supplement to such Registration Statement or
Prospectus as may be necessary to correct any statements or
omissions if, at the time when a Prospectus relating to such
securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any
such Prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were
made, not misleading;
(g) advise such holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance
of any stop order by the Commission suspending the
effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose
and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order
should be issued;
(h) advise such holders (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been
filed and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective,
(ii) of any request by the Commission or any state securities
authority for amendments and supplements to a Registration
Statement and Prospectus or for additional information after
the Registration Statement has become effective, (iii) of the
issuance by the Commission of any stop order suspending the
effectiveness of a Registration Statement, (iv) of the
issuance by any state securities commission or other
regulatory authority of any order suspending the
qualification or exemption from qualification of any of the
Registrable Securities under state securities or "blue sky"
laws, and (v) of the happening of any event which makes any
statement made in a Registration Statement or related
Prospectus untrue or which requires the making of any changes
in such Registration Statement or Prospectus so that they
will not contain any untrue statement of a material fact or
omit to state any 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. As
soon as practicable following expiration of the Suspension
Period (as defined below), the Company shall prepare and file
with the Commission and furnish a supplement or amendment to
such Prospectus so that, as thereafter deliverable to the
purchasers of such Registrable Securities, such Prospectus
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will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading;
(i) furnish to such holders such number of copies of
a Prospectus, including a preliminary Prospectus, in
conformity with the requirements of the Securities Act, and
such other documents, as they may reasonably request in order
to facilitate the disposition of the Registrable Securities
owned by them that are included in such registration;
(j) in the event of any underwritten public
offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter(s) of such offering; and
(k) use its best efforts to secure the listing of
the Registrable Securities covered by a registration
statement on the NASDAQ SmallCap Market (or the principal
exchange, market or system on which the Company's Common
Stock shall then be listed or traded).
Upon receipt of any notice (a "Suspension Notice") by a holder
from the Company of the happening of any event of the kind described in Section
11.3(h)(ii), (iii) or (v), a holder shall forthwith discontinue disposition of
the Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 11.3(h) or until the holder is
advised in writing (the "Advice") by the Company that the use of the Prospectus
may be resumed, and has received copies of any additional or supplemental
filings which are incorporated by reference in the Prospectus, and, if so
directed by the Company, will, or will request any broker-dealer acting as
holder's agent to, deliver to the Company (at the Company expense) all copies,
other than permanent file copies then in the holder's or broker-dealer's
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice; provided, however, that in no event shall
the period from the date on which the holder receives a Suspension Notice to the
date on which the holder receives either the Advice or copies of the
supplemented or amended Prospectus contemplated by Section 11.3(h), and any
additional or supplemental filings incorporated therein by reference (the
"Suspension Period"), exceed 60 days. The period during which the Company is
required under this Agreement to keep any Registration Statement filed pursuant
to Section 11.1 or 11.2 effective shall be extended by the number of days during
a period that the Registration Statement required to be filed under Section 11.1
of the Agreement is subject to a stop order or is otherwise not in effect or the
holder is advised that the prospectus included therein contains a material
misstatement or omission.
20
<PAGE>
11.4 Expenses. Except as provided in this Section 11.4, with
respect to the registration pursuant to Section 11.1 hereof and with respect to
each inclusion of shares of Conversion Stock and Warrant Stock in a Registration
Statement pursuant to Section 11.2 hereof, the Company shall bear all fees,
costs and expenses except expenses of counsel and accountants for the selling
securities holders.
11.5 Indemnification. In the event that any Conversion Stock
or Warrant Stock is included in a Registration Statement under Section 11.1 or
11.2 hereof:
(a) The Company will indemnify and hold harmless
each holder of Registrable Securities which are included in a
Registration Statement pursuant to the provisions of this
Section 11, its directors, officers, partners and affiliates,
and any underwriter (as defined in the Securities Act) for
such holder and each person, if any, who controls such holder
or such underwriter within the meaning of the Securities Act,
from and against, and will reimburse such holder, director,
officer, partner and affiliate and each such underwriter and
controlling person with respect to, any and all loss, damage,
liability, cost and expense (including reasonable attorneys'
fees) to which such holder, director, officer, partner or
affiliate or any such underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar
as such losses, damages, liabilities, costs or expenses
(including reasonable attorneys' fees) are caused by any
untrue statement or alleged untrue statement of any material
fact contained in such Registration Statement, any Prospectus
contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged
omission to state therein 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 the Company will not be
liable in any such case to the extent that any such loss,
damage, liability, cost or expense arises out of or is based
upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with
information furnished by such holder, such underwriter or
such controlling person in writing specifically for use in
the preparation thereof.
(b) Each holder of Registrable Securities which are
included in a Registration Statement pursuant to the
provisions of this Section 11 will indemnify and hold
harmless the Company, its directors and officers, any
controlling person and any underwriter from and against, and
will reimburse the Company, its directors and officers, any
controlling person and any underwriter with respect to, any
and all loss, damage, liability, cost or expense to which the
Company or any controlling person and/or any underwriter may
become subject under the Securities Act or otherwise, insofar
as such losses,
21
<PAGE>
damages, liabilities, costs or expenses are caused by any
untrue or alleged untrue statement of any material fact
contained in such Registration Statement, any Prospectus
contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged
omission to state therein 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, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in
reliance upon and in strict conformity with written
information furnished by such holder specifically for use in
the preparation thereof.
(c) Promptly after receipt by an indemnified party
pursuant to the provisions of paragraph (a) or (b) of this
Section 11.5 of notice of the commencement of any action
involving the subject matter of the foregoing indemnity
provisions such indemnified party will, if a claim thereof is
to be made against the indemnifying party pursuant to the
provisions of said paragraph (a) or (b), promptly notify the
indemnifying party of the commencement thereof; but the
omission to so notify the indemnifying party will relieve
such indemnifying party of liability, but only to the extent
that such indemnifying party is prejudiced with respect to a
specific claim. In case such action is brought against any
indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party shall have
the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, provided, however, if
the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties
which are different from or additional to those available to
the indemnifying party, or if there is a conflict of interest
which would prevent counsel for the indemnifying party from
also representing the indemnified party, the indemnified
party or parties shall have the right to select separate
counsel to participate in the defense of such action on
behalf of such indemnified party or parties. 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 pursuant
to the provisions of said paragraph (a) or (b) for any legal
or other expense subsequently incurred by such indemnified
party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the
proviso of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party
22
<PAGE>
within a reasonable time after the notice of the commencement
of the action, or (iii) the indemnifying party has authorized
the employment of counsel for the indemnified party at the
expense of the indemnifying party.
(d) If the indemnification provided for in paragraph
(a) or (b) of this Section 11.5 shall be unavailable to hold
harmless an indemnified party in respect of any loss, damage,
liability, cost or expenses (including reasonable attorneys'
fees) under the Securities Act or otherwise, then, and in
each such case, the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified
party as a result of such loss, damage, liability, cost or
expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and
of the indemnified party on the other in connection with the
statement or omissions that resulted in such loss, damage,
liability, cost or expenses (including reasonable attorneys'
fees) as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or
by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct
or prevent such statement or omission; provided that in no
event shall any contribution under this subsection (d) by any
holder exceed the gross proceeds from the offering received
by such indemnifying party. No person or entity guilty of
fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company and the holders
under this Section 11.5 will survive the completion of any
offering of Registrable Securities in a Registration
Statement, and otherwise.
12. General Indemnity. The Company will indemnify and hold harmless the
Purchasers, and their respective officers, directors, general partners,
employees, agents and affiliates, from and against any and all claims,
liabilities, losses, damages and expenses (including reasonable attorneys' fees)
incurred by any of such indemnified parties in any way relating to, arising out
of or resulting from (i) the breach of any of the representations or warranties
made by the Company in this Agreement and (ii) the breach or the failure of
performance by the Company of any of its covenants or agreements to be performed
under this Agreement.
23
<PAGE>
13. Changes, Waivers, Etc. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the Purchasers owning or having the right to
acquire 66.67% of the Conversion Stock and the Warrant Stock.
14. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and
(a) if to FAMCO III, LIMITED LIABILITY COMPANY,
addressed to 600 South Highway 169, St. Louis Park, Minnesota
55426, or to such other address as such holder may specify by
written notice to the Company, or
(b) if to SPECIAL SITUATIONS PRIVATE EQUITY FUND,
L.P., addressed to 153 East 53rd Street, 51st Floor, New
York, New York 10022, or to such other address as such holder
may specify by written notice to the Company, or
(c) if to the Company, addressed to the Company, One
Main Street SE, Suite 85, Minneapolis, Minnesota 55414,
attention President, or to such other address as the Company
may specify by written notice to the Purchasers, and
(d) such notices and other communications shall for
all purposes of this Agreement be treated as being effective
or having been given upon: personal delivery; five (5) days
after deposit in the United States Mail, certified or
registered (return receipt requested); one (1) business day
after deposit with a nationally recognized overnight courier
(prepaid) or one (1) business day after transmission by
facsimile and receipt of confirmation of receipt by sender.
15. Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement for a period of five (5) years.
16. Parties in Interest. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, whether so expressed or
not, and, in particular, shall inure to the benefit of and be enforceable by the
holder or holders at the time of any of the Purchased Stock. The Company cannot
assign this Agreement, or its rights or obligations hereunder.
17. Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
24
<PAGE>
18. Choice of Law. It is the intention of the parties that the laws of
Minnesota shall govern the validity of this Agreement, the construction of its
terms and the interpretation of the rights and duties of the parties.
19. Counterparts. This Agreement may be executed concurrently in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Instruments. From time to time, each party hereto will
execute and deliver such instruments and documents as may be reasonably
necessary to carry out the purposes and intent of this Agreement.
21. Integration; Entire Agreement. This Agreement, including and
incorporating all schedules and exhibits attached hereto, constitutes and
contains the entire agreement and understanding of the parties regarding the
subject matter of this Agreement and supersedes in its entirety any and all
prior agreements, whether written or oral, among the parties with respect to the
subject matter hereof.
22. Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the remaining provisions of this
Agreement shall be unaffected thereby and shall remain in full force and effect
to the fullest extent permitted by law.
25
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
undersigned, whereupon this letter shall become a binding contract among you and
the undersigned.
Very truly yours,
TELIDENT, INC.
/s/ W. Edward McConaghay
-------------------------------------
W. Edward McConaghay, President and
Chief Executive Officer
The foregoing Agreement is hereby
accepted as of the date first above
written.
FAMCO III LIMITED LIABILITY COMPANY
By: Family Financial Strategies, Inc.
Its: Manager
By: /s/ John Wunsch
------------------------------------
John Wunsch
Its: President
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
By: MG Advisers LLC
Its: General Partner
/s/ Austin Marxe
- ---------------------------------
By: Austin Marxe
Its: Member
26
<PAGE>
SCHEDULE 1
NAME OF NUMBER OF NUMBER OF
PURCHASER PREFERRED WARRANTS PURCHASE
SHARES PURCHASED PURCHASED PRICE
========================= ====================== =============== ==============
FAMCO III 200,000 200,000 $500,000
Limited Liability
Company
- ------------------------- ---------------------- --------------- --------------
Special Situations
Private Equity
Fund, L.P. 200,000 200,000 $500,000
========================= ====================== =============== ==============
27
<PAGE>
SCHEDULE 5.12A
Currently Outstanding, Reserved and Committed Securities
<TABLE>
<CAPTION>
CAPITAL STOCK OUTSTANDING, RESERVED OR UNDERLYING
SHARES ON A FULLY DILUTED BASIS
<S> <C>
Common Stock........................................................................ 2,786,735
Series I Preferred Stock............................................................... 37,500
Series II Preferred Stock................................................................... 0
Subtotal................................................................ 2,824,235
STOCK OPTIONS AND PLAN RESERVES
Stock Options issued pursuant to 1988 Stock Option Plan (the "Plan").................. 116,849
Remaining Shares reserved under the Plan............................................... 10,751
------
Subtotal.................................................................. 127,600
WARRANTS
Warrant dated October 1995 issued to Okabena Partnership K............................. 37,500
Preemptive rights dated January 1996 issued to holders of 10% Series B
Convertible Debentures issued in May 1993.................................................. 25
Warrants dated May 1996 issued to parties providing bridge financing................... 31,250
Warrant dated June 1996 issued to Mr. Sheffert......................................... 12,500
Warrant dated August 1996 issued to R.J. Steichen...................................... 28,750
Warrant dated September 1997 issued to Mr. Sheffert.................................... 12,500
Warrants dated July 1997 issued to former holders of 10% Convertible
Debentures dated October 1992, and originally due October 1, 1995, and
10% Series B Convertible Debentures dated May 1993, and
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
originally due May 1, 1996............................................................. 97,475
Warrant dated July 1997 issued to Family Financial Strategies......................... 312,500
Warrant dated February 25, 1998 issued to Mack Traynor................................ 100,000
-------
Subtotal.................................................................. 632,500
DEBENTURES
10% Convertible Debentures dated October 1992, and originally
due October 1, 1995, and 10% Series B Convertible Debentures
dated May 1993, and originally due May 1, 1996,
all of which mature July 15, 1997
and the cumulative face value of which is $50,000....................................... 3,157
-----
Subtotal.................................................................... 3,157
TOTAL............................................................................... 3,587,491
=========
</TABLE>
29
<PAGE>
SCHEDULE 5.12B
Outstanding, Reserved and Committed Securities After Closing
<TABLE>
<CAPTION>
CAPITAL STOCK OUTSTANDING, RESERVED OR UNDERLYING
SHARES ON A FULLY DILUTED BASIS
<S> <C>
Common Stock........................................................................ 2,786,735
Series I Preferred Stock............................................................... 37,500
Series II Preferred Stock................................................................... 0
Series III Preferred Stock............................................................ 400,000
Subtotal................................................................ 3,224,235
STOCK OPTIONS AND PLAN RESERVES
Stock Options issued pursuant to 1988 Stock Option Plan (the "Plan").................. 116,849
Remaining Shares reserved under the Plan............................................... 10,751
------
Subtotal.................................................................. 127,600
WARRANTS
Warrant dated October 1995 issued to Okabena Partnership K............................. 37,500
Preemptive rights dated January 1996 issued to holders of 10% Series B
Convertible Debentures issued in May 1993.................................................. 25
Warrants dated May 1996 issued to parties providing bridge financing................... 31,250
Warrant dated June 1996 issued to Mr. Sheffert......................................... 12,500
Warrant dated August 1996 issued to R.J. Steichen...................................... 28,750
Warrants dated July 1997 issued to former holders of 10% Convertible
Debentures dated October 1992, and originally due October 1, 1995,
and 10% Series B Convertible Debentures dated May 1993, and
originally due May 1, 1996............................................................. 97,475
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
Warrant dated September 1997 issued to Mr. Sheffert.................................... 12,500
Warrant dated July 1997 issued to Family Financial Strategies......................... 312,500
Warrant dated February 25, 1998 issued to Mack Traynor................................ 100,000
Warrants dated April 1998 issued to FAMCO III Limited
Liability Company and Special Situations Private Equity Fund, L.P..................... 400,000
-------
Subtotal................................................................ 1,032,500
DEBENTURES
10% Convertible Debentures dated October 1992, and originally
due October 1, 1995, and 10% Series B Convertible Debentures
dated May 1993, and originally due May 1, 1996,
all of which mature July 15, 1997
and the cumulative face value of which is $50,000....................................... 3,157
-----
Subtotal.................................................................... 3,157
TOTAL SHARES OUTSTANDING OR RESERVED................................................ 4,387,491
=========
TOTAL SHARES AUTHORIZED............................................................ 12,500,000
Total Authorized Shares of Preferred Stock.............................. 2,500,000
Total Authorized Shares of Common Stock................................ 10,000,000
----------
</TABLE>
31
<PAGE>
SCHEDULE 5.17
Registration Statements on file with the Commission
The Company currently has the following registration statements on
file with the Commission:
1. Final Prospectus, dated May 14, 1997 (Registration No.
333-99054);
2. Post-Effective Amendment No. 1 to Registration Statement on
Form SB-2 on Form S-3, filed with the Commission on May 1,
1997 (Registration No. 333-99054);
3. Final Prospectus, dated August 13, 1996 (Registration No.
33-04311);
4. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 33-04311), filed with the Commission on
August 8, 1996;
5. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 33-04311), filed with the Commission on May
22, 1996;
6. Final Prospectus, dated April 16, 1996 (Registration No.
333-01804);
7. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 333-01804), filed with the Commission on
April 4, 1996;
8. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 333-01804), filed with the Commission on
February 29, 1996;
9. Final Prospectus, dated January 26, 1996 (Registration No.
33-99054);
10. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 33-99054), filed with the Commission on
January 16, 1996;
11. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 33-99054), filed with the Commission on
December 27, 1995;
32
<PAGE>
12. Pre-Effective Amendment to Registration Statement on Form SB-2
(Registration No. 33-99054), filed with the Commission on
November 7, 1995.
13. Final Prospectus, dated November 25, 1991 (Registration No.
33-41513);
14. Pre-Effective Amendment to Registration Statement on Form S-1
(Registration No. 33-41513), filed with the Commission on
November 25, 1991;
15. Pre-Effective Amendment to Registration Statement on Form S-1
(Registration No. 33-41513), filed with the Commission on
November 18, 1991;
16. Pre-Effective Amendment to Registration Statement on Form S-1
(Registration No. 33-41513), filed with the Commission on
October 15, 1991;
17. Pre-Effective Amendment to Registration Statement on Form S-1
(Registration No. 33-41513), filed with the Commission on July
1, 1991;
18. Post-Effective Amendment No. 2 to Registration Statement on
Form S-18 (Registration No. 33-25922), filed with the
Commission May 21, 1991;
19. Post-Effective Amendment No. 1 to Registration Statement on
Form S-18 (Registration No. 33-25922), filed with the
Commission May 21, 1991;
20. Final Prospectus, dated July 10, 1989 (Registration No.
33-25922);
21. Pre-Effective Amendment to Registration Statement on Form S-18
(Registration No. 33-25922), filed with the Commission on May
23, 1989;
22. Pre-Effective Amendment to Registration Statement on Form S-18
(Registration No. 33-25922), filed with the Commission on May
22, 1989;
23. Pre-Effective Amendment to Registration Statement on Form S-18
(Registration No. 33-25922), filed with the Commission on
March 29, 1989;
24. Pre-Effective Amendment to Registration Statement on Form S-18
(Registration No. 33-25922), filed with the Commission on
December 22, 1988;
33
EXHIBIT 10.2
FORM OF WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
TELIDENT, INC.
DATED
APRIL 13, 1998
THIS CERTIFIES THAT, for value received, _______________________(the
"Holder") or registered permitted assigns is entitled to purchase from TELIDENT,
INC., (the "Corporation"), a corporation organized and existing under the laws
of the State of Minnesota, at the purchase price per share specified below
(subject to adjustment as noted below) at any time or from time to time from and
after the date hereof to and including the Termination Date (as hereinafter
defined) 200,000 fully paid and nonassessable shares of the Corporation's Common
Stock, par value $0.08 per share (the "Warrant Stock") (subject to adjustment as
noted below). This Warrant has been issued in connection with the purchase from
the Corporation of series III convertible preferred shares of the Corporation
(the "Series III Preferred Stock") pursuant to a Stock Purchase Agreement dated
April 13, 1998 (the "Purchase Agreement"), by and among the Corporation, certain
other equity investors and the Holder. For purposes of this Warrant,
"Termination Date" shall mean 5:00 P.M. Minneapolis time on the second
anniversary of the Closing Date unless extended as provided herein. All
capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Purchase Agreement.
The purchase price of the Warrant Stock upon exercise of the Warrant
shall be $3.125 per share (the "Purchase Price"). The Purchase Price shall be
subject to adjustment as provided below.
The Holder may sell, transfer, assign or otherwise dispose of any of
its rights or obligations hereunder in accordance with applicable securities
laws.
This Warrant is subject to the following provisions, terms and
conditions:
1. This Warrant may be exercised by the Holder hereof, in whole or
in part, by written notice of exercise delivered to the Corporation along with
the surrender of this Warrant (properly endorsed if required) at the principal
office of the Corporation and upon payment to it by wire transfer of the
Purchase Price for the number of shares of Warrant Stock which the Holder elects
to purchase. The Corporation agrees that the shares so purchased shall be and
are deemed to be issued to the Holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. Subject to the
provisions of the
<PAGE>
next succeeding paragraph, certificates for the Warrant Stock so purchased shall
be delivered to the Holder hereof within a reasonable time, not exceeding two
(2) days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be delivered to the Holder hereof within such time.
2. Subject to the provisions of this Section 2, the Corporation
shall have the right to require the Holder to exercise this Warrant (the
"Call"), upon the Corporation's giving written notice to the Holder (the "Call
Notice"). The Call may be exercised at the option of the Corporation at any time
if the bid price of the Corporation's Common Stock on The NASDAQ SmallCap Market
(or such other market or exchange as such Common Stock may be traded) has
equaled or exceeded $4.375 per share (equitably adjusted to reflect stock
splits, stock dividends, reorganizations, consolidations and similar changes
hereafter effected) for a period of at least ten (10) consecutive trading days
immediately prior to the Call Notice. Upon receipt of such Call Notice, the
Holder (i) shall surrender this Warrant to the Corporation together with payment
of the Purchase Price for the number of shares of Warrant Stock to be purchased
on or before the fifteenth day following the Corporation's giving of the Call
Notice to the Holder, or (ii) shall decline to exercise the Warrant, in whole or
in part, whereupon the Warrant shall immediately terminate with respect to any
shares which the Holder does not exercise. If Holder purchases less than all of
the Warrant Stock within such fifteen (15) day period, the Warrant shall
immediately terminate with respect to all shares of Warrant Stock not so
purchased. Notwithstanding anything to the contrary contained herein, the
Corporation cannot exercise the Call at any time that the Registration Statement
required to be filed under Section 11.1 of the Purchase Agreement is not
effective. Additionally, the 15-day period described herein shall be extended by
the number of days during a period that such Registration Statement is subject
to a stop order or is otherwise not in effect or the holder is advised that the
prospectus included therein contains a material misstatement or omission.
3. The Corporation covenants and agrees that, the Warrant Stock
will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Corporation further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised, the
Corporation will, at all times have authorized and reserved for the purpose of
issue or transfer upon exercise of the rights evidenced by this Warrant, a
sufficient number of shares of Warrant Stock to provide for the exercise of the
rights represented by this Warrant.
4. The above provisions are, however, subject to the following:
2
<PAGE>
(a) The Purchase Price shall, from and after the date of issuance of
this Warrant, be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the Purchase Price, the Holder of this Warrant
shall thereafter be entitled to purchase, at the Purchase Price resulting from
such adjustment, the number of shares obtained by multiplying the Purchase Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Purchase Price resulting from such adjustment.
(b) Except for (i) options to purchase shares of Common Stock
pursuant to the Corporation's 1988 Stock Option Plan adopted by the Corporation
which are outstanding as of the date hereof and except for shares of Common
Stock issued upon the exercise of such options granted pursuant to such plan and
(ii) shares of Common Stock issued upon conversion of the Series III Preferred
Stock or exercise of this Warrant or other warrants or rights to purchase the
securities of the Corporation outstanding as of the date hereof, if and whenever
the Corporation shall issue or sell any additional shares of its Common Stock
for a consideration per share less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then, forthwith upon such issue or
sale, the Purchase Price shall be reduced to such lesser price as is determined
by multiplying the Purchase Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance or sale of such
additional shares and the number of shares of Common Stock which the aggregate
consideration received (determined in accordance with this paragraph 4) for the
issuance or sale of such additional shares would purchase at the Purchase Price
then in effect, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after the issuance or sale of such
additional shares.
(c) For the purposes of paragraph (b), the following provisions (i)
to (iii), inclusive, shall also be applicable:
(i) In case at any time the Corporation shall grant (whether
directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, (aa)
Common Stock or (bb) any obligations or any shares of stock of the
Corporation which are convertible into or exchangeable for Common Stock
(any of such obligations or shares of stock being hereinafter called
"Convertible Securities") whether or not such rights or options or the
right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by dividing (cc) the
total amount, if any, received or receivable by the Corporation as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Corporation
upon the exercise of
3
<PAGE>
such rights or options, plus, in the case of such rights or options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by
(dd) the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of such rights
or options) shall be less than the Purchase Price in effect immediately
prior to the time of the granting of such rights or options on the date of
such grant, then the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon conversion or
exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such rights or options shall (as of the date
of granting of such rights or options) be deemed to be outstanding and to
have been issued for such price per share. No further adjustments of the
Purchase Price shall be made upon the actual issue of such Common Stock or
of such Convertible Securities upon exercise of such rights or options or
upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities.
(ii) In case the Corporation shall issue or sell (whether directly
or by assumption in a merger or otherwise) any Convertible Securities,
whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (aa) the
total amount received or receivable by the Corporation as consideration
for the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (bb) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the
Purchase Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable
upon conversion or exchange of all such Convertible Securities shall (as
of the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued for such price per share,
provided that if any such issue or sale of such Convertible Securities is
made upon exercise of any rights to subscribe for or to purchase or any
option to purchase any such Convertible Securities for which adjustments
of the Purchase Price have been or are to be made pursuant to other
provisions of this paragraph (c), no further adjustment of the Purchase
Price shall be made by reason of such issue or sale.
(iii) In case any shares of Common Stock or Convertible Securities
or any rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for cash, the consideration received
therefor shall be deemed to be
4
<PAGE>
the amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions,
discounts or concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock or Convertible Securities or
any rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined by the Board of Directors of the Corporation, without deducting
therefrom any expenses incurred or any underwriting commissions, discounts
or concessions paid or allowed by the Corporation in connection therewith.
In case any shares of Common Stock or Convertible Securities or any rights
or options to purchase such Common Stock or Convertible Securities shall
be issued in connection with any merger or consolidation in which the
Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value as determined by the Board
of Directors of the Corporation of such portion of the assets and business
of the non-surviving corporation or corporations as such Board shall
determine to be attributable to such Common Stock, Convertible Securities,
rights or options, as the case may be. In the event of any consolidation
or merger of the Corporation in which the Corporation is not the surviving
corporation or in the event of any sale of all or substantially all of the
assets of the Corporation for stock or other securities of any other
corporation, the Corporation shall be deemed to have issued a number of
shares of its Common Stock for stock or securities of the other
corporation computed on the basis of the actual exchange ratio on which
the transaction was predicated and for a consideration equal to the fair
market value on the date of such transaction of such stock or securities
of the other corporation, and if any such calculation results in
adjustment of the Purchase Price, the determination of the number of
shares of Common Stock issuable upon exercise of this Warrant immediately
prior to such merger, conversion or sale, for purposes of paragraph (g)
below, shall be made after giving effect to such adjustment of the
Purchase Price.
(d) In case the Corporation shall (i) declare a dividend upon the
Common Stock payable in Common Stock (other than a dividend declared to effect a
subdivision of the outstanding shares of Common Stock, as described in paragraph
(e) below) or Convertible Securities, or in any rights or options to purchase
Common Stock or Convertible Securities, or (ii) declare any other dividend or
make any other distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus, then thereafter the Holder of this Warrant upon the
exercise hereof will be entitled to receive the number of shares of Warrant
Stock to which Holder shall be entitled upon such exercise, and, in addition and
without further payment therefor, each dividend described in clause (i) above
and each dividend or distribution described in clause (ii) above which Holder
would have received by way of dividends or distributions if continuously since
the issuance of this
5
<PAGE>
Warrant, Holder (i) had been the record Holder of the number of shares of
Warrant Stock then received, and (ii) had retained all dividends or
distributions in stock or securities (including Common Stock or Convertible
Securities, or in any rights or options to purchase any Common Stock or
Convertible Securities) payable in respect of such Warrant Stock or in respect
of any stock or securities paid as dividends or distributions and originating
directly or indirectly from such Warrant Stock. For the purposes of the
foregoing, a dividend or distribution other than in cash shall be considered
payable out of earnings or earned surplus only to the extent that such earnings
or earned surplus are charged an amount equal to the fair value of such dividend
or distribution as determined by the Board of Directors of the Corporation.
(e) In case the Corporation shall at any time subdivide its
outstanding shares of Common Stock into a greater number of shares, the Purchase
Price in effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock of the
Corporation shall be combined into a smaller number of shares, the Purchase
Price in effect immediately prior to such combination shall be proportionately
increased.
(f) If (i) the purchase price provided for in any right or option
referred to in clause (i) of paragraph (c), or (ii) the additional
consideration, if any, payable upon the conversion or exchange of Convertible
Securities referred to in clause (i) or clause (ii) of paragraph (c), or (iii)
the rate at which any Convertible Securities referred to in clause (i) or clause
(ii) of paragraph (c) are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against dilution), the Purchase Price then in effect shall forthwith
be increased or decreased to such Purchase Price which would have been obtained
had the adjustments made upon the issuance of such rights, options or
Convertible Securities been made upon the basis of (i) the issuance of the
number of shares of Common Stock theretofore actually delivered upon the
exercise of such options or rights or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor, and (ii)
the issuance at the time of such change of any such options, rights or
Convertible Securities then still outstanding for the consideration, if any,
received by the Corporation therefor and to be received on the basis of such
changed price; and on the expiration of any such option or right or the
termination of any such right to convert or exchange such Convertible
Securities, the Purchase Price then in effect hereunder shall forthwith be
increased to such Purchase Price which would have obtained had the adjustments
made upon the issuance of such rights or options or Convertible Securities been
made upon the basis of the issuance of the shares of Common Stock theretofore
actually delivered (and the total consideration received therefor) upon the
exercise of such rights or options or upon the conversion or exchange of such
Convertible Securities. If the purchase price provided for in any such right or
option referred to in clause (i) of paragraph (c) or the rate at which any
Convertible Securities referred to in
6
<PAGE>
clause (i) or clause (ii) of paragraph (c) are convertible into or exchangeable
for Common Stock shall decrease at any time under or by reason of provisions
with respect thereto designed to protect against dilution, then in case of the
delivery of Common Stock upon the exercise of any such right or option or upon
conversion or exchange of any such Convertible Security, the Purchase Price then
in effect hereunder shall forthwith be decreased to such Purchase Price as would
have obtained had the adjustments made upon the issuance of such right, option
or Convertible Securities been made upon the basis of the issuance of (and the
total consideration received for) the shares of Common Stock delivered as
aforesaid.
(g) If any capital reorganization or reclassification of the capital
stock of the Corporation, or consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that the holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Warrant Stock of the
Corporation immediately theretofore purchasable and receivable upon the exercise
of the rights represented hereby, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the Purchase Price and of the number of
shares purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Corporation)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
Holder hereof at the last address of Holder appearing on the books of the
Corporation, the obligation to deliver to Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, the Holder
may be entitled to purchase.
(h) In case any time:
7
<PAGE>
(1) the Corporation shall declare any cash dividend on
its Common Stock or preferred stock at a rate in excess of the rate
of the last cash dividend theretofore paid;
(2) the Corporation shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other than
regular cash dividends) to the holders of its Common Stock or
preferred stock;
(3) the Corporation shall offer for subscription pro
rata to the holders of its Common Stock or preferred stock any
additional shares of stock of any class or other rights;
(4) there shall be any capital reorganization, or
reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation; or
(5) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give written
notice, by first-class mail, postage prepaid, addressed to the registered Holder
of this Warrant at the address of the Holder as shown on the books of the
Corporation, of the date on which (aa) the books of the Corporation shall close
or a record shall be taken for such dividend, distribution or subscription
rights, or (bb) such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up shall take place, as the case may
be. Such notice shall also specify the date as of which the holders of Common
Stock of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. Such written notice shall be given at least 20 days prior to the action
in question and not less than 20 days prior to the record date or the date on
which the Corporation's transfer books are closed in respect thereto.
(i) If any event occurs as to which in the opinion of the Board of
Directors of the Corporation the other provisions of this paragraph 4 are not
strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the Holder of this Warrant or of Warrant Stock in accordance
with the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.
8
<PAGE>
(j) No fractional shares of Warrant Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which would
otherwise be issuable, the Corporation shall pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the Holder hereof upon such
exercise) in respect of such fraction in an amount equal to the same fraction of
the Market Price per share of Common Stock as of the close of business on the
date of the notice required by paragraph 1 above. "Market Price" shall mean, if
the Common Stock is traded on a securities exchange, the NASDAQ National Market
or on The NASDAQ SmallCap Market, the closing price of the Common Stock on such
exchange, the NASDAQ National Market or the NASDAQ SmallCap Market, or, if the
Common Stock is otherwise traded in the over-the-counter market, the closing
price, in each case averaged over a period of 20 consecutive business days prior
to the date as of which "Market Price" is being determined. If at any time the
Common Stock is not traded on an exchange, the NASDAQ National Market or The
NASDAQ SmallCap Market, or otherwise traded in the over-the-counter market, the
"Market Price" shall be deemed to be the higher of (i) the book value thereof as
determined by any firm of independent public accountants of recognized standing
selected by the Board of Directors of the Corporation as of the last day of any
month ending within 60 days preceding the date as of which the determination is
to be made, or (ii) the fair value thereof determined in good faith by the Board
of Directors of the Corporation as of a date which is within 15 days of the date
as of which the determination is to be made.
(k) Whenever the number of shares purchasable upon the exercise of
this Warrant or the Purchase Price is adjusted, as provided herein, the
Corporation shall promptly, but in no event more than 3 days following such
adjustment, give the Holder notice of such adjustment, certified by the chief
financial officer of the Corporation, setting forth the number of shares
purchasable upon exercise of the Warrant and the Purchase Price, the computation
by which such adjustment was made and a brief statement of the facts requiring
such adjustment.
5. As used herein, the term "Common Stock" shall include the
Corporation's presently authorized Common Stock and shall also include any
capital stock of any class of the Corporation 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
Corporation; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Corporation on the date of
original issue of this Warrant or, in the case of any reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
paragraph 4(g) above.
6. So long as this Warrant remains outstanding, the Corporation will
not issue any additional capital stock of any class preferred as to dividends or
as to the
9
<PAGE>
distribution of assets upon voluntary or involuntary liquidation, dissolution or
winding up, unless the rights of the holders thereof shall be limited to a fixed
sum or percentage of par, liquidation or redemption value in respect of
participation in dividends and in the distribution of such assets.
7. This Warrant shall not entitle the Holder hereof to any voting
rights or other rights as a stockholder of the Corporation.
8. The Holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Corporation before transferring this Warrant or
transferring any unregistered Warrant Stock issuable or issued upon the exercise
hereof of Holder's intention to do so, describing briefly the manner of any
proposed transfer of this Warrant or Holder's intention as to the disposition to
be made of shares of Common Stock issuable or issued upon the exercise hereof.
Holder shall also provide the Corporation with an opinion of counsel
satisfactory to the Corporation to the effect that the proposed transfer of this
Warrant or disposition of unregistered shares may be effected without
registration or qualification (under any Federal or State law) of this Warrant
or the shares of Common Stock issuable or issued upon the exercise hereof. Upon
receipt of such written notice and opinion by the Corporation, Holder shall be
entitled to transfer this Warrant, or to exercise this Warrant in accordance
with its terms and dispose of the shares received upon such exercise or to
dispose of shares of Common Stock received upon the previous exercise of this
Warrant, provided that an appropriate legend respecting the aforesaid
restrictions on transfer and disposition may be endorsed on this Warrant or the
certificates for such shares. The Holder and any assignee of the Holder shall be
entitled to the registration rights provided in Section 11 of the Purchase
Agreement.
9. Subject to the provisions of paragraph 8 hereof, this Warrant and
all rights hereunder are transferable, in whole or in part, by the Holder hereof
in person or by duly authorized attorney, upon surrender at the principal office
of the Corporation of this Warrant properly endorsed. Each taker and holder of
this Warrant, by taking or holding the same, consents and agrees that the bearer
of this Warrant, when endorsed, may be treated by the Corporation and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to the transfer hereof on the books of the Corporation, any notice to the
contrary notwithstanding; but until such transfer on such books, the Corporation
may treat the registered Holder hereof as the owner for all purposes.
10. This Warrant is exchangeable, upon the surrender hereof by the
Holder hereof at the principal office of the Corporation, for new Warrants of
like tenor representing in the aggregate the right to subscribe for and purchase
the number of shares which may be subscribed for and purchased hereunder, each
of such new Warrants to represent the right to
10
<PAGE>
subscribe for and purchase such number of shares as shall be designated by said
Holder hereof at the time of such surrender.
11. The Holder of this Warrant and of the Warrant Stock issuable or
issued upon the exercise hereof shall be entitled to the registration rights set
forth in Section 11 of the Purchase Agreement.
12. The obligations contained herein shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
13. All questions concerning this Warrant will be governed and
interpreted and enforced in accordance with the internal law of the State of
Minnesota.
14. Any notice required to be given to the Corporation under the
terms of this Warrant shall be in writing and addressed to the Secretary of the
Corporation at One Main Street, S.E., Suite 85, Minneapolis, Minnesota 55414.
Any notice required to be given to the Holder shall be in writing and addressed
to the Holder at 153 East 53rd Street, 51st Floor, New York, New York 10022, or
such other address as it may designate in writing from time to time. All notices
shall be deemed to have been given or delivered upon: personal delivery; five
(5) days after deposit in the United States Mail, certified or registered
(return receipt requested); one (1) business day after deposit with a nationally
recognized overnight courier (prepaid) or one (1) business day after
transmission by facsimile and receipt of confirmation of receipt by sender.
15. In the event that (i) (A) the Corporation shall fail for any
reason to deliver shares of Common Stock to a Holder upon any exercise of this
Warrant within the time period specified in Section 1 hereof, or (B) the Company
shall fail to remove any restrictive legend or any certificates evidencing such
shares of Common Stock as and when required under Section 4.3 of the Purchase
Agreement and (ii) thereafter, such Holder shall purchase (in an open market
transaction or otherwise) shares of Common Stock to make delivery in
satisfaction of a sale by such Holder of (A) all or a portion of the shares of
Common Stock which such Holder anticipated receiving upon such exercise, or (B)
all or a portion of such unlegended shares of Common Stock, as the case may be
(in each case, the "Sold Shares"), then the Corporation shall pay to such Holder
(in addition to any other remedies available to the Holder) the amount by which
(x) such Holder's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased shall exceed (y) the net proceeds
received by such Holder from the sale of the Sold Shares. The Corporation shall
make any payments required pursuant to this paragraph 15 within five (5)
business days after receipt of written notice from the Holder setting forth the
calculation of the amount due hereunder.
11
<PAGE>
16. The Termination Date of this Warrant shall be extended by the
number of days that any of the following events has occurred and is continuing:
(i) commencing ninety-one (91) days after the date hereof, the Registration
Statement required to be filed under Section 11.1 of the Purchase Agreement is
not effective, or (ii) such Registration Statement is subject to a stop order or
is otherwise not in effect or the Holder is advised that the prospectus included
therein contains a material misstatement or omission.
12
<PAGE>
IN WITNESS WHEREOF, the Corporation and the Holder have caused this
Warrant to be signed by their duly authorized officers as of April 13, 1998.
TELIDENT, INC.
----------------------------------------------
By: W. Edward McConaghay
Its: President and Chief Executive Officer
----------------------------------------------
By:
-----------------------
Its:
------------------
13
<PAGE>
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without (i)
an opinion of counsel reasonably satisfactory to the Corporation that such
transfer may be lawfully made without registration under the Federal Securities
Act of 1933 and all applicable state securities laws or (ii) such registration.
14
<PAGE>
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
this Warrant, and appoints
to transfer this Warrant on the books of the Corporation with the full power of
substitution in the premises.
Dated:
In the presence of:
------------------------------------------
(Signature must conform in all respects to
the name of the Holder as specified on the
face of this Warrant without alteration,
enlargement or any change whatsoever)
15
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Holder of This Warrant if Holder
Desires to Exercise This Warrant in Whole or in Part:
To: Telident, Inc. (the "Corporation")
The undersigned ________________________________
Please insert Social Security or other
identifying number of Subscriber:
______________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, _________ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the
Corporation in the amount of $_________, such payment being made as provided on
the face of this Warrant.
The undersigned requests that certificates for such shares of Common
Stock be issued as follows:
Name:
---------------------------------------------------
Address:
---------------------------------------------------
Deliver to:
---------------------------------------------------
Address:
---------------------------------------------------
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
-----------------------
Signature
-------------------------------------
Note: The signature on this
Subscription Form must correspond
with the name as written upon the
face of this Warrant in every
particular, without alteration or
enlargement or any change whatever.
16
EXHIBIT 10.3
FORM OF PURCHASE WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
TELIDENT, INC.
DATED
JUNE 30, 1997
THIS CERTIFIES THAT, for value received, _________________________
(the "Holder"), or registered permitted assigns, is entitled to purchase from
TELIDENT, INC. (the "Corporation"), a corporation organized and existing under
the laws of the State of Minnesota, at the purchase price per share specified
below (subject to adjustment as noted below) at any time or from time to time
from and after the date hereof to and including the Termination Date (as
hereinafter defined) up to _________________________ fully paid and
nonassessable shares of the Corporation's Common Stock, par value $0.02 per
share (the "Common Stock") (subject to adjustment as noted below). This Warrant
has been issued in connection with the conversion of that certain 10%
Convertible Debenture and/or 10% Series B Convertible Debenture issued by the
Company to the Holder in the aggregate principal amount of $__________ (the
"Debenture"). For purposes of this Warrant, "Termination Date" shall mean 5:00
P.M. Minneapolis time on the second anniversary hereof, unless extended as
provided herein.
The purchase price shall be $1.41 per share (the "Purchase Price").
The Purchase Price shall be subject to adjustment as provided below.
The Holder may sell, transfer, assign or otherwise dispose of any of
its rights or obligations hereunder in accordance with applicable securities
laws.
This Warrant is subject to the following provisions, terms and
conditions:
1. This Warrant may be exercised by the Holder hereof, in whole or
in part, by written notice of exercise delivered to the Corporation thirty (30)
days prior to the intended date of exercise along with the surrender of this
Warrant (properly endorsed if required) at the principal office of the
Corporation and upon payment to it by wire transfer of the Purchase Price for
the number of shares of Common Stock which the Holder elects to purchase. The
Corporation agrees that the shares so purchased shall be and are deemed to be
issued to the Holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Subject to the provisions of the next
succeeding paragraph, certificates for the shares of stock so purchased shall be
delivered to the Holder hereof within a reasonable time, not exceeding 10 days,
after the rights represented by this Warrant shall have been so exercised, and,
unless this Warrant has expired, a new Warrant representing the number of
shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the Holder hereof within such time.
<PAGE>
2. The Corporation shall have the right to require the Holder to
exercise this Warrant in full or forego all rights under this Warrant (the
"Call"), and the Holder agrees to exercise this Warrant in full or forego all
such rights (to the extent this Warrant has not previously been exercised), upon
the Corporation's giving written notice to the Holder (the "Call Notice"). The
Call may be exercised at the option of the Corporation at any time if the
average of the bid price of the Corporation's Common Stock on The NASDAQ
SmallCap Market (or such other market or exchange as such Common Stock may be
traded) has equaled or exceeded $1.97 per share for a period of at least ten
(10) consecutive trading days immediately prior to the Call Notice. Upon receipt
of such Call Notice, the Holder shall surrender this Warrant to the Corporation
and, if the Holder intends to exercise this Warrant, along with payment of the
Purchase Price for the Common Stock to be purchased on or before the fifteenth
(15th) day following the Corporation's giving of the Call Notice to the Holder.
If the Corporation gives the Call Notice to the Holder and the Holder does not
exercise the Warrant in full within such fifteen (15) day period, this Warrant
shall be null and void and of no further force and effect.
3. The Corporation covenants and agrees that all shares which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized and issued, fully paid and nonassessable.
4. The above provisions are subject to the following:
(a) The Purchase Price shall, from and after the date of issuance of
this Warrant, be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the Purchase Price, the Holder of this Warrant
shall thereafter be entitled to purchase, at the Purchase Price resulting from
such adjustment, the number of shares obtained by multiplying the Purchase Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Purchase Price resulting from such adjustment.
(b) In case the Corporation shall at any time subdivide or combine
its outstanding shares of Common Stock into a greater number of shares, the
Purchase Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination shall
be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Corporation, or consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that the holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the
2
<PAGE>
Corporation immediately theretofore purchasable and receivable upon the exercise
of the rights represented hereby, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof.
(d) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which would
otherwise be issuable, the Corporation shall pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the Holder hereof upon such
exercise) in respect of such fraction in an amount equal to the same fraction of
the Market Price per share of Common Stock as of the close of business on the
date of the notice required by paragraph 1 above. "Market Price" shall mean, if
the Common Stock is traded on a securities exchange or on The NASDAQ SmallCap
Market, the closing price of the Common Stock on such exchange or the NASDAQ
SmallCap Market, or, if the Common Stock is otherwise traded in the
over-the-counter market, the closing price, in each case averaged over a period
of 20 consecutive business days prior to the date as of which "Market Price" is
being determined. If at any time the Common Stock is not traded on an exchange
or The NASDAQ SmallCap Market, or otherwise traded in the over-the-counter
market, the "Market Price" shall be the fair value thereof determined in good
faith by the Board of Directors of the Corporation as of a date which is within
15 days of the date as of which the determination is to be made.
5. As used herein, the term "Common Stock" shall include shares
designated as Common Stock of the Corporation on the date of original issue of
this Warrant or, in the case of any reclassification of the outstanding shares
thereof, the stock, securities or assets provided for in paragraph 4(c) above.
6. This Warrant shall not entitle the Holder hereof to any voting
rights or other rights as a stockholder of the Corporation.
7. The Holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Corporation before transferring this Warrant or
transferring any unregistered Common Stock issuable or issued upon the exercise
hereof of Holder's intention to do so, describing briefly the manner of any
proposed transfer of this Warrant or Holder's intention as to the disposition to
be made of shares of Common Stock issuable or issued upon the exercise hereof.
Holder shall also provide the Corporation with an opinion of counsel
satisfactory to the Corporation to the effect that the proposed transfer of this
Warrant or disposition of unregistered shares may be effected without
registration or qualification (under any Federal or State law) of this Warrant
or the shares of Common Stock issuable or issued upon the exercise hereof. Upon
receipt of such written notice and opinion by the Corporation, Holder shall be
entitled to transfer this Warrant, or to exercise this
3
<PAGE>
Warrant in accordance with its terms and dispose of the shares received upon
such exercise or to dispose of shares of Common Stock received upon the previous
exercise of this Warrant, provided that an appropriate legend respecting the
aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for such shares.
8. Subject to the provisions of paragraph 7 hereof, this Warrant and
all rights hereunder are transferable, in whole or in part, by the Holder hereof
in person or by duly authorized attorney, upon surrender at the principal office
of the Corporation of this Warrant properly endorsed. Each taker and holder of
this Warrant, by taking or holding the same, consents and agrees that the bearer
of this Warrant, when endorsed, may be treated by the Corporation and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to the transfer hereof on the books of the Corporation, any notice to the
contrary notwithstanding; but until such transfer on such books, the Corporation
may treat the registered Holder hereof as the owner for all purposes.
9. The obligations contained herein shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
10. All questions concerning this Warrant will be governed and
interpreted and enforced in accordance with the internal law of the State of
Minnesota.
11. Any notice required to be given to the Corporation under the
terms of this Warrant shall be in writing and addressed to the Secretary of the
Corporation at One Main Street, S.E., Suite 85, Minneapolis, Minnesota 55414.
All notices shall be deemed to have been given or delivered upon: personal
delivery; five (5) days after deposit in the United States Mail, certified or
registered (return receipt requested); or one (1) business day after deposit
with a nationally recognized overnight courier (prepaid).
IN WITNESS WHEREOF, the Corporation and the Holder have caused this
Warrant to be signed effective June 30, 1997.
TELIDENT, INC.
-----------------------------------------
W. Edward McConaghay,
President and Chief Executive Officer
4
<PAGE>
HOLDER
For an Entity:
-----------------------------------------
Print Name of Entity
By:
--------------------------------------
Print Name:
---------------------------
Its:
----------------------------------
For an Individual:
-----------------------------------------
Print Name:
------------------------------
5
<PAGE>
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without (i)
an opinion of counsel reasonably satisfactory to the Corporation that such
transfer may be lawfully made without registration under the Federal Securities
Act of 1933 and all applicable state securities laws or (ii) such registration.
<PAGE>
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
this Warrant, and appoints
to transfer this Warrant on the books of the Corporation with the full power of
substitution in the premises.
Dated:
In the presence of:
----------------------------------------
(Signature must conform in all respects
to the name of the Holder as specified
on the face of this Warrant without
alteration, enlargement or any change
whatsoever)
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Holder of This Warrant if Holder
Desires to Exercise This Warrant in Whole or in Part:
To: Telident, Inc. (the "Corporation")
The undersigned ________________________________
Please insert Social Security or other
identifying number of Subscriber:
______________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, __________ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the
Corporation in the amount of $__________, such payment being made as provided on
the face of this Warrant.
The undersigned requests that certificates for such shares of Common
Stock be issued as follows:
Name:
---------------------------------------------------
Address:
---------------------------------------------------
Deliver to:
---------------------------------------------------
Address:
---------------------------------------------------
<PAGE>
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
------------------------
For an Entity:
-----------------------------------------
Print Name of Entity
By:
--------------------------------------
Print Name:
---------------------------
Its:
----------------------------------
For an Individual:
-----------------------------------------
Print Name:
------------------------------
Note: The signature on this Subscription Form must correspond with the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatever.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-25922C of Telident, Inc. on Form S-8 and Registration Statement No.
33-99054 of Telident, Inc. on Form S-3 of our report dated July 31, 1998 (August
18, 1998 as to Note 7) in the Annual Report on Form 10-KSB of Telident, Inc. for
the fiscal year ended June 30, 1998.
Deloitte & Touche LLP
Minneapolis, Minnesota
August 18, 1998
Exhibit 99.1
TELIDENT, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------
Actual Adjustment* Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 258,875 $1,000,000 $1,258,875
Trade accounts receivable, net of
allowance for doubtful accounts of $30,000 508,956 508,956
Inventories 285,708 285,708
Other 76,088 76,088
------------ ---------- ----------
Total current assets 1,129,627 1,000,000 2,129,627
FURNITURE AND OFFICE EQUIPMENT, less
accumulated depreciation of $298,955 209,435 209,435
INTANGIBLE ASSETS, less accumulated
amortization of $166,986 289,672 289,672
OTHER ASSETS 83,055 (33,200) 49,855
------------ ---------- ----------
$ 1,711,789 $ 966,800 $2,678,589
============ ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 95,271 $ 95,271
Trade accounts payable 168,069 168,069
Accrued expenses 118,123 118,123
Deferred revenue 21,053 21,053
Current portion of long-term debt 101,519 101,519
------------ ----------
Total current liabilities 504,035 504,035
LONG-TERM DEBT, less current portion 31,825 31,825
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.08 par value, 2,500,000
shares authorized
Series I 3,000 3,000
Series III $ 32,000 32,000
Common stock, $.08 par value,
10,000,000 shares authorized,
2,787,297 shares outstanding 222,933 222,933
Additional paid-in capital 14,612,497 934,800 15,547,297
Accumulated deficit (13,662,501) (13,662,501)
------------ ---------- ----------
Total shareholders' equity 1,175,929 966,800 2,142,729
------------ ---------- ----------
$ 1,711,789 $ 966,800 $2,678,589
============ ========== ==========
</TABLE>
*Reflects the receipt of $1 million from the issuance of 400,000 shares of
Series III Convertible Preferred Stock in August 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 258,875
<SECURITIES> 0
<RECEIVABLES> 538,956
<ALLOWANCES> (30,000)
<INVENTORY> 285,708
<CURRENT-ASSETS> 1,129,627
<PP&E> 501,390
<DEPRECIATION> 291,955
<TOTAL-ASSETS> 1,711,789
<CURRENT-LIABILITIES> 504,035
<BONDS> 31,825
0
3,000
<COMMON> 222,933
<OTHER-SE> 949,996
<TOTAL-LIABILITY-AND-EQUITY> 1,711,789
<SALES> 2,269,000
<TOTAL-REVENUES> 2,269,000
<CGS> 705,088
<TOTAL-COSTS> 705,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,656
<INCOME-PRETAX> (601,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (601,115)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
