U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1999
[] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ______________ to ______________
Commission file number 0-20887
TELIDENT, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1533060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 SECOND STREET N.E., SUITE 212
MINNEAPOLIS, MINNESOTA 55413
(Address of principal executive offices) (Zip Code)
(612) 623-0911
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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 ___.
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of equity
securities, as of April 30, 1999: i) 3,027,657 shares of Common Stock, par value
$.08 per share and ii) 400,000 shares of Series III Convertible Preferred Stock,
par value $.08 per share.
1
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION.........................................................................3
ITEM 1. Financial Statements......................................................................3
Condensed Balance Sheets (unaudited) as of March 31, 1999 and June 30, 1998...................3
Condensed Statements of Operations (unaudited) for the three months and nine months
ended March 31, 1999 and March 31, 1998.......................................................4
Statement of Shareholders' Equity (unaudited) for the nine months ended
March 31, 1999................................................................................5
Condensed Statements of Cash Flows (unaudited) for the nine months ended
March 31, 1999 and March 31, 1998.............................................................6
Notes to Consolidated Financial Statements (unaudited)........................................7
ITEM 2. Management's Discussion and Analysis and Plan of Operation...............................9
PART II OTHER INFORMATION............................................................................14
ITEM 2. Changes in Securities and Use of Proceeds ..............................................14
ITEM 5. Other Information.......................................................................14
ITEM 6. Exhibits and Reports on Form 8-K .......................................................14
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TELIDENT, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,221,389 $ 258,875
Trade accounts receivable, net of allowance for doubtful
accounts of $30,000 at both dates 602,788 508,956
Inventories 291,889 285,708
Other 86,030 76,088
------------ ------------
Total current assets 2,202,096 1,129,627
FURNITURE AND OFFICE EQUIPMENT, less accumulated
depreciation of $357,330 and $291,955, respectively 173,315 209,435
INTANGIBLE ASSETS, less accumulated amortization of $240,886
and $159,386, respectively 218,747 289,672
OTHER ASSETS 25,105 83,055
------------ ------------
$ 2,619,263 $ 1,711,789
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 199,058 $ 95,271
Trade accounts payable 117,561 168,069
Accrued expenses 96,744 118,123
Deferred revenue 22,514 21,053
Current portion of long-term debt 40,040 101,519
------------ ------------
Total current liabilities 475,917 504,035
LONG-TERM DEBT, less current portion 3,975 31,825
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.08 par value, 2,500,000 authorized
Series I Class A, convertible into common stock at the rate of 6.4 common
shares for each preferred share at December 31,1998 and one common
share for each preferred share at June 30, 1998, 37,500 shares
outstanding at June 30, 1998 -- 3,000
Series III, cumulative dividend equal to the Series I Class A, if any,
convertible into common stock equal to the quotient of the per
share Purchase Price ($2.50) divided by the lesser of (i) the
Conversion Price ($2.50) or (ii) 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 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
after May 11, 1999, 400,000 shares
outstanding at March 31, 1999 32,000 --
Common stock, $.08 par value, 10,000,000 shares authorized,
3,027,657 and 2,786,657 shares outstanding, respectively 242,213 222,933
Additional paid-in capital 15,507,964 14,612,497
Accumulated deficit (13,642,806) (13,662,501)
------------ ------------
Total shareholders' equity 2,139,371 1,175,929
------------ ------------
$ 2,619,263 $ 1,711,789
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 461,449 $ 450,503 $ 1,909,345 $ 1,581,078
COST OF SALES 138,364 173,081 540,638 525,243
----------- ----------- ----------- -----------
GROSS PROFIT 323,085 277,422 1,368,707 1,055,835
OPERATING EXPENSES:
Sales and marketing 113,479 208,765 367,434 629,434
Research and development 118,697 177,157 328,185 450,886
General and administrative 187,073 198,279 664,355 606,020
----------- ----------- ----------- -----------
Total operating expenses 419,249 584,201 1,359,974 1,686,340
----------- ----------- ----------- -----------
Income (loss) from operations (96,164) (306,779) 8,733 (630,505)
INTEREST INCOME 14,428 7,363 40,630 26,883
INTEREST EXPENSE (7,367) (15,402) (29,668) (43,980)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (89,103) (314,818) 19,695 (647,602)
PREFERRED STOCK DIVIDENDS 0 (41,625) (275,442) (432,087)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCK $ (89,103) $ (356,443) $ (255,747) $(1,079,689)
=========== =========== =========== ===========
NET LOSS PER
COMMON SHARE:
Basic and diluted $ (.03) $ (.21) $ (.09) $ (.62)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic and diluted 2,790,990 1,734,546 2,788,547 1,727,960
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Number of Amount of Number of Amount of Additional
Preferred Preferred Common Common Paid-in Accumulated
Shares Issued Stock Shares Issued Stock Capital Deficit
------------- --------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 $63,753 400,000 32,000 -- -- 904,247 --
Warrant issued for services -- -- -- -- 5,000 --
Common stock issued for services -- -- 1,000 80 2,420 --
Conversion of preferred stock to
common stock (37,500) (3,000) 240,000 19,200 (16,200)
Net income -- -- -- -- -- 19,695
-------- ------- ---------- -------- ------------ ------------
BALANCE, March 31, 1999 400,000 $32,000 3,027,657 $242,213 $ 15,507,964 $(13,642,806)
======== ======= ========== ======== ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,695 $ (647,602)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization expense 146,875 121,450
Common stock warrant issued for services 5,000 --
Common stock issued for services 2,500 --
Changes in assets and liabilities:
Trade accounts receivable (93,832) (32,807)
Inventories (6,181) 110,754
Other assets 48,008 (43,752)
Trade accounts payable (50,508) (56,884)
Accrued expenses and deferred revenue (19,918) 20,096
----------- -----------
Net cash provided by (used in) operating activities 51,639 (528,745)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of capitalized software costs (10,575) (239,404)
Purchase of furniture and office equipment (29,255) (20,519)
----------- -----------
Net cash used in investing activities (39,830) (259,923)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable 103,787 69,788
Payments of long-term debt (89,329) (132,605)
Proceeds from issuance of preferred stock, net 936,247 1,193,627
----------- -----------
Net cash provided by financing activities 950,705 1,130,810
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 962,514 342,142
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 258,875 22,319
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,221,389 $ 364,461
=========== ===========
Supplemental non-cash financing activities:
Common stock offset against note receivable $ -- $ 11,635
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements included in this Form 10-QSB are
unaudited. However, in the opinion of Telident, Inc. (the "Company"), the
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the results of operations
and financial position for the interim periods.
The results of operations for the three-month and nine-month periods ended
March 31, 1999 do not necessarily indicate the results to be expected for the
full year. These statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto, contained in the Company's
Annual Report on Form 10-KSB/A for the year ended June 30, 1998.
2. INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first out method, and consisted of the following:
March 31, June 30,
1999 1998
--------- --------
Raw materials $ 305,513 $325,804
Work in progress 35,402 1,876
Finished goods 55,974 48,028
Inventory reserve (105,000) (90,000)
--------- --------
$ 291,889 $285,708
========= ========
3. SHAREHOLDERS' EQUITY
ISSUANCE OF SERIES III CONVERTIBLE PREFERRED 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 with two investors for $1,000,000 ($2.50 per unit). The warrants are
exercisable at $3.125 per share and will expire two years from the closing date
of this transaction. The warrants may be called by the Company at a price of
$4.38. The Company incurred offering costs of $63,753 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. Upon any such conversion, each share of Series III
convertible preferred stock shall be converted into a number of fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100th of
a share) of common stock of the Company equal to the quotient of (x) the per
share purchase price (appropriately adjusted to reflect stock splits, stock
dividends, reorganizations, consolidations and similar changes hereafter
effected) of such share of Series III convertible preferred stock, divided by
(y) the lesser of (i) the Conversion Price (as defined) or (ii) 80% of the
average of the closing bid price for the shares of common stock on the ten (10)
trading days prior to the date that the Company receives written notice of
conversion from a holder of such Series III convertible preferred stock.
However, for 200,000 shares, 80% of the average closing bid price shall not be
more 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. The value of the
beneficial conversion feature, $250,000, was recorded as a deemed preferred
stock dividend on the date of issuance.
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CUMULATIVE UNDECLARED DIVIDENDS AND CONVERSION OF PREFERRED STOCK TO 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. During the second
quarter of 1999, $96,192 of accumulated dividends on Series I convertible
preferred stock were canceled in exchange for re-pricing the conversion feature
from one share of common stock for each share of preferred stock to 6.4 common
shares for each share of preferred stock. During the third quarter the holders
of the Company's Series I convertible preferred stock elected to convert their
preferred stock to common stock. The 37,500 shares of Series I convertible
preferred stock were converted into 240,000 shares of common stock. If the
conversion had taken place on January 1,1999, the Company's basic and diluted
loss per share for the three and nine months ended March 31, 1999, would have
been ($.03) and ($.09), respectively. The preferred stock dividends on the
Statement of Operations include 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 nine months ended March 31, 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,
$334,500 of deemed dividends for the nine months ended March 31, 1998 will not
be paid. If the conversion had taken place in July 1997, the Company's basic and
diluted loss per share for the nine months ended March 31, 1998 would have been
($.27).
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting
Comprehensive Income," which was adopted by the Company beginning July 1, 1998.
SFAS No. 130 requires the disclosure of comprehensive income and its components
in the general-purpose financial statements. The adoption by the Company of SFAS
No. 130 did not have a material effect on the Company's financial statements for
the nine months ended March 31, 1999 or 1998. Total comprehensive income (loss)
for the three months ended March 31, 1999 and 1998, was $(89,103) and
$(314,818), respectively, and for the nine months ended March 31, 1999 and 1998,
was $19,695 and $(647,602), respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which became effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The adoption of SFAS No. 131
did not impact the Company's financial statements since the Company operates in
one segment.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
This discussion and analysis contains forward-looking terminology such as
"believes," "anticipates," "expects" and "intends," or comparable terminology.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Potential purchasers
of the Company's securities are cautioned not to place undue reliance on such
forward-looking statements which are qualified in their entirety by the cautions
and risks described herein.
Telident, Inc. designs, manufactures and markets proprietary hardware and
software systems, which provide the exact location of a 911 telephone call to
the emergency dispatcher who receives the call. Telident's systems provide
information which can shorten the response time to a 911 call, reduce the costs
associated with responses to incorrect locations and improve the safety of
individuals within a private branch exchange ("PBX") telephone system.
RESULTS OF OPERATIONS
For the three month period ended March 31, 1999, Telident recorded a net
loss of $(89,103) compared to a net loss of $(314,818) for the same period in
fiscal year 1998. For the nine months ended March 31, 1999, Telident recorded
net income of $19,695 compared to a net loss of $(647,602) for the same period
one year ago.
REVENUES
Revenues consist of equipment sales of hardware and software systems for
enhanced 911 service, mainly from Telident's Station Translation System ("STS")
for PBX systems and packages of hardware and software applications providing
"total PBX 9-1-1 solutions." We also generate revenues from services and
extended warranty contracts.
Revenues for the three month and nine month periods ended March 31, 1999
were $461,449 and $1,909,345 compared to $450,503 and $1,581,078 for the same
periods in fiscal year 1998, an increase of 2% for the three month period and an
increase of 21% for the nine month period. Revenues in the current quarter were
lower than expected as a result of a timing issue caused by marketplace
confusion over the status of an Illinois law mandating enhanced 911 capability
on existing PBX's. The Illinois legislature extended the implementation window
for grandfathered PBX systems (those installed prior to June 30, 1996) from June
30, 1999 to June 30, 2000. There is no change for new systems (systems installed
or upgraded since July1, 1996) which are still required to be compliant with the
mandate at the time they are installed. Increases in revenue were the result of
focusing selling efforts on our core PBX 9-1-1 products including on-site
notification software and 9-1-1 database software applications. Software and
systems sales increased after we introduced new product packaging and pricing
for customer installable PBX 9-1-1 solutions. In addition, direct selling of our
solutions through telephone sales programs has not only increased our direct
revenue, but increased the general awareness of the PBX 9-1-1 issue and the
relevance of Telident's solutions among end users and distributors alike.
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GROSS MARGIN
Gross margin for the three month and nine month periods ended March 31,
1999 increased to 70% and 72% compared to 62% and 67% for the same periods in
fiscal year 1998. These increases resulted from increased shipments of our core
PBX 9-1-1 products, software sales, and improved cost controls of resold
products and installation services.
SALES AND MARKETING
Sales and marketing expenses for the three month and nine month periods
ended March 31, 1999 decreased to $113,479 and $367,434 from $208,765 and
$629,434 for the same periods in fiscal year 1998. These decreases resulted from
the closing of several under-producing sales offices and a reduction in sales
personnel and marketing expenses during the third quarter of fiscal year 1998.
Telident has shifted the focus of its selling efforts away from a field sales
force to direct marketing to end users and distributors. This strategy has
resulted in increased sales while at the same time decreasing sales and
marketing expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month and nine month
periods ended March 31, 1999 decreased to $118,697 and $328,185 from $177,157
and $450,886 during the same periods in fiscal year 1998. These decreases were
due to a reduction in personnel, decreased use of consultants, and a
concentrated focus on research and development efforts for the Telident's
existing PBX 9-1-1 product line.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three month period ended March
31, 1999 decreased to $187,073 from $198,279 and for the nine month period ended
March 31, 1999 increased to $664,355 compared to $606,020 during the same
periods in fiscal year 1998. The increase for the nine month period ended March
31,1999 is due to increased wages and increased professional fees.
INTEREST INCOME
Interest income for the three month and nine month periods ended March
31,1999 was $14,428 and $40,630 compared to $7,363 and $26,883 for the same
periods in fiscal 1998. The increases in the current year are due to the higher
level of cash and cash equivalents due to the sale of preferred stock completed
in August 1998.
INTEREST EXPENSE
Total interest expense for the three month and nine month periods ended
March 31, 1999 was $7,367 and $29,668 compared to $15,402 and $43,980 for the
same periods in fiscal year 1998. The decreases in interest expense were due to
decreased average outstanding borrowings and lower interest rates.
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DIVIDENDS
Telident has never paid a cash dividend on its common stock. The payments
of dividends, if any in the future rest with the discretion of the Board of
Directors and will depend, among other things, upon our earnings, if any,
capital requirements and financial condition. No preferred stock dividends were
paid during the nine months ended March 31, 1999. We plan to retain all
earnings, if any, to further the development of the business.
INFLATION
Inflation has not had a material impact on Telident's net sales or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Telident had cash and cash equivalents of $1,221,389 and
accounts receivable of $602,788. During the nine month period ended March 31,
1999 net cash provided by operating activities was $51,639, due to income from
operations. We used $39,830 of cash to purchase capital equipment and for
capitalized software development costs. We received $103,787 of cash due to net
borrowings on our bank line of credit and used $89,329 to make payments on debt.
Telident completed a sale of preferred stock in August 1998 that resulted in net
proceeds of $936,247. We have relied on debt, equity capital and revenues to
fund our operations during the first three quarters of fiscal year 1999 and
during prior periods.
Based on the projected revenues and expenses, We believe that cash and cash
equivalents, the existing line of credit and collections from accounts
receivable, will be adequate to fund our working capital requirements through
March 31, 2000.
Telident has no material commitments for capital expenditures at March 31,
1999.
TELIDENT'S 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, in less than one year, 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 are presently completing 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
11
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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.
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 expect that minor Year 2000 compliance issues will
continue to be identified as an outcome of these Year 2000 simulation tests and
we intend to address these compliance issues no later than the second quarter of
calendar 1999.
Telident's internal accounting software is not Year 2000 compliant;
however, we have already purchased Year 2000 compliant accounting software and
we plan to roll over our accounting operations to utilize the new software in
1999. Our internal telecommunications and data processing systems have all been
brought into compliance.
We are currently performing a compliance survey of our critical vendors.
Our key computer and software application suppliers are Year 2000 compliant, or
we know their plans to become so. 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, but will utilize
consultants should the need arise. In the aggregate, we have spent an estimated
$22,000 and anticipate spending an additional $13,000 as part of our Year 2000
assessment and remediation. The additional $13,000 includes the estimated $3,000
to $5,000 cost of rolling over 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.
12
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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.
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
are now in the process of assessing and cataloging the first responses to the
survey. We are hopeful of receiving adequate responses from critical vendors and
many non-critical vendors by the second calendar quarter of 1999. We presently
expect to work with vendors that show a need for assistance or that provide
inadequate responses, and in many cases expect that survey results will be
refined significantly by such work. Where ultimate survey results show that the
need arises, we will arrange for back-up vendors before the change-over date.
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; however, we expect that minor Year 2000
compliance issues will continue to be identified as an outcome of these Year
2000 simulation tests. We intend to address these compliance issues no later
than the second quarter of calendar 1999.
5. Disruption of non-computer systems. We are currently conducting a
comprehensive assessment of all non-computer systems, including utility,
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 calendar
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. This Statement is
13
<PAGE>
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company has not yet determined the effects SFAS No. 133 will
have on its financial position or the result of its operations.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31,1999, Telident issued 240,000 shares of common stock to the
three holders of its outstanding Series I convertible preferred stock
upon the conversion of such preferred stock. This issuance was made in
reliance upon the exemption provided in Section 4(2) of the Securities
Act. Such securities were initially restricted as to sale or transfer,
but were subsequently registered for resale under the Securities Act.
The recipient 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 discounts were paid with
respect to the issuance of such securities.
ITEM 5. OTHER INFORMATION
Cautionary Statement
Telident is filing herewith a Cautionary Statement pursuant to the
Private Securities Litigation Reform Act of 1995 for use as a readily
available written document to which reference may be made in connection
with forward-looking statements, as defined in such act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99 Cautionary Statement
27 Financial Data Schedule
(b) Current Reports on Form 8-K
The registrant filed no Current Reports on Form 8-K
during the quarter ended March 31, 1999.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELIDENT, INC.
(Registrant)
May 14, 1999 /s/ W. Edward McConaghay
- --------------------- --------------------------------------
Date W. Edward McConaghay, President
(Principal Executive, Financial and
Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
99 Cautionary Statement
27 Financial Data Schedule
16
EXHIBIT 99
CAUTIONARY STATEMENT
TELIDENT, INC. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION
REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN
IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE
"SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS INTENDED TO BE A
READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE
RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS
ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY
BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT
ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
IF NASDAQ DECIDES THAT TELIDENT'S PAST ISSUANCES OF SECURITIES VIOLATED
NASDAQ'S CORPORATE GOVERNANCE RULES OR THAT TELIDENT HAS VIOLATED OTHER
CONTINUED LISTING RULES, TELIDENT COULD LOSE ITS NASDAQ LISTING, POSSIBLY
DECREASING LIQUIDITY FOR SHAREHOLDERS. The Nasdaq Stock Market may decide that
our past issuances of securities violated Nasdaq's corporate governance rules.
Further, we barely exceed the minimum quantitative standards for continued
listing on the Nasdaq SmallCap Market. In either case, our shares could be
delisted. Nasdaq's corporate governance rules require, among other things, that
issuers obtain shareholder approval prior to the issuance of securities in
connection with a transaction, other than a public offering, involving the sale
or issuance by the issuer of common stock equal to 20% or more of the common
stock or 20% or more of the voting power outstanding before the issuance for
less than the greater of book or market value of the stock.
When Telident entered into the purchase agreement to sell its Series
III convertible preferred stock and the related warrants, the preferred stock
was convertible into less than 20% of the issued and outstanding shares of
common stock and was priced at the then fair market value of the common stock.
The warrants were exercisable for less than 20% of the issued and outstanding
shares of common stock and had an exercise price in excess of the then fair
market value of the common stock. After signing the purchase agreement, but
prior to the issuance of the preferred stock and the warrants, the continued
listing of Telident's securities was being reviewed by Nasdaq. At the time of
that review, Telident provided Nasdaq with all of the documents related to the
issuance of the preferred stock and warrants. Before, during and after Nasdaq's
review, Telident's common stock traded below $2.50 per share. As a result of the
conversion provisions applicable to the preferred stock, the holders gained the
ability to convert those shares into more than 20% of the issued and outstanding
shares of common stock. To date, the antidilution provisions of the warrants
have not been triggered. As a result, there has been no change in the number of
shares for which the warrants may be exercised. Such number is still less than
20% of the issued and outstanding shares of common stock. See "- Preferred stock
conversions, warrant exercises and option exercises will substantially dilute
Telident's shareholders."
Although Nasdaq reviewed the continued listing of Telident's securities
in July 1998, it did not affirmatively exempt Telident from the corporate
governance rules. In early 1999, Nasdaq issued an interpretation of its
corporate governance rules which indicates that if Telident's transaction were
to take place today, it would require shareholder approval. While it was not
apparent that shareholder approval of Telident's transaction was required when
the parties entered into the purchase agreement in April 1998 or when Telident
<PAGE>
appeared before a Nasdaq panel in July 1998, Nasdaq may determine, based on its
recent interpretation, that shareholder approval was required. If Nasdaq reaches
this decision, our securities may be delisted.
If our shares do not continue to be listed on the Nasdaq SmallCap
Market, trading, if any, would be conducted in the over-the-counter market in
the so-called "pink sheets" or the OTC Bulletin Board, which was established for
securities that do not meet the Nasdaq SmallCap Market listing requirements.
Consequently, selling our shares would be more difficult because smaller
quantities of shares could be bought and sold, transactions could be delayed,
and security analyst and news media coverage of Telident may be reduced. These
factors could result in lower prices and larger spreads in the bid and ask
prices for our shares. There can be no assurance that our common stock will
continue to be listed on the Nasdaq SmallCap Market.
IF UNABLE TO RECEIVE ADDITIONAL REQUIRED CAPITAL, TELIDENT COULD LOSE
ITS NASDAQ LISTING, POSSIBLY DECREASING LIQUIDITY FOR SHAREHOLDERS. At March 31,
1999, we had approximately $1.2 million in cash and $2.2 million in net tangible
assets. We believe that the proceeds from our August 1998 private placement and
the cash received from future operations will enable us to meet the working
capital requirements of our current operating plan and to sustain our business
as a going concern at least through March 31, 2000. However, should we incur
additional operating losses in the future, we may require additional capital to
meet Nasdaq's $2.0 million net tangible asset requirement for continued listing
on the Nasdaq SmallCap Market. If additional capital is not available in these
circumstances, we could lose our listing on the Nasdaq SmallCap Market possibly
decreasing liquidity for shareholders. The availability of capital may also
impact our ability to consummate a future acquisition of another company.
Additional capital may not be available on terms acceptable to us or at all.
TELIDENT MAY NOT OPERATE PROFITABLY IN THE FUTURE AND MAY NOT BE ABLE
TO CONTINUE IN BUSINESS UNLESS LONG-TERM TRENDS CHANGE. We have historically
incurred losses from operations because we have not sold enough products to
cover our expenses. We had an accumulated deficit of approximately $13.6 million
as of March 31, 1999. Net losses applicable to our common stock including deemed
dividends for the years ended June 30, 1998 and 1997, were approximately $1.1
million and $3.8 million, respectively. We cannot assure you that we will be
able to operate profitably in the future. We cannot assure you that we will be
able to continue in business unless long-term trends change.
PREFERRED STOCK CONVERSIONS, WARRANT EXERCISES AND OPTION EXERCISES
WILL SUBSTANTIALLY DILUTE TELIDENT'S SHAREHOLDERS. In general, the 400,000
outstanding shares of Series III convertible preferred stock are convertible at
a floating rate that may be substantially below the market price of the common
stock. Based on a 10-day average closing price for the period ending April 16,
1999, each share of this series was convertible into approximately 1.77 common
shares. Pursuant to a modification agreement with Special Situations, one of the
two preferred stock holders, Special Situations is entitled to convert each
preferred share, during a limited period of time, into approximately 3.18 common
shares. The lower the common stock price at the time of conversion, the more
common shares FAMCO and Special Situations get. Due to the conversion formula
applicable to this series, there is no limit on the number of common shares into
which shares of this series can be converted:
* To the extent FAMCO and Special Situations convert preferred
shares and then sell common stock, the common stock price may
decrease due to the additional shares in the market. This could
allow FAMCO and Special Situations to convert preferred shares
into a greater amount of common stock, the sales of which would
further decrease the price of the common stock.
<PAGE>
* The significant downward pressure on the price of the common
stock as FAMCO and Special Situations convert and sell material
amounts of common stock could encourage short sales by FAMCO,
Special Situations or others. This could place further downward
pressure on the price of the common stock.
* The conversion of preferred shares may result in substantial
dilution to the interests of other holders of common stock since
FAMCO and Special Situations may ultimately convert and sell the
full amount issuable upon conversion.
As of April 16, 1999, there were 3,027,657 shares of common stock
outstanding. There were warrants outstanding to purchase 1,084,907 shares of
common stock and options outstanding to purchase 93,519 shares of common stock.
As noted above, there were also 400,000 shares of Series III convertible
preferred stock outstanding. While the preferred shares convert at a floating
rate, each outstanding warrant is exercisable for one common share. If Telident
issues new securities at a price less than $2.50 per share, the antidilution
provisions of the preferred shares and the warrants would cause Telident to
issue a greater number of common shares upon their conversion/exercise based
upon such trigger price.
Based on the 10-day average closing price presented above and assuming
full conversion of the preferred stock and the exercise of all outstanding
warrants and options, Telident would have issued approximately 2,168,475 shares
of common stock. Such shares would have represented approximately 71.6% of our
issued and outstanding common stock on that date.
The following chart depicts the number of common shares we would be
required to issue upon full conversion of the outstanding preferred stock and
the exercise of all outstanding warrants and options, including those which have
exercise prices higher than the current market price. It is worthwhile to note
that, 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 its preferred stock into the numbers of common shares presented in
the following chart.
<TABLE>
<CAPTION>
Common Shares
Issuable Percentage of Resulting
10-Day Average Percentage Above Preferred Stock Common Shares Upon Conversion Total Outstanding Common Shares
Common Stock or Below Recent Conversion Ratio Issuable Upon of Preferred Stock Common Stock Beneficially Owned By
Price at Time of 10-Day Average ----------------- Exercise of ------------------ Newly Issued ----------------------
Conversion or Common Stock Special Warrants and Special Shares Would Special
Exercise Price FAMCO Situations Options FAMCO Situations Represent FAMCO Situations
- ---------------- ---------------- ----- ---------- ------------- ----- --------- ----------------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <S> <C>
$0.708 -60% 4.414 4.414 1,178,426 882,768 882,768 97.2% 2,499,864 1,082,768
$1.062 -40% 2.943 3.185 1,178,426 588,512 636,942 79.4% 2,205,608 836,942
$1.416 -20% 2.207 3.185 1,178,426 441,384 636,942 74.5% 2,058,480 836,942
$1.770 No Change 1.766 3.185 1,178,426 353,107 636,942 71.6% 1,970,203 836,942
$2.124 +20% 1.471 3.185 1,178,426 294,256 636,942 69.7% 1,911,352 836,942
$2.478 +40% 1.261 3.185 1,178,426 252,220 636,942 68.3% 1,869,316 836,942
$2.832 +60% 1.103 3.185 1,178,426 200,000 636,942 66.6% 1,817,096 836,942
</TABLE>
TELIDENT MAY BE UNABLE TO SELL ITSELF OR ACQUIRE ANOTHER COMPANY. We
are exploring strategic options, including selling Telident or acquiring another
company. These options are designed to increase the size and capability of
Telident, to spread the cost of our existing infrastructure, and to increase
shareholder value. We do not have any understandings, commitments or agreements
with respect to any such transactions. There can be no assurance that we will
consummate any such transaction or that any such transaction, if consummated,
will ultimately be advantageous or profitable for us.
<PAGE>
TELIDENT'S RESTRUCTURING MAY NOT LEAD TO PROFITABILITY. We have focused
on strengthening our market position, reducing our costs and examining ways to
grow and be profitable. Such efforts have included reducing operating expenses,
cutting our workforce and repositioning our sales force. These steps may not
lead to increased revenue, improved market position or profitability. If these
measures and other reorganization efforts prove unsuccessful, our business,
operating results and financial condition could be materially adversely affected
and we may be unable to achieve the strategic objectives described above.
IF TELIDENT CANNOT INTRODUCE NEW OR IMPROVED PRODUCTS ON A TIMELY
BASIS, CUSTOMERS WILL TURN TO OUR COMPETITORS AND OUR REVENUE WILL DROP. We
participate in an industry in which significant changes and new and better
products are rapidly introduced. To keep up with the industry changes and
product development, we must make substantial investments in product and
technology developments. We are currently investing in hardware and software
upgrades to increase our product capabilities and to take advantage of improving
microprocessor and software capabilities available on the market. However, if
existing technical standards change more rapidly than we anticipate or if our
plans for operating within changing technical standards prove unworkable, our
products may not meet a competitive market's needs or timing and may not meet
necessary regulatory requirements. Furthermore, we may not have the funds
required to continue these developments or to make additional investments on a
timely basis in the future.
W. EDWARD MCCONAGHAY AND OTHERS COULD LEAVE TELIDENT AT ANY TIME,
IMPAIRING OUR DEVELOPMENT AND PROFITABILITY. We believe that our development and
ability to operate profitably depends on the continued employment of our senior
management team. If W. Edward McConaghay, the President and Chief Executive
Officer, who Telident has employed since April 1997, or other members of the
management team do not continue to serve in their present positions, our
business, operating results, financial condition, and cash flows could be
materially adversely affected. We have not entered into non-competition or
employment agreements with our employees. As a result, our employees could leave
at any time and compete against us in our industry. Further, we do not maintain
life insurance on any of our employees.
COMPETITION IN 911 TRANSLATION MAY PREVENT TELIDENT FROM GETTING OR
KEEPING CUSTOMERS. We face increasing competition from other companies that
market products similar to our station translation system product. We are aware
of two competitors which market similar products. In addition, several other
competitors provide a basic 911 translation capability through hardware and
software used in connection with private telephone systems. Many of our
potential competitors are larger and have greater resources than we do. In
addition, the technology used in the telecommunications industry is subject to
rapid change. We must be able to adapt to such changes by our competitors or our
products will become obsolete. There can be no assurance that we will be able to
adapt to such changes on a timely basis, if at all. Our competitors continually
take steps to attract customers and increase their market share. The most
heavily used techniques are advertising, target marketing and price competition.
These competitive practices, as well as competition that may develop in the
future, could diminish our ability to obtain and keep customers.
THE MARKETPLACE MAY NOT ACCEPT 911 TRANSLATION PRODUCTS. There can be
no assurance that additional states or the FCC will mandate the modification of
certain private telephone systems to make them fully compatible with existing
911 technology. In the absence of such mandates, there can be no assurance that
our products will maintain their current level of acceptance.
TELEPHONE COMPANIES MAY NOT COOPERATE WITH TELIDENT. The attractiveness
of our products 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
<PAGE>
drop.
We presently are experiencing delays with Ameritech, the telephone
company for Illinois, Michigan, Ohio, Indiana and Wisconsin. We believe that
other telephone equipment manufacturers and related service providers are having
similar difficulties with Ameritech. We have installed and continue to install
working systems in these states; however, we can experience 120-150 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 are exploring ways to improve our relationship with Ameritech 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.
TELIDENT'S ANALOG PRODUCTS WILL BECOME OBSOLETE; TELIDENT WILL BE
REQUIRED TO DEVELOP DIGITAL SOFTWARE INTERFACES. Several telephone companies
have expressed a preference to sell digital equipment to customers within their
territories instead of the current standard analog interface offered by
Telident. We are currently preparing for a change to the use of digital
interfaces connecting our products to private telephone systems. We are in the
early stages of developing interfaces so that our software will work with
digital equipment, we believe that we have the technical ability to develop such
interfaces and we estimate that such development will cost $20,000 to $30,000.
We intend that our software applications will operate with digital equipment
independent of the type of interface and independent of the hardware vendor.
TELIDENT'S STOCK PRICE MAY BE VOLATILE. The market price of our common
stock has fluctuated significantly in recent months in response to numerous
factors. Variations in our financial results, changes by financial research
analysts in their estimates of our earnings, conditions in the economy in
general or in our industry in particular, unfavorable publicity or changes in
applicable laws and regulations affecting us may cause such fluctuations. In the
first four months of trading in 1999, our stock ranged from a high of $7.00 per
share on January 12 to a low of $1.06 per share on March 19 and 22. There can be
no assurance that purchasers of our stock can sell such stock at or above the
prices at which it was purchased.
TELIDENT MAY BE LIABLE FOR DELAYED RESPONSES TO 911 CALLS. We may be
liable if, through the failure of any of our products, any such products
contribute to a delayed response from a 911 call resulting in injury, illness or
death. While our products are designed to complete 911 calls even if they fail
to provide number and location detail, there can be no assurance that this
feature will always work as expected. We carry product liability insurance, but
this insurance may not be adequate to cover successful product liability claims.
We know of no product liability claims against us and we know of no product
liability claims brought against our competitors. However, a successful product
liability suit could materially adversely affect our business, operating
results, financial condition and cash flows.
TELIDENT MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY. We rely
upon trade secrets and patents to protect the technology we develop. We also
require our employees to execute nondisclosure agreements to preserve our trade
secrets. It is important for our success to preserve our intellectual property.
Our competitors may develop or acquire substantially equivalent technologies or
gain access to our trade secrets. We may not be able to protect our rights in
our trade secrets and our attempts to do so may not provide us with a
competitive advantage.
THE SALE OF TELIDENT'S STOCK MAY CAUSE THE MARKET PRICE OF TELIDENT'S
STOCK TO FALL. The market price of our common stock could drop as a result of a
large number of shares of common stock being sold in the market following resale
registrations, the exercise of warrants and options, the conversion of
convertible securities, or the perception that such sales could occur. These
factors could also make it more difficult for us to raise funds through future
equity offerings.
TELIDENT'S LOW STOCK PRICE MAY PRESENT LIQUIDITY PROBLEMS FOR
SHAREHOLDERS. If our shares are not listed on the Nasdaq SmallCap Market, a
broker-dealer trading our shares may need to make a special suitability
determination for a purchaser and receive a purchaser's written consent to a
transaction prior to sale.
<PAGE>
If our shares are delisted from Nasdaq and we fail to meet other financial
criteria, the SEC may apply "penny stock" restrictions to our shares. In either
case, the market liquidity for our shares would be adversely affected.
SINCE THE DIRECTORS EFFECTIVELY CONTROL TELIDENT, THEY COULD TAKE
ACTIONS CONTRARY TO THE PREFERENCES OF SHAREHOLDERS AT LARGE. Our current
directors beneficially own over half of our common stock. Accordingly, such
persons may control the outcome of shareholder approvals of business
acquisitions, mergers and combinations and other actions. Even if other
shareholders sought to discontinue operations and liquidate Telident, our
current directors could prevent Telident from taking such actions.
YEAR 2000 COMPLIANCE ISSUES MAY NEGATIVELY AFFECT TELIDENT. 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,
in less than one year, 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 are presently completing 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.
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 expect that minor Year 2000 compliance issues will
continue to be identified as an outcome of these Year 2000 simulation tests and
we intend to address these compliance issues no later than the second quarter of
calendar 1999.
Telident's internal accounting software is not Year 2000 compliant;
however, we have already purchased Year 2000 compliant accounting software and
we plan to roll over our accounting operations to utilize the new software in
1999. Our internal telecommunications and data processing systems have all been
brought into compliance.
We are currently performing a compliance survey of our critical
vendors. Our key computer and software application suppliers are Year 2000
compliant, or we know their plans to become so. 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, but will utilize
consultants should the need arise. In the aggregate, we have spent an estimated
$22,000 and anticipate spending an additional $13,000 as part of our Year 2000
assessment and remediation. The additional $13,000 includes the estimated $3,000
to $5,000 cost of rolling over our accounting operations to utilize new software
that is Year 2000 compliant.
<PAGE>
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.
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 are now in the process of assessing and cataloging the first
responses to the survey. We are hopeful of receiving adequate responses from
critical vendors and many non-critical vendors by the second calendar quarter of
1999. We presently expect to work with vendors that show a need for assistance
or that provide inadequate responses, and in many cases expect that survey
results will be refined significantly by such work. Where ultimate survey
results show that the need arises, we will arrange for back-up vendors before
the change-over date.
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; however, we expect that minor Year 2000
compliance issues will continue to be identified as an outcome of these Year
2000 simulation tests. We intend to address these compliance issues no later
than the second quarter of calendar 1999.
5. Disruption of non-computer systems. We are currently conducting a
comprehensive assessment of all non-computer systems, including utility,
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 calendar 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,221
<SECURITIES> 0
<RECEIVABLES> 633
<ALLOWANCES> 30
<INVENTORY> 292
<CURRENT-ASSETS> 2,202
<PP&E> 530
<DEPRECIATION> 357
<TOTAL-ASSETS> 2,619
<CURRENT-LIABILITIES> 476
<BONDS> 4
0
32
<COMMON> 242
<OTHER-SE> 1,865
<TOTAL-LIABILITY-AND-EQUITY> 2,619
<SALES> 1,909
<TOTAL-REVENUES> 1,909
<CGS> 541
<TOTAL-COSTS> 541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 20
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
