SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
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 per share
Check whether the issuer: (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 [ ].
The registrant's revenues for its most recent fiscal year: $ 2,677,869
Aggregate market value of voting stock held by non-affiliates of registrant as
of August 18, 1999: Approximately $2,737,410.
Number of shares outstanding as of August 31, 1999; 3,037,657 shares of Common
Stock, par value $.08 per share, and 400,000 shares of Series III Convertible
Preferred Stock, par value $.08 per share.
Transitional Small Business Disclosure format: Yes [ ] No [X].
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held November 2, 1999, a definitive copy of which will be
filed with the SEC within 120 days of June 30, 1999, are incorporated by
reference into Items 9, 10, 11 and 12 of Part III of this Form 10-KSB.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I ....................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS.............................................................................1
ITEM 2. DESCRIPTION OF PROPERTY.............................................................................5
ITEM 3. LEGAL PROCEEDINGS...................................................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................5
PART II ....................................................................................................6
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...............8
ITEM 7. FINANCIAL STATEMENTS...............................................................................14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............26
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.....................................................26
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................................................26
SIGNATURES ...................................................................................................28
EXHIBIT INDEX ...................................................................................................29
</TABLE>
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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
We design, manufacture and market 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 who receives the call.
Telident'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 private businesses and public
institutions that own or operate private telephone systems (PBX). We also
manufacture and market systems that direct emergency calls to the correct 911
response center and which are used to create emergency networks for public and
private telephone networks and governmental agencies.
Our products utilize existing Enhanced 911 technology (E911) which automatically
transmits both the caller's telephone number and address to the nearest
emergency dispatcher. Over two-thirds of the telephone systems in the United
States have access to this enhanced technology. Despite this level of access,
generally only individual telephones (such as residential telephones) connected
to the public telephone company are able to take advantage of this enhanced
technology. Private telephone systems, such as those used by private businesses
and public institutions, generally do not have the ability to send a caller's
location to an emergency 911 dispatcher without equipment such as ours. Our
products work with enhanced technology to transmit the precise location, and
generally the caller's name, to the nearest emergency dispatcher through the
existing enhanced public network. As of June 30, 1999, six states had adopted
legislation mandating the modification of certain private telephone systems to
make them fully compatible with existing 911 technology. We believe other states
are considering such legislation.
The primary markets for our systems and services include a wide variety of
private telephone system owners such as:
* Medium to large corporations
* Colleges and universities
* City, county and state government offices
* Public schools
* Apartments and condominiums
* Nursing and retirement homes
* Hotels and motels
* Hospitals and clinics
HISTORY
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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 in the network. The designers of the enhanced
911 network may not have envisioned the popularity and deployment of PBX systems
in the United States.
1
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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
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Telident 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 SRU1), a
system which permits operating telephone companies to increase dedicated phone
services capabilities. Based on a review of the market for the SRU1, Telident
determined that there was a significant market opportunity for products, based
on the technology of the SRU1, which could expand the capabilities, safety and
reliability of emergency 911 service systems. Since 1989, the Company's goal has
been to become a leading designer of systems that enable precise identification
of the location of 911 callers within a PBX system.
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 or STS) 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 software
applications, 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 public safety
answering point 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 major distributors of PBX equipment and services and telephone
companies. Telident also has distribution agreements with most PBX manufacturers
and many independent PBX distributors and systems integrators. 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. During fiscal 1999, sales to one major telephone
equipment manufacturer amounted to 11% of total sales revenue.
PRIMARY PRODUCTS
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9-1-1 STS(TM) (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 public
safety answering point 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 11 manufacturers, who account for over 90% of domestic PBX sales.
The Company has more than 1,100 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.
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TRAX OSN(TM) (ON-SITE NOTIFICATION) is a software program which enhances the
STS. With TRAX OSN, the STS will simultaneously provide (a) automatic
identification to the public safety answering point of the location of the
caller within a PBX system and (b) on-site notification of the call to a
location within the organization, such as a security desk, reception desk 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 at the same time those calls are received at the
public safety answering point.
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.
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 telephone companies; 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 employs sales representatives at its headquarters to market directly to
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, as of June 30,
1999, Texas, Illinois, Washington, Kentucky, Vermont and Mississippi had 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. The FCC mandate has yet to be issued.
PRODUCT DEVELOPMENT
- -------------------
The Company uses a combination of employees and outside contract development
companies to design and develop new products for the telephone industry and to
support developments of new application software to broaden applications of its
existing products. The research and development portion of the Company's
development expenditures for fiscal 1999 and 1998 were $131,112 and $124,674,
respectively. New research and development projects will be initiated and funded
as customer requirements and commitments are realized. Future products will
continue to be developed by a combination of employees and outside contract
development companies.
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MANUFACTURING
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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.
COMPETITION
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The Company is aware of two competitors that market a product that 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. Furthermore, some customers prefer to use ISDN
technology from telephone companies to provide basic 911 translation ability
rather than use an external device such as Telident's STS. The Company believes
that these products are more limited in capability than the Company's solutions
and may not be appropriate for a large number of installed PBXs due to the
expense of the upgrades required to accommodate them. While precise numbers are
not available, the Company believes that none of these competitive alternatives
is dominant in the PBX 911 market. Telident'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. Notwithstanding
competition against its STS equipment, the Company believes that it has the
industry leading on-site notification and database management software
applications and a high level of expertise in implementing these capabilities to
various business telephone systems. Furthermore, the Company's total 911 systems
knowledge and turnkey project management and installation services distinguish
it from other suppliers.
COOPERATION WITH TELEPHONE COMPANIES
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The attractiveness of our product to the public depends, in part, on the tariffs
filed by local or regional telephone companies. We depend, and our customers
depend, upon the cooperation of local telephone companies for the installation
and operation of our products. If the pricing for network interfaces or database
access provided by telephone companies is not favorable to our products, or if
telephone companies are uncooperative, our sales in the affected market may
drop.
We have experienced delays with Ameritech, the telephone company for Illinois,
Michigan, Ohio, Indiana and Wisconsin. We believe that other telephone equipment
manufacturers and related service providers have similar difficulties with
Ameritech. We have installed and continue to install working systems in these
states: however, we have experienced 120 to 150 day delays by Ameritech in the
installation of requested network interfaces throughout this territory. Although
the delays have not had a material adverse effect on our business, we have
established a joint working committee with Ameritech to explore ways to improve
our processes so that completion of projects for our customers are not unduly
delayed. There can be no assurance that we will be successful in these
endeavors.
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PATENTS AND PROPRIETARY INFORMATION
- -----------------------------------
The Company has obtained United States patents on its STS and SRU1 designs which
expire on August 10, 2010 and December 12, 2005, respectively. The Company has
applied for international patents with respect to the STS design. 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), Site-Alert(TM), Tel-Alert(TM), and 911
Solutions(TM).
REGULATION
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The 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. At June 30,1999, the Company's
equipment met both FCC and UL requirements.
EMPLOYEES
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At June 30, 1999, the Company had 17 employees, consisting of two
administrative, six sales and marketing, and nine operations and development
personnel. Periodically, the Company employs contract employees as needed to
meet business requirements.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company currently leases 7,700 square feet of office and final assembly
space in Minneapolis at a monthly rental of approximately $9,600. The leases
expire in September 1999 and the Company is exploring leasing alternatives. We
are able to extend our lease in our existing space on comparable terms. 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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following table provides information with respect to Telident's executive
officer as of June 30, 1999. The executive officer has been appointed to serve
until his succesor is duly apointed by the Board of Directors or his earlier
removal or resignation from office.
Name Age Position
---- --- --------
W. Edward McConaghay 50 President and Chief Executive Officer
W. Edward McConaghay has been the President, Chief Executive Officer and a
member of the Board of Directors of the Company since April 1997. He was
President and Chief Executive Officer of Digital Technics, a telecommunications
firm, from 1996 to 1997. During 1995, he was a principal in Key
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Indicators, a consulting firm specializing in new product and market development
for information and technology based businesses. He was Senior Vice President of
Sales and Marketing for Deluxe Corporation, a Minnesota check and business forms
printing company, from December 1993 to January 1995. From 1983 to 1993 , he
served in various executive positions at Northern Telecom, Ltd. Mr. McConaghay
currently serves on the board of directors of Medical Graphics Corporation, a
designer and provider of solutions for innovative and non-invasive medical
diagnostic systems.
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 Nasdaq SmallCap Market. 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 to reflect the 4:1 reverse stock split on January 13, 1998.
Bid Prices
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High Low
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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
Fiscal 1999
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Quarter ended September 30, 1998 $ 2.38 $ 1.13
Quarter ended December 31, 1998 2.25 0.72
Quarter ended March 31, 1999 7.25 1.06
Quarter ended June 30, 1999 2.25 1.19
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At June 30, 1999, the number of holders of the Company's common stock was
approximately 1,539 consisting of 297 record holders and approximately 1,242
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 payment of
dividends, if any, is at 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 does not plan to issue any cash dividends.
During fiscal 1999, holders of Series I convertible preferred stock agreed to
relinquish their cumulative dividend rights in exchange for a reduction in the
conversion rate. These shareholders subsequently exercised their conversion
rights and converted their shares to common stock during the third quarter of
fiscal 1999. The Company did not have accumulated preferred stock dividends at
June 30, 1999.
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RECENT SALES OF UNREGISTERED SECURITIES
In April 1998, Telident entered into a securities purchase agreement with FAMCO
III, Limited Liability Company (FAMCO) and Special Situations Private Equity
Fund, L.P. (Special Situations), pursuant to which FAMCO and Special Situations
each purchased 200,000 shares of Series III convertible preferred stock and
warrants to purchase 200,000 shares of common stock yielding aggregate gross
proceeds of $1,000,000 in cash. Family Financial Strategies, Inc. is the manager
of FAMCO. John Wunsch and Greg Nelson are the sole officers and directors of
Family Financial Strategies. Mr. Wunsch has also been a director of Telident
since July 1997. MG Advisors, L.L.C. acts as general partner of and investment
advisor to Special Situations. Austin W. Marxe and David Greenhouse are the sole
members of MG Advisors.
In general, the 400,000 outstanding shares of Series III convertible preferred
stock are convertible at a floating rate which depends on the 10-day average
closing bid price of the common stock at the time of conversion. The following
conversion formula applies to the preferred stock:
$2.50
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The lesser of (i) $2.50 or (ii) if the 10-day average closing
bid price of the common stock is less than $2.50, then 80% of
such average price
Based on the 10-day average closing price of approximately $1.34 per share for
the period ending August 31, 1999, FAMCO and Special Situations would have been
entitled to convert each preferred share into approximately 2.33 common shares.
Pursuant to a modification agreement, Telident amended the conversion terms that
apply to Special Situations, the owner of 200,000 shares of preferred stock. The
modification agreement only applies to those shares of common stock which
Special Situations receives upon conversion and sells before the last date that
the closing bid price of the common shares exceeds $1.75 for a period of 10
consecutive trading days. During this special conversion period, the phrase "80%
of such average price" in the conversion formula shall not exceed $0.785. In
other words, as to those shares which Special Situations is able to sell during
the special conversion period, the conversion rate will be approximately 3.18
shares of common stock, as opposed to approximatley 2.33 shares of common stock
which would otherwise be received upon conversion, for each share of preferred
stock. Depending upon the 10-day average closing price at the time of
conversion, Telident's average daily trading volume may prevent Special
Situations from converting all of its preferred stock during the special
conversion period. At the end of the special conversion period, the conversion
rate set forth in the modification agreement will no longer apply to the shares
of preferred stock then owned Special Situations.
The actual number of common shares issuable upon conversion of the shares of
preferred stock is subject to adjustment depending on factors that cannot be
predicted at this time, such as the future market price of the common stock. The
preferred stock also contains antidilution rights which provide that the number
of shares issuable upon conversion will be increased if Telident issues new
securities at a price less than $2.50 per share.
FAMCO and Special Situations are entitled to dividends if dividends are paid on
the common stock. If dividends are paid on the common stock, a comparable
dividend must be paid on the preferred stock. No cumulative dividends are
currently outstanding on Telident's preferred stock.
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In connection with their purchase of preferred stock, FAMCO and Special
Situations each received warrants to purchase 200,000 shares of common stock.
Such warrants are exercisable at $3.125 per share and they expire in October
2000. These warrants also contain antidulition rights which provide that the
number of shares issuable upon exercise will be increased if Telident issues new
securities at a price less than $2.50 per share. Telident may call the warrants
if the bid price of the common stock equals or exceeds $4.375 per share for at
least 10 consecutive trading days immediately before the call. Telident may not
call the warrants during any period in which the registration of the shares
underlying the warrants is not effective.
In May 1999, Telident registered for resale the shares of common stock issuable
upon conversion of the Series III convertible preferred stock and the shares of
common stock issuable upon exercise of the related warrants.
In March 1999, Telident issued 10,000 shares of common stock to Manchester
Financial Group, Inc. (Manchester) in connection with Manchester's March 1999
agreement to provide consulting services. Mark W. Sheffert, chairman of
Telident's board of directors is the President of Manchester Financial Group.
These issuances were made in reliance upon the exemption provided in Section
4(2) of the Securities Act. The foregoing securities are restricted as to sale
or transfer, unless registered under the Securities Act, and certificates
representing such securities contain restrictive legends preventing sale,
transfer or other disposition unless registered under the Securities Act. In
addition, the recipients of such securities received, or had access to, material
information concerning Telident including but not limited to Telident's reports
on Form 10-KSB, Form 10-QSB and Form 8-K, as filed with the SEC. No underwriting
commissions or discount were paid with respect to the issuances of such
securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
Telident was incorporated in July 1983 and currently 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 who receives the call. From inception to March 31, 1998,
the Telident incurred losses from operations because product sales had not
covered expenses. During fiscal 1998, Telident reduced operating expenses by
closing three sales offices and changing to inside telephone sales
representatives, reduced the use of consultants and outside professional
services and limited research and development expenditures to projects that had
immediate sales potential. Telident also changed its product offering to
increase services and software content to increase margins. The impact of these
changes was realized by the end of fiscal 1998 with a profitable fourth quarter.
During fiscal 1999, Telident generated net income for the year for the first
time in its history. Due to the impact of preferred stock deemed dividends on
reported per share results the Company modified the conversion terms of the
Series I convertible preferred stock to eliminate dividends. As a result of the
modification, all of the Series I convertible preferred stock was converted to
common stock during the year. No cumulative dividends are currently outstanding
on Telident's preferred stock.
During fiscal 1998, Telident retained the investment banking firm of Manchester
Financial Group, Inc. to assist it with the exploration of strategic options for
the Company, which may include the acquisition of or merger with another company
or the sale of Telident to another company. Mark W. Sheffert, chairman of
Telident's board of directors, is the President of Manchester Financial Group,
Inc.
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Telident received gross proceeds of $1,250,000 and $1,000,000 from the sales of
preferred stock and warrants in the first quarter of fiscal year 1998 and 1999,
respectively. The proceeds from the private placements were used to increase
Telident's liquidity and to meet the Nasdaq SmallCap Market's requirements for
continued listing. At the time of issuance, the preferred stock contained
beneficial conversion features which increased the net loss applicable to common
shareholders or decreased the net income applicable to common shareholders. The
value of the beneficial conversion feature relating to the sale of preferred
stock in fiscal year 1998, $312,500, increased the net loss applicable to common
shareholders by $0.16 per share for the year. The value of the beneficial
conversion feature relating to the sale of preferred stock in fiscal year 1999,
$250,000, caused the Company to report a net loss applicable to common
shareholders instead of a net profit. The value of the beneficial conversion
feature increased the net loss applicable to common shareholders by $0.09 per
share for the year ended June 30, 1999. The preferred stock sold in the first
quarter of fiscal 1998 was converted into 1,052,189 shares of common stock in
the fourth quarter of fiscal 1998.
Based on projected revenue and expenses, Telident believes the $1,000,000 equity
transaction in fiscal year 1999, together with cash from operations, will be
adequate to fund the Company's working capital requirements at least through
June 30, 2000.
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
(DECREASE)
FISCAL YEAR -------------------------
----------- 1999 1998
1999 1998 1997 OVER 1998 OVER 1997
------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 18.0% 29.3%
Cost of sales 26.8 31.1 32.6 1.6 23.5
Inventory revaluation -- -- 13.7 -- (100.0)
----- ----- ------
Gross profit 73.2 68.9 53.7 25.4 65.8
Sales and marketing 18.2 33.8 71.2 (36.3) (38.7)
Product development and operations 17.8 25.1 58.6 (16.2) (44.5)
General and administrative 33.7 35.3 67.8 12.7 (32.7)
Restructuring charges -- -- 22.3 -- (100.0)
----- ----- ------
Total operating expenses 69.7 94.2 219.9 (12.6) (44.6)
----- ----- ------
Operating income (loss) 3.5 (25.3) (166.2) 116.2 80.3
Interest income (expense), net 0.8 (1.2) (10.4) 179.2 (85.0)
Debt conversion expense -- -- (38.8) -- (100.0)
----- ----- ------
Net income (loss) 4.3% (26.5)% (215.4)% 119.1 84.1
===== ===== ======
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales in fiscal 1999 increased 18.0% to $2,677,869 compared to $2,269,000 in
fiscal 1998. This growth was attributed to Telident's sales and marketing
strategies to promote its hardware and software in bundled packages and to sell
through direct marketing. At June 30, 1999, Telident had a backlog of orders of
approximately $582,000.
9
<PAGE>
Gross margin percentage increased to 73.2% of revenue in fiscal 1999 from 68.9%
in fiscal 1998. Increased margins were achieved through decreased material costs
and increased sales volumes in service sales.
Operating expenses decreased 12.6% to $1,868,470 in fiscal 1999 compared to
$2,137,591 in fiscal 1998 due to:
* Sales and marketing expenses decreased 36.3% to $487,903 in 1999
compared to $766,080 in 1998. During fiscal 1998, Telident reduced
the size of its direct sales force and closed its offices in
California, Texas, and Illinois and replaced them with lower cost
sales representatives located at Telident's headquarters. The full
impact of these reductions was reflected in the fiscal 1999 results.
* Product development and operations expenses decreased 16.2% to
$478,171 in 1999 compared to $570,795 in fiscal 1998. In fiscal
1999, Telident reduced its operations personnel and use of
consultants.
* General and administrative expenses increased 12.7% to $902,396 in
1999 compared to $800,716 in 1998. The increase was primarily due to
fees for investment banking services as Telident is exploring
strategic options which may include a merger, acquisition or sale of
the Company.
Interest income increased $24,267 in fiscal 1999 due to higher average
investment balances as a result of the private placement of preferred stock in
August 1998 which generated net proceeds of $905,600. Interest expense decreased
$24,905 in fiscal 1999 compared to fiscal 1998. Telident experienced a decrease
in interest expense for fiscal 1999 as a result of decreases in average bank
borrowings and due to an amendment to its credit agreement which reduced the
interest rate charged to Telident.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales in fiscal 1998 increased 29.3% to $2,269,000 compared to $1,754,451 in
fiscal 1997. This growth was attributed to Telident'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. Telident'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.
Gross margin percentage increased to 68.9% of revenue in fiscal 1998 from 53.7%
of revenue in fiscal 1997. The primary reasons for the increase were the higher
cost of goods sold including the inventory revaluation of $240,245 in 1997 and
an increase in software sales, improved operating efficiencies, better control
over service costs, and increased sales volumes in software related products in
1998. The 1997 inventory revaluation consisted of $130,245 for specific
inventory that was not used in the production process, $35,000 for inventory
relating to the discontinued Cantus line, and the recording of a $75,000 reserve
for specifically identified items that would not be used in the future.
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 1997. During fiscal 1998, the Telident
reduced the size of its direct sales force and closed its offices in
California, Texas, and Illinois and replaced them with lower cost
sales representatives located at company headquarters.
10
<PAGE>
* Product development and operations expenses decreased 44.5% to
$570,795 in 1998 compared to $1,028,464 in 1997. In 1998, Telident
reduced its operations personnel and use of consultants.
Furthermore, research and development spending was limited on
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 1997. These decreases were due to
reduced general and administrative personnel, fewer outside
professional services, and lower rent.
* Restructuring charges of $391,519 were recorded in the third quarter
of fiscal 1997 as a result of Telident's decision to discontinue the
production and sale of its Cantus products and decrease the number
of employees to reduce expenses. Telident expensed the remaining net
book value of goodwill associated with the fiscal 1995 acquisition
of Cantus Corporation, $268,076, and reduced the number of employees
by 45%. The 13 former employees received severance packages totaling
$60,515 in 1997. The reduction in the number of employees resulted
in Telident having excess office and warehouse space under
noncancelable leases with a term of one year. Telident expensed
$39,600 relating to these leases in fiscal 1997, of which $9,900 was
paid in fiscal 1997 and the remaining $29,700 was paid in 1998. The
Company also paid $23,328 in fiscal 1997 for professional services
in connection with the above events.
Interest expense, net of interest income, decreased $155,846 in fiscal 1998
period compared to fiscal 1997. Telident experienced a decrease in interest
expense for fiscal 1998 as a result of decreases in bank borrowings made
possible by a private placement of Telident'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 Telident's common stock in June
1997.
During fiscal 1997, Telident recorded a noncash debt conversion expense of
$679,797 when holders with principal balances and accrued interest of $835,000
and $41,775, respectively, elected to convert their debt and accrued interest
into 194,500 shares of common stock. Telident temporarily reduced the conversion
price of the convertible subordinated debentures from $15.84 to $4.50 per share
and agreed to issue a warrant to purchase one share of common stock at $5.64 per
share for every two shares of common stock received upon conversion. Telident
decided to offer this incentive to improve its balance sheet and reduce future
cash flow requirements relating the repayment of the convertible subordinated
debentures and accrued interest. Substantially all ($835,000 of $993,000)
subordinated convertible debentures holders elected to converted their debt and
related accrued interest into 194,950 shares of common stock. In connection with
the conversion, Telident issued warrants to purchase 97,475 shares of common
stock at $5.64 per share. The warrants expired unexercised on June 30, 1999.
INFLATION
Management believes inflation has not had a material effect on Telident's
operations or on its financial condition.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Telident had cash, cash equivalents and restricted cash of
$1,232,519 and accounts receivable of $633,760. For the period ended June 30,
1999, net cash provided by Telident's operating activities was $282,999,
consisting primarily of the income from operations of $114,653 and depreciation
and amortization expense of $207,118, partially offset by an increase in
accounts receivable. Telident used $65,215 for payments of capitalized software
and purchases of equipment and $149,740 for payments on notes payable and debt.
Telident received net proceeds of $905,600 from the sale of preferred stock in
August 1998.
Based on projected revenues and expenses, Telident believes that the preferred
stock transaction (see Note 4 to the financial statements) together with cash
generated from operations will be adequate to fund Telident's working capital
requirements at least through June 30, 2000. Telident has no material
commitments for capital expenditures for fiscal 2000. At June 30, 1999, Telident
had shareholders' equity of $2,217,682.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. In July 1999, the FASB issued SFAS No. 137 delaying
the efective date of SFAS No. 133 for one year to fiscal years beginning after
June 15, 2000. The Company has not yet determined the effect SFAS No. 133 will
have on its financial position or the results of its operations.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products, which are
currently coded to accept only two digit date entries, will need to accept four
digit date entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The failure of our
products, our vendors or our customers to achieve Year 2000 compliance on a
timely basis could materially adversely affect our business, operating results,
financial condition and cash flows.
State of readiness. We have completed the assessment of our Year 2000 readiness
for operations, focusing on critical operating and applications systems,
particularly the Year 2000 compliance of:
* our hardware and software products
* our internal administrative systems, and
* the compliance of our key software/hardware vendors.
We believe that all Telident products currently manufactured and marketed are
Year 2000 compliant. None of our current products rely on a date to function
properly. To the extent that our products process dates, they use four digit
years and are not subject to the effects of Year 2000. We communicate these
facts, and specific product compliance, non-compliance and upgrade options, to
our customers through our Internet web page and routine sales and marketing
communications activities.
12
<PAGE>
As a part of our Year 2000 assessment, we simulated the event by inserting key
dates leading up to and beyond the Year 2000 in an orchestrated manner for our
key infrastructure components, critical business processes and key applications
systems. We have addressed all compliance issues identified to date.
Telident's internal accounting software is not Year 2000 compliant; however, we
have already purchased and installed Year 2000 compliant accounting software.
The conversion of our accounting operations to utilize the new software has been
started and will be completed as soon as possible. We anticipate no problems
completing the conversion. Our internal telecommunications and data processing
systems have all been brought into compliance.
We have completed a compliance survey of our critical vendors. Our key computer
and software application suppliers have indicated they are Year 2000 compliant.
We have requested and will review our building operator's and utility vendors'
plans for becoming Year 2000 compliant.
Costs to address Year 2000 issues. We intend to complete our Year 2000
remediation efforts primarily with in-house resources. In the aggregate, we have
spent an estimated $30,000 and anticipate spending an additional $3,000 to
$5,000 to complete the conversion of our accounting operations to utilize new
software that is Year 2000 compliant.
Risks of Year 2000 issues. We recognize that issues related to Year 2000
constitute a material known uncertainty. We also recognize the importance of
ensuring that Year 2000 issues will not adversely affect our operations. We
believe that the processes described above will be effective to manage the risks
associated with the problem. However, there can be no assurance that the
processes can be completed on the timetable described above or that remediation
will be fully effective. The failure to identify and remediate Year 2000 issues,
or the failure of customers, key vendors or other critical third parties who do
business with us to timely remediate their Year 2000 issues could cause system
failures or errors, business interruptions and, in a worst case scenario, the
inability to engage in normal business practices for an unknown length of time.
Our business, operating results, financial condition and cash flows could be
materially adversely affected. At this time, however, Telident does not possess
information necessary to estimate the overall potential financial impact of Year
2000 compliance issues. Specific risks we face with regard to Year 2000 issues
include the following:
1. Decreased sales. Although we have tested and believe that our current
products are Year 2000 compliant, we believe that the purchasing patterns of
customers and potential customers may be affected as they direct a significant
portion of their scarce information technology resources to complete their Year
2000 compliance programs. These expenditures may result in reduced funds
available to purchase 911 hardware and software products such as ours. This
could result in a material adverse effect on our business, operating results,
financial condition and cash flows.
2. Customer litigation. We have developed a program to advise our customers
of the Year 2000 compliance status of our products and we have identified
upgrade and replacement products for our customers potentially affected by Year
2000 issues. Although we believe that our efforts will ensure no disruption in
the business or operations of our customers, the possibility exists that some
customers may experience problems that may motivate them to sue us for
restitution and damages that may be related to such problems.
13
<PAGE>
3. Disruption of supply materials. Several months ago, we began an ongoing
process of surveying our vendors with regard to their Year 2000 readiness and we
have completed the process of assessing and cataloging the vendors' responses to
the survey. Our key computer and software application suppliers have indicated
they are Year 2000 compliant. In reviewing our vendors we have determined that
we are not dependent on any one vendor for materials. We have alternate sources
of supply for the major components of our products which are printed circuit
boards and related electronic components.
4. Disruption of internal computer systems. Telident has simulated the Year
2000 event by inserting key dates leading up to and beyond the Year 2000 in an
orchestrated manner for our key infrastructure components, critical business
processes and key applications systems. We believe that disruption of our
internal computer systems is unlikely and we believe we have addressed all
identified compliance issues.
5. Disruption of non-computer systems. We have completed an assessment of
all non-computer systems, including telecommunications, delivery and other
services. Although we intend to work with any third party providers of such
services to ensure that there will be no disruption in our operations, we
believe that if any disruptions do occur, such will be dealt with promptly and
will be no more severe with respect to correction or impact than would be an
unexpected breakdown of such services and related equipment.
Contingency plans. We recognize the need for Year 2000 contingency plans in the
event that remediation is not fully successful or that the remediation efforts
of our vendors, suppliers and governmental/regulatory agencies are not timely
completed. We intend to address contingency planning during the third and fourth
quarters of 1999.
If key parts suppliers or contract manufacturers do not achieve Year 2000
compliance in a timely manner, or at all, we believe that we have identified
alternative sources that will meet our business or operations requirements.
Additionally, we plan to create sufficient reserves of finished goods inventory,
such that any delay in changing vendors will have a minimal effect on our
business, operating results, financial condition and cash flows.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are included herein:
Independent Auditors' Report
Balance Sheets - June 30, 1999 and 1998
Statements of Operations - Years Ended June 30, 1999 and 1998
Statements of Shareholders' Equity - Years Ended June 30, 1999 and 1998
Statements of Cash Flows - Years Ended June 30, 1999 and 1998
Notes to Financial Statements - Years Ended June 30, 1999 and 1998
14
<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, 1999 and 1998 and the related statements of operations,
shareholders' equity, 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, the financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1999 and 1998 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
AUGUST 2, 1999
15
<PAGE>
TELIDENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 925,785 $ 258,875
Restricted cash 306,734 --
Trade accounts receivable, net of allowance of $25,000
and $30,000, respectively 633,760 508,956
Inventories 261,758 285,708
Other 79,569 76,088
------------ ------------
Total current assets 2,207,606 1,129,627
FURNITURE AND EQUIPMENT:
Furniture and equipment 447,932 501,390
Accumulated depreciation (288,775) (291,955)
------------ ------------
Net furniture and equipment 159,157 209,435
INTANGIBLE ASSETS 198,047 289,672
OTHER ASSETS 16,855 83,055
------------ ------------
$ 2,581,665 $ 1,711,789
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 48,051 $ 95,271
Trade accounts payable 138,150 168,069
Accrued expenses 127,123 118,123
Deferred revenue 19,835 21,053
Current portion of long-term debt 28,330 101,519
------------ ------------
Total current liabilities 361,489 504,035
LONG-TERM DEBT, less current portion 2,494 31,825
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.08 par value, 2,500,000 shares authorized
Series I, Class A, converted into common stock at the rate of 6.4
common shares for each preferred share during fiscal 1999 -- 3,000
Series III, convertible into common stock equal to the quotient of $2.50
divided by the lesser of $2.50 or 80% of the average of the closing bid
price for the shares of common stock on the ten trading days prior to
notice of conversion, except for 200,000 shares for which 80% of the
average price shall not be more than $.785 until the closing bid price is
greater than $1.75 on any ten consecutive trading days, 400,000
shares outstanding at June 30, 1999 32,000 --
Common stock, $.08 par value, 10,000,000 shares authorized,
3,037,657 and 2,786,657 shares outstanding, respectively 243,013 222,933
Additional paid-in capital 15,490,517 14,612,497
Accumulated deficit (13,547,848) (13,662,501)
------------ ------------
Total shareholders' equity 2,217,682 1,175,929
------------ ------------
$ 2,581,665 $ 1,711,789
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
TELIDENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
NET SALES $ 2,677,869 $ 2,269,000
COST OF SALES 716,482 705,088
--------------- ---------------
Gross profit 1,961,387 1,563,912
OPERATING EXPENSES:
Sales and marketing 487,903 766,080
Product development and operations 478,171 570,795
General and administrative 902,396 800,716
--------------- ---------------
Total operating expenses 1,868,470 2,137,591
--------------- ---------------
Income (loss) from operations 92,917 (573,679)
INTEREST INCOME 54,487 30,220
INTEREST EXPENSE (32,751) (57,656)
--------------- ---------------
NET INCOME (LOSS) 114,653 (601,115)
PREFERRED STOCK DIVIDENDS (275,442) (449,800)
--------------- ---------------
NET LOSS APPLICABLE TO COMMON STOCK $ (160,789) $ (1,050,915)
=============== ===============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.06) $ (0.54)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 2,851,337 1,952,520
=============== ===============
</TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY
<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, 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)
Preferred stock issued in private placement,
net of offering expenses of $94,400 400,000 32,000 -- -- 873,600 --
Conversion of preferred stock to common stock (37,500) (3,000) 240,000 19,200 (16,200) --
Common stock issued for services -- -- 11,000 880 15,620 --
Value of warrant issued for services -- -- -- -- 5,000 --
Net income -- -- -- -- -- 114,653
-------- -------- ---------- --------- ------------ ------------
BALANCE, JUNE 30, 1999 400,000 $ 32,000 3,037,657 $ 243,013 $ 15,490,517 $(13,547,848)
======== ======== ========== ========= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
TELIDENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1999 1998
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 114,653 $ (601,115)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 207,118 144,118
Common stock issued for services 16,500 --
Value of warrant issued for services 5,000 --
Changes in assets and liabilities:
Trade accounts receivable (124,804) (76,845)
Inventories 23,950 144,798
Other assets 62,719 (35,463)
Trade accounts payable (29,919) (131,615)
Accrued expenses and deferred revenue 7,782 16,122
--------- -----------
Net cash provided by (used in) operating activities 282,999 (540,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (306,734) --
Payments of patent and capitalized software costs (19,275) (240,761)
Purchases of furniture and equipment (45,940) (21,798)
--------- -----------
Net cash used in investing activities (371,949) (262,559)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable (47,220) (6,445)
Payments of long-term debt (102,520) (144,908)
Proceeds from issuance of preferred stock 905,600 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)
--------- -----------
Net cash provided by financing activities 755,860 1,039,115
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 666,910 236,556
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 258,875 22,319
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 925,785 $ 258,875
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION - Interest paid $ 40,251 $ 183,282
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for office equipment $ -- $ 17,186
Long-term debt incurred for other assets -- 66,750
Common stock offered against note receivable -- 11,635
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<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 and operates solely in this industry segment. 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 considers all short-term, highly liquid investments that are readily
convertible into known amounts of cash and that have original maturities of
three months or less to be cash equivalents. The Company's cash equivalents
consist primarily of money market accounts. The restricted cash is security for
the Company's revolving line of credit with a bank and is available to the
Company if the line of credit is repaid and the agreement canceled.
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, 1999 and 1998, 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,
------------------------------
1999 1998
-------- --------
Raw materials $217,868 $235,804
Work in progress 335 1,876
Finished goods 43,555 48,028
-------- --------
$261,758 $285,708
======== ========
FURNITURE AND EQUIPMENT
Furniture and 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,
--------------------
1999 1998
-------- --------
Patents $ 35,969 $110,742
Purchased software development 260,036 338,316
-------- --------
296,005 449,058
Less accumulated amortization 97,958 159,386
-------- --------
$198,047 $289,672
======== ========
Patents are being amortized over their estimated lives of five years using the
straight line method.
Purchased 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. Amortization expense was $104,181
and $32,518 during the years ended June 30, 1999 and 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The Company records impairment losses on long-lived assets used in operations
when events or changes in circumstances indicate that the assets may be impaired
and the undiscounted cash flows estimated to be generated by those assets are
less than the net book value of those assets. As if June 30, 1999, the Company
did not consider any of its assets to be impaired.
19
<PAGE>
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 product 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. The research and development
portion of the Company's development expenditures for fiscal 1999 and 1998 were
$131,112 and $124,674, respectively.
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.
STOCK BASED COMPENSATION
The Company has adopted Financial Accounting Standards Board (FASB) SFAS No.
123, "Accounting for Stock-Based Compensation." This Statement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under
the fair value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. The Company accounts for stock option grants and awards to
employees in accordance with APB No. 25 and related interpretations.
NET LOSS PER COMMON SHARE
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 1999 and 1998 are the same as
basic net loss per share due to the antidilutive effect of the assumed exercise
of stock options and warrants.
Fiscal 1999 diluted net loss per common share excludes stock options and
warrants to purchase 1,183,495 shares of common stock at a weighted average
price of $4.66 per share due to their antidilutive effect. Fiscal 1998 diluted
net loss per common share excludes stock option and warrants to purchase 775,426
shares of common stock at a weighted average price of $5.54 per share due to
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
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>
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income includes all changes in shareholders' equity except those resulting from
investments by and distributions to owners. For the years ended June 30, 1999
and 1998 there was no diffence between net income (loss) and comprehensive
income (loss).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. In July 1999, the FASB issued SFAS No. 137 delaying
the efective date of SFAS No. 133 for one year to fiscal years beginning after
June 15, 2000. The Company has not yet determined the effect SFAS No. 133 will
have on its financial position or the results of its operations.
NOTE 2: FINANCING ACTIVITIES
NOTES PAYABLE
The Company has a revolving line of credit with a bank providing advances up to
$300,000. The line of credit is secured by $300,000 of the Company's cash
equivalents. The loan agreement also contains provisions requiring minimum net
worth and limitations on debt. The Company was in compliance with the financial
convenants at June 30, 1999. Interest on the line of credit is payable monthly
at the bank's base rate plus 2.0% (9.75% at June 30, 1999). The line of credit
agreement is cancelable by the bank at any time. Borrowings under this agreement
were $48,051 as of June 30, 1999 with additional availability of $251,949. Prior
to October 1998, the line of credit was $750,000, interest was at the bank's
base rate plus 7.5%, and was secured by all of the Company's assets.
LONG-TERM DEBT
Long-term debt at June 30 consisted of the following:
1999 1998
-------- --------
Debentures, paid in fiscal 1999 $ -- $ 50,000
Note payable 14,800 48,371
Capital lease obligations
(see Note 3) 16,024 34,973
-------- --------
30,824 133,344
Less current maturities 28,330 101,519
-------- --------
$ 2,494 $ 31,825
======== ========
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.
At June 30, 1999, principal payments on the note payable and capital lease
obligations in the fiscal years ending June 30 are as follows:
2000 $ 28,330
2001 2,494
----------
$ 30,824
==========
21
<PAGE>
NOTE 3: COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its office space under an operating lease which expires
September 30, 1999. The Company is negotiating a new lease. The Company also
leases certain office equipment under a capital lease agrement. The following is
a schedule of the minimum rental payments under the leases for the years ending
June 30:
CAPITAL LEASE OPERATING LEASE
------------- ---------------
2000 $ 14,172 $ 28,904
2001 2,517 --
---------- -----------
Total minimum lease payments 16,689 $ 28,904
Less amount representing interest 665 ===========
----------
Present value of net minimum
payments 16,024
Less current portion of capital
lease 13,530
----------
Long-term portion of capital
lease $ 2,494
==========
Rent expense incurred was $109,503 and $130,510 during the years ended June 30,
1999 and 1998, respectively.
Furniture and office equipment includes $62,019 of leased office equipment at
June 30, 1999 and 1998, respectively. Related accumulated amortization
aggregated $27,572 and $15,169 at June 30, 1999, and 1998, 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 litigatioin 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 August 1998, the Company completed the sale of 400,000 shares of Series III
convertible preferred stock and issued warrants in the aggregate to purchase
400,000 shares of common stock to two investors for $1,000,000 ($2.50 per unit).
The warrants are exercisable at $3.125 per share and will expire in October,
2000. The warrants may be called by the Company at a price of $4.38. The Company
incurred offering cost of $94,400 and subsequently registered for resale the
shares issuable upon conversion/exercise. Each share of the Series III
convertible preferred stock is convertible at the option of the holder into
common stock equal to the quotient of $2.50 divided by the lesser of $2.50 and
80% of the average of the closing bid price for the shares of common stock on
the ten trading days prior to the date that the Company receives written notice
of conversion. For 200,000 of the shares, 80% of the average closing bid price
shall be not be greater than $.785 until such time as the closing bid price for
the common stock is greater than $1.75 on any ten consecutive trading days after
May 11, 1999. The value of the beneficial conversion feature, $250,000, was
recorded as a deemed preferred stock dividend on the date of issuance, which
decreased net income applicable to common stock in the calculation of basic and
diluted net loss per share.
In July 1997, the Company completed an $1.25 million equity transaction in the
form of 277,778 shares of Series II Convertible Preferred Stock with FAMCO.
FAMCO also received warrants to purchase 364,907 shares of common stock. The
warrants are exercisable at $4.83 per share and expired 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 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.
22
<PAGE>
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 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 paid a yearly
dividend at the rate of 1% over the prime rate from time to time of National
City Bank of Minneapolis and were redeemable at the Company's option. The
Company had redeemed 25,000 shares of the preferred stock. The Company had not
paid dividends since March 31, 1997. During the second quarter of fiscal 1999,
$96,200 of accumulated dividends on the Series I Convertible Preferred Stock
were canceled in exchange for re-pricing the conversion feature from one share
of common stock for each share of preferred stock to 6.4 shares of common stock
per share of preferred stock. During the third quarter of fiscal 1999 the
holders of the Company's Series I Convertible Preferred Stock converted their
37,500 shares to 240,000 shares of common stock.
None of the preferred stock dividends shown on the Statement of Operations will
ever be paid by the Company. The Company has not paid dividends on Series I
convertible preferred stock since March 31, 1997. As discussed above, the
accumulated dividends on Series I convertible preferred stock were canceled in
exchange for repricing the conversion feature from one share of common stock for
each share of preferred stock to 6.4 common shares for each share of preferred
stock. The preferred stock divdidends on the Statement of Operations also
includes the value assigned to the beneficial conversion feature of the Series
III and II convertible preferred stock of $250,000 and $312,500 for the fiscal
years ended June 30, 1999 and 1998, respectively. In April 1998, all of the
Company's Series II convertible preferred stock was converted into 1,052,189
shares of common stock. As a result of the conversion, $334,500 of deemed
dividends for the year ended June 30, 1998 will not be paid.
WARRANTS
The Company has issued warrants to directors, investors and selling agents, and
in connection with the issuances of debt and equity securities. A summary of the
Company's common stock warrants activity follows:
WEIGHTED
NUMBER OF SHARES AVERAGE PRICE
OF COMMON STOCK PER SHARE
--------------- ---------
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 issued - consultants 50,000 2.69
Warrants expired (13,893) 16.00
-------
Outstanding at June 30, 1998 734,907 5.50
Warrants issued - equity private
placement 400,000 3.13
Warrants canceled - consultants (50,000) 2.69
Warrants expired (97,475) 5.64
-------
Outstanding at June 30, 1999 987,432 $ 4.67
======= ======
Exercisable at June 30, 1999 887,432 $ 5.06
======= ======
STOCK OPTIONS
The Company's 1988 Stock Option Plan expired in December 1998. The 1988 plan
provided 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. At June 30, 1999, there were 92,207 options outstanding under the 1988
plan. The 1998 Stock Option Plan was adopted in October 1998. The 1998 plan
reserved 350,000 shares for the granting of options to employees, officers and
directors of the Company. 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 plans.
23
<PAGE>
A summary of the status of the Company's stock options are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 90,519 $ 4.33 94,058 $ 8.16
Granted 34,828 2.50 51,832 3.91
Expired (375) 13.60 -- --
Terminated (26,384) 10.31 (55,371) 10.31
-------- -------
Outstanding at end of year 98,588 $ 3.63 90,519 $ 4.33
======== ====== ======= ======
Options exercisable at year end 34,277 $ 4.27 9,262 $ 5.75
======== ====== ======= ======
Options available for future grants 343,619 37,081
======== =======
</TABLE>
Pro forma information regarding net loss applicable to common stock and loss per
share has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss applicable to common stock, as
reported $ (160,789) $(1,050,915)
Net loss applicable to common stock, pro forma (239,725) (1,095,636)
Net loss per common share, basic and diluted,
as reported $ (.06) $ (.54)
Net loss per common share, basic and diluted,
pro forma (.08) (.56)
</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>
1999 1998
---- ----
<S> <C> <C>
Dividend yield None None
Expected volatility 104% 79%
Expected life of option 7 years 7 years
Risk-free interest rate 4.6% 6.1%
Fair value of options on grant date $1.00 $2.65
</TABLE>
The following table summarizes information about stock options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> V <C> <C>
$ 1.56 - $ 3.13 41,957 6.32 $ 2.47 4,127 $2.36
4.00 - 5.37 55,819 5.06 4.44 29,500 4.46
8.00 - 19.00 812 8.00 8.00 650 8.00
------ ------
98,588 5.58 $ 3.63 34,277 $4.27
====== ==== ======= ====== =====
</TABLE>
NOTE 5: MAJOR CUSTOMERS
Sales to one of the Company's major distributors amounted to 11% of total sales
for the fiscal year ended June 30, 1999. During fiscal 1998, no customer
accounted for 10% or more of total sales.
24
<PAGE>
NOTE 6: 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 7: INCOME TAXES
Income tax expense for the year ended June 30,1999, has been offset by a
reduction in the valuation allowance for deferred taxes. The benefit for income
taxes has been offset by a valuation allowance for the year ended June 30, 1998,
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:
1999 1998
---- ----
Tax expense (benefit) computed at
statutory rates $ 40,000 $(210,000)
State taxes, net of federal effect 8,500 (39,000)
Change in valuation allowance (45,000) 226,000
Other (3,500) 23,000
--------- ---------
$ -- $ --
========= =========
At June 30, 1999, 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 more than 50 percent of the Company's ownership changes
within a three year period. These net operating loss and tax credit
carryforwards expire as follows:
EXPIRATION DATES NET OPERATING LOSS TAX CREDIT
---------------- ------------------ ----------
2001-2005 $ 945,200 $ 26,700
2006 1,057,700 38,700
2007 959,400 30,900
2008 1,668,600 53,100
2009 1,551,600 49,900
2010 817,600 36,400
2011 1,648,100 --
2012 2,444,700 27,500
2013 824,100 10,300
2014 -- 2,300
------------ --------
$ 11,917,000 $275,800
============ ========
The tax effect of the temporary differences, tax carryforwards, and valuation
allowances at June 30, is as follows:
1999 1998
---- ----
Deferred tax assets
Loss and credit carryforwards $ 5,043,000 $ 5,090,000
Intangible assets 134,000 147,400
Other 138,000 122,600
------------ -------------
5,315,000 5,360,000
Valuation allowance for deferred
tax assets (5,315,000) (5,360,000)
------------ -------------
$ -- $ --
============ =============
NOTE 8: RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company entered into a consulting agreement with a
member of the board of directors. As compensation for services the Company
issued a warrant for 100,000 shares of common stock at $1.188 per share. The
warrant may be exercised commencing Februrary 2003 and expires the earlier of
Februrary 2005 or the termination of the consulting agreement. The vesting of
the warrant accelerates upon the Company's achievement of certain financial
results.
25
<PAGE>
In June 1998, the Company entered into an engagment agreement with Manchester
Financial Group, Inc. to provide investment banking services. A member of the
board of directors is the President of Manchester Financial Group, Inc. Under
the terms of the agreement Manchester is entitled to receive a monthly fee of
$6,500 and upon the acquisition of another company a cash fee equal to 3% of the
transaction plus warrants to purchase 100,000 shares of common stock. In
connection with this agreement the Company issued warrants in the aggregate to
purchase 50,000 shares of common stock to Manchester and to an employee of
Manchester. During fiscal 1999, the warrants to purchase 50,000 shares of common
stock were canceled.
In March 1999, the Company entered into a consulting agreement with Manchester
Financial Group, Inc. As compensation under this agreement the Company issued
10,000 shares of common stock to Manchester Financial Group, Inc.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information in response to this item is incorporated by reference herein from
the sections entitled "Proposal No.1 - Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" within the Company's 1999 proxy
statement.
ITEM 10. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference herein from
the section entitled "Executive Compensation" within the Company's 1999 proxy
statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated by reference herein from
the section "Security Ownership of Certain Beneficial Owners and Management"
within the Company's 1999 proxy statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this item is incorporated by reference herein from
the section "Certain Relationships and Related Transactions" within the
Company's 1999 proxy statement.
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> <C>
3.1 Articles of Incorporation, as amended, of the Company Incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended
June 30, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
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.
- ---------- ------------------------------------------------------- ----------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
- ---------- ------------------------------------------------------- ----------------------------------------------------
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.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.2 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.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.3 Promissory Note and Security Agreement dated February Incorporated herein by reference to the Company's
3, 1995 between Registrant and Norwest Credit, Inc. Annual Report on Form 10-KSB for the year ended
June 30, 1995.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.4 Collateral Pledge Agreement dated October 22, 1998
between the Company and Norwest Credit, Inc.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.5 Second Amendment to Security Agreement dated October
22, 1998 between the Company and Norwest Credit,
Inc.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.6 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.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.7 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.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.8 Telident, Inc. Stock Option Plan of 1998, Form of Incorporated herein by reference to the Company's
Incentive Stock Option Agreement and Form of 1998 Proxy Statement.
Nonstatutory Stock Option Agreement
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.9 Form of Warrant issued to FAMCO III Limited Liability Incorporated herein by reference to the Company's
Company and Special Situations Private Equity Fund, Annual Report on Form 10-KSB for the year ended
L.P., dated April 13, 1998 June 30, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.10 Form of Warrant issued upon conversion of 10% Series Incorporated herein by reference to the Company's
B Convertible Debentures, dated June 30, 1997 Annual Report on Form 10-KSB for the year ended
June 30, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
4.11 Amended Warrant issued to Mack Traynor dated March 25,
1999.
- ---------- ------------------------------------------------------- ----------------------------------------------------
10.1 Stock Purchase Agreement between the Company and Incorporated herein by reference to the Company's
FAMCO III Limited Liability Company and Special Annual Report on Form 10-KSB for the year ended
Situations Private Equity Fund, L.P., dated April 13, June 30, 1998.
1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
10.2 Modification Agreement to the Stock Purchase Incorporated herein by referencd to the Company's
Agreement between the Company and Special Situations Report on Form 10-QSB for the quarter ended
Private Equity Fund, L.P. dated December 29, 1998. December 31, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
10.3 Engagement Agreeement between the Company and Incorporated herein by reference to the Company's
Manchester Financial Group, Inc. dated June 13, 1998 Annual Report on Form 10-KSB/A for the year ended
June 30, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
10.4 Letter Agreement between the Company and Mack V. Incorporated herein by reference to the Company's
Traynor dated April 13, 1999. Annual Report on Form 10-KSB/A for the year ended
June 30, 1998.
- ---------- ------------------------------------------------------- ----------------------------------------------------
10.5 Consulting Agreement between the Company and
Manchester Financial Group, Inc. dated March 1, 1999.
- ---------- ------------------------------------------------------- ----------------------------------------------------
23 Consent of Deloitte and Touche LLP
- ---------- ------------------------------------------------------- ----------------------------------------------------
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of the period ended
June 30, 1999.
27
<PAGE>
SIGNATURES
In accordance with 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 on September 24, 1999.
TELIDENT, INC.
By /s/ W. Edward McConaghay
----------------------------------------------
W. Edward McConaghay
President and Chief Executive Officer
In accordance with 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.
<TABLE>
<S> <C>
/s/ Mark W. Sheffert September 24, 1999
- -----------------------------------------------------------------------
Mark W. Sheffert, Chairman of the Board and Director
/s/ W. Edward McConaghay September 24, 1999
- -----------------------------------------------------------------------
W. Edward McConaghay, President, Chief Executive Officer
and Director (Principal Executive Officer, Principal Accounting Officer
and Principal Financial Officer)
/s/ Scott R. Anderson September 24, 1999
- -----------------------------------------------------------------------
Scott R. Anderson, Director
/s/ Willis K. Drake September 24, 1999
- -----------------------------------------------------------------------
Willis K. Drake, Director
/s/ David F. Durenberger September 24, 1999
- -----------------------------------------------------------------------
David F. Durenberger, Director
/s/ John D. Wunsch September 24, 1999
- -----------------------------------------------------------------------
John D. Wunsch, Director
/s/ Mack V. Traynor, III. September 24, 1999
- -----------------------------------------------------------------------
Mack V. Traynor, III., Director
</TABLE>
28
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.4 Collateral Pledge Agreement dated October 22, 1998 between the
Company and Norwest Credit, Inc.
4.5 Second Amendment to Security Agreement dated October 22, 1998
between the Company and Norwest Credit, Inc.
4.11 Amended Warrant issued to Mack Traynor dated March 25, 1999.
10.5 Consulting Agreement between the Company and Manchester Financial
Group, Inc. dated March 1, 1999.
23 Consent of Deloitte and Touche LLP
27 Financial Data Schedule
29
EXHIBIT 4.4
COLLATERAL PLEDGE AGREEMENT
Date: October 22, 1998
DEBTOR: Telident, Inc.
10 Second St. NE
Suite 212
Minneapolis, MN 55413
Telecopier No. (612) 623-0944
SECURED PARTY: Norwest Credit, Inc.
Roanoke Building, Suite 400
Seventh Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
1. Security Interest and Collateral. To secure the payment and
performance of each and every debt, liability and obligation of every type and
description which the Debtor may now or at any time hereafter owe to the Secured
Party (whether such debt, liability or obligation now exists or is hereafter
created or incurred, and whether it is or may be direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or joint, several or joint and several; all such debts,
liabilities and obligations being herein collectively referred to as the
"Obligations"), the Debtor hereby grants the Secured Party a security interest
(herein called the "Security Interest") in:
any funds or Investment Property, as such term is defined in
the Uniform Commercial Code, in account number 10937613 maintained with
Norwest Investment Services, Inc., and all property and assets now or
hereafter carried in such account, together with all rights in
connection with such property (herein called the "Collateral").
2. Representations, Warranties and Covenants. The Debtor
represents, warrants and covenants that:
(a) The Debtor will duly endorse, in blank, each and every
instrument constituting Collateral by signing on said instrument or by
signing a separate document of assignment or transfer, if required by
the Secured Party.
(b) The Debtor is the owner of the Collateral free and clear
of all liens, encumbrances, security interests and restrictions, except
the Security Interest and any restrictive legend appearing on any
instrument constituting Collateral.
(c) The Debtor will keep the Collateral free and clear of all
liens, encumbrances and security interests, except the Security
Interest.
<PAGE>
(d) The Debtor will pay, when due, all taxes and other
governmental charges levied or assessed upon or against any Collateral.
(e) At any time, upon request by the Secured Party, the Debtor
will deliver to the Secured Party all notices, financial statements,
reports or other communications received by the Debtor as an owner or
holder of the Collateral.
(f) The Debtor will upon receipt deliver to the Secured Party
in pledge as additional Collateral all securities distributed on
account of the Collateral such as stock dividends and securities
resulting from stock splits, reorganizations and recapitalizations.
3. Rights of the Secured Party. The Debtor agrees that the
Secured Party may at any time after the occurrence of an Event of Default and
without notice or demand of any kind, (i) notify the obligor on or issuer of any
Collateral to make payment to the Secured Party of any amounts due or
distributable thereon; (ii) in the Debtor's name or the Secured Party's name
enforce collection of any Collateral by suit or otherwise, or surrender, release
or exchange all or any part of it, or compromise, extend or renew for any period
any obligation evidenced by the Collateral; (iii) receive all proceeds of the
Collateral; and (iv) hold any increase or profits received from the Collateral
as additional security for the Obligations, except that any money received from
the Collateral shall, at the Secured Party's option, be applied in reduction of
the Obligations, in such order of application as the Secured Party may
determine, or be remitted to the Debtor.
4. Events of Default. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called "Event of
Default"): (i) the Debtor shall fail to pay any or all of the Obligations when
due or (if payable on demand) on demand, or shall fail to observe or perform any
covenant or agreement herein binding on it; (ii) any representation or warranty
by the Debtor set forth in this Agreement or made to the Secured Party in any
financial statements or reports submitted to the Secured Party by or on behalf
of the Debtor shall prove materially false or misleading; (iii) an Event of
Default, as defined in any credit agreement or other instrument or agreement
evidencing or governing any or all of the Obligations, shall occur.
5. Remedies upon Event of Default. Upon the occurrence of an
Event of Default and at any time thereafter, the Secured Party may exercise any
one or more of the following rights or remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand; (ii)
exercise all voting and other rights as a holder of the Collateral; (iii)
exercise and enforce any or all rights and remedies available upon default to a
secured party under the Uniform Commercial Code as in effect from time to time
in the state of Minnesota, including the right to offer and sell the Collateral
privately to purchasers who will agree to take the Collateral for investment and
not with a view to distribution and who will agree to the imposition of
restrictive legends on the certificates representing the Collateral, and the
right to arrange for a sale which would otherwise qualify as exempt from
-2-
<PAGE>
registration under the Securities Act of 1933; and if notice to the Debtor of
any intended disposition of the Collateral or any other intended action is
required by law in a particular instance, such notice shall be deemed
commercially reasonable if given at least 10 calendar days prior to the date of
intended disposition or other action; (iv) exercise or enforce any or all other
rights or remedies available to the Secured Party by law or agreement against
the Collateral, against the Debtor or against any other person or property.
6. Miscellaneous. Any disposition of the Collateral in the
manner provided in Section 5 shall be deemed commercially reasonable. This
Agreement can be waived, modified, amended, terminated or discharged, and the
Security Interest can be released, only explicitly in a writing signed by the
Secured Party. A waiver signed by the Secured Party shall be effective only in
the specific instance and for the specific purpose given. Mere delay or failure
to act shall not preclude the exercise or enforcement of any of the Secured
Party's rights or remedies. All rights and remedies of the Secured Party shall
be cumulative and may be exercised singularly or concurrently, at the Secured
Party's option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other. All notices to be given to the Debtor shall be deemed sufficiently given
if delivered or mailed by registered or certified mail, postage prepaid, or by
telecopier to the Debtor at its address or telecopier number, as the case may
be, set forth above or at the most recent address or telecopier number shown on
the Secured Party's records. The Secured Party's duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
the Secured Party exercises reasonable care in physically safekeeping such
Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercise reasonable care in the selection of the
bailee or other third person, and the Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. The Secured Party shall not be
obligated to preserve any rights the Debtor may have against prior parties, to
exercise at all or in any particular manner any voting rights which may be
available with respect to any Collateral, to realize on the Collateral at all or
in any particular manner or order, or to apply any cash proceeds of Collateral
in any particular order of application. The Debtor will reimburse the Secured
Party for all expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Secured Party in the protection, defense or enforcement of the
Security Interest, including expenses incurred in any litigation or bankruptcy
or insolvency proceedings. This Agreement shall be binding upon and inure to the
benefit of the Debtor and the Secured Party and its respective heirs,
representatives, successors and assigns and shall take effect when signed by the
Debtor and delivered to the Secured Party, and the Debtor waives notice of the
Secured Party's acceptance hereof. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not affect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the unlawful or
unenforceable provision or application had never been contained herein or
prescribed hereby. All representations and warranties contained in this
Agreement shall survive the execution, delivery and performance of this
Agreement and the creation and payment of the Obligations. If this Agreement is
signed by more than one person as the Debtor, the term "Debtor" shall refer to
each of them separately and to both or all of them
-3-
<PAGE>
jointly; all such persons shall be bound both severally and jointly with the
other(s); and the Obligations shall include all debts, liabilities and
obligations owed to the Secured Party by any Debtor solely or by both or several
or all Debtors jointly or jointly and severally, and all property described in
Section 1 shall be included as part Collateral, whether it is owned jointly by
both or all Debtors or is owned in whole or in part by one (or more) of them.
This Agreement shall be governed by the internal laws (other than conflict laws)
of the state of Minnesota and, unless the context otherwise requires, all terms
used herein which are defined in Articles 1 and 9 of the Uniform Commercial
Code, as in effect in Minnesota, shall have the meanings therein stated. Each
party consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement, waives any argument that venue in any such forum is not
convenient, and agrees that any litigation initiated by any of them in
connection with this Agreement shall be venued in either the District Court of
Hennepin County, Minnesota, or the United States District Court, District of
Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
TELIDENT, INC.
By /s/ W. Edward McConaghay
------------------------
W. Edward McConaghay
Its President and Chief Executive Officer
-4-
EXHIBIT 4.5
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Second Amendment, dated as of October 22, 1998, is made
by and between TELIDENT, INC., a Minnesota corporation (the "Borrower"), and
NORWEST CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
--------
The Borrower and the Lender have executed and delivered a
Credit and Security Agreement dated as of February 3, 1995, as amended by First
Amendment to Credit and Security Agreement dated as of May 1, 1995 (as amended,
the "Credit Agreement"). All capitalized terms used herein have the meanings
given to them in the Credit Agreement.
The Borrower may request Advances from the Lender from time to
time pursuant to the Credit Agreement and the Lender may, in its discretion,
choose to make loans to the Borrower pursuant to the Credit Agreement. The
Lender may demand repayment of the loans at any time pursuant to the terms of
the Credit Agreement.
The Borrower has requested that the Lender reduce the Maximum
Line and decrease the Floating Rate. The Lender is willing to grant the
Borrower's requests pursuant to the following terms and conditions.
ACCORDINGLY, in consideration of the premises and of the
mutual covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Second
Amendment which are defined in the Credit Agreement shall have the same meanings
as defined therein, unless otherwise defined herein or in the Recitals hereto.
In addition, Section 1.1 of the Credit Agreement is amended by adding or
amending, as the case may be, the following definitions:
"'Borrowing Base' means, at any time, the lesser of:
(a) the Maximum Line, or
(b) 100% of the Eligible Marketable Securities."
in either case, computed in accordance with the most recent
collateral reports provided to and accepted by the Lender. The Lender
may change from time to time, IN ITS SOLE DISCRETION AND WITH ONE DAY'S
NOTICE TO THE BORROWER, the standards, criteria and formulae used by
the Lender in determining the Borrowing Base."
<PAGE>
"'Control Agreement' means that certain Notice of Pledge and
Control Agreement by and among NISI, the Lender, and the Borrower dated
as of October 22, 1998."
"'Eligible Marketable Securities' means, in the Lender's sole
discretion, government/agency securities, in the NISI Account, and for
which the Lender has received a Control Agreement executed and
acknowledged by the Borrower and NISI."
"'Floating Rate' means an annual rate equal to the sum of the
Base Rate plus two percent (2.0%) which annual rate shall change when
and as the Base Rate changes."
"'Maximum Line' means $300,000."
"'NISI' means Norwest Investment Services, Inc., a Minnesota
corporation."
"'NISI Account' means account no. 10937613 maintained with
NISI."
"'Pledge Agreement' means that certain Collateral Pledge
Agreement by the Borrower for the benefit of the Lender, dated as of
October 22, 1998."
"'Second Amendment' means that certain Second Amendment to
Credit and Security Agreement dated as of October 22, 1998, by and
between the Borrower and the Lender.
"'Second Amendment Effective Date' means the date that all of
the conditions in paragraph 5 of Second Amendment have been satisfied."
2. Minimum Interest Charge. Section 2.2(b) of the Credit
Agreement is deleted in its entirety, and replaced with the following:
"(b) Minimum Interest Charge. Notwithstanding the interest
payable pursuant to Section 2.2(a), the Borrower shall pay the Lender
interest of not less than $17,000 per calendar year during the term of
this agreement (prorated for less than full years), and the Borrower
shall pay any deficiency between such minimum interest charge and the
amount of interest otherwise calculated under Sections 2.2(a) and
2.2(c)."
3. Administration Fees. Section 2.3 of the Credit Agreement is
deleted in its entirety.
4. Daily Reporting. Section 6.1(f) of the Credit Agreement is
amended in its entirety and replaced with the following:
-2-
<PAGE>
"(f) Omitted."
5. No Other Changes. Except as explicitly amended by this
Second Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance thereunder.
6. Conditions Precedent. This Second Amendment shall be
effective when the Lender shall have received an executed original hereof,
together with each of the following, each in substance and form acceptable to
the Lender in its sole discretion:
(a) The Control Agreement, duly executed by the Borrower, NISI
and the Lender.
(b) The Pledge Agreement, duly executed by the Borrower.
(c) Such other matters as the Lender may require.
7. Representations and Warranties. The Borrower hereby
represents and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to
execute this Second Amendment and to perform all of its obligations
hereunder, and this Second Amendment has been duly executed and
delivered by the Borrower and constitutes the legal, valid and binding
obligation of the Borrower, enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of
this Second Amendment have been duly authorized by all necessary
corporate action and do not (i) require any authorization, consent or
approval by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, (ii) violate any
provision of any law, rule or regulation or of any order, writ,
injunction or decree presently in effect, having applicability to the
Borrower, or the articles of incorporation or by-laws of the Borrower,
or (iii) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its
properties may be bound or affected.
(c) All of the representations and warranties contained in
Article IV of the Credit Agreement are correct on and as of the date
hereof as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date.
8. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Note or Security Documents to the Credit
Agreement shall be deemed to refer to the Credit Agreement as amended hereby.
-3-
<PAGE>
9. No Waiver. The execution of this Second Amendment and
acceptance of any documents related hereto shall not be deemed to be a waiver of
any Default or Event of Default under the Credit Agreement or breach, default or
event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this Second Amendment.
10. Release. The Borrower hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Second Amendment,
whether such claims, demands and causes of action are matured or unmatured or
known or unknown.
11. Costs and Expenses. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Second Amendment and the documents and instruments incidental hereto. The
Borrower hereby agrees that the Lender may, at any time or from time to time in
its sole discretion and without further authorization by the Borrower, make a
loan to the Borrower under the Credit Agreement, or apply the proceeds of any
loan, for the purpose of paying any such fees, disbursements, costs and
expenses.
12. Miscellaneous. This Second Amendment may be executed in
any number of counterparts, each of which when so executed and delivered shall
be deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
TELIDENT, INC.
By /s/ W. Edward McConaghay
---------------------------
W. Edward McConaghay
Its President and Chief Executive Officer
NORWEST CREDIT, INC.
By /s/ Becky A. Koehler
-----------------------
Becky A. Koehler
Its Vice President
-5-
EXHIBIT 4.11
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
TELIDENT, INC.
DATED
FEBRUARY 25, 1998
AMENDED MARCH 25, 1999
THIS CERTIFIES THAT, for value received, Mack Traynor (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 the date upon
which this Warrant, or any portion of this Warrant, vests in accordance with
paragraph 3(d) hereof to and including the Termination Date (as hereinafter
defined) up to 100,000 fully paid and non-assessable shares of the Corporation's
Common Stock, par value $0.08 per share (the "Common Stock") (subject to
adjustment and vesting requirements as noted below). This Warrant has been
issued in connection with efforts relating to a consulting agreement. For
purposes of this Warrant, "Termination Date" shall mean 5:00 P.M. Minneapolis
time on the earlier of (i) the second anniversary of the date on which any
portion of this Warrant becomes exercisable pursuant to paragraph 3(d) hereof or
(ii) the date on which that certain consulting agreement dated February 25, 1998
by and between the Corporation and the Holder is terminated if prior to the
occurrence of an event set forth in paragraph 3(d) hereof, unless extended as
provided herein.
The purchase price shall be $1.188 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
<PAGE>
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 ten (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.
2. The Corporation covenants and agrees that all shares which may be
issued upon exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized and issued, fully paid and nonassessable.
3. 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 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
2
<PAGE>
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) This Warrant shall vest as follows:
(i) 100% of the Warrant shall vest if substantially all of the
assets of the Corporation are sold to a non-affiliated entity
or the Corporation is merged or consolidated with a
non-affiliated entity where the Corporation is not the
surviving entity.
(ii) (A) 40% of the Warrant shall vest upon the closing of
any merger or consolidation of the Corporation with a
non-affiliated entity where the Corporation is the
surviving entity or upon the closing of an
acquisition of all the stock or substantially all the
assets of a non-affiliated entity by the Corporation
(collectively, a "Transaction").
(B) 20% of the Warrant shall vest (in addition to the
percentage vested in paragraph 3(d)(ii)(A) hereof) if
the consideration paid or payable by the Corporation
for the assets or stock of a non-affiliated entity in
a Transaction exceeds $5,000,000.
(C) 20% of the Warrant shall vest (in addition to the
percentage vested in paragraphs 3(d)(ii)(A) & (B)
hereof) if the consideration paid or payable by the
Corporation for the assets or stock of a
non-affiliated entity in a Transaction exceeds
$10,000,000.
(D) 20% of the Warrant (in addition to the percentage
vested in paragraphs 3(d)(ii)(A), (B) & (C) hereof)
if the consideration paid or payable by the
Corporation for the assets or stock of a
non-affiliated entity in a Transaction exceeds
$15,000,000.
The portion of this Warrant that vests upon the
closing of a Transaction shall be limited to the percentage
set forth in paragraph 3(d)(ii)(A), unless the consideration
paid or payable by the Corporation for the assets or stock of
a non-affiliated entity in a Transaction exceeds the dollar
values set forth in paragraphs 3(d)(ii)(B), (C) or (D), in
which case, the percentage of this
3
<PAGE>
Warrant that vests shall be increased incrementally as
provided therein, respectively.
(e) 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 twenty (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 fifteen (15) days of the date as of which the determination
is to be made.
4. 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 3(c) above.
5. This Warrant shall not entitle the Holder hereof to any voting
rights or other rights as a stockholder of the Corporation.
6. 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 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
4
<PAGE>
respecting the aforesaid restrictions on transfer and disposition may be
endorsed on this Warrant or the certificates for such shares.
7. Subject to the provisions of paragraph 6 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.
8. The obligations contained herein shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
9. All questions concerning this Warrant will be governed and
interpreted and enforced in accordance with the internal law or the State of
Minnesota.
10. 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, MN 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).
5
<PAGE>
IN WITNESS WHEREOF, the Corporation and the Holder have caused this
Amended Warrant to be signed effective March 25, 1999.
HOLDER
/s/ Mack Traynor
----------------
Mack Traynor
TELIDENT, INC.
/s/ W. Edward McConaghay
------------------------
By: W. Edward McConaghay
Its: President and CEO
6
<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.
7
<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: _____________, 1999/200__
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)
8
<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: __________________________
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.
9
EXHIBIT 10.5
CONSULTING AGREEMENT
THIS AGREEMENT is entered into as of March 1, 1999 between Manchester Financial
Group, Inc. ("MFGI") and Telident, Inc. ("Company").
1. CONSULTING SERVICES. Company hereby retains MFGI to provide
consulting services regarding financial and capitalization
matters pertaining to the Company and make recommendations when
appropriate. MFGI will not be directly involved in any financing
activities unless provided for under a separate agreement between
the parties. MFGI does not and will not provide legal advice. The
Company must rely upon advice from its own legal counsel as to
all legal matters.
2. TERM. MFGI is hereby retained by Company on a monthly basis for a
period of one year beginning March 1, 1999 to February 28, 2000.
3. FEE. As compensation for the services to be provided hereunder,
the Company, upon execution of this Agreement, agrees to pay
$25,000 or in lieu thereof issue ten thousand (10,000) shares of
unrestricted registered common stock of the Company to MFGI or
its designees. If registered common stock is not available, the
Company will issue unregistered common stock and agrees to
provide for participation in any registration by the Company at
the expense of the Company. Such registration will occur not
later than six (6) months after the date of this Agreement.
4. CONFIDENTIALITY.
A. MFGI agrees to treat as confidential all proprietary
information ("Information") provided by Company during the
period of this Agreement and for one year thereafter and
agrees that all such Information will remain the sole
property of Company; provided that Information does not
include information which is available to the public,
already in possession of another party on a
non-confidential basis or which is available on a
non-confidential basis from a third party.
B. Notwithstanding the foregoing, any party may disclose such
"information" if required by a court of law or, if in the
opinion of such party's counsel, the party is required
under the law to disclose information.
5. INDEMNIFICATION. If, in connection with any services or matters
that are the subject of this Agreement, MFGI becomes involved in
any capacity in any action or legal proceeding, pending or
threatened, Company agrees (i) to reimburse MFGI for the
reasonable legal fees, disbursements of counsel and other
expenses (including the cost of investigation and preparation)
incurred by MFGI as such fees, disbursements and other expenses
are incurred; and (ii) to indemnify, defend, and hold MFGI
harmless against any losses, claims, damages, or liabilities,
joint or several, to which MFGI may become subject arising out
any such action or legal proceeding unless
<PAGE>
such claims arise from MFGI's gross negligence or willful
misconduct as determined in a judicial proceeding.
6. SURVIVAL. The provisions of this Agreement shall, where
applicable, survive the expiration of the period of this
Agreement, including any extensions thereof.
7. RELIANCE. In performing its services hereunder, MFGI shall be
entitled to rely without investigation upon all information that
is available from public sources as well as all other information
supplied to it by or on behalf of the Company or its advisors.
8. CONFLICT OF INTEREST. The Company hereby acknowledges that the
Chairman of its Board of Directors is the Chairman and Chief
Executive Officer of Manchester Companies, Inc., which is the
majority shareholder of MFGI. The Company further acknowledges
that it has consulted with its legal counsel regarding this
potential conflict of interest.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
hereof and supersedes and as of the date hereof all prior
understandings, written or oral, with respect to the subject
matter hereof.
10. GOVERNING LAW. This Agreement and the agreements contained herein
shall be governed by, and construed in accordance with, the laws
of the State of Minnesota, without giving effect to the
principles of conflicts of laws thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MANCHESTER FINANCIAL GROUP, INC.
By: /s/ Kenneth W. Hager
- ------------------------
Its: Managing Director
TELIDENT, INC.
By: /s/ W. Edward McConaghay
- ----------------------------
Its: President
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-25922C and No. 333-81867 of Telident, Inc. on Form S-8 and Registration
Statements No. 333-67741 and No. 33-99054 of Telident, Inc. on Form S-3 of our
report dated August 2, 1999 in the Annual Report on Form 10-KSB of Telident,
Inc. for the fiscal year ended June 30, 1999.
Deloitte & Touche LLP
Minneapolis, Minnesota
September 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 BALANCE SHEET AND STATEMENT OF OPERATION FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,232,519
<SECURITIES> 0
<RECEIVABLES> 658,760
<ALLOWANCES> 25,000
<INVENTORY> 261,758
<CURRENT-ASSETS> 2,207,606
<PP&E> 447,932
<DEPRECIATION> 288,775
<TOTAL-ASSETS> 2,581,665
<CURRENT-LIABILITIES> 361,489
<BONDS> 2,494
0
32,000
<COMMON> 243,013
<OTHER-SE> 1,942,669
<TOTAL-LIABILITY-AND-EQUITY> 2,581,665
<SALES> 2,677,869
<TOTAL-REVENUES> 2,677,869
<CGS> 716,482
<TOTAL-COSTS> 716,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,751
<INCOME-PRETAX> 114,653
<INCOME-TAX> 0
<INCOME-CONTINUING> 114,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,653
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
