U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ______________ to ______________
Commission file number 0-20887
TELIDENT, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1533060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 SECOND STREET N.E., SUITE 212
MINNEAPOLIS, MINNESOTA 55413
(Address of principal executive offices) (Zip Code)
(612) 623-0911
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___.
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of equity
securities, as of January 29, 1999: i) 2,787,657 shares of Common Stock, par
value $.08 per share; ii) 37,500 shares of Series I Class A Convertible
Preferred Stock, par value $.08 per share; and iii) 400,000 shares of Series III
Convertible Preferred Stock, par value $.08 per share.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION ...............................................................3
ITEM 1. Financial Statements .............................................................3
Condensed Balance Sheets (unaudited) as of December 31, 1998 and June 30, 1998.........3
Condensed Statements of Operations (unaudited) for the three months and six months
ended December 31, 1998 and December 31, 1997..........................................4
Statements of Shareholders' Equity (unaudited) for the six months ended
December 31, 1998 .....................................................................5
Condensed Statements of Cash Flows (unaudited) for the six months ended
December 31, 1998 and December 31, 1997................................................6
Notes to Consolidated Financial Statements.............................................7
ITEM 2. Management's Discussion and Analysis and Plan of Operation.......................10
PART II OTHER INFORMATION ..................................................................16
ITEM 2. Changes in Securities and Use of Proceeds .......................................16
ITEM 4. Submission of Matters to a Vote of Security Holders .............................16
ITEM 5. Other Information ...............................................................17
ITEM 6. Exhibits and Reports on Form 8-K ................................................19
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TELIDENT, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31 June 30,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,264,363 $ 258,875
Trade accounts receivable, net of allowance for doubtful
accounts of $30,000 at both dates 791,082 508,956
Inventories 279,022 285,708
Other 73,479 76,088
------------- -------------
Total current assets 2,407,946 1,129,627
FURNITURE AND OFFICE EQUIPMENT, less accumulated
depreciation of $334,855 and $291,955, respectively 185,089 209,435
INTANGIBLE ASSETS, less accumulated amortization of $211,486
and $159,386, respectively 237,572 289,672
OTHER ASSETS 33,355 83,055
------------- -------------
$ 2,863,962 $ 1,711,789
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 204,591 $ 95,271
Trade accounts payable 170,540 168,069
Accrued expenses 148,458 118,123
Deferred revenue 25,845 21,053
Current portion of long-term debt 52,005 101,519
------------- -------------
Total current liabilities 601,439 504,035
LONG-TERM DEBT, less current portion 5,442 31,825
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.08 par value, 2,500,000 authorized
Series I Class A, convertible into common stock at the rate of 6.4 common
shares for each preferred share at December 31,1998 and one common
share for each preferred share at June 30, 1998, 37,500 shares
outstanding at both dates 3,000 3,000
Series III, cumulative dividend equal to the Series I Class A, if any,
convertible into common stock equal to the quotient of the per share
Purchase Price ($2.50) divided by the lessor of (i) the Conversion
Price ($2.50) and (ii) 80% of the average of the closing bid price
for the shares of common stock on the ten trading days prior to notice
of conversion, except for 200,000 shares 80% of the average price shall
not be more than $.785 until the closing bid price is greater than $1.75
on any ten consecutive trading days following the effective date of the
registration statement for the common shares to be issued upon conversion
of the Series III preferred stock, 400,000 shares outstanding at
December 31, 1998 32,000 --
Common stock, $.08 par value, 10,000,000 shares authorized,
2,787,657 and 2,786,657 shares outstanding, respectively 223,013 222,933
Additional paid-in capital 15,552,771 14,612,497
Accumulated deficit (13,553,703) (13,662,501)
------------- -------------
Total shareholders' equity 2,257,081 1,175,929
------------- -------------
$ 2,863,962 $ 1,711,789
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 730,393 $ 625,777 $ 1,447,896 $ 1,130,575
COST OF SALES 216,737 188,332 402,274 352,162
------------ ------------ ------------ ------------
GROSS PROFIT 513,656 437,445 1,045,622 778,413
OPERATING EXPENSES:
Sales and marketing 111,240 242,097 253,955 420,669
Research and development 106,450 152,499 209,488 273,729
General and administrative 247,245 171,642 477,282 407,741
------------ ------------ ------------ ------------
Total operating expenses 464,935 566,238 940,725 1,102,139
------------ ------------ ------------ ------------
Income (loss) from operations 48,721 (128,793) 104,897 (323,726)
INTEREST INCOME 15,746 10,353 26,202 19,520
INTEREST EXPENSE (7,008) (16,509) (22,301) (28,578)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 57,459 (134,949) 108,798 (332,784)
PREFERRED STOCK DIVIDENDS 0 (41,625) (275,442) (390,462)
------------ ------------ ------------ ------------
NET INCOME (LOSS)
APPLICABLE TO COMMON
STOCK $ 57,459 $ (176,574) $ (166,644) $ (723,246)
============ ============ ============ ============
NET INCOME (LOSS) PER
COMMON SHARE:
Basic $ .02 $ (.10) $ (.06) $ (.42)
============ ============ ============ ============
Diluted $ .01 $ (.10) $ (.06) $ (.42)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 2,787,550 1,734,546 2,787,346 1,734,982
============ ============ ============ ============
Diluted 3,899,238 1,734,546 2,787,346 1,734,982
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
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TELIDENT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Number of Amount of Number of Amount of Additional
Preferred Preferred Common Common Paid-in Accumulated
Shares Issued Stock Shares Issued Stock Capital Deficit
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 37,500 $ 3,000 2,786,657 $ 222,933 $ 14,612,497 $ (13,662,501)
Preferred stock issued in private
placement, net of offering
expenses of $35,146 400,000 32,000 -- -- 932,854 --
Value of warrant issued for
services -- -- -- -- 5,000 --
Common stock issued for services -- -- 1,000 80 2,420 --
Net income -- -- -- -- -- 108,798
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1998 437,500 $ 35,000 2,787,657 $ 223,013 $ 15,552,771 $ (13,553,703)
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to condensed financial statements.
5
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TELIDENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
December 31,
------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 108,798 $ (332,784)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization expense 95,000 69,950
Common stock warrant issued for services 5,000 --
Common stock issued for services 2,500 --
Changes in assets and liabilities:
Trade accounts receivable (282,126) (223,170)
Inventories 6,686 70,423
Other assets 52,309 (67,193)
Trade accounts payable 2,471 (71,919)
Accrued expenses and deferred revenue 35,127 62,310
------------- -------------
Net cash provided by (used in) operating activities 25,765 (492,383)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of patent and capitalized software costs -- (125,576)
Purchase of furniture and office equipment (18,554) (20,519)
------------- -------------
Net cash used in investing activities (18,554) (146,095)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable 109,320 280,718
Payments of long-term debt (75,897) (120,611)
Proceeds from issuance of preferred stock, net 964,854 1,193,627
------------- -------------
Net cash provided by financing activities 998,277 1,353,734
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,005,488 715,256
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 258,875 22,319
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,264,363 $ 737,575
============= =============
Supplemental non-cash financing activities:
Common stock offset against note receivable $ -- $ 11,635
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
6
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TELIDENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements included in this Form 10-QSB are
unaudited. However, in the opinion of Telident, Inc. (the "Company"), the
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the results of operations
and financial position for the interim periods.
The results of operations for the three-month and six-month periods ended
December 31, 1998 do not necessarily indicate the results to be expected for the
full year. These statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto, contained in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1998.
2. INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first out method, and consisted of the following:
December 31, June 30,
1998 1998
---- ----
Raw materials $ 308,129 $ 325,804
Work in progress 12,767 1,876
Finished goods 63,126 48,028
Inventory reserve (105,000) (90,000)
----------- -----------
$ 279,022 $ 285,708
=========== ===========
3. SHAREHOLDERS' EQUITY
ISSUANCE OF SERIES III CONVERTIBLE PREFERRED STOCK - In August 1998, the
Company completed the sale of 400,000 shares of Series III Convertible Preferred
stock and issued warrants in the aggregate to purchase 400,000 shares of common
stock with two investors for $1,000,000 ($2.50 per unit). The warrants are
exercisable at $3.125 per share and will expire two years from the closing date
of this transaction. The warrants may be called by the Company at a price of
$4.38. The Company incurred offering costs of $35,146 and will incur additional
costs in the future as the Company is required to register the shares with the
Securities and Exchange Commission. Each share of the Series III Convertible
Preferred Stock is convertible at the option of the holder into common stock.
Upon any such conversion, each share of Series III Preferred Stock shall be
converted into a number of fully paid and nonassessable shares (calculated as to
each conversion to the nearest 1/100th of a share) of common stock of the
Company equal to the quotient of (x) the per share purchase price (appropriately
adjusted to reflect stock splits, stock dividends, reorganizations,
consolidations and similar changes hereafter effected) of such share of Series
III Preferred Stock, divided by (y) the lessor of (i) the Conversion Price (as
defined) and (ii) 80% of the average of the closing bid price for the shares of
common stock on the ten (10) trading days prior to the date that the Company
receives written notice of conversion from a holder of such Series III Preferred
Stock. However, for 200,000 shares, 80% of the average closing bid price shall
not be more than $.785 until such time as the closing bid price for the common
stock is greater than $1.75 on any ten consecutive days following the effective
date of the registration statement which registers for resale the shares of
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common stock issuable upon conversion of the Series III Preferred Stock. The
value of the beneficial conversion feature, $250,000, was recorded as a deemed
preferred stock dividend on the date of issuance.
CUMULATIVE UNDECLARED DIVIDENDS - The Company has not paid dividends on
Series I preferred stock since March 31, 1997. During the quarter the Company
negotiated with its Series I shareholders to eliminate their cumulative and
future dividends in exchange for re-pricing the conversion feature of their
preferred shares. The Series I preferred stock was convertible at one share of
preferred for one share of common stock. The new conversion rate is 6.4 common
shares for each share of preferred stock. The amount of Series I cumulative
dividends that were canceled was $96,192. Based upon a valuation by the Company
there was no deemed dividend in connection with the modification to this
agreement. The preferred stock dividends on the statement of operations include
the value assigned to the beneficial conversion feature of the Series III and II
preferred stock of $250,000 and $312,500 for the six months ended December 31,
1998 and 1997, respectively. In April 1998, all of the Company's Series II Class
A Convertible Preferred Stock was converted into 1,052,189 shares of common
stock. As a result of the conversion, $334,500 of deemed dividends for the six
months ended December 31, 1997 will not be paid. If the conversion had taken
place in July 1997, the Company's basic and diluted loss per share for the six
months ended December 31, 1997, would have been ($.14).
4. NET INCOME (LOSS) PER COMMON SHARE
The increase in the weighted average number of shares outstanding for the
diluted earnings per share calculation for the quarter ended December 31, 1998
was due to the requirement to assume conversion of all of the Series I and III
preferred stock into 1,111,668 shares of common stock as of October 1, 1998. For
the other periods presented there is no difference between basic and diluted
weighted average shares outstanding as any assumed conversion of preferred stock
would be antidilutive.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting
Comprehensive Income," which was adopted by the Company beginning July 1, 1998.
SFAS No. 130 requires the disclosure of comprehensive income and its components
in the general-purpose financial statements. The adoption by the Company of SFAS
No. 130 did not have a material effect on the Company's financial statements for
the six months ended December 31, 1998 or 1997. Total comprehensive income
(loss) for the three months ended December 31, 1998 and 1997, was $57,459 and
($134,949), respectively, and for the six months ended December 31, 1998 and
1997, was $108,798 and $(332,784), respectively.
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In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which became effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. The adoption of SFAS No. 131
did not impact the Company's financial statements since the Company operates in
one segment.
9
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
This discussion and analysis contains forward-looking terminology such as
"believes," "anticipates," "expects" and "intends," or comparable terminology.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Potential purchasers
of the Company's securities are cautioned not to place undue reliance on such
forward-looking statements which are qualified in their entirety by the cautions
and risks described herein.
Telident, Inc. (the "Company") designs, manufactures and markets
proprietary hardware and software systems which provide the exact location of a
911 telephone call to the emergency dispatcher who receives the call. The
Company's systems provide information which can shorten the response time to a
911 call, reduce the costs associated with responses to incorrect locations and
improve the safety of individuals within a private branch exchange ("PBX")
telephone system.
RESULTS OF OPERATIONS
For the three month and six month periods ended December 31, 1998, the
Company recorded a net income of $57,459 and $108,798 compared to a net loss of
$134,949 and $332,784 for the same periods in fiscal year 1998.
REVENUES
Revenues consist of equipment sales of the Company's hardware and software
systems for enhanced 911 service, mainly from Telident's Station Translation
System ("STS") for PBX systems and packages of hardware and software
applications providing "total PBX 9-1-1 solutions." The Company also generates
revenues from services and extended warranty contracts.
Revenues for the three month and six month periods ended December 31, 1998
were $730,393 and $1,447,896 compared to $625,777 and $1,130,575 for the same
periods in fiscal year 1998, an increase of 17% for the three month period and
an increase of 28% for the six month period. The Company increased revenues by
focusing selling efforts on its core PBX 9-1-1 products including its on-site
notification software and 9-1-1 database software applications. Software and
systems sales increased after the Company introduced new product packaging and
pricing for customer installable PBX 9-1-1 solutions. In addition, the Company
began direct selling of its solutions through telephone sales programs.
GROSS MARGIN
Gross margin for the three month and six month periods ended December 31,
1998 increased to 70.3% and 72.2% compared to 69.9% and 68.9% for the same
periods in fiscal year 1998. These increases resulted from increased shipments
of the Company's core PBX 9-1-1 products, software sales, and improved cost
controls of resold products and installation services.
10
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SALES AND MARKETING
Sales and marketing expenses for the three month and six month periods
ended December 31, 1998 decreased to $111,240 and $253,955 from $242,097 and
$420,669 for the same periods in fiscal year 1998. These decreases resulted from
the closing of several under-producing sales offices and a reduction in sales
personnel and marketing expenses during the third quarter of fiscal year 1998.
The Company has shifted the focus of its selling efforts away from a field sales
force to direct marketing to end users and distributors. This strategy has
resulted in increased sales while at the same time decreasing the Company's
sales and marketing expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month and six month
periods ended December 31, 1998 decreased to $106,450 and $209,488 from $152,499
and $273,729 during the same periods in fiscal year 1998. These decreases were
due to a reduction in personnel, decreased use of consultants, and a
concentrated focus on research and development efforts for the Company's
existing PBX 9-1-1 product line.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three month and six month
periods ended December 31, 1998 increased to $247,245 and $477,282 from $171,642
and $407,741 during the same periods in fiscal year 1998. Increases in fiscal
year 1999 compared to fiscal year 1998 are due to increased wages and increased
legal, consulting and investment banking fees.
INTEREST INCOME
Interest income for the three month and six month periods ended December
31, 1998 was $15,746 and $26,202 compared to $10,353 and $19,520 for the same
periods in fiscal 1998. The increase in the current year is due to the higher
level of cash and cash equivalents due to the sale of preferred stock completed
in August 1998.
INTEREST EXPENSE
Total interest expense for the three month and six month periods ended
December 31, 1998 was $7,008 and $22,301 compared to $16,509 and $28,578 for the
same periods in fiscal year 1998. The decreases in interest expense were due to
decreased outstanding borrowings and lower interest rates.
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 Company has
paid a cash dividend on its preferred stock in the past. No such dividend was
paid during the six months ended December 31, 1998. During the quarter the
Company negotiated with its Series I preferred shareholders to eliminate the
cumulative dividend
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provision and cancel unpaid cumulative dividends on the Series I preferred
stock. The Company plans to retain all earnings, if any, to further the
development of the business.
INFLATION
Inflation has not had a material impact on the Company's net sales or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of
$1,264,363 and accounts receivable of $791,082. During the six month period
ended December 31, 1998 net cash provided by the Company's operating activities
was $20,765, due to income from operations. The Company used $18,554 of cash to
purchase capital equipment. The Company received $109,320 of cash due to net
borrowings on its bank line of credit and used $75,897 to make payments on debt.
The Company completed a sale of preferred stock in August 1998 that resulted in
net proceeds of $964,854. The Company has relied on debt, equity capital and
revenues to fund its operations during the first half of fiscal year 1999 and
during prior periods.
Based on the projected revenues and expenses, the Company believes that
cash and cash equivalents, the existing line of credit and its collections from
accounts receivable, will be adequate to fund the Company's working capital
requirements through December 31, 1999.
The Company has no material commitments for capital expenditures at
December 31, 1998.
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.
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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
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, the Company 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 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
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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 expects 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 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 the
operations, financial condition and cash flows of the Company.
14
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. This
Statement is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. The Company has not yet determined the effects SFAS
No. 133 will have on its financial position or the result of its operations.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 28, 1998, Telident issued 1,000 shares of common stock to David
A. Lynn in consideration of consulting services rendered by Mr. Lynn in
connection with Telident's investigation of its strategic options,
including selling Telident or acquiring another company. This issuance was
made in reliance upon the exemption provided in Section 4(2) of the
Securities Act. Such securities are restricted as to sale or transfer,
unless registered under the Securities Act, and the certificate
representing such securities contains a restrictive legend preventing
sale, transfer or other disposition unless registered under the Securities
Act. In addition, the recipient of such securities received, or had access
to, material information concerning Telident, including but not limited to
Telident's reports on Form 10-KSB, Form 10-QSB and Form 8-K, as filed with
the SEC. No underwriting commissions or discounts were paid with respect
to the issuance of such securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on October 28, 1998.
There were 2,786,735 shares of common stock outstanding and entitled to
vote, and a total of 2,373,506 shares (85.2%) were represented at the
meeting in person or by proxy. The following summarizes vote results of
proposals submitted to the Company's shareholders.
1. Proposal to elect 7 directors, each for a one-year term.
FOR WITHHOLD
--- --------
Scott R. Anderson 2,355,306 18,200
Willis K. Drake 2,355,731 17,775
David F. Durenberger 2,353,419 20,087
John D. Wunsch 2,355,306 18,200
W. Edward McConaghay 2,355,481 18,025
Mark W. Sheffert 2,356,794 16,712
Mack V. Traynor 2,357,306 16,200
2. Proposal to consider and vote upon approval of the Company's 1998 Stock
Option Plan.
BROKER
FOR WITHHOLD ABSTAIN NON-VOTES
--- -------- ------- ---------
1,484,289 114,395 54,295 720,527
3. Proposal to ratify and approve the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the fiscal year ending
June 30, 1999.
BROKER
FOR WITHHOLD ABSTAIN NON-VOTES
--- -------- ------- ---------
2,359,734 10,747 3,025 0
16
<PAGE>
ITEM 5. OTHER INFORMATION
THE FOLLOWING INFORMATION IS PROVIDED IN RESPONSE TO ITEM 5 OF FORM 8-K
(OTHER EVENTS)
(a) Conversion of Preferred Stock
Series III Convertible Preferred Stock
In general, the 400,000 outstanding shares of Series III
Convertible Preferred Stock are convertible at a floating rate
which depends on the 10-day average closing bid price of the
common stock at the time of conversion. The following
conversion formula applies to the 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
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.
Based on a recent 10-day average closing price of $2.25 per
common share for the period ending February 9, 1999, the
holders of Series III Convertible Preferred Stock would have
been entitled to convert each preferred share into
approximately 1.39 common shares.
Pursuant to a modification agreement, attached hereto as an
exhibit, Telident amended the conversion terms that apply to
one holder of its Series III Convertible Preferred Stock,
Special Situations Private Equity Fund, L.P.
17
<PAGE>
Special Situation owns 200,000 shares of Series III
Convertible Preferred Stock.
The modification agreement only applies to those shares of
common stock which Special Situations receives upon conversion
and sells between (a) the effective date of the registration
statement which registers such shares and (b) the last date
that the closing bid price of the common shares exceeds $1.75
for a period of 10 consecutive trading days (the "Special
Conversion Period"). During the Special Conversion Period, the
phrase "80% of such average price" in the conversion formula
shall not exceed $0.785. In other words, as to those shares
which Special Situations is able to sell during the Special
Conversion Period, the conversion rate shall be approximately
3.18 shares of common stock for each share of preferred stock.
At the end of the Special Conversion Period, the conversion
rate set forth in the Modification Agreement will no longer
apply to the shares of Series III Convertible Preferred Stock
then owned by Special Situations.
The actual number of common shares issuable upon conversion of
the shares of 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.
Series I Convertible Preferred Stock
Pursuant to a modification agreement, attached hereto as an
exhibit, the outstanding shares of Series I Convertible
Preferred Stock are convertible at a fixed rate of 6.4 common
shares per preferred share. The Series I Convertible Preferred
Stock also contains customary antidilution rights.
(b) Cautionary Statement
Telident is filing herewith a Cautionary Statement pursuant to the
Private Securities Litigation Reform Act of 1995 for use as a
readily available written document to which reference may be made in
connection with forward-looking statements, as defined in such act.
(c) Warrant Cancellation
Manchester Financial Group, Inc. and Kenneth W. Hager have agreed to
the cancellation of the warrants issued to them by the Company in
connection with the engagement agreement between the Company and
Manchester, effective December 31, 1998.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Series I Convertible Preferred Stock Modification
Agreement dated December 29, 1998, between Telident,
Inc. and the holders of Series I Convertible Preferred
Stock.
10.2 Series III Convertible Preferred Stock Modification
Agreement dated December 29, 1998, between Telident and
Special Situations Private Equity Fund, L.P.
99.1 Cautionary Statement
27 Financial Data Schedule
(b) Current Reports on Form 8-K
The registrant filed no Current Reports on Form 8-K during the
quarter ended December 31, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELIDENT, INC.
(Registrant)
February 16, 1999 /s/ W. Edward McConaghay
- ------------------------------ ---------------------------------------
Date W. Edward McConaghay, President
(Principal Executive, Financial and
Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Series I Convertible Preferred Stock Modification
Agreement dated December 29, 1998, between Telident,
Inc. and the holders of Series I Convertible Preferred
Stock.
10.2 Series III Convertible Preferred Stock Modification
Agreement dated December 29, 1998, between Telident and
Special Situations Private Equity Fund, L.P.
99.1 Cautionary Statement
27 Financial Data Schedule
20
EXHIBIT 10.1
SERIES I CONVERTIBLE PREFERRED STOCK
MODIFICATION AGREEMENT
THIS SERIES I CONVERTIBLE PREFERRED STOCK MODIFICATION AGREEMENT is
entered into and shall be effective as of the 29th day of December, 1998, by and
between Telident, Inc., a Minnesota corporation (the "Company") and Willis
Drake, Richard Hencley and the Warren Tyler Estate (collectively, the
"Shareholders").
WHEREAS, the Shareholders currently hold all of the Series I
Convertible Preferred Stock of the Company (the "Preferred Stock");
WHEREAS, the Preferred Stock was established and is governed
pursuant to that Certificate of Designation of Series I Convertible Preferred
Stock (the "Certificate") which was filed with the Secretary of State of the
State of Minnesota on November 2, 1994, a copy of which is hereby attached as
Exhibit A hereto; and
WHEREAS, the Company and the Shareholders desire to enter into this
Agreement to modify the rights and preferences of the Preferred Stock from those
rights and preferences created by the Certificate.
NOW THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto hereby agree as follows:
1. Dividends. Section A of the Certificate is hereby deemed deleted.
The Shareholders hereby waive their rights pursuant to the
Certificate to any cumulative dividends which have already accrued
or which may accrue hereafter. However, in the event that any
dividend or distribution is declared or made with respect to each
share of outstanding Common Stock in the future, a comparable
dividend or distribution shall be simultaneously made with respect
to each share of outstanding Preferred Stock.
2. Conversion Rights. The first sentence of section C of the
Certificate is hereby deemed amended in its entirety to read as
follows:
At any time prior to the redemption of the
Series I Preferred Stock, holders thereof
shall have the right to convert all or a
portion of such shares from time to time into
shares of the Common Stock of the Company (the
"Conversion Right") at the conversion rate of
1 share of Series I Preferred Stock for 6.4
shares of such Common Stock.
The Shareholders must exercise the Conversion Right within five (5)
years from the date of this Agreement.
3. Registration Rights. The Company shall use its best efforts to
register for resale on Form S-3 the Common Stock underlying the
Preferred Stock under the Securities Act of 1933. The Company
<PAGE>
shall maintain such registration for a period of two (2) years.
4. Entire Agreement. This Agreement states the entire agreement of the
parties regarding the matters herein, merges all prior negotiations,
agreements, and understandings, if any there be, and states in full
all representations, warranties and undertakings that have induced
this Agreement, there being no representations, warranties or
undertakings other than those stated herein.
5. Amendment. This Agreement may be modified or amended only by an
instrument in writing duly executed by the parties hereto.
6. Assignment. The parties may not assign their rights or delegate
their duties under this Agreement without the express written
consent of the other parties. The Agreement shall be binding upon
and inure to the benefit of and be enforceable by the parties hereto
and successors and assigns of the parties.
7. Governing Law. This Agreement shall be governed by the internal laws
of the State of Minnesota.
8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but
all of which together shall constitute but one agreement
9. Cooperation. The parties agree to take any additional actions
necessary to carry out the intents and purposes of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
TELIDENT, INC.
By: /s/ W. Edward McConaghay
-------------------------
W. Edward McConaghay
Its: President and Chief Financial Officer
/s/ Willis Drake
----------------------------
Willis Drake
/s/ Richard Hencley
----------------------------
Richard Hencley
WARREN TYLER ESTATE
By: /s/ Steve Tyler
--------------------------------------
Its: Trustee
--------------------------------------
EXHIBIT 10.2
SERIES III CONVERTIBLE PREFERRED STOCK
MODIFICATION AGREEMENT
THIS SERIES III CONVERTIBLE PREFERRED STOCK MODIFICATION AGREEMENT
is entered into and shall be effective as of the 29th day of December, 1998, by
and between Telident, Inc., a Minnesota corporation (the "Company"), and Special
Situations Private Equity Fund, L.P. (the "Shareholder").
WHEREAS, the Shareholder currently holds 200,000 shares (the
"Preferred Stock") of the Series III Convertible Preferred Stock of the Company;
WHEREAS, the Preferred Stock is governed pursuant to that
Certificate of Designation of Series III Convertible Preferred Stock (the
"Certificate") which was filed with the Secretary of State of the State of
Minnesota on April 14, 1998, a copy of which is attached as Exhibit A hereto;
and
WHEREAS, the Company and the Shareholder desire to enter into this
Agreement to modify the rights and preferences of the Preferred Stock set forth
in the Certificate to redress alleged damages that the Shareholder has incurred
related to the registration of the common stock of the Company for resale upon
the conversion of the Series III Convertible Preferred Stock of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto hereby agree as follows:
1. Modification to Conversion Rights.
(a) The first sentence of Article I, Section C(2) of the Certificate
is hereby deemed to include the following at the end of the
sentence:
, however, that 80% of the Average Price shall
not be more than $ .785 until such time as the
closing bid price for the shares of Common
Stock (appropriately adjusted to reflect stock
splits, stock dividends, reorganizations,
consolidations and similar changes hereafter
effected) is greater than $1.75 on any ten
(10) consecutive trading days following
receipt by Shareholder of written notification
of the initial effective date of the
registration statement which registers for
resale the shares of Common Stock issuable
upon conversion of the Series III Preferred
Stock.
(b) Shareholder agrees not to convert any shares of Series III
Convertible Preferred Stock into Common Stock pursuant to the
conversion terms set forth in Section 1(a) (as opposed to the
conversion terms that exist in the Certificate) without first having
sold to an unrelated third party the Common Stock underlying such
Convertible Preferred Stock.
2. Release and Waiver. Shareholder releases the Corporation and its
employees, advisors, officers and directors, from any and all claims
or liability related to or arising out of the fact that a
registration statement covering the Preferred Stock was not filed
with the Securities and Exchange Commission within thirty days after
the closing of the purchase of the Preferred Stock.
<PAGE>
3. Entire Agreement. This Agreement states the entire agreement of the
parties regarding the matters herein, merges all prior negotiations,
agreements, and understandings, if any there be, and states in full
all representations, warranties and undertakings that have induced
this Agreement, there being no representations, warranties or
undertakings other than those stated herein.
4. Amendment. This Agreement may be modified or amended only in a
writing duly executed by the parties hereto.
5. Assignment. The Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and successors
and assigns of the parties.
6. Governing Law. This Agreement shall be governed by the internal laws
of the State of Minnesota.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but
all of which together shall constitute but one agreement
2
<PAGE>
8. Cooperation. The parties agree to take any additional actions
necessary to carry out the intents and purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
TELIDENT, INC.
By: /s/ W. Edward McConaghay
--------------------------------------
W. Edward McConaghay
Its: President and Chief Financial Officer
SPECIAL SITUATIONS PRIVATE EQUITY
FUND, L.P.
By: /s/ David Greenhouse
--------------------------------------
Its: Executive Vice President
--------------------------------------
3
EXHIBIT 99.1
CAUTIONARY STATEMENT
TELIDENT, INC. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION
REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN
IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE
"SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS INTENDED TO BE A
READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE
RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS
ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY
BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE
EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
TELIDENT'S HISTORY OF OPERATING LOSSES. Except for the last three
quarters, we have historically incurred losses from operations because we have
not sold enough products to cover our expenses. We had an accumulated deficit of
approximately $13.6 million as of December 31, 1998. Net losses applicable to
our common stock for the years ended June 30, 1998 and 1997, were approximately
$1.0 million and $3.8 million, respectively. We cannot assure you that we will
be able to operate profitably in the future.
IMPACT OF CONVERSION OF TELIDENT'S PREFERRED STOCK AND EXERCISE OF
WARRANTS AND OPTIONS. The 400,000 outstanding shares of Series III Convertible
Preferred Stock are convertible at separate floating rates that may be
substantially below the market price of the common stock. Based on a 10-day
average closing price ending February 9, 1999 ($2.25 per share), shares of this
series were convertible into over twice as many shares as would be issued in a
one-for-one conversion. The lower the common stock price at the time a holder
converts, the more common shares the holder gets. Due to the conversion ratios
applicable to this series, there is no limit on the number of common shares into
which shares of this series can be converted.
To the extent a holder of Series III Convertible Preferred Stock
converts and then sells its common stock, the common stock price may decrease
due to the additional shares in the market. This could allow a holder to convert
its shares of Series III Convertible Preferred Stock into a greater amount of
common stock, the sales of which would further decrease the price of the common
stock. The significant downward pressure on the price of the common stock as the
holder converts and sells material amounts of common stock could encourage short
sales by the holder or others. This could place further downward pressure on the
price of the common stock. The conversion of shares of this series, or any other
series of preferred stock, may result in substantial dilution to the interests
of the other holders of common stock since each holder of preferred stock may
ultimately convert and sell the full amount issuable upon conversion.
As of February 9, 1999, there were 2,787,657 shares of common stock
outstanding. There were warrants outstanding to purchase 1,084,907 shares of
common stock and options outstanding to purchase 100,045 shares of common stock.
In addition, there were 37,500 shares of Series I Convertible Preferred Stock
and 400,000 shares of Series III Convertible Preferred Stock outstanding. As
noted above, the Series III Convertible Preferred Stock converts at separate
floating rates. On the other hand, the Series I Convertible Preferred Stock
converts at a fixed rate of 6.4 common shares for each preferred share. In
general, each outstanding warrant is exercisable for one common share. However,
if Telident issues new securities at a price less than $2.50 per share, the
antidilution provisions of the Series III Convertible Preferred Stock and the
related warrants would cause the Telident to issue a greater number of common
shares upon their conversion/exercise.
<PAGE>
Based on the 10-day average closing price presented above and
assuming full conversion of all outstanding preferred stock and the exercise of
all outstanding warrants and options, Telident would have issued approximately
2,339,671 shares of common stock. Such shares would have represented
approximately 83.9% of our issued and outstanding common stock on that date.
The following chart depicts the number of common shares we would be
required to issue upon full conversion of all outstanding preferred stock and
exercise of all outstanding warrants and options.
<TABLE>
<CAPTION>
Number of Common Shares Number of Common Shares Percentage of
10- Day Average Issuable Upon Conversion Issuable Upon Conversion Total Outstanding
Common Stock Percentage Above Number of Common Shares of 37,500 Outstanding of 400,000 Common Stock
Price at Time of or Below Recent Issuable Upon Exercise of Shares of Series I Outstanding Share the Newly Issued
Conversion/ 10-Day Average 1,184,952 Outstanding Convertible Preferred ------------------------ Shares Would
Exercise Common Stock Price Warrants and Options Stock Special Represent
FAMCO Situations
- ---------------- --------------- ----------------------- ----------------------- ------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$0.90 -60% 1,184,952 240,000 694,444 694,444 100.9%
$1.35 -40% 1,184,952 240,000 462,962 636,942 90.6%
$1.80 -20% 1,184,952 240,000 347,222 636,942 86.4%
$2.25 No Change 1,184,952 240,000 277,777 636,942 83.9%
$2.70 +20% 1,184,952 240,000 200,000 636,942 81.1%
$3.15 +40% 1,184,952 240,000 200,000 636,942 81.1%
$3.60 +60% 1,184,952 240,000 200,000 636,942 81.1%
</TABLE>
POTENTIAL INABILITY TO SELL TELIDENT OR ACQUIRE ANOTHER COMPANY. We
are exploring strategic options, including selling Telident or acquiring another
company. These options are designed to increase the size and capability of
Telident, to spread the cost of our existing infrastructure, and to increase
shareholder value. We do not have any understandings, commitments or agreements
with respect to any such transactions. There can be no assurance that we will
consummate any such transaction or that any such transaction, if consummated,
will ultimately be advantageous or profitable for us.
TELIDENT'S FUTURE CAPITAL REQUIREMENTS. At December 31, 1998, we had
approximately $1.3 million in cash and $2.3 million in net tangible assets. We
believe that the proceeds from our August 1998 private placement and the cash
received from future operations will enable us to meet the working capital
requirements of our current operating plan and to sustain our business as a
going concern at least through December 31, 1999. However, should we incur
additional operating losses in the future, we may require additional capital to
meet Nasdaq's $2.0 million net tangible asset requirement for continued listing
on the Nasdaq SmallCap Market. If additional capital is not available in these
circumstances, we could lose our listing on the Nasdaq SmallCap Market. The
availability of capital may also impact our ability to consummate a future
acquisition of another company. Additional capital may not be available on terms
acceptable to us or at all.
NO ASSURANCE OF TELIDENT'S CONTINUED QUOTATION ON THE NASDAQ STOCK
MARKET. Telident barely exceeds the minimum standards for continued listing on
the Nasdaq SmallCap Market. The Nasdaq Stock Market may also decide that our
past issuances of securities violated Nasdaq's corporate governance
requirements. In either case, our shares could be delisted. If our shares do not
continue to be listed on the Nasdaq SmallCap Market, trading, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or the
OTC Bulletin Board, which was established for securities that do not meet the
Nasdaq SmallCap Market listing requirements. Consequently, selling our shares
would be more difficult because smaller quantities of shares could be bought and
sold, transactions could be delayed, and security analyst and news media
coverage of Telident may
<PAGE>
be reduced. These factors could result in lower prices and larger spreads in the
bid and ask prices for our shares. There can be no assurance that our common
stock will continue to be listed on the Nasdaq SmallCap Market.
EFFECTS OF TELIDENT'S RECENT RESTRUCTURING. We have focused on
strengthening our market position, reducing our costs and examining ways to grow
and be profitable. Such efforts have included reducing operating expenses,
cutting our workforce and repositioning our sales force. These steps may not
lead to increased revenue, improved market position or profitability. If these
measures and other reorganization efforts prove unsuccessful, our business,
operating results and financial condition could be materially adversely affected
and we may be unable to achieve the strategic objectives described above.
TELIDENT'S DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL
CHANGES. We participate in an industry in which significant changes and new and
better products are rapidly introduced. To keep up with the industry changes and
product development, we must make substantial investments in product and
technology developments. We are currently investing in hardware and software
upgrades to increase our product capabilities and to take advantage of improving
microprocessor and software capabilities available on the market. New products
that we attempt to develop may not work as expected, may not meet a competitive
market's needs or timing and may not meet necessary regulatory requirements.
Furthermore, we may not have the funds required to continue these developments
or to make additional investments on a timely basis in the future.
DEPENDENCE ON W. EDWARD MCCONAGHAY AND OTHER KEY PERSONNEL. We
believe that our development and ability to operate profitably depends on the
continued employment of our senior management team. If W. Edward McConaghay, the
President and Chief Executive Officer, who Telident has employed since April 1,
1997, or other members of the management team do not continue to serve in their
present positions, our business, operating results, financial condition and cash
flows could be materially adversely affected. We have not entered into
non-competition or employment agreements with our employees. As a result, our
employees could leave at any time and compete against us in our industry.
Further, we do not maintain life insurance on any of our employees.
COMPETITION IN 911 TRANSLATION. We face increasing competition from
other companies that market products similar to our station translation system
product. We are aware of two competitors which market similar products. In
addition, several other competitors provide a basic 911 translation capability
through hardware and software used in connection with private telephone systems.
While we believe we have the industry-leading on-site notification and database
management software applications, many of our potential competitors are larger
and have greater resources than we do. In addition, the technology used in the
telecommunications industry is subject to rapid change. We must be able to adapt
to such changes by our competitors or our products will become obsolete. There
can be no assurance that we will be able to adapt to such changes on a timely
basis, if at all. Our competitors continually take steps to attract customers
and increase their market share. The most heavily used techniques are
advertising, target marketing and price competition. These competitive
practices, as well as competition that may develop in the future, could diminish
our ability to obtain and keep customers.
ACCEPTANCE OF 911 TRANSLATION PRODUCTS. There can be no assurance
that additional states or the FCC will mandate the modification of certain
private telephone systems to make them fully compatible with existing 911
technology. In the absence of such mandates, there can be no assurance that our
products will maintain their current level of acceptance.
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.
<PAGE>
We presently are experiencing a lack of cooperation 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
working systems in these states; however, we have experienced 120-150 day delays
by Ameritech in the installation of requested network interfaces throughout this
territory. 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.
POTENTIAL OBSOLESCENCE OF TELIDENT'S ANALOG PRODUCTS; DEVELOPMENT OF
DIGITAL INTERFACES. Several telephone companies have expressed a preference to
sell digital equipment to customers within their territories instead of the
current standard analog interface offered by Telident. We are currently
preparing for a change to the use of digital interfaces connecting our products
to private telephone systems. We are in the early stages of developing 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.
VOLATILITY OF MARKET PRICE OF TELIDENT STOCK. The market price of
our common stock has fluctuated significantly in recent days in response to
numerous factors. Variations in our financial results, changes by financial
research analysts in their estimates of our earnings, conditions in the economy
in general or in our industry in particular, unfavorable publicity or changes in
applicable laws and regulations affecting us may cause such fluctuations. During
the first month of 1999, our stock ranged from a low of $1.50 on January 4 - 7
and January 11 to a high of $7.00 on January 12. There can be no assurance that
purchasers of our stock can sell such stock at or above the prices at which it
was purchased.
POTENTIAL LIABILITY FOR DELAYED RESPONSES TO 911 CALLS. We may be
liable if, through their failure, any of our products contribute to a delayed
response from a 911 call resulting in injury, illness or death. While our
products are designed to complete 911 calls even if they fail to provide number
and location detail, there can be no assurance that this feature will always
work as expected. We carry product liability insurance, but this insurance may
not be adequate to cover successful product liability claims. We know of no
pending material product liability claims against us and we know of no product
liability claims brought against our competitors. However, a successful product
liability suit could materially adversely affect our business, operating
results, financial condition and cash flows.
PROTECTION OF TELIDENT'S INTELLECTUAL PROPERTY. We rely upon trade
secrets and patents to protect the technology we develop. We also require our
employees to execute nondisclosure agreements to preserve our trade secrets. It
is important for our success to preserve our intellectual property. Our
competitors may develop or acquire substantially equivalent technologies or gain
access to our trade secrets. We may not be able to protect our rights in our
trade secrets and our attempts to do so may not provide us with a competitive
advantage.
IMPACT OF SALE OF TELIDENT STOCK. The market price of our common
stock could drop as a result of a large number of shares of common stock being
sold in the market following resale registrations, the exercise of warrants and
options, the conversion of convertible securities, or the perception that such
sales could occur. These factors could also make it more difficult for us to
raise funds through future equity offerings.
LIMITATIONS ON BROKER-DEALER SALES OF TELIDENT STOCK; APPLICABILITY
OF "PENNY STOCK" RULES. If our shares are not listed on the Nasdaq SmallCap
Market, they may become subject to an Exchange Act rule which imposes additional
sales practice requirements on broker-dealers that sell low-priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent
<PAGE>
to the transaction prior to sale. Consequently, this rule may affect the ability
of holders to sell our shares in the secondary market.
The SEC's regulations generally define a "penny stock" to be any
equity security that has a market price less than $5.00 per share or with an
exercise price of less than $5.00 per share. The penny stock restrictions will
not apply if our shares continue to be listed on the Nasdaq SmallCap Market and
we provide price and volume information on a current and continuing basis, or
meet required minimum net tangible assets or average revenue criteria. We cannot
assure you that our shares will continue to qualify for exemption from these
restrictions. If our shares were subject to the penny stock rules, the market
liquidity for the shares would be adversely affected.
CONTROL BY TELIDENT'S MANAGEMENT. Our current officers and directors
beneficially own over half of our common stock. Accordingly, such persons exert
substantial influence over our business and affairs. Such persons may also
control the outcome of shareholder approvals of business acquisitions, mergers
and combinations and other actions.
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
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.
<PAGE>
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, the Company 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
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 expects 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 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,
<PAGE>
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 the operations and financial condition of the Company.
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