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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB/A
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-20887
TELIDENT, INC.
(Name of Small Business Issuer in Its Charter)
MINNESOTA 41-1533060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TEN SECOND STREET N.E., SUITE 212, MINNEAPOLIS, MINNESOTA 55413
(Address of Principal Executive Offices, including Zip Code)
(612) 623-0911
(Issuer's Telephone Number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK ($.08 PAR VALUE)
(Title of Class)
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 contained 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. |_|
The issuer's revenues for its most recent fiscal year were $2,269,000.
The aggregate market value of the voting stock held by non-affiliates
of the issuer as of August 3, 1998 was approximately $5,226,328.
The number of shares of the common stock of the issuer outstanding as
of August 3, 1998 was 2,787,297.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
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PART I ........................................................................1
ITEM 1 DESCRIPTION OF BUSINESS.......................................1
ITEM 2 DESCRIPTION OF PROPERTY.......................................6
ITEM 3 LEGAL PROCEEDINGS.............................................6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........6
PART II .......................................................................7
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................9
ITEM 7 FINANCIAL STATEMENTS.........................................17
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................32
PART III .....................................................................33
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.................................................33
ITEM 10 EXECUTIVE COMPENSATION.......................................36
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................37
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............39
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................41
SIGNATURES ...................................................................44
INDEX TO EXHIBITS ............................................................45
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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/A relate to
Telident, Inc.
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
We design, manufacture and market hardware and software systems
which provide the exact location of a 911 telephone call to the emergency
dispatcher at the 911 public safety answering point who receives the call. Our
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. 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 network technology which
automatically transmits 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 December 31, 1998, 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 * Apartments and condominiums
* Colleges and universities * Nursing and retirement homes
* City, county and state
government offices * Hotels and motels
* Public schools * Hospitals and clinics
HISTORY
The development of the emergency response telephone network, 911,
began in the late 1960's under the direction of AT&T in conjunction with Bell
Labs. The 911 network was designed using the fundamental theory that the
specific pair of wires connecting the caller with the telephone company could
identify each caller. This design theory mirrored the long distance routing
network that AT&T had previously developed. This design theory has created the
911 incompatibility problem that exists with PBX systems today. PBX systems
share multiple connections (pairs of wires), and the ability to pinpoint the
caller behind a business
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telephone system is lost to the network. The designers of the Enhanced 911
network may not have envisioned the popularity and deployment of PBX systems in
the United States. Throughout the 1970's, 911 systems were deployed with voice
transmission only. In response to public demand for more precise information as
to the caller's location, development of the Enhanced 911 network began in the
early 1980's. However, widespread use of PBX systems did not begin until after
the breakup of AT&T in 1983.
STRATEGY
The Company was incorporated in Minnesota in July 1983 to develop
and market electronic equipment for the telephone communications industry. From
1983 to 1985, Telident developed the Status Recognition Unit System I (the
SRU1), a system which permits operating telephone companies to increase
dedicated phone services capabilities. Based on a review of the market for the
SRU1, Telident determined that there was a significant market opportunity for
products, based on the technology of the SRU1, which could expand the
capabilities, safety and reliability of emergency 911 service systems. Since
1989, the Company's goal has been to become a leading designer of systems which
enable precise identification of the location of 911 callers within a PBX
system.
To achieve this goal, the Company provides its customers with a
total E911 solution, providing the hardware, software and service components to
meet their emergency 911 information needs. For example, the Company provides
PBX users: (i) equipment (the Station Translation System) required to enable the
PBX to be compatible with E911 service; (ii) software and services which enable
PBX users to create and maintain the required database; and (iii) additional
software applications, such as TRAX OSNTM software which expands the
capabilities of a PBX system utilizing the STS so that it automatically provides
the precise location of the caller within the network to both the appropriate
PSAP and to on-site personnel, such as security guards.
Telident has developed a national distribution network to provide
sales support for its products and services through relationships with major
distributors of PBX equipment and services and telephone companies. Telident has
distribution agreements with 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. No
PBX manufacturer, distributor or customer accounts for more than 10% of revenue.
PRIMARY PRODUCTS
9-1-1 STS (STATION TRANSLATION SYSTEM)
The 9-1-1 STS(TM) (STS) is a product designed for use with PBX
systems. A PBX is a switching center maintained by an organization, such as an
apartment complex, university, office building or government office complex
where calls to and from phone locations are routed to their destination. The STS
is designed to provide for the automatic identification for 911 purposes of the
location of all callers within the PBX area. The STS provides automatic
identification to the PSAP of the location of the caller within a PBX system.
The Company has satisfactorily tested the compatibility of the STS with the PBX
equipment of eleven manufacturers, who account for over 90% of domestic PBX
sales. The Company has more than 1,000 STS installations in the United States
and Canada.
DATABASE MANAGEMENT SOFTWARE is a collection of software programs,
which assist in the development, and maintenance of a customer's location
information database. A database collection tool is included to collect the data
necessary to create the initial database. A database maintenance program is
included to allow users to maintain their data and send updates to the telephone
company.
TRAX OSN(TM) (On-Site Notification) is a software program to enhance
the STS. With TRAX OSN, the STS will provide automatic identification to the
PSAP of the location of the caller within a PBX system
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and simultaneously will provide on-site notification of the call to a location
within the organization, such as a security desk, reception or first-aid
station.
SITE ALERT(TM) is a high quality, low cost PBX/911 on-site
notification only system that provides security personnel, console attendants
and other individuals responsible for identifying the location of emergency
calls with the time and extension number of 911 calls simultaneously to those
calls being received at the public safety answering point (PSAP).
These products are variously packaged in "bundles" of hardware and
software to create total "9-1-1 SOLUTIONS(TM)". These packages are simple to
install and maintain, are sold directly by Telident or through its distribution
channels, and are available with optional installation, applications consulting,
and maintenance programs.
9-1-1 ACS (ANI CONTROL SYSTEM)
The 9-1-1 ACS(TM), or ANI Control System, takes an incoming 911 call
and delivers the voice portion of the call to the emergency operator's telephone
and the telephone signaling portion (which contains the incoming caller's
telephone number) to a database where the caller's location can be obtained and
relayed to the emergency operator. The ACS is used in public 911 and private
emergency response applications. The ACS is sold to public network 911 systems
integrators as a component part of their total system. It is also sold directly
by Telident in conjunction with private PBX 911 applications.
9-1-1 NCS (NETWORK CONTROL SYSTEM)
The 9-1-1 NCS(TM) (NCS) is a microprocessor-based unit that
selectively routes a 911 call originated from any station in the 911 service
area to the correct PSAP designated to serve the originating station. Because
NCS units can be distributed throughout the telephone network, Telident believes
trunking costs can be minimized for the telephone operating company and Enhanced
911 service which is often taken for granted in large metropolitan areas may
more readily be made available to rural America.
MARKETING AND DISTRIBUTION
The Company markets its 911 products through distribution agreements
which include major PBX manufacturers and distributors; local, state and
national public safety agencies; service providers, including certain of the
regional Bell operating companies and major independent telcos; and
manufacturers' representatives. Customers for these products include businesses,
PBX manufacturers, colleges and universities, public and private school systems,
banks, the healthcare industry, hotels and motels, businesses with multi-story
or multi-building facilities, regional Bell operating companies, the military,
system integrators, and government agencies.
Telident instituted a new plan for growth during fiscal 1998 by
closing its three regional sales offices and employing inside sales
representatives to market directly to its prospects. These seasoned telephone
sales representatives are focused on selling to select customers within the
Company's target markets that meet pre-determined criteria such as business type
and telecommunications equipment on site. The Company's products have been
bundled into complete user-friendly packages of hardware and software that can
be installed by the customer or their system's integrator. These changes have
made a direct positive impact on Telident's sales efforts.
E911 regulatory issues, such as the actions of the Federal
Communications Commission (FCC) and the Public Utilities Commissions (PUCs) in
the 50 states affect potential markets for the Company's products. For example,
as of December 31, 1998, Texas, Illinois, Washington, Kentucky, Vermont and
Mississippi had passed state laws or enacted regulations mandating (to various
degrees) the modification of PBX systems to
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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 maintains an engineering department to design and
develop new products for the telephone industry and to support developments of
new application software to broaden applications of its products. The Company
employed one electrical engineer during fiscal 1998 to manage projects performed
by outside contract development companies. The research and development portion
of the Company's development expenditures for fiscal 1998 and 1997 were $94,021
and $262,725, respectively. New research and development projects will be
initiated and funded as customer requirements and commitments are realized. The
Company intends to expand its development capabilities during fiscal year 1999
by hiring additional experts. Future products will continue to be developed by a
combination of in-house talent and outside contract development companies.
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 such interfaces, 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 also offer our
customers software applications which operate with digital equipment independent
of the type of interface.
MANUFACTURING
Telident conducts final assembly and testing along with receiving
and shipping of its products. The Company subcontracts all of its equipment
subassembly fabrication to local manufacturers and assembly houses that are
equipped and qualified to perform this work and that produce high quality
printed circuit board assembly products. The Company is not dependent on any one
of its subcontractors. The component electronic parts required for assembly of
the Company's products are available from a number of different sources. As unit
volumes increase, the Company will evaluate and qualify contract manufacturers
as part of a transition to complete outsourced turnkey manufacturing.
COMPETITION
The Company is aware of two competitors which market a product which
competes with the Company's STS. 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. Additionally,
several PBX manufacturers now provide a basic 911 translation capability through
new PBX hardware and software releases. The Company believes that these products
are more limited in capability than the Company's solutions and are not
appropriate for a large number of installed PBXs due to the expense of the
required upgrades. 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 offers PBX owners and distributors a single comprehensive solution,
independent of PBX type. The Company believes that, notwithstanding competition
for its STS equipment, that it has the industry leading on-site notification and
database management software applications. Furthermore, the Company's total 911
systems knowledge and turn-key project management and installation services
distinguish it from other suppliers.
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COOPERATION WITH TELEPHONE COMPANIES
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 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.
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), FEU-2(TM), 9-1-1
NCS(TM), 9-1-1 ACS(TM), Site-Alert(TM), Tel-Alert(TM), and 911 Solutions(TM).
REGULATION
The United States Federal Communications Commission (FCC) requires
that certain communication devices be tested by a certified facility prior to
receiving FCC approval. Testing is designed to demonstrate that devices will not
cause harmful interference to telephone communications. In addition, certain
jurisdictions may require that the Company's products meet Underwriters'
Laboratory (UL) requirements. The Company's equipment meets both FCC and UL
requirements.
EMPLOYEES
At June 30, 1998, the Company had 19 employees, including two
administrative, seven sales and marketing, and ten operations and development
personnel. At various times, the Company employs from two to seven contract
employees to fulfill customer requirements.
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ITEM 2. DESCRIPTION OF PROPERTIES.
The Company currently leases 6,000 square feet of office and final
assembly space at a monthly rental of approximately $8,200. The leases expires
in September 1999. The Company considers the office suitable for its needs for
the duration of the lease term. The Company's headquarters are located at Ten
Second Street NE, Suite 212, Minneapolis, Minnesota 55413.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock trades on the Nasdaq SmallCap Market
under the symbol TLDT. The following table shows the range of high and low bid
prices for the Company's common stock as reported by the National Quotation
Bureau for the period from July 1, 1996, to August 12, 1996 and as reported by
the Nasdaq SmallCap Market thereafter monthly. These quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions,
and may not represent actual transactions. The prices are adjusted for the
effect of a 4:1 reverse stock split on January 13, 1998.
Bid Prices
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High Low
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Fiscal 1997
- -----------
Quarter ended September 30, 1996 $ 16.00 $ 12.00
Quarter ended December 31, 1996 12.50 6.50
Quarter ended March 31, 1997 8.25 4.00
Quarter ended June 30, 1997 5.12 3.37
Fiscal 1998
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Quarter ended September 30, 1997 $ 5.25 $ 3.50
Quarter ended December 31, 1997 4.63 2.25
Quarter ended March 31, 1998 3.56 1.00
Quarter ended June 30, 1998 2.88 2.06
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At June 30, 1998, the number of holders of the Company's common
stock was approximately 2,237 consisting of 137 record holders and approximately
2,100 stockholders whose stock is held by a bank, broker or other nominee.
DIVIDENDS
The Company has never paid a cash dividend on its common stock. The
payments of dividends, if any, in the future rest with the discretion of the
Board of Directors and will depend, among other things, upon the Company's
earnings, if any, capital requirements, and financial condition. The Board of
Directors intends to reinvest all earnings into the development of the Company's
products and markets, and as such, no cash dividends are currently contemplated.
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RECENT SALES OF UNREGISTERED SECURITIES
In April 1998, Telident entered into a securities purchase agreement
with FAMCO III, Limited Liability Company and Special Situations Private Equity
Fund, L.P., 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. Family Financial Strategies, Inc. is
the manager of FAMCO. John Wunsch, Greg Nelson and Diane Neimann are the sole
officers and directors of Family Financial Strategies. Mr. Wunsch has also been
a director of Telident since July 1997. MG Advisers, L.L.C. acts as general
partner of and investment adviser to Special Situations. Austin W. Marxe and
David Greenhouse are the sole members of MG Advisers.
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 outstanding shares of Series III Convertible
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 a 10-day average closing price of $1.86 per share for the
period ending August 31, 1998, the holders of Series III Convertible Preferred
Stock were entitled to convert each preferred share into approximately 1.68
common shares.
Due to the above conversion formula, the actual number of shares
issuable upon conversion of the outstanding Series III Convertible 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 Series III
Convertible 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.
Holders of outstanding preferred stock are entitled to dividends if
dividends are paid on the common stock. If dividends are paid on the common
stock, a comparable dividend (in cash or common shares) must be paid on the
preferred stock. In addition, holders of Series III Convertible Preferred Stock
are also entitled to dividends if dividends are paid on the Series I Convertible
Preferred Stock. As of December 31, 1998, no cumulative dividends were
outstanding on any series of Telident's preferred stock.
In connection with their purchase of Series III Convertible
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 terminate in April 2000. These warrants also contain antidilution
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.
Under our stock purchase agreements with FAMCO and Special
Situations, we agreed to register (a) their shares of common stock, (b) shares
to be issued to them upon the conversion of their preferred stock, and (c)
shares to be issued to them upon the exercise of their warrants. We also agreed
to use our
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best efforts to keep the registration statement effective for three years, until
they no longer hold or have the right to acquire the shares, or until all of
their shares may be sold pursuant to SEC rules without volume restrictions,
whichever comes first.
The Company believes the transaction was exempt pursuant to Section
4(2) under the Securities Act of 1933 and Rule 506 under Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The Company 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 June 30,
1998, the Company incurred losses from operations because product sales have not
covered expenses.
In fiscal 1997, the Company's Board developed and implemented a
restructuring plan addressing both the business and organizational elements
required to ensure operational effectiveness and negotiated several agreements
to strengthen the balance sheet, provide liquidity and improve cash flow:
* The Company wrote off specific inventory items with a value of
$130,245 that were not used in the production process, wrote
off inventory relating to the discontinued Cantus line of
$35,000, and set up a $75,000 reserve for specifically
identified items that would not be used in the future.
* As a result of the Company's decision to discontinue the
production and sale of its Cantus products, the Company
expensed the remaining net book value of goodwill associated
with the fiscal 1995 acquisition of Cantus Corporation,
$268,076.
* To decrease future expenses, the Company reduced the number of
employees by 45%. The 13 former employees received severance
packages totaling $60,515 in fiscal 1997. The reduction in the
number of employees resulted in the Company having excess
office and warehouse space under noncancelable leases with a
term of one year. The Company 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 subsequently vacated such space when the leases
expired. The Company also paid $23,328 in fiscal 1997 for
professional services in connection with the above events.
* During the fourth quarter, substantially all ($835,500 of
$993,000) subordinated convertible debentures holders
converted their debt and related accrued interest into
Telident common stock. As an incentive to cause the debenture
holders to convert, the Company temporarily reduced the
conversion price from $15.84 to $4.50 per share and issued
warrants to purchase 97,475 shares of common stock at $5.64
per share. The warrants will expire on June 30, 1999, and may
be called any time after the market value of the Company's
common stock exceeds $7.88 per share for 10 days. The Company
recorded a noncash debt conversion expense of $679,797 during
fiscal 1997 relating to the induced conversion.
The Company received gross proceeds of $1,250,000 and $1,000,000
from the sale of convertible 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 the Company's liquidity and to meet the Nasdaq
SmallCap Market's requirements for continued listing. At the time of issuance,
the convertible 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 convertible preferred stock in fiscal year 1998,
$312,500, increased the net loss applicable to common shareholders by $0.16 per
share for the year ended June 30, 1998. The value of the beneficial conversion
feature relating to
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the sale of convertible preferred stock in fiscal year 1999 will increase the
net loss applicable to common shareholders or decrease the net income applicable
to common shareholders by $250,000 in the first quarter of fiscal 1999. The
convertible preferred stock sold in July 1997 was converted into 1,052,189
shares of common stock in April 1998.
Based on projected revenue and expenses, the Company 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
through June 30, 1999.
RESULTS OF OPERATIONS
The following table presents the statement of operations data as a
percentage of net sales for the fiscal years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
(DECREASE)
FISCAL YEAR ----------------------
----------- 1998 1997
1998 1997 1996 OVER 1997 OVER 1996
----------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 29.3% (28.5)%
Cost of sales 31.1 32.6 32.2 23.5 (27.9)
Inventory revaluation -- 13.7 -- (100.0) N/A
------- -------- --------
Gross profit 68.9 53.7 67.8 65.8 (43.3)
Sales and marketing 33.8 71.2 39.8 (38.7) 27.9
Research and development 25.1 58.6 41.4 (44.5) 1.3
General and administrative 35.3 67.8 41.6 (32.7) 16.3
Restructuring charges -- 22.3 -- (100.0) N/A
------- -------- --------
Total operating expenses 94.2 219.9 122.8 (44.6) 28.0
------- -------- --------
Operating loss (25.3) (166.2) (55.0) 80.3 115.8
Interest expense, net 1.2 10.4 15.4 (85.0) (51.6)
Debt conversion expense -- 38.8 2.6 (100.0) 973.4
------- -------- --------
Net loss (26.5)% (215.4)% (73.0)% 84.1 110.8
======= ======== ========
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales in fiscal 1998 increased 29.3% to $2,269,000 compared to
$1,754,451 in 1997. This growth was attributed to the Company's new sales and
marketing strategies to promote its hardware and software in bundled packages
and to sell through direct marketing. PBX 911 solutions, including hardware and
software packages, accounted for 97% of sales in 1998 compared to 88% in 1997.
The Company's other products, including maintenance revenues attributable to
discontinued Cantus products, the ANI Control System ("ACS") and the Network
Control System ("NCS"), collectively accounted for 3% of sales in 1998 compared
to 12% of sales in 1997. At June 30, 1998, the Company had a backlog of orders
of approximately $675,000.
Gross margin percentage increased to 68.9% of revenue in 1998 from
53.7% of revenue in 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
10
<PAGE>
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 the 1997 period. During fiscal
1998, the Company reduced the size of its direct sales force
and closed its offices in California, Texas, and Illinois and
replaced them with lower cost inside sales representatives.
* Research and development expenses decreased 44.5% to $570,795
in 1998 compared to $1,028,464 in the 1997 period. In 1998,
the Company reduced its operations personnel and use of
consultants. Furthermore, research and development spending
was limited 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 the 1997 period. 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 the Company's decision
to discontinue the production and sale of its Cantus products
and decrease the number of employees to reduce expenses. The
Company 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 the Company having excess office and
warehouse space under noncancelable leases with a term of one
year. The Company expenses $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 the
1998 period compared to the 1997 period. The Company experienced a decrease in
interest expense for fiscal 1998 as a result of decreases in bank borrowings
made possible by a private placement of the Company's preferred stock in July
1997 which generated net proceeds of $1.2 million, and the elimination of
$950,000 of debt through redemption and conversion of debt into the Company's
common stock in June 1997.
During fiscal 1997, the Company 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. The Company 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 half share of
common stock at $5.64 per share for each share of common stock received upon
conversion. The Company 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, the Company issued warrants to
purchase 97,475 shares of common stock at $5.64 per share. The warrants will
expire on June 30, 1999, and may be called any time after the market value of
the Company's common stock exceeds $7.88 per share for 10 days.
11
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
The Company had net sales in fiscal 1997 of $1,754,451 compared with
$2,454,807 for 1996, a decrease of 28.5%. The decline in total revenues for
fiscal 1997 was the result of several factors, including a significant reduction
in the Company's workforce, a change in the Company's senior management, the
ramp-up requirements of new sales people and a slowdown in Station Translation
System ("STS") shipments to match the Company's new customer fulfillment
procedures. One time charges of approximately $1,551,000 were incurred in the
third and fourth quarters of fiscal 1997, to revalue inventory and other assets,
and to pay the costs associated with the termination of employees. STS product
sales accounted for 88% of the sales in the 1997 period compared to 80% in the
1996 period. Maintenance revenues attributable to discontinued Cantus products
amounted to 3% of sales in fiscal 1997 compared to 12% in the fiscal 1996
period. The Company's other products, including the ANI Control System ("ACS")
and the Network Control System ("NCS"), collectively accounted for 9% of sales
in the 1997 period compared to 8% of sales in the 1996 period. At June 30, 1997,
the Company had a backlog of orders of approximately $811,000.
Gross profit decreased $720,130 or 43.3% in fiscal 1997, as a result
of lower sales and the $240,245 inventory revaluation. Excluding the revaluation
charge, the gross margin percentage in fiscal 1997 was 67.5% versus 67.8% in
fiscal 1996. The revaluation charge is primarily due to inventory items being
written off due to changes in bills-of-materials and the discontinuation of a
product line.
Operating expenses increased from $3,014,005 in fiscal 1996 to
$3,858,300 during fiscal 1997, an increase of $844,295 or 28.0% due to:
* Sales and marketing expenses increased $272,470 in fiscal
1997, a 27.9% increase. The Company steadily increased its
marketing expenses, as well as the size of its sales and
marketing staff, reaching a peak of five regional sales
offices in Atlanta, San Francisco, Los Angeles, Chicago, and
Dallas to assist in the sales by the Company's distributors.
The offices in Atlanta and Los Angeles were closed in April
1997.
* Research and development expenses increased $13,143 or 1.3% in
the 1997 period compared to the 1996 period as the Company
continued a high level of investment in research and
development.
* General and administrative expenses for fiscal 1997 increased
$167,163, or 16.3% compared to the similar 1996 period. These
increases were due in part to an increase in rent, and
professional fees.
* Restructuring charges of $391,519 were recorded in the third
quarter of fiscal 1997 as a result of a reorganization of the
Company's personnel and certain write downs of other assets.
Interest expense, net of interest income, decreased $195,281 in the
1997 period compared to the 1996 period. The Company experienced a decrease in
interest expense for fiscal 1997 as a result of reduced bank borrowings made
possible by a public offering of 287,500 shares of the Company's common stock in
August of 1996 which generated net proceeds of $2.9 million, and the conversion
of debt into the Company's common stock.
Debt conversion expense relates to the induced conversion of
convertible debentures and accrued interest into 194,950 shares of the Company's
common stock and the issuance of warrants to purchase 97,475 shares of common
stock at $5.64 per share. The debt conversion expense did not impact cash flows.
12
<PAGE>
CAUSE AND EFFECTS OF RECENT RESTRUCTURING
Telident has historically incurred losses from operations because
the Company has not sold enough products to cover expenses. By the third quarter
of fiscal 1997, the Company had incurred cumulative losses of $11.7 million.
Therefore, a restructuring of the Company was initiated in the third quarter of
fiscal 1997 with a plan to address the business and organizational elements
required to ensure effective management, sales growth, operational effectiveness
and financial controls. The reorganization was substantially completed by the
end of fiscal 1997. All restructuring charges were declared in the third quarter
and fourth quarter of fiscal 1997. Any additional costs related to personnel
changes or financings were charged to earnings in the period in which the action
took place. During fiscal 1998 additional personnel changes were required to
meet the needs of the business and new equity financing was arranged. By the
fourth quarter of fiscal 1998, although the accumulated deficit had grown to
$13.7 million, the Company was recording sufficient increases in revenue and
decreases in operating expenses to produce quarterly profits. There are no
further restructuring actions nor any restructuring charges planned at this
time. Significant events are outlined below.
* The organizational changes began with the appointment of a new
President and Chief Executive Officer on April 1, 1997.
Coincident with this appointment a 35% staff reduction was
implemented, obsolete software assets were written down, and
reserves for slow moving and obsolete inventory were increased
to reflect the appropriate value of the inventory. Operating
expense control and cash management measures were instituted.
* A transition to a more effective and cost efficient telephone
sales and sales support strategy began in fourth quarter of
fiscal 1997 with the elimination of two field sales offices
and personnel. This transition was completed in the third
quarter of fiscal 1998 when the remaining three offices and
field sales personnel were eliminated and all selling
activities converted to independent distributors and inside
telephone sales personnel.
* Conversion to equity of substantially all ($835,500 of
$993,000) of the Company's subordinated convertible debt took
place in fiscal 1997, at which time the Company recorded a one
time debt conversion expense of $679,797. The remaining
$157,500 balance of the debt was paid in July 1997 and July
1998.
* Telident raised $1.25 million new equity in the first quarter
of fiscal 1998 and $1.0 million new equity in the first
quarter of fiscal 1999. This equity was used for normal
working capital requirements and to meet Nasdaq minimum
tangible net asset listing requirements.
* Changes in the Company's product offering to increase the
software and services content began in fiscal 1998 with the
introduction of new database management software and
improvements to the existing on-site notification software.
The Company was able to increase the software content in its
"total 911 solutions" packages and therefore maintain the
Company's traditionally high margins (approximately 70%)
notwithstanding increased distributor sales. Furthermore,
selected services were redefined and repriced throughout
fiscal 1998 to improve profit margins.
Telident's actions have created a structure that is appropriate for its sales
projections based on current business opportunities. New sales growth, coupled
with the operational efficiencies and cost controls put in place, positioned the
Company for profitability. The impact of these actions were seen beginning in
the fourth quarter of fiscal 1998 with continuing improvement into fiscal 1999.
13
<PAGE>
INFLATION
Management believes inflation has not had a material effect on the
Company's operations or on its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of
$258,875 and accounts receivable of $508,956. For the period ended June 30,
1998, net cash used in the Company's operating activities was $540,000,
consisting primarily of the Company's loss from operations of $601,115, an
increase in accounts receivable, and a decrease in accounts payable, partially
offset by a decrease in inventories. Funds required to finance the Company's
operations, investments and payments of debt during fiscal 1998, were provided
by net proceeds of $1,193,627 from the private placement stock offering
completed during the first quarter of fiscal 1998. The Company has relied on
debt and equity capital to fund its operating losses during fiscal 1998 and
prior periods.
Based on projected revenues and expenses, the Company believes that
the August 1998, $1,000,000 equity transaction (see Note 7 to the financial
statements) together with cash from operations will be adequate to fund the
Company's working capital requirements through June 30, 1999. The Company has no
material commitments for capital expenditures for fiscal 1999. At June 30, 1998,
the Company had shareholders' equity of $1,175,929.
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: (a) our hardware
and software products, (b) our internal administrative systems, and (c) 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. In addition, we are in the process of determining whether our voice mail
14
<PAGE>
system is Year 2000 compliant. If we determine that our voice mail system is not
Year 2000 compliant, we plan to upgrade the system to achieve Year 2000
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. Our internal telecommunications
and data processing systems are 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, but will utilize
consultants should the need arise. In the aggregate, we have spent an estimated
$20,000 and anticipate spending an additional $15,000 as part of our Year 2000
assessment and remediation. The additional $15,000 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.
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. The Company 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
15
<PAGE>
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 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which will be effective for the Company beginning July 1,
1998. SFAS No. 130 requires the disclosure of comprehensive income and its
components in the general-purpose financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which became effective for
the Company beginning July 1, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. The Company
anticipates the adoption of SFAS No. 131 will result in the Company continuing
to operate in one segment.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are included
herein:
Independent Auditors' Report
Balance Sheets - June 30, 1998 and 1997
Statements of Operations - Years Ended June 30, 1998 and 1997
Statements of Shareholders' Equity - Years Ended June 30, 1998
and 1997
Statements of Cash Flows - Years Ended June 30, 1998 and 1997
Notes to Financial Statements - Years Ended June 30, 1998 and 1997
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Telident, Inc.
We have audited the accompanying balance sheets of Telident, Inc.
(the Company) as of June 30, 1998 and 1997 and the related statements of
operations, shareholders' equity (deficit), and cash flows for the two years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1998 and
1997 and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
MINNEAPOLIS, MINNESOTA
JULY 31, 1998
(AUGUST 18, 1998 AS TO NOTE 7)
18
<PAGE>
TELIDENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS (Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 258,875 $ 22,319
Trade accounts receivable, net of allowance for doubtful
accounts of $30,000 and $40,000, respectively 508,956 432,111
Inventories 285,708 430,506
Other 76,088 37,710
------------ ------------
Total current assets 1,129,627 922,646
FURNITURE AND OFFICE EQUIPMENT, less accumulated
depreciation of $291,955 and $198,355, respectively 209,435 264,051
INTANGIBLE ASSETS, less accumulated amortization of
$159,386 and $108,868, respectively 289,672 99,429
OTHER ASSETS 83,055 30,855
------------ ------------
$ 1,711,789 $ 1,316,981
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 2) $ 95,271 $ 101,716
Trade accounts payable 168,069 299,684
Accrued expenses 118,123 121,104
Deferred revenue 21,053 1,950
Current portion of long-term debt (Note 2) 101,519 85,913
------------ ------------
Total current liabilities 504,035 610,367
LONG-TERM DEBT, less current portion (Note 2) 31,825 108,403
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY (Note 4):
Preferred stock, $.08 par value, 2,500,000 and 625,000 shares
authorized, respectively
Series I, Class A, cumulative dividend at an annual rate of
the prime rate plus 1%, convertible into common stock
at the rate of one common share for each preferred
share, 37,500 shares outstanding at both dates 3,000 3,000
Common stock, $.08 par value, 10,000,000 and 2,500,000
shares authorized, 2,786,735 and 1,737,131 shares
outstanding, respectively 222,933 138,971
Additional paid-in capital 14,612,497 13,517,626
Accumulated deficit (13,662,501) (13,061,386)
------------ ------------
Total shareholders' equity 1,175,929 598,211
------------ ------------
$ 1,711,789 $ 1,316,981
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
TELIDENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
NET SALES $ 2,269,000 $ 1,754,451
COST OF SALES 705,088 571,062
INVENTORY REVALUATION -- 240,245
----------- -----------
Gross profit 1,563,912 943,144
OPERATING EXPENSES:
Sales and marketing 766,080 1,248,736
Research and development 570,795 1,028,464
General and administrative 800,716 1,189,581
Restructuring charges -- 391,519
----------- -----------
Total operating expenses 2,137,591 3,858,300
----------- -----------
Loss from operations (573,679) (2,915,156)
INTEREST INCOME 30,220 36,377
DEBT CONVERSION EXPENSE (Note 2) -- (679,797)
INTEREST EXPENSE (57,656) (219,659)
----------- -----------
NET LOSS (601,115) (3,778,235)
PREFERRED STOCK DIVIDENDS, INCLUDING $449,800 and $14,450
OF CUMULATIVE DIVIDENDS, RESPECTIVELY (449,800) (62,640)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $(1,050,915) $(3,840,875)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.54) $ (2.56)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES ASSUMED
OUTSTANDING - BASIC AND DILUTED 1,952,520 1,502,266
=========== ===========
</TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PREFERRED AMOUNT OF COMMON AMOUNT OF ADDITIONAL
SHARES PREFERRED SHARES COMMON PAID-IN ACCUMULATED
ISSUED STOCK ISSUED STOCK CAPITAL DEFICIT
--------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 46,875 $ 3,750 1,225,777 $ 98,062 $ 9,025,640 $ (9,283,151)
Common stock issued to directors for services -- -- 1,890 152 20,848 --
Common stock issued in public offering net of
offering expenses of $532,077 -- -- 287,500 23,000 2,894,923 --
Common stock issued for conversion of debentures
and related interest -- -- 194,950 15,596 1,541,476 --
Common stock issued for conversion of bridge
financing -- -- 23,889 1,911 227,429 --
Exercise of options -- -- 3,125 250 4,750 --
Preferred stock redemptions (9,375) (750) -- -- (149,250) --
Preferred stock dividends -- -- -- -- (48,190) --
Net loss -- -- -- -- -- (3,778,235)
--------- ------------ --------- ------------ ------------ ------------
BALANCE, June 30, 1997 37,500 3,000 1,737,131 138,971 13,517,626 (13,061,386)
Preferred stock issued in private placement,
net of offering expenses of $56,373 277,778 22,222 -- -- 1,171,405 --
Common stock offset against note receivable -- -- (2,585) (207) (11,428) --
Conversion of preferred stock to common stock,
net of expenses of $3,022 (277,778) (22,222) 1,052,189 84,175 (64,975) --
Repurchase of fractional shares -- -- (78) (6) (131) --
Net loss -- -- -- -- -- (601,115)
--------- ------------ --------- ------------ ------------ ------------
BALANCE, June 30, 1998 37,500 $ 3,000 2,786,657 $ 222,933 $ 14,612,497 $(13,662,501)
========= ============ ========= ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
TELIDENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (601,115) $(3,778,235)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 144,118 249,622
Common stock issued for services -- 21,000
Common stock issued for interest -- 41,775
Inventory reserve and revaluation -- 315,245
Noncash restructuring charges -- 307,676
Debt conversion expense -- 679,797
Changes in assets and liabilities:
Trade accounts receivable (76,845) 393,247
Inventories 144,798 (172,665)
Other assets (35,463) 12,903
Trade accounts payable (131,615) 41,178
Accrued expenses and deferred revenue 16,122 (137,049)
----------- -----------
Net cash used in operating activities (540,000) (2,025,506)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of patent and capitalized software costs (240,761) (41,674)
Purchases of furniture and office equipment (21,798) (49,112)
----------- -----------
Net cash used in investing activities (262,559) (90,786)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable (6,445) (1,049,572)
Payments of long-term debt (144,908) (76,165)
Preferred stock redemption -- (150,000)
Preferred stock dividends -- (48,190)
Proceeds from issuance of preferred stock 1,193,627 --
Payment of costs relating to conversion of preferred stock to
common stock (3,022) --
Repurchase of fractional shares of common stock (137) --
Proceeds from issuance of common stock -- 3,013,884
----------- -----------
Net cash provided by financing activities 1,039,115 1,689,957
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 236,556 (426,335)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,319 448,654
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 258,875 $ 22,319
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 58,031 $ 183,282
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt incurred for office equipment $ 17,186 $ 38,119
Long-term debt incurred for other assets 66,750 --
Common stock offered against note receivable 11,635 --
Conversion of notes payable to common stock -- 1,064,840
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
TELIDENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS ACTIVITIES AND ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS ACTIVITIES
Telident, Inc. (the Company) was organized in July 1983. The Company
is a designer and manufacturer of hardware and software for the Enhanced 911
(E911) marketplace. The Company provides enhancements to telephone systems
(PBXs), as well as providing public safety answering point systems and
alternative selective routing equipment for the 911 marketplace throughout the
United States. In addition, the Company provides ongoing support services to its
customers under separate hardware and software maintenance agreements.
CASH AND CASH EQUIVALENTS
The Company maintains cash and cash equivalents in bank accounts
which at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company considers investments with
an original maturity of three months or less at the time of purchase to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include the following financial
instruments: cash and cash equivalents; accounts receivable; accounts payable;
and notes and debentures payable. At June 30, 1998 and 1997, no separate
comparison of fair values versus carrying values is presented for the
aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out
method), or market, and consisted of the following:
JUNE 30,
---------------------------
1998 1997
---- ----
Raw materials $ 325,804 $ 416,735
Work in progress 1,876 336
Finished goods 48,028 103,435
Reserve for inventory
obsolescence (90,000) (90,000)
--------- ---------
$ 285,708 $ 430,506
========= =========
During fiscal 1997, the Company disposed of inventory due to changes
in bills-of-materials and the discontinuance of a product line, resulting in an
inventory revaluation charge of $240,245.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount.
When the Company determines that asset impairment exists, the loss is recorded
based on
22
<PAGE>
the difference between the carrying value of the asset and the estimated fair
value of the asset calculated using discounted cash flows expected to be
generated by the asset.
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment is stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over
estimated useful lives of three to seven years.
INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
---------------------------------------- ----------------------------------------
Purchased Purchased
Software Software
Patents Development Total Patents Development Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cost $ 110,742 $ 338,316 $ 449,058 $ 110,742 $ 97,555 $ 208,297
Less accumulated
amortization 94,468 64,918 159,386 76,468 32,400 108,868
---------- ---------- ---------- ---------- ---------- ----------
$ 16,274 $ 273,398 $ 289,672 $ 34,274 $ 65,155 $ 99,429
========== ========== ========== ========== ========== ==========
</TABLE>
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 $32,518 and
$32,400 during the years ended June 30 1998 and 1997, respectively.
The Company reviews its intangibles periodically to determine
potential impairment by comparing the carrying value of the intangibles with
expected future net cash flows provided by operating activities of the business
or related products. Should the sum of the expected future net cash flows be
less than the carrying value, the Company would determine whether an impairment
loss should be recognized. An impairment loss would be measured by comparing the
amount by which the carrying value exceeds the fair value of the intangible
based on market value which is based on the discounted cash flows expected to be
generated by the asset. During the fiscal year ended June 30, 1997, the Company
wrote off the remaining book value ($268,076) of the goodwill associated with
the November 1994 Cantus acquisition due to discontinuance of the product line.
The write-off of goodwill is included in restructuring charges in the 1997
statement of operations.
DEFERRED REVENUE
Deferred revenue primarily represents payments received for ongoing
customer support to be provided by the Company. These revenues are recognized
over the period for which the related services are provided.
REVENUE RECOGNITION
Revenue is recognized on hardware shipment or completion of the
service.
23
<PAGE>
RESEARCH AND DEVELOPMENT
The costs of Company-sponsored research and development related to
both present and future products are expensed as incurred.
INCOME TAXES
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
variances between the amounts of assets and liabilities recorded for income tax
and financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance to reflect the possibility that some portion or all of the deferred
tax assets may not be realized.
NET LOSS PER COMMON SHARE
Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Net loss
per share for fiscal 1997 has been restated for the adoption of SFAS No. 128.
Basic net loss per common share is computed by dividing net loss applicable to
common stock (net loss less preferred stock dividends) by the weighted average
number of common shares outstanding. Diluted net loss per share is computed by
dividing net loss applicable to common stock (net loss less preferred stock
dividends) by the weighted average number of common shares outstanding and the
exercise of stock options and warrants using the treasury stock method, if
dilutive. Diluted net loss per share for fiscal 1998 and 1997 are the same as
basic net loss per share due to the antidulutive effect of the assumed exercise
of stock options and warrants.
Fiscal 1998 diluted net loss per common share excludes stock options
and warrants to purchase 775,426 shares of common stock at a weighted average
price of $5.54 per share due their antidilutive effect. Fiscal 1997 diluted net
loss per common share excludes stock option and warrants to purchase 315,451
shares of common stock at a weighted average price of $9.37 per share due their
antidilutive effect.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is conducted with customers
located within the United States. Accounts receivable transactions are generally
unsecured. A provision for estimated doubtful accounts is provided for accounts
receivable. There are neither concentrations of business transacted with a
particular customer or supplier nor concentrations of revenue from a particular
service or geographic area that could severely impact the Company in the near
future.
USE OF ESTIMATES
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform to the presentation adopted in the 1998 financial
statements. The reclassifications had no effect on stockholders' equity or net
loss as previously reported.
24
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income", which will be effective for the
Company beginning July 1, 1998. SFAS No. 130 requires the disclosure of
comprehensive income and its components in the general-purpose financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which is effective for the
Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments
are determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The Company anticipates the
adoption of SFAS No. 131 will result in the Company continuing to operate in one
segment
NOTE 2: FINANCING ACTIVITIES
NOTES PAYABLE
In February 1995, the Company obtained a revolving line of credit
with a bank providing advances up to $750,000. Advances under the agreement are
limited to 75% of eligible receivables. The loan agreement also contains
provisions requiring compliance with certain financial covenants. The Company
was in compliance with the financial convenants at June 30, 1998. The line of
credit agreement expires on February 3, 1999, when all outstanding amounts are
due and payable. Borrowings under this agreement were $95,271 as of June 30,
1998 with additional availability of $225,488. The agreement bears interest at
the bank's base rate plus 7.5% (16.0% at June 30, 1998). The note is secured by
all of the Company's assets.
In May 1996, the Company completed a bridge financing arrangement
consisting of $1,250,000 in notes payable and warrants to purchase 31,250 shares
of common stock at $9.60 per share. In September 1996, the Company repaid
$1,020,660 and $37,847 of principal and interest payable, respectively.
In addition, $229,340 of the remaining principal was converted into 23,889
shares of common stock.
LONG-TERM DEBT
Long-term debt at June 30 consisted of the following:
1998 1997
---- ----
Debentures $ 50,000 $ 157,500
Note payable 48,371 --
Capital lease obligations (see
Note 3) 34,973 36,816
--------- ---------
133,344 194,316
Less current maturities 101,519 85,913
--------- ---------
$ 31,825 $ 108,403
========= =========
25
<PAGE>
At June 30, 1998, principal payments on the debentures, note
payable, and capital lease obligations in the fiscal years ending June 30 are as
follows:
1999 $ 101,519
2000 28,330
2001 3,495
---------
$ 133,344
=========
DEBENTURES
The debentures outstanding at June 30, 1998 were repaid in July
1998.
During June 1997, holders with principal balances and accrued
interest of $835,500 and $41,775, respectively, elected to convert their
debentures and accrued interest into 194,950 shares of common stock. The holders
who elected to convert their debentures and accrued interest into shares of
common stock included two members of the board of directors who converted 100%
of their individual holdings, or $175,000 of debentures. As an incentive to
cause the debenture holders to convert, the Company temporarily reduced the
conversion price from $15.84 to $4.50 per share and issued warrants to purchase
97,475 shares of common stock at $5.64 per share. The warrants will expire on
June 30, 1999, and may be called any time after the market value of the
Company's common stock exceeds $7.88 per share for 10 days. The Company recorded
a noncash debt conversion expense of $679,797 during the year ended June 30,
1997 relating to the induced conversion.
NOTES PAYABLE
During 1998, the Company financed a portion of an insurance policy
covering three years with the proceeds from a note. The note has an interest
rate of 8.02% and is due in monthly installments of $3,020 through fiscal 2000.
NOTE 3: COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its office space under an operating lease. The
Company also leases certain office equipment under a capital lease agreement.
The following is a schedule of the minimum rental payments under the leases for
the years ending June 30:
CAPITAL OPERATING
LEASE LEASE
----- -----
1999 $ 21,305 $ 98,400
2000 14,172 24,600
2001 3,517 --
-------- ---------
Total minimum lease payments 38,994 $ 123,000
Less amount representing =========
interest 4,021
--------
Present value of net minimum
payments 34,973
Less current portion of capital
lease 17,948
--------
Long-term portion of capital
lease $ 17,025
========
26
<PAGE>
Rent expense incurred was $97,008 and $139,407 during the years
ended June 30, 1998 and 1997, respectively.
Furniture and office equipment includes $63,306 and $46,120 of
leased office equipment at June 30, 1998 and 1997, respectively. Related
accumulated amortization aggregated $46,850 and $4,483 at June 30, 1998, and
1997, respectively.
CONTINGENCIES
The Company is involved in various legal proceedings arising in the
normal course of business. Management is of the opinion that any judgment or
settlement resulting from pending or threatened litigation will not have a
material adverse effect on the financial condition or results of operations of
the Company.
NOTE 4: EQUITY TRANSACTIONS
REVERSE STOCK SPLIT
In January 1998, the Board of Directors declared a one-for-four
reverse stock split. All references in the financial statements to number of
shares and per share amounts have been restated to reflect the split. In
connection with the reverse stock split, the Company repurchased fractional
shares totaling 78 shares for $137.
ISSUANCE OF PREFERRED AND COMMON STOCK
In July 1997, the Company completed an $1.25 million equity
transaction upon the issuance of 277,778 shares of Series II Class A Convertible
Preferred Stock with Family Financial Strategies, Inc. (FAMCO). FAMCO also
received warrants to purchase 364,907 shares of common stock. The warrants are
exercisable at $4.83 per share, are currently exercisable, and expire on July
23, 1999. FAMCO converted the preferred stock into 1,052,189 shares of common
stock in April 1998. Assuming the Series II Class A Convertible Preferred Stock
conversion had taken place in July 1997, the Company's basic and diluted loss
per share for the year ended June 30, 1998, would have been $(.24).
The Series II Class A Convertible Preferred Stock contained a
beneficial conversion feature. The value of the beneficial conversion feature,
$312,500, was recorded as a deemed preferred stock dividend at the date of
issuance, which increased the net loss applicable to common stock in the
calculation of basic and diluted net loss per share.
On June 30, 1994, three directors of the Company, were issued a
combined total of 62,500 voting shares of Series I Class A Convertible
Cumulative Preferred Stock at $16.00 per share, resulting in proceeds to the
Company of $1,000,000, which was utilized to pay-off the existing bank line of
credit. These shares pay a yearly dividend at the rate of 1% over the prime rate
from time to time of National City Bank of Minneapolis and are redeemable at the
Company's option. The prime rate of National City Bank of Minneapolis was 8.5%
on June 30, 1998. The Company has redeemed 25,000 shares of preferred stock. In
addition, the Company has made dividend payments in the aggregate of $48,190 for
the fiscal year ended June 30, 1997. The Company has not paid dividends since
March 31, 1997. At June 30, 1998, there are $68,450 of cumulative undeclared
dividends on the Series I Class A Preferred Stock.
During the year ended June 30, 1997, certain members of the
Company's board of directors received shares of the Company's common stock in
lieu of cash remuneration for director services, resulting in the issuance of
1,890 shares. The shares issued were valued based on the market value of the
Company's common stock at issuance ($21,000) and was charged to expense.
27
<PAGE>
In August 1996, the Company completed a secondary public offering
for 287,500 shares of common stock at $12.00 per share, resulting in proceeds to
the Company of $2,917,923 after related expenses. The Company's underwriter
received 28,750 common stock warrants as part of its compensation. The warrants
are exercisable at $14.40 per share, are fully exercisable after one year from
the date of this offering, and expire on August 15, 2001.
In September 1996, bridge notes holders of $229,340 converted their
principal balances into common stock at $9.60 per share, resulting in the
issuance of 23,889 shares of common stock.
WARRANTS
The Company has issued warrants to directors and selling agents, and
in connection with the issuances of debt and equity. The Company estimates the
value of warrants on the issuance date and, as applicable, on each reporting
date. The value of warrants issued in connection with service agreements is
expensed over the vesting period or as the services are performed. The value of
warrants issued in connection with debt offerings increases additional paid-in
capital and original issue discount. A summary of the Company's outstanding
common stock warrants follows:
NUMBER OF
SHARES WEIGHTED
OF COMMON AVERAGE PRICE
STOCK PER SHARE
--------- -------------
Outstanding at June 30, 1996 95,168 $ 12.85
Warrants issued - public offering 28,750 14.40
Warrants issued - debenture conversion 97,475 5.64
--------
Outstanding at June 30, 1997 221,393 9.88
Warrants issued - directors 112,500 1.56
Warrants issued - equity private placement 364,907 4.83
Warrants expired (13,893) 16.00
--------
Outstanding at June 30, 1998 684,907 $ 5.70
======== =======
Exercisable at June 30, 1998 572,407 $ 6.51
======== =======
STOCK OPTIONS
The Company has a stock option plan, which provides for the granting
of options to certain employees, officers and directors of the Company to
purchase up to a maximum of 168,750 shares of common stock. The options vest
over a five year period and expire seven years after being granted, except in
the case of directors who vest 50% one year from date of grant and the remainder
over a two year period. Canceled options are available for future grant under
the plan.
28
<PAGE>
A summary of the status of the Company's stock options are presented
below:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -----------------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 94,058 $ 8.16 102,676 $ 12.72
Granted 51,832 3.91 70,750 6.44
Exercised -- -- (3,125) 4.00
Terminated (55,371) 10.31 (76,243) 13.52
------- -------
Outstanding at end of year 90,519 $ 4.33 94,058 $ 8.16
======= ======== ======= ========
Options exercisable at year end 9,262 $ 5.75 13,144 $ 12.72
======= ======== ======= ========
Options available for future grants 37,081 33,543
======= =======
</TABLE>
The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. No
compensation cost has been recognized for options issued under the Plan when the
exercise price of the options granted are at least equal to the fair value of
the common stock on the date of grant to employees. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant date for awards in the fiscal years ended June 30, 1998 and 1997,
consistent with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's net
loss applicable to common stock and net loss per share would have changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss applicable to common stock, as reported $ (1,050,915) $ (3,840,875)
Net loss applicable to common stock, pro forma (1,095,636) (3,903,929)
Net loss per common share, basic and diluted, as reported $ (.54) $ (2.56)
Net loss per common share, basic and diluted, pro forma (.56) (2.60)
</TABLE>
The fair value of each option grant for the pro forma disclosure
required by SFAS 123 is estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions and results for the grants:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield None None
Expected volatility 79.03% 77.32%
Expected life of option 7 years 7 years
Risk-free interest rate 6.11% 6.76%
Fair value of options on grant date $2.65 $5.02
</TABLE>
29
<PAGE>
The following table summarizes information about stock options at
June 30, 1998:
<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> <C> <C>
$1.56 - $2.00 2,251 6.53 $ 1.83 -- $ --
2.50 - 3.13 13,005 6.78 2.51 -- --
4.00 - 5.37 71,577 6.02 4.44 7,075 4.34
8.00 - 19.00 3,686 3.58 10.15 2,187 10.32
------ ------
90,519 6.05 $ 4.33 9,262 $ 5.75
====== ====== ======= ====== =======
</TABLE>
NOTE 5: BENEFIT PLAN
All employees of the Company may participate in a defined
contribution plan established in October 1996, under the provisions of Section
401(k) of the Internal Revenue Code. The plan provides for a contribution by the
employee of up to 15% of their gross earnings. Currently the Company does not
contribute to the plan.
NOTE 6: INCOME TAXES
The benefit for income taxes has been offset by a valuation
allowance for the years ended June 30, 1998 and 1997, because the Company's net
operating losses could not be carried back and future realization of the net
operating loss carryforwards is uncertain.
A reconciliation between taxes computed at the expected federal
income tax rate and the effective tax rate for the years ended June 30, is as
follows:
1998 1997
---- ----
Tax benefit computed at statutory rates $(210,000) $(1,322,000)
State taxes, net of federal effect (39,000) (244,000)
Debt conversion costs -- 275,000
Change in valuation allowance 226,000 1,225,000
Other 23,000 66,000
--------- -----------
$ -- $ --
========= ===========
30
<PAGE>
At June 30, 1998, the Company has available net operating loss and
research and development tax credit carryforwards. Realization of these
carryforwards may be subject to provisions of IRC Section 382, which limits the
utilization of net operating losses if 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
---------------- ------------------ ------------
1999-2005 $ 1,049,500 $ 26,800
2006 1,065,000 37,000
2007 954,500 35,000
2008 1,629,500 46,000
2009 1,623,800 47,000
2010 900,000 25,000
2011 1,497,000 92,000
2012 2,630,000 --
2013 660,000 --
------------- ------------
$ 12,009,300 $ 308,800
============= ============
The tax effect of the temporary differences, tax carryforwards, and
valuation allowances at June 30, is as follows:
1998 1997
---- ----
Deferred tax assets
Loss and credit carryforwards $ 5,029,000 $ 4,762,000
Intangible assets 136,000 149,000
Other 96,000 114,000
------------- ------------
5,261,000 5,025,000
Valuation allowance for deferred tax assets (5,261,000) (5,025,000)
------------- ------------
$ -- $ --
============= ============
NOTE 7: SUBSEQUENT EVENT
In April 1998, the Company entered into an agreement to issue
400,000 shares of Series III Convertible Preferred Stock with two institutional
investors in exchange for $1,000,000. Each share of the Series III Convertible
Preferred Stock is convertible at the option of the holder into common stock.
Upon any such conversion, each share of Series III Preferred Stock shall be
converted into a number of fully paid and nonassessable shares (calculated as to
each conversion to the nearest 1/100th of a share) of common stock of the
Company equal to the quotient of (x) the Per Share Purchase Price (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected) of such share of Series
III Preferred Stock, divided by (y) the lesser of (i) the Conversion Price (as
defined) and (ii) 80% of the average of the closing bid price for the shares of
common stock on the ten (10) trading days prior to the date that the Company
receives written notice of conversion from a holder of such Series III Preferred
Stock. The value of the beneficial conversion feature, $250,000, will be
recorded as a deemed preferred stock dividend on the date of issuance. These
investors also received in the aggregate warrants to purchase 400,000 shares of
common stock. The warrants are exercisable at $3.125 per share and will expire
two years from the closing date of this transaction. The proceeds from the sale
were released into an escrow account during April 1998. The investors have
certain registration rights. The funds were released to the Company and the
shares were released to the investors in August 1998 upon the Company's
certification to the investors that it complied with all the requirements of the
Nasdaq SmallCap Market. The Company believes the transaction was exempt pursuant
to Section 4(2) under the Securities Act of 1933 and Rule 506 under Regulation
D. The Investors were Family Financial Strategies (FAMCO) and Special
Situations.
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
32
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table provides information with respect to the Company's
directors and executive officers as of December 31, 1998. Each executive officer
has been appointed to serve until his successor is duly appointed by the Board
of Directors or his earlier removal or resignation from office. Each director
has been elected to serve a one-year term expiring in 1999 and until his
successor has been duly elected and qualified. There are no family relationships
between any director or executive officer.
<TABLE>
<CAPTION>
Name Age Principal Occupation Position with Telident Director Since
- ---- --- -------------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Mark W. Sheffert 51 President of Manchester Chairman, Director 1990
Companies, Inc.
W. Edward McConaghay 49 President and Chief Executive President and Chief 1997
Officer of the Company Executive Officer,
Director
Scott R. Anderson(1) 58 President and Chief Executive Director 1995
Officer of North Memorial
Health Center
Willis K. Drake(1) 75 Private Investor Director 1988
David F. Durenberger(2) 64 Vice President of Public Policy Director 1996
Partners
Mack V. Traynor(2) 40 President of Manitou Director 1998
Investments, Inc.
John D. Wunsch(1) 50 President and Chief Executive Director 1997
Officer of Family Financial
Strategies, Inc.
</TABLE>
- -------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MARK W. SHEFFERT has been Chairman of the Board of Directors of the
Company since May 1994. Mr. Sheffert has been a member of the Board of Directors
since 1990. He is President of Manchester Companies, Inc., a private investment
and management consulting firm formed in 1993. From 1990 to 1993, he served as
managing partner of Sheffert & Wein, Inc., a management consulting firm. From
September 1982 to October 1989, Mr. Sheffert served in various executive
positions with First Bank System, Minneapolis, Minnesota, including Chairman and
CEO, First Trust Company, FBS Mortgage Company, FBS Card Services, Inc., and FBS
Insurance. Mr. Sheffert currently is serving on the board of directors of
Combined Financial Group, Inc., Fourth Shift, Inc., LifeRate Systems, Inc. and
Medical Graphics Corporation.
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 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.
33
<PAGE>
SCOTT R. ANDERSON joined the Board of Directors in July 1995. Mr.
Anderson is President and Chief Executive Officer of North Memorial Health Care
in Robbinsdale, Minnesota. He has been associated with North Memorial since
August 1964, serving 17 years as Executive Vice President, and since 1981 in the
position of President and Chief Executive Officer. During his career he has
served as a member of many committees and boards, both locally and nationally,
and has served as chairman of the board of the following organizations:
Metropolitan Healthcare Council (Council of Hospital Corporations), Health
Employers, Inc., Healthcare Education and Research Foundation and Medical Alley.
He currently serves as a director of EMPI, Inc.
WILLIS K. DRAKE has been a member of the Board of Director since 1988.
Mr Drake has been a private investor over the last nine years. He served as
Chairman of the Board of Directors of Telident from 1989 to August 1993. Mr.
Drake spent the early years of his career with Univac in a sales and marketing
capacity. He later became a founder of Control Data Corporation. In 1969, he
became founder, Chairman and President of Data Card Corporation, a manufacturer
of high-performance embossing/encoding equipment for the plastic card industry.
When he retired in 1983, Data Card had sales in excess of $100 million. Since
his retirement, Mr. Drake has used his entrepreneurial, management, marketing
and technical experiences to assist a variety of companies. He serves as a
director of Analysts International Corporation, Digi International and Innovex,
Inc.
DAVID F. DURENBERGER has been a member of the Board of Directors since
October, 1996. Mr. Durenberger is vice president of health care consultant firm,
Public Policy Partners, Durenberger/Foote, and a Senior Fellow, for the
University of St. Thomas Graduate School of Business. Prior to that time, he
served as a United States Senator for the state of Minnesota from 1978 to 1995.
Mr. Durenberger has over 20 years of public service, and while a U.S. Senator,
served on several committees including the Finance, Select Intelligence, and
Office of Technology committees. In addition he has been the executive director
and chaired numerous committees on both a state and national level. In November
1995, Mr. Durenberger plead guilty to misdemeanor charges of falsifying a
statement for reimbursement of $425.
MACK V. TRAYNOR has been a member of the Board of Directors since
March, 1998. Mr. Traynor is a private investor and President of Manitou
Investments, Inc., a strategic investment and business advisory firm. He served
as Chief Executive Officer, Chief Operating Officer, and as a director of
Eltrax, a nationwide provider of networking products and managed services from
1995 to 1997. Mr. Traynor was the chief architect for that company's shift in
strategy and dramatic growth through acquisition. He continues to serve on the
Eltrax board of directors. Prior to Eltrax, Mr. Traynor served as President and
Chief Operating Officer of Military Communications Center, Inc. ("MCC"), a
company which provided telecommunications services to U.S. Military personnel
and which was acquired by WorldCom, Inc. in October 1994. Prior to MCC, Mr.
Traynor served in executive positions with US West, most recently as President
of US West Enterprises Technologies Division. Mr. Traynor is on the board of
directors of HEI, Inc., a contract manufacturing company.
JOHN D. WUNSCH has been a member of the Board of Directors since July,
1997. Mr. Wunsch has been President and Chief Executive Officer of Family
Financial Strategies, Inc., a registered investment advisory firm, since January
1997. Family Financial Strategies, Inc., specializes in services to high net
worth families, manages a diversified investment strategy including several
equity pools and direct investments in real estate, venture capital, energy and
other non-traditional investments throughout the country. From 1990 to January
1997, he served as President of Perrybell Investments, a registered investment
advisory firm. Mr. Wunsch is a director of ADC Telecommunications, Inc. and
Medical Graphics Corporation.
BOARD MEETINGS AND COMMITTEES
The Board of Directors held a total of eight meetings during the fiscal
year ended June 30, 1998. No director attended fewer than 75% of the total
number of meetings of the Board of Directors or committees of
34
<PAGE>
the Board of Directors held in fiscal year 1998. The Board of Directors has
established Audit and Compensation Committees, both of which consist of only
non-employee directors.
The Audit Committee, which consisted of Messrs. Durenberger, Sagan, and
Traynor during fiscal year 1998, held four meetings during that fiscal year. Mr.
Wunsch replaced Mr. Sagan as a member of the Audit Committee upon Mr. Sagan's
retirement from the Board of Directors in October 1998. This committee makes
recommendations to the Board of Directors regarding the selection of independent
accountants, reviews the results and scope of audit and other services provided
by the Company's independent accountants and reviews and evaluates the Company's
audit and control functions.
The Compensation Committee, which consisted of Messrs. Anderson, Drake
and Wunsch during fiscal year 1998, held two meetings during that fiscal year.
This committee reviews and recommends to the Board of Directors the compensation
guidelines for executive officers and other key employees. This committee also
makes recommendations regarding the Company's 1988 Stock Option Plan,
administers such plan and makes decisions concerning salaries and incentive
compensation for employees and consultants of the Company.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the
Company for their service as members of the Board of Directors, although members
are reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings. Non-employee directors have received periodic
option grants under the Company's 1988 Stock Option Plan and are eligible to
receive periodic grants under the 1998 Stock Option Plan.
On the first day of each quarter during fiscal year 1998, each
non-employee director was granted an option to purchase 188 shares of Common
Stock at exercise prices ranging from $2.00 to $4.50 as a quarterly retainer.
For each Board meeting attended during fiscal year 1998, each non-employee
director was granted an option to purchase 125 shares of Common Stock at
exercise prices ranging from $1.56 to $5.00 (other than the Chairman of the
Board who received an option to purchase 250 shares of Common Stock at exercise
prices ranging from $1.56 to $5.00 for each Board meeting attended). Each
non-employee director was also granted an option to purchase 63 shares of Common
Stock at exercise prices ranging from $2.50 to $5.00 for each Committee meeting
personally attended, not to exceed options to purchase 188 shares per committee
member for the year. In addition to the quarterly grant given to non-employee
directors, the Chairman of the Board also received an option to purchase 250
shares of Common Stock at exercise prices ranging from $2.00 to $5.37 as a
monthly retainer.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the SEC and to provide the Company
with copies of all such reports. To the Company's knowledge, based solely on its
review of copies of reports filed with the SEC during fiscal year 1998, all
applicable Section 16(a) filing requirements were satisfied, except that eight
reports on Form 5 setting forth the issuances during fiscal year 1998 of options
to purchase an aggregate of 40,725 shares of Common Stock by Messrs. Wunsch,
Drake, Traynor, Sheffert, Sagan, McConaghay, Anderson and Durenberger were not
filed on a timely basis.
35
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services rendered to the Company by the President and
Chief Executive Officer and the other highest paid executive officer whose
annual compensation exceeded $100,000 during fiscal year 1998 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------------
ANNUAL
COMPENSATION AWARDS
------------------------------ ------------------------------
SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
YEAR ($) ($) OPTIONS ($)
------- -------- ------- ------------ --------------
<S> <C> <C> <C> <C> <C>
W. Edward McConaghay(1) .................. 1998 165,000 -- -- --
President and Chief Executive Officer . 1997 41,250 -- 5,000 --
Craig A. Lowder(2) ....................... 1998 92,727 -- -- 23,553(3)
Vice President of Sales ............... 1997 75,833 9,626 40,500 36,438(4)
</TABLE>
- --------------------
(1) Mr. McConaghay's employment commenced on April 1, 1997.
(2) Mr. Lowder's employment commenced on September 1, 1996 and terminated
on March 31, 1998.
(3) Consists of sales incentives.
(4) Consists of moving expenses.
The following table sets forth the number and value of the unexercised
options held by the Named Executive Officers as of the end of fiscal year 1998.
No stock options were granted to or exercised by the Named Executive Officers
during fiscal year 1998.
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
VALUE OPTIONS AT FY-END AT FY-END ($)(1)
SHARES REALIZED ---------------------------- ----------------------------
NAME ACQUIRED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Edward McConaghay -- -- 5,000 20,000 0 0
Craig A. Lowder -- -- -- -- 0 0
</TABLE>
- ---------------------
(1) Value is based on the June 30, 1998 closing price of $2.25 per share of
Common Stock as listed on the Nasdaq SmallCap Market less the exercise price
for such shares.
REPRICING OF STOCK OPTIONS
In September 1997, the Board of Directors reviewed the compensation
structure in place for its members. Prior to this review, the Company had
provided its Board members with cash compensation and stock options for their
service. To better align the interests of Board members with the Company's
shareholders, it was determined that (i) the Board would not receive cash
compensation for attending Board or committee meetings with retroactive effect
through fiscal year 1997 and (ii) that all outstanding stock options
36
<PAGE>
held by members of the Board, with exercise prices ranging from $4.00 to $20.00,
would be canceled and replaced with new options to purchase two-thirds of the
shares purchasable pursuant to the canceled options at $4.50 per share. On the
date of such repricing, the closing market price of one share of Common Stock
was $1.69. The aggregate number of shares of Common Stock purchasable pursuant
to the canceled options was 19,663. The aggregate number of shares purchasable
pursuant to the new options was 13,115 shares.
EXECUTIVE COMPENSATION PLAN
The Board of Directors adopted an executive compensation plan for
fiscal year 1998, which was based on the Company's performance compared to the
operating budget adopted for the year. The plan provided for cash bonuses of up
to 50% of base compensation and for stock option awards provided that certain
financial objectives were met. No awards were made pursuant to this plan during
fiscal year 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of its Common Stock as of August 31, 1998, by (i)
each person who is known to the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) each of the Company's directors and
nominees for director, (iii) the executive officers named in the "Summary
Compensation Table" below, and (iv) all directors and executive officers as a
group. Unless otherwise noted, each person identified below has sole voting and
investment power with respect to such shares. Except as otherwise noted below,
the Company knows of no agreements among its shareholders which relate to voting
or investment power with respect to its Common Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
SHARES BENEFICIALLY
BENEFICIALLY OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1)(2) (1)(2)
- --------------------------------------- ------------ ------------
<S> <C> <C>
John D. Wunsch(3)........................................................... 1,953,993 53.0%
FAMCO III, Limited Liability Company(4)..................................... 1,953,117 53.0%
Interchange Tower, Suite 850
600 S. Highway 169
Minneapolis, MN 55426
Special Situations Private Equity Fund, L.P.(5)............................. 536,021 16.1%
153 East 53rd Street
New York, NY 10022
Willis K. Drake(6).......................................................... 179,189 6.4%
Mark W. Sheffert(7)......................................................... 62,986 2.2%
John Sagan(8)............................................................... 43,316 1.5%
W. Edward McConaghay(9)..................................................... 6,250 *
Scott R. Anderson(10)....................................................... 1,982 *
David F. Durenberger(11).................................................... 1,832 *
Mack V. Traynor............................................................. 0 0
Craig A. Lowder............................................................. 0 0
All current directors and executive officers as a group (8 persons) (12).... 2,249,548 59.4%
</TABLE>
- -------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and includes voting
or investment power with respect to securities. Unless otherwise
indicated, the address for each listed shareholder is c/o Telident, Inc.,
Ten Second Street, N.E., Suite 212, Minneapolis, Minnesota 55413. To the
Company's knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all
37
<PAGE>
shares. The number of shares beneficially owned includes shares issuable
pursuant to warrants and stock options that are exercisable within 60 days
of August 31, 1998.
(2) Percentage of beneficial ownership is based on 2,787,297 shares of common
stock outstanding as of August 31, 1998. Shares issuable pursuant to the
conversion of Preferred Stock and the exercise of warrants and stock
options are deemed outstanding for computing the percentage of the person
holding such Preferred Stock, warrants or options but are not deemed
outstanding for computing the percentage of any other person. The
Preferred Stock and certain warrants reported herein contain antidilution
rights which may be triggered upon certain issuances of Telident's common
stock for less than $2.50 per share. We have assumed a conversion ratio of
approximately 1.68-for-one for the Series III Convertible Preferred Stock
(based on the 10-day average closing price ending August 31, 1998). See
"-Conversion Terms of the Convertible Preferred Stock."
(3) Mr. Wunsch is the President and Chief Executive Officer of Family
Financial Strategies ("FFS"), which is an affiliate of FAMCO III, Limited
Liability Company ("FAMCO"). As a result, FAMCO's shares are included in
the beneficial ownership of Mr. Wunsch and the beneficial ownership of all
directors and executive officers as a group. Mr. Wunsch's beneficial
ownership also includes 876 shares purchasable by Mr. Wunsch pursuant to
the exercise of stock options.
(4) Family Financial Strategies, Inc. is the manager of FAMCO. John Wunsch,
Greg Nelson and Diane Neimann are the sole officers and directors of
Family Financial Strategies. FAMCO's beneficial ownership includes 336,021
shares purchasable pursuant to the conversion of Series III Convertible
Preferred Stock and 564,907 shares purchasable pursuant to the exercise of
warrants. The number of shares purchasable pursuant to one of FAMCO's
warrants has been adjusted to reflect previously triggered antidilution
rights.
(5) MG Advisers, L.L.C. acts as general partner of and investment adviser to
Special Situations. Austin W. Marxe and David Greenhouse are the sole
members of MG Advisers. Special Situations' beneficial ownership includes
336,021 shares purchasable pursuant to the conversion of Series III
Convertible Preferred Stock and 200,000 shares purchasable pursuant to the
exercise of warrants.
(6) Includes 12,500 shares purchasable pursuant to the conversion of Series I
Convertible Preferred Stock, 1,596 shares purchasable pursuant to the
exercise of stock options and 14,583 shares purchasable pursuant to the
exercise of warrants.
(7) Mr. Sheffert is President of Manchester Companies, Inc. ("Manchester"). As
a result, Manchester's warrant to purchase 25,000 shares is included in
the beneficial ownership of Mr. Sheffert and the beneficial ownership of
all directors and executive officers as a group. Mr. Sheffert's beneficial
ownership also includes 4,749 shares purchasable by Mr. Sheffert pursuant
to the exercise of stock options and 25,000 shares purchasable by Mr.
Sheffert pursuant to the exercise of warrants.
(8) Includes 2,911 shares purchasable pursuant to the exercise of stock
options and 5,833 shares purchasable pursuant to the exercise of warrants.
Mr. Sagan retired from the Board of Directors in October 1998. As a
result, his unexercised options expired in January 1999.
(9) Includes 5,000 shares purchasable pursuant to the exercise of stock
options.
(10) Represents 1,982 shares purchasable pursuant to the exercise of stock
options.
(11) Includes 1,645 shares purchasable pursuant to the exercise of stock
options.
(12) Includes 12,500 shares purchasable pursuant to the conversion of Series I
Convertible Preferred Stock, 336,021 shares purchasable pursuant to the
conversion of Series III Convertible Preferred Stock, 18,739 shares
purchasable pursuant to the exercise of stock options, and 635,323 shares
purchasable pursuant to the exercise of warrants.
CONVERSION TERMS OF THE CONVERTIBLE PREFERRED STOCK
As of August 31, 1998, the outstanding shares of Series I Convertible
Preferred Stock were convertible at a fixed rate of one for one.
As of August 31, 1998, the outstanding shares of Series III Convertible
Preferred Stock were convertible at a floating rate which depended on the 10-day
average closing bid price of the common stock at the time of conversion. The
following conversion ratio applied to the shares of Series III Convertible
Preferred Stock:
$2.50
-----------------------------------------------------
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
38
<PAGE>
Based on a 10-day average closing price ending August 31, 1998 ($1.86
per share), the conversion ratio on the Series III Convertible Preferred Stock
was approximately 1.68 for 1.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 28, 1997, the Board of Directors offered more favorable
conversion terms on its 10% Subordinated Convertible Debentures to avoid
default, conserve cash and contribute to the Company's net tangible assets.
Conversion of such securities was offered at a conversion price of $4.50 per
share. Additionally, for every two shares of Common Stock issued in conjunction
with the conversion, the Company agreed to issue a two-year warrant to purchase
one share of Common Stock at an exercise price of $5.64 per share. During fiscal
year 1997, Willis K. Drake and John Sagan, both directors, converted all of
their individual Debenture holdings into 29,167 and 11,667 shares, respectively.
In connection with such conversion, Messrs. Drake and Sagan obtained warrants to
purchase 14,583 and 5,833 shares, respectively. As of July 15, 1998, all of the
principal and accrued interest on the Debentures had been converted into shares
of Common Stock or paid in full.
On July 23, 1997, the Company concluded a $1,250,000 equity private
placement for which FAMCO was issued 277,778 shares of Series II Convertible
Preferred Stock. FAMCO subsequently converted all of its Series II Convertible
Preferred Stock into 1,052,189 shares of Common Stock, representing
approximately 60.6% of the Company's Common Stock, at a conversion price of
$1.188 per share, the per share market price of the Common Stock at the time of
conversion. FAMCO also was issued a warrant to purchase up to 364,907 shares of
Common Stock (as adjusted pursuant to previously triggered antidilution rights)
at an exercise price of $4.83 per share. The warrant contains antidilution
rights which provide that the number of shares issuable upon exercise will be
increased if the Company issues new securities at a price less than $2.50 per
share. The Company may call the warrant if the bid price of its Common Stock
trades at 175% of the conversion price for ten successive trading days
immediately before the call. Additionally, John D. Wunsch, President and Chief
Executive Officer of Family Financial Strategies, an affiliate of FAMCO, became
a director of the Company in connection with such private placement.
On April 8, 1998, the Board of Directors approved a consulting
agreement by and between the Company and Mack V. Traynor, a member of the Board
of Directors (the "Consulting Agreement"). The services provided by Mr. Traynor
to the Company under the Consulting Agreement include (a) reviewing and refining
the Company's strategic growth plan, (b) assisting the Company in strategy
implementation and business growth, and (c) developing investment banking and
financial markets relationships for the Company. As compensation for his
consulting services, the Company agreed to issue a warrant to Mr. Traynor,
entitling him to purchase 100,000 shares of Common Stock at $1.188 per share.
The following terms of the warrant were finalized in September 1998. This
warrant may be exercised commencing February 25, 2003 to and including its
termination date, which occurs on the earlier of February 25, 2005 or the date
on which the Consulting Agreement is terminated, unless extended as provided in
the warrant. The vesting of the warrant accelerates upon the Company's
achievement of certain financial results.
On June 13, 1998, the Company entered into an engagement agreement by
and between the Company and Manchester Financial Group, Inc. (the "Engagement
Agreement") under which Manchester Financial Group, Inc. agreed to assist the
Company with the acquisition of certain target companies. Under the terms of the
Engagement Agreement, Manchester Financial Group, Inc. is entitled to receive
$6,500 per month as a retainer fee for an initial period of six months and on a
month-to-month basis thereafter. In addition, Manchester Financial Group, Inc.
is entitled to receive an accomplishment fee upon the closing of the Company's
acquisition of a target company. This fee consists of a cash payment equal to 3%
of the total acquisition consideration and warrants to purchase 100,000 shares
of the Company's common stock.
The Company issued a warrant to Manchester Financial Group, Inc.
entitling it to purchase 25,000 shares of Common Stock at $2.688 per share
effective June 13, 1998. The Company also issued a warrant to Kenneth
39
<PAGE>
W. Hager pursuant to the Engagement Agreement entitling him to purchase 25,000
shares of Common Stock at $2.688 per share effective June 13, 1998. These
warrants were exercisable through their fifth anniversary. The terms of these
warrants were finalized in October 1998. Effective December 31, 1998, Manchester
Financial Group, Inc. and Kenneth W. Hager agreed to the cancellation of such
warrants. Mark W. Sheffert, a member of the Board of Directors, is President of
Manchester Financial Group, Inc. Kenneth W. Hager is an employee and Managing
Director of Manchester Financial Group, Inc.
In August 1998, the Company concluded a private placement of equity in
which it issued 400,000 shares of Series III Convertible Preferred Stock to two
institutional investors, FAMCO and Special Situations Private Equity Fund, L.P.
(the "Investors"), in exchange for $1,000,000. As of August 31, 1998, each share
of the Series III Preferred Stock was convertible at the option of the holder
into Common Stock at a floating rate which depended on the 10-day average
closing bid price of the common stock at the time of conversion. Based on the
10-day average closing price ending August 31, 1998 ($1.86 per share), the
conversion ratio on the Series III Convertible Preferred Stock was approximately
1.68 for 1. The Investors also received, in the aggregate, warrants to purchase
400,000 shares of Common Stock. The warrants are exercisable at $3.125 per share
and expire two years from the closing date of the transaction. The warrants also
contain antidilution 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. The funds, which were placed into escrow accounts
during April 1998, were released to the Company and the shares and warrants,
which were also placed into escrow accounts during April 1998, were released to
the Investors in August 1998 upon the Company's certification to the investors
that it complied with the requirements of the Nasdaq SmallCap Market. As the
President and Chief Executive Officer of Family Financial Strategies, an
affiliate of FAMCO, John D. Wunsch was an interested party to this transaction.
On the first day of each quarter during fiscal year 1998, each
non-employee director was granted an option at or above fair market value on
date of grant to purchase 188 shares of Common Stock at exercise prices ranging
from $2.00 to $4.50 as a quarterly retainer. For each Board meeting attended
during fiscal year 1998, each non-employee director was granted an option at or
above fair market value on date of grant to purchase 125 shares of Common Stock
at exercise prices ranging from $1.56 to $5.00 (other than the Chairman of the
Board who received an option to purchase 250 shares of Common Stock at exercise
prices ranging from $1.56 to $5.00 for each Board meeting attended). Each
non-employee director was also granted an option at or above fair market value
on date of grant to purchase 63 shares of Common Stock at exercise prices
ranging from $2.50 to $5.00 for each Committee meeting personally attended, not
to exceed options to purchase 188 shares per committee member for the year. In
addition to the quarterly grant given to non-employee directors, the Chairman of
the Board also received an option to purchase 250 shares of Common Stock at
exercise prices ranging from $2.00 to $5.37 as a monthly retainer.
The Company believes that all of the transactions set forth herein were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions, including loans (if
any), between the Company and its officers, directors, and principal
shareholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested
non-employee directors, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
INDEMNIFICATION
The Company's Articles of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Minnesota Business
Corporations Act. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
40
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of the Incorporation, as Previously filed.
amended, of the Company
3.2 Bylaws, as amended, of the Company Incorporated herein by
reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.1 Specimen form of the Company's Incorporated herein by
Common Stock certificate reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.2 Form of Debenture issued pursuant to Incorporated herein by
May, 1993 Unit offering reference to the Company's
Annual Report on Form 10-KSB
for the year ended June 30,
1994.
4.3 Subscription and Purchase Agreement Incorporated herein by
dated as of August 23, 1993 between reference to the Company's
Registrant and Okabena Partnership K Annual Report on Form 10-KSB
for the year ended June 30,
1994.
4.4 Conversion, Exercise, Subscription Incorporated herein by
and Purchase Agreement dated as of reference to the Company's
October 13, 1995 between Registrant Registration Statement on Form
and Okabena Partnership K SB-2 Reg. No. 33- 99054.
4.5 Form of Warrant issued pursuant to Incorporated herein by
October 1995 Unit offering reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 33- 99054.
4.6 Certificate of Designation of Series Reference is made to Exhibit
I Convertible Preferred Stock 3.1 herein.
4.7 Promissory Note and Security Incorporated herein by
Agreement dated February 3, 1995 reference to the Company's
between Registrant and Norwest Annual Report on Form 10-KSB
Credit, Inc. for the year ended June 30,
1995.
41
<PAGE>
4.8 Form of May 1996 Bridge Loan Incorporated herein by
Agreement, including form of reference to the Company's
Promissory Note and Warrant Registration Statement on Form
Agreement SB-2 Reg. No. 333- 04311.
4.9 Telident, Inc. Stock Option Plan of Incorporated herein by
1988, Form of Incentive Stock Option reference to the Company's
Agreement and Form of Nonstatutory Registration Statement on Form
Stock Option Agreement S-8 Reg. No. 33- 25922C.
4.10 Form of Underwriter's Warrant issued Incorporated herein by
on August 16, 1996 reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.11 Certificate of Designation of Series Reference is made to Exhibit
III Convertible Preferred Stock 3.1 herein.
10.1 Stock Purchase Agreement between the Previously filed.
Company and FAMCO III Limited
Liability Company and Special
Situations Private Equity Fund,
L.P., dated April 13, 1998
10.2 Form of Warrant issued to FAMCO III Previously filed.
Limited Liability Company and
Special Situations Private Equity
Fund, L.P., dated April 13, 1998
10.3 Form of Warrant issued upon Previously filed.
conversion of 10% Series B
Convertible Debentures, dated June
30, 1997
10.4 Letter Agreement between the Company Filed herewith.
and Mack V. Traynor dated April 13,
1998
10.5 Engagement Agreement between the Filed herewith.
Company and Manchester Financial
Group, Inc. dated May 15, 1998
16 Letter of McGladrey & Pullen, LLP to Incorporated herein by
the SEC dated August 8, 1997 reference to the Company's
Annual Report on Form 10-KSB
for the year ended June 30,
1997.
23 Consent of Deloitte and Touche LLP Filed herewith.
27 Financial Data Schedule Previously filed.
42
<PAGE>
99 Pro Forma Balance Sheets Previously filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period ended
June 30, 1998.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Gaylord, State of
Michigan on April 2, 1999.
TELIDENT, INC.
By /s/ W. Edward McConaghay
-------------------------------------
W. Edward McConaghay
President and Chief Executive Officer
(principal executive officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints W. Edward McConaghay and Mark W. Sheffert as his
or her true and lawful attorney-in-fact and agent, with full powers of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities 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 date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Edward McConaghay President, Chief Executive Officer, Chief April 2, 1999
- ----------------------------- Financial Officer and Director (Principal
W. Edward McConaghay Executive Officer, Principal Accounting
Officer and Principal Financial Officer)
/s/ Mark W. Sheffert Chairman of the Board April 2, 1999
- -----------------------------
Mark W. Sheffert
/s/ Scott R. Anderson Director April 2, 1999
- -----------------------------
Scott R. Anderson
/s/ Willis K. Drake Director April 2, 1999
- -----------------------------
Willis K. Drake
/s/ David F. Durenberger Director April 2, 1999
- -----------------------------
David F. Durenberger
/s/ John D. Wunsch Director April 2, 1999
- -----------------------------
John D. Wunsch
/s/ Mack V. Traynor, III Director April 2, 1999
- -----------------------------
Mack V. Traynor, III
</TABLE>
44
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of the Incorporation, as Previously filed.
amended, of the Company
3.2 Bylaws, as amended, of the Company Incorporated herein by
reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.1 Specimen form of the Company's Incorporated herein by
Common Stock certificate reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.2 Form of Debenture issued pursuant to Incorporated herein by
May, 1993 Unit offering reference to the Company's
Annual Report on Form 10-KSB
for the year ended June 30,
1994.
4.3 Subscription and Purchase Agreement Incorporated herein by
dated as of August 23, 1993 between reference to the Company's
Registrant and Okabena Partnership K Annual Report on Form 10-KSB
for the year ended June 30,
1994.
4.4 Conversion, Exercise, Subscription Incorporated herein by
and Purchase Agreement dated as of reference to the Company's
October 13, 1995 between Registrant Registration Statement on Form
and Okabena Partnership K SB-2 Reg. No. 33- 99054.
4.5 Form of Warrant issued pursuant to Incorporated herein by
October 1995 Unit offering reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 33- 99054.
4.6 Certificate of Designation of Series Reference is made to Exhibit
I Convertible Preferred Stock 3.1 herein.
4.7 Promissory Note and Security Incorporated herein by
Agreement dated February 3, 1995 reference to the Company's
between Registrant and Norwest Annual Report on Form 10-KSB
Credit, Inc. for the year ended June 30,
1995.
45
<PAGE>
4.8 Form of May 1996 Bridge Loan Incorporated herein by
Agreement, including form of reference to the Company's
Promissory Note and Warrant Registration Statement on Form
Agreement SB-2 Reg. No. 333- 04311.
4.9 Telident, Inc. Stock Option Plan of Incorporated herein by
1988, Form of Incentive Stock Option reference to the Company's
Agreement and Form of Nonstatutory Registration Statement on Form
Stock Option Agreement S-8 Reg. No. 33- 25922C.
4.10 Form of Underwriter's Warrant issued Incorporated herein by
on August 16, 1996 reference to the Company's
Registration Statement on Form
SB-2 Reg. No. 333- 04311.
4.11 Certificate of Designation of Series Reference is made to Exhibit
III Convertible Preferred Stock 3.1 herein.
10.1 Stock Purchase Agreement between the Previously filed.
Company and FAMCO III Limited
Liability Company and Special
Situations Private Equity Fund,
L.P., dated April 13, 1998
10.2 Form of Warrant issued to FAMCO III Previously filed.
Limited Liability Company and
Special Situations Private Equity
Fund, L.P., dated April 13, 1998
10.3 Form of Warrant issued upon Previously filed.
conversion of 10% Series B
Convertible Debentures, dated June
30, 1997
10.4 Letter Agreement between the Company Filed herewith.
and Mack V. Traynor dated April 13,
1998
10.5 Engagement Agreement between the Filed herewith.
Company and Manchester Financial
Group, Inc. dated May 15, 1998
16 Letter of McGladrey & Pullen, LLP to Incorporated herein by
the SEC dated August 8, 1997 reference to the Company's
Annual Report on Form 10-KSB
for the year ended June 30,
1997.
23 Consent of Deloitte and Touche LLP Filed herewith.
99 Pro Forma Balance Sheets Previously filed.
27 Financial Data Schedule Previously filed.
46
EXHIBIT 10.4
April 13, 1998
Mack V. Traynor, III
19880 Sweetwater Curve
Shorewood, MN 55331
Dear Mack:
I am pleased to confirm our agreement reached on February 25, 1998. Telident
will engage you to perform consulting and business development activities. These
services extend beyond the normal responsibilities, and are in addition to your
role as a Director of the company. Our consulting relationship will have no
fixed termination date, but will continue at the pleasure of the board of
directors, or when by mutual agreement we decide that the assignment has
achieved its objectives and should be concluded. Time is the of the essence, and
I look forward to your early and detailed involvement.
You will assist Telident in the following areas:
I. Add your telecommunications experience and insight through
review/refinement of the company's strategic growth plan.
II. Assist in strategy implementation and business growth through, but not
limited to:
A. evaluation of expansion opportunities in new markets,
B. definition and valuation of new product opportunities,
C. assessment and completion of joint ventures, partnerships and
strategic alliances,
D. identification of potential merger and acquisition candidates,
E. negotiation and execution of partnering/merger agreements.
III. Investment Banking and Financial Markets Relationships, including
A. developing effective presentations,
B. providing introductions, and telling the story to investment
bankers, financial analysts, and others as appropriate,
C. assist in the acquisition of capital, as required.
For these services, Telident will grant you 100,000 warrants to purchase shares
of Telident Common Stock at $1.188 (the closing price on February 25, 1998, the
date on which this agreement was reached). The warrants will vest five years
from this date (February 25, 2003) and will be exercisable for a period of two
(2) years from the date of vesting. Any warrants not otherwise vested will
terminate at such time as this consulting agreement is terminated. If Telident
is sold, merged, or otherwise reorganized into another public entity where
Telident is not the surviving company, all warrants will vest immediately.
<PAGE>
The vesting of the warrants will be accelerated on achievement of the following
financial results:
* 60% of warrants will vest according to the following Revenue
achievement, where the revenue is defined as the annualized
revenue run-rate, measured quarterly.
* 20% when Telident total revenues exceed $10 Million
* 20% when Telident total revenues exceed $20 Million
* 20% when Telident total revenues exceed $30 Million
* 40% of warrants will vest according to the achievement of the
following Stock Price
* 20% when Telident stock reaches $4.00,
* 20% when Telident stock price reaches $6.00.
The Telident board of directors ratified this consulting arrangement and the
issuance of these warrants at its telephone board meeting held on Wednesday,
April 8, 1998. Warrant documents effective February 25, 1998 will be issued to
you shortly.
I look forward to working with you, and to our success.
Sincerely yours,
/s/ W. Edward McConaghay
W. Edward McConaghay
President & CEO
cc: Mark Sheffert
Chairman of the Board
EXHIBIT 10.5
MANCHESTER ENGAGEMENT AGREEMENT
TELIDENT, INC. (THE "COMPANY")
This Engagement Agreement (the "Agreement") confirms the COMPANY's retention of
Manchester Financial Group, Inc. ("MFGI"), for a minimum period of six (6)
months from the date hereof, to assist it with the acquisition of certain target
companies ("Target Companies") or any similar transaction related to the
COMPANY. MFGI will proceed on a month-to-month basis until the COMPANY provides
MFGI with written 30-day notice of termination of this Agreement.
1. MFGI'S PERFORMANCE. Throughout the course of its engagement, MFGI will
follow all Process Guidelines set forth in Exhibit A.
2. TYPES OF TRANSACTIONS COVERED. Transactions covered under this Agreement
(individually, a "Transaction" and collectively, "Transactions") include
the acquisition of one or more Target Companies, whether accomplished by a
purchase of assets or stock by or through the COMPANY, an affiliate of the
COMPANY and/or it shareholders (in a single transaction or one or more
series of related transactions), and shall include without limitation any
merger, tender or exchange offer, joint venture, equity investment,
recapitalization, or any other transaction, the effect of which is to
change the financial structure, control or ownership of the COMPANY. If a
Transaction is completed during the term of this Agreement, MFGI shall be
entitled to its Accomplishment Fee provided herein.
3. EQUITABLE AGENCY PROTECTION PERIOD. If within a period of twelve (12)
months following termination of this Agreement, the COMPANY, an affiliate
of the COMPANY or its shareholders enter into an agreement in principle to
consummate a Transaction with any Target Companies identified during the
term of this Agreement or the six (6) month period prior to the date of
this Agreement, MFGI's Accomplishment Fee shall be due and payable in full
upon closing of such Transaction pursuant to section 5 below. For purposes
of record keeping and monitoring only, within approximately thirty (30)
days of the expiration of this Agreement, MFGI will provide the COMPANY
with a protective list of Target Companies.
4. ACCOMPLISHMENT FEE AND TOTAL CONSIDERATION. The Accomplishment Fee payable
by COMPANY to MFGI at the closing of each Transaction shall be calculated
as provided on Exhibit B. MFGI's Accomplishment Fee shall be based upon
the total consideration ("Total Consideration") paid or payable directly
or indirectly by the COMPANY, an affiliate of the COMPANY and/or its
shareholders (including holders of options or other stock rights), in
connection with, or in anticipation of, the Transaction, regardless of how
allocated or the form of consideration, and shall specifically including
without limitation:
(a) Cash paid and securities transferred by the COMPANY, an affiliate of
the COMPANY and/or its shareholders at closing;
<PAGE>
(b) In the case of an acquisition or deemed acquisition of stock by the
COMPANY or an affiliate of the COMPANY all liabilities of the Target
Companies, other than trade payables and accrued operating expenses.
In the case of an acquisition or deemed acquisition of assets, all
liabilities of the Target Companies, other than trade payables and
accrued operating expenses, which are assumed by the COMPANY or an
affiliate of the COMPANY.
(c) In the case of a Joint Venture, the COMPANY's pro rata equity
interest in the enterprise value of the Joint Venture calculated as
the sum of (i) the Joint Venture's debt and (ii) the fair market
value of the partners' capital contributions to the Joint Venture.
For purposes of this section, "Joint Venture" shall mean any joint
undertaking between the COMPANY and the Target Companies involving
the pooling of assets of efforts for a shared economic goal;
(d) All deferred installments of the purchase price including promissory
notes;
(e) Any portion of the Total Consideration held in escrow subsequent to
closing;
(f) All non-compete compensation and the like;
(g) Future payments that are contingent on the future earnings or
operations of the Target Companies, with such payments included in
Total Consideration based on the net present value of such payment
stream by application of a 15 percent per annum discount rate;
(h) Any extraordinary compensation to be paid to Target Company and/or
its shareholders or affiliates thereof for services rendered
subsequent to closing.
5. PAYMENT OF ACCOMPLISHMENT FEE. Except as otherwise provided below, MFGI's
Accomplishment Fee shall be paid in cash at closing. In the event that all
or a portion of the Total Consideration includes capital stock, securities
or other property (other than installment notes), the portion of MFGI's
Accomplishment Fee attributable thereto, shall be payable at closing in
cash, based on the fair market value of such non-cash items as determined
by mutual agreement of the parties. In the event the parties are unable to
agree on the fair market value, MFGI shall have the option to receive
payment in like kind, or to cause an independent appraiser acceptable to
the COMPANY to determine fair market value, the expense of which appraisal
shall be shared equally by the parties. The COMPANY, at its option, may
pay 1.5% of the cash Accomplishment Fee in Company common stock. The stock
price to be used to determine the number of common shares to be
transferred, if the COMPANY chooses this option, will be the average price
of the COMPANY's common stock during the ten (10) trading days before the
announcement of the respective Transaction to the public. The COMPANY
common stock transferred shall be registered stock without any trading
restrictions.
6. RETAINERS AND EXPENSES. The COMPANY shall pay MFGI a retainer, monthly in
advance, of $6,500 per month for the term of this Agreement. Also, upon
execution of this Agreement MFGI or its designees will be granted a
Warrant or Warrants to purchase 50,000 shares of the COMPANY's common
stock at an exercise price equal to the closing price of the COMPANY's
stock on the date of this Agreement, and with such other terms set forth
in Exhibit B hereto. The COMPANY shall also reimburse MFGI monthly in
arrears for all reasonable out-of-pocket expenses incurred on behalf of
the COMPANY. MFGI shall provide detailed monthly itemized summaries of
expenses for which reimbursement is requested by MFGI. The COMPANY agrees
that any unpaid payment (or portion thereof) of any fee, expense,
retainer, or other amount payable to MFGI shall bear interest payable at
the highest rate of interest permissible by law, but not to exceed 12
percent per annum, from the date that such payment is due hereunder to the
date that said payment is paid in full.
<PAGE>
7. INDEMNIFICATION. The COMPANY agrees not to assert claims against or
recover from MFGI (which term, for purposes of this paragraph, includes
its affiliates, directors, officers, shareholders and employees) for
losses, claims, damages or liability to the COMPANY or its shareholders,
arising out of or in connection with this engagement or performance by
MFGI of services hereunder, and to indemnify and hold MFGI harmless
against and from all losses, claims, damages or liabilities, and all
actions, claims, proceedings and investigations in respect thereof
(collectively, "Losses"), arising out of or in connection with this
engagement or the performance by MFGI of services hereunder, and to
reimburse MFGI for all reasonable legal and other out-of-pocket expenses
as incurred by MFGI in connection with investigating, preparing or
defending any such Losses, whether or not MFGI is named as a party
thereto; provided, however, that the COMPANY shall not be liable to the
extent such Losses are finally determined by arbitration as herein
provided to have arisen out of MFGI gross negligence or willful
misconduct. If such indemnification is insufficient or unavailable, the
COMPANY agrees to make contributions to any Losses paid or payable such
that MFGI will not be liable for more than the Accomplishment Fee paid to
MFGI.
8. RELIANCE AND CONFIDENTIALITY. 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 or the Target
Companies or its advisors and shall not in any respect be responsible for
the accuracy or completeness of, or have any obligation to verify, the
same or to conduct any appraisal of assets. To the extent consistent with
legal requirements, all information given to MFGI by the COMPANY, unless
publicly available or otherwise available to MFGI without restriction or
breach of any Confidentiality Agreement, will be held by MFGI in
confidence and will not be disclosed to anyone other than MFGI agents and
advisors without the COMPANY's prior approval or used for any purpose
other than those referred to in this Agreement.
9. ARBITRATION. The COMPANY and MFGI both agree that any dispute between them
in any way relating to this Agreement shall be determined and settled by
arbitration in accordance with the rules of the American Arbitration
Association. All costs associated with any such disputes (including both
parties' legal fees) shall be allocated between the parties by the
arbitrators. All decisions and awards of the arbitrators shall be final
and binding on both parties, and may be enforced by any court with
jurisdiction.
10. CONFLICT OF INTEREST. The COMPANY hereby acknowledges that the Chairman of
its Board of Directors is Chairman and Chief Executive Officer of
Manchester Companies, Inc., which is the majority shareholder of MFGI. The
COMPANY further acknowledges that is has consulted with its legal counsel
regarding this potential conflict of interest.
11. REPRESENTATIONS. The COMPANY will in good faith use its best efforts to
conduct any offer, offer for sale, and sale of COMPANY stock in a manner
intended to be in compliance with federal and state securities laws, rules
and regulations. It is expressly intended that MFGI shall not be acting as
a broker-dealer but is assisting the COMPANY in its management of the
acquisitions. MFGI is not a member of the National Association of
Securities Dealers, Inc. and is not licensed as a broker-dealer in any
state.
12. MISCELLANEOUS. This Agreement is transferable and assignable by MFGI to
any corporation under common control and ownership with MFGI. In addition,
MFGI may assign part or all of the services to be performed under this
Agreement to a third party with the consent of the COMPANY, which consent
will not be unreasonably withheld. All questions arising hereunder shall
be determined according to Minnesota Law. Facsimile copies of the
Agreement signed in counterpart shall be considered for all purposes,
including delivery, as originals. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction
shall not affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the offending term
or provision in any other situation or in any other jurisdiction. The
provisions of this paragraph and Paragraphs 3, 5, 7, and 9 will survive
the termination of this Agreement.
<PAGE>
Read and agreed to this June 13, 1998 by:
TELIDENT, INC. MANCHESTER FINANCIAL GROUP, INC.
By: /s/ W. Edward McConaghay By: /s/ Kenneth W. Hager
---------------------------------- ----------------------------------
Its: President and CEO Its: Managing Director
-------------------------------- --------------------------------
<PAGE>
EXHIBIT A
to
Engagement Agreement
MANCHESTER FINANCIAL GROUP, INC.
and
TELIDENT, INC.
PROCESS GUIDELINES
In the course of MFGI engagement hereunder, MFGI will exercise its best efforts
to:
(a) Maintain strict confidentiality of all financial and other proprietary
information, data, and materials relating to the COMPANY and the Target
Companies except as provided below.
(b) Familiarize itself with the business, financial condition and prospects of
Target Companies identified by the COMPANY and believed by the COMPANY to
be viable acquisition targets.
(c) Not share with the Target Companies any confidential information relating
to the COMPANY unless the Target Companies has executed a CONFIDENTIALITY
AGREEMENT in a form pre-approved by the COMPANY.
(d) Contact Target Companies, identified by the COMPANY on the COMPANY's
behalf and, as appropriate, arrange for and orchestrate meetings between
Target Companies and the COMPANY.
(e) Work with the COMPANY's legal counsel, accountants, and other advisors as
reasonably requested and directed by the COMPANY.
(f) Present to the COMPANY all proposals from any Target Companies and make
recommendations as to the COMPANY's appropriate negotiating strategy and
course of conduct.
(g) Assist in all negotiations, in due diligence and in all document review as
reasonably requested and directed by the COMPANY.
(h) The COMPANY or its shareholders have the right to reject any and all
proposals submitted to MFGI.
<PAGE>
EXHIBIT B
to
Engagement Agreement
MANCHESTER FINANCIAL GROUP, INC.
and
TELIDENT, INC.
Fee Structure
3.0 percent of the Total Consideration, paid by COMPANY, or an affiliate
of the COMPANY to each Target Company or its shareholders.
In addition, with regard to each Transaction, MFGI or its designees will be
granted a Warrant or Warrants to purchase 100,000 shares of the COMPANY's common
stock (the "Warrants"). Such Warrants will be exercisable at any time for a
period of five (5) years from the date of issuance at an exercise price equal to
the average closing price of the COMPANY's stock during the ten (10) trading
days before the announcement of the respective Transaction to the public but in
no event less than $2.50. The Warrants shall contain a net exercise provision,
customary anti-dilution provisions and shall provide for participation of the
shares underlying the Warrants on a "piggy-back" basis in any registration by
the COMPANY during the Warrants duration and two (2) years thereafter, and
registration to be at the expense of the COMPANY. The Warrants will also contain
ratchet-down provisions which will result in the repricing of the Warrants in
the event that shares, options or warrants are subsequently issued by the
COMPANY at a lower price. The form of such Warrant is attached hereto.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-25922C of Telident, Inc. on Form S-8 and Registration Statement No. 33-99054
of Telident, Inc. on Form S-3 of our report dated July 31, 1998 (August 18, 1998
as to Note 7) in the Annual Report on Form 10-KSB/A of Telident, Inc. for the
fiscal year ended June 30, 1998.
/s/ Deloitte & Touche LLP
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Deloitte & Touche LLP
Minneapolis, Minnesota
April 2, 1999
