U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
GENROCO, Inc.
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(Name of Small Business Issuer in its charter)
Wisconsin 88-0230309
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
255 Info Highway, Slinger, WI 53086
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(Address of principal executive offices) (Zip code)
Issuer's telephone number (262) 644-8700
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.02 per share
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(Title of class)
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL OVERVIEW
GENROCO, Inc. and its wholly owned subsidiaries, VideoPropulsion, Inc. and
GENROCO International, Inc. (collectively the "Company" or "GENROCO") design,
manufacture and sell a range of high-performance network interface cards,
bridges and switches. The Company's products are used in Storage Area Networks
(SAN's) that connect data storage to computer processors. The Company produces
a bridge that enables equipment using different industry networking protocol
standards to interact and communicate across multiple platforms, a switch that
allows data to be transferred between computer and storage devices at very high
data transfer rates, and a one-terabyte storage subsystem with data transfer
speeds of approximately 700 megabytes per second. Exclusive of interface cards,
the equipment has sale prices ranging from approximately $20,000 to $500,000 per
unit.
This equipment, largely because of the Company's associated driver software,
(See "About Scheduled Transfer (ST)" section for further definition) is capable
of moving data from one point to another, within a computer configuration or on
a data network, at speeds far in excess of what the typical high-performance
computer installation does today.
The Company is located in Slinger, Wisconsin (30 miles north of Milwaukee) and
has 28 employees. The Company's primary focus is the SAN market and this effort
currently receives the majority of the Company's available research and
development resources.
In order to focus on the emerging Digital Video Broadcast ("DVB") market, which
the Company believes will bring High Definition Television and Video-On-Demand
("VOD") functionality into the average household within five years, the Company
recently formed a new wholly-owned subsidiary VideoPropulsion, Inc. ("VPI"). In
January 2000, the Company intends to spin-off the subsidiary (subject to
approval of the Board of Directors and compliance with the securities laws) in
the form of a stock dividend to all GENROCO, Inc. shareholders of record. The
primary reason for this strategic move is to allow the Company to devote
specific resources to the DVB market and pursue alternate marketing strategies
with a separate management team.
The Company (initially General Robotics Corporation) has been in business since
1974 and was reorganized under the laws of the State of Wisconsin in 1989 as
GENROCO, Inc. The Company's Internet address is www.genroco.com.
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The Company is registering voluntarily its common stock under the Securities
Exchange Act of 1934, as amended by filing this Form 10-SB. The Company is
registering its common stock so that it may seek to have its common stock quoted
on the NASD Electronic Bulletin Board. Until December 1, 1999, the Company's
common stock was listed on the Electronic Bulletin Board. As a result of a
recent regulatory change, the NASD Electronic Bulletin Board will only quote
securities which have been registered under the Securities Exchange Act of 1934,
as amended and the Company has decided to proceed with such registration.
PRINCIPAL PRODUCTS AND MARKETS
The Company's current circuit board products sold include Host Bus Adapters
("HBA") and Network Interface Card ("NIC") printed circuit boards, populated
with standard and custom integrated circuit chips and other electronic
components. These circuit boards use Fibre Channel ("FC") and HIPPI-800
("HIPPI") communication protocols for a variety of applications.
GENROCO'S other current products (available for sale and delivery) include:
o An eight-port Gigabit System Network ("GSN") Switch.
o An eight-port GSN to Fibre Channel or HIPPI or Gigabit Ethernet
("GigE") (or any combination thereof) Bridge / Router.
o A Storage Subsystem with data transfer speeds of approximately 700
megabytes per second
Future products (in development and anticipated to become available for sale by
the fourth quarter of 2000) include:
o An eight-port GSN to OC-48 Asynchronous Transfer Mode ("ATM")
Bridge/Router
o Scheduled transfer software as a stand-alone product.
Additional development costs for these future products are anticipated to
approximate $100,000.
The Company's future target markets are the SAN market using the Scheduled
Transfer ("ST") communication protocol and the DVB market. In response to an
increasing demand for higher speed data paths, which can inter-operate with
existing communication protocols and network infrastructure, the Company is
developing the above-indicated "family" of host bus adapters, storage arrays,
switches and routers. The SAN market is aimed toward high-performance computer
configurations. The Company currently enjoys selling products to customers
utilizing SANs running on high-speed backbones (the underlying communication
hardware used to transfer data at high speed). The network data storage market
is expected to grow at a rate of 21.5% per year to more than $60.0 billion by
2003 up from $18.8 billion in 1997, based on a report by Kathy Barrett of the
Gartner Group, published under their research reference number 836-344-1 and
entitled STOR E-08-3062.
The Company anticipates that its future products will be sold into a variety of
applications oriented around large SANs with data transfer speeds of gigabytes
per second while communicating concurrently with numerous types of network
standards.
ABOUT SCHEDULED TRANSFER (ST)
ST is a new American National Standards Institute ("ANSI") standard network
protocol designed to allow many times higher bandwidth with much lower
processing requirements than other current industry standards. ST
commences, or "schedules" data transfer, only when it is ready to be
received. This allows the sending and receiving processors to operate at
the highest possible speed and efficiency by eliminating inefficiencies.
Officers of the Company were participants on the industry committee that
adopted the ANSI standard.
ABOUT GIGABYTE SYSTEM NETWORK (GSN)
The GSN standard transfers data at the highest bandwidth with the least
amount of delays as compared with other standards and provides full duplex
800 megabyte per second transfer speeds of error-free data. The technology
is utilized wherever organizations require timely movement of large amounts
of information including scientific and technical computing, digital TV and
movie production, transaction processing, video and film archiving, and
storage management. This standard provides for communication between
different technologies including Ethernet, FC, ATM, HIPPI-800, and other
standards.
STRATEGIC DIRECTION
GENROCO initially positioned itself as an engineering and marketing company with
a focus on solving complex data transfer problems for many of the major
manufacturers of supercomputers and top-end server systems. During its early
years, the Company focused on producing unique or custom controller cards for a
number of platform vendors with a focus on Digital Equipment Corporation's (now
owned by Compaq) requirements. Experience in these areas led to original
equipment manufacturer contracts for its products with Compaq, Tektronix,
Fujitsu and Hewlett Packard as well as projects with SGI, Sun and others.
In the early 1990's the Company developed and introduced a family of disk
controllers that is the foundation for products currently being sold and
undergoing additional research.
The Company has developed a family of products designed to resolve the number of
connection and bandwidth problems associated with building very large SAN
systems and provide cross-platform support between FC, HIPPI, GSN, GigE, and/or
ATM communication protocols. The Company believes this is a high growth segment
in which it can successfully compete with its current products and those under
development.
DISTRIBUTION AND SALES CHANNELS
The Company currently uses a direct sales force of four people, which receives
technical and sales support from the engineering staff on an as needed basis.
Products are typically shipped from the Company's Wisconsin facility direct to
the customer via an independent shipping service.
The Company sells the majority of its products and technology in Europe, Japan
and the United States. Approximately 53%, 22% and 37% of fiscal 1999, 1998 and
1997 sales were made to non-U.S. customers.
The European sales effort is coordinated by a GENROCO employee who has an office
at CERN, the European laboratory for particle research, located in Geneva,
Switzerland. CERN is a leading developer of high-speed networking designs and
hosted the 1999 European high speed GSN workshop. Current sales to European
customers include products sold to Compaq - France.
The sales effort in Japan is spearheaded by Tokyo Electron under a distribution
agreement with the Company. The Company also sells products directly to Fujitsu
and a few Japanese supercomputer manufacturers.
FISCAL YEAR END
The Company has a fiscal year end of March 31. The results herein include the
years ended March 31, 1999 ("1999"), March 31, 1998 ("1998"), and March 31, 1997
("1997"). The fiscal year ending March 31, 2000 is referred to as "2000".
MAJOR CUSTOMERS
The following customers comprise a significant portion of the Company's
business:
CUSTOMER REVENUE AS A PERCENT OF TOTAL REVENUE
1999 1998 1997
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Tektronix 28 % 41 % 17 %
DEC 0 % 8 % 9 %
Compaq 34 % 0 % 0 %
Fujitsu 19 % 14 % 27 %
Convex 0 % 11 % 12 %
STL 2 % 10 % 12 %
The balance of the business is generated from approximately 30 customers.
Total revenue from integrators for the US Departments of Defense and Energy were
as follows:
REVENUE FROM INTEGRATORS FOR THE DEPARTMENTS OF
DEFENSE AND ENERGY AS A PERCENTAGE OF TOTAL REVENUE
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PERCENTAGE OF TOTAL REVENUE
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1999 1998 1997
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5 % 11 % 12 %
COMPETITION
Direct competition for the Company's GSN products is expected to come from ODS,
Inc. (formerly Essential Communication, Inc.), and PMR, Inc. for the GSN switch,
as well as Silicon Graphics, Inc. for the Company's PCI/ GSN host bus adapters.
The Company intends to face the competition by striving to deliver competitively
priced first-to-market products that are more effective than other products.
The Company does not expect near-term competition for any of its current GSN to
FC storage array and GSN bridge/router products. The Company believes its
current ability to provide product features and systems software communication
solutions provides a competitive advantage.
Indirect competition for the Company's current GSN products is being provided by
existing technology in the form of other products that are already in the market
place and providing reasonably satisfactory solutions. The Company's growth
will be limited if SAN technology and solutions do not become widely accepted.
The Company's product development and marketing efforts are focused on the SAN
market, which has only recently begun to develop and the Company believes is
changing from traditional server based storage systems to storage systems that
do not require servers to control the flow of data. The markets for new
technology frequently develop more slowly than the technology targeted to these
markets. Organizations often implement SAN's in connection with their
deployment of new storage systems and servers and, as a result, the Company is
dependent on the storage systems and server markets. Potential end-user
customers who have invested substantial resources in their existing data storage
and management systems may be reluctant or slow to adopt a new approach, like
SAN's. The Company's success also depends in part upon market acceptance of its
SAN switching solutions in conjunction with the use of hubs and Fibre Channel
switches. Because this technology is new, it is difficult to predict its
potential size or future growth rate. If the market does not accept the use of
GSN switches, bridges and routers, the Company's business could be adversely
affected.
SUPPLIERS
The Company purchases its non-critical parts and services from suppliers and
distributors. The following suppliers comprise a significant portion of the
Company's cost of goods sold.
SUPPLIER COSTS AS A PERCENT OF TOTAL COST OF GOODS SOLD
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1999 1998 1997
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Multek 10% 14% 12%
Insight 20% 20% 20%
Hewlett Packard 10% 10% 6%
Wyle 4% 10% 10%
DASH 5% 10% 12%
Generally, the Company purchases its critical parts directly from manufacturers.
In the event that a manufacturer is unable to supply parts, the Company would
then select an alternate supplier which it believes are generally available.
However a select few components are single-source and if unavailable, the
Company would be required to redesign the product. Price increases are
generally passed along to the customer.
All circuit board fabrication and circuit board assembly work is out-sourced to
high quality suppliers who are ISO 9001 certified and have demonstrated the
ability to produce quality products quickly.
The Company's dependence on a limited number of suppliers and the possible
unavailability of some key components may prevent it from being able to produce
its products at the level desired by customers. Some of the components the
Company uses in its products are available only from a single supplier, or from
a limited number of suppliers. These components may occasionally be in short
supply or unavailable from a sole source supplier. The following factors could
each have a material adverse effect on the Company's ability to obtain
components for the Company's products:
1. Scarce quantities of components
2. A reduction or interruption in component supply
3. A disruption of existing supplier relationships
4. An inability to develop alternative sources
5. A significant increase in the price of components
If the Company is unable to purchase components on a timely basis, it may not be
able to produce its products. In addition to the Year 2000 Readiness issues
discussed in Item 2 of this registration statement, the Company's distributors
are beginning to provide allocation schedule information, designed to promote
forward planning and purchase commitments, which in itself constitutes a
business risk beyond the control of the Company.
EMPLOYEES
As of September 30, 1999, the Company had 28 employees, of which 27 were full-
time employees. Of the 27 full time employees, five are employed by
VideoPropulsion, Inc. ("VPI"), a wholly owned subsidiary. None of the Company's
employees are represented by a union. The Company believes that its relations
with its employees are good.
INTELLECTUAL PROPERTY - PATENTS AND TRADEMARKS
The Company owns a U.S. patent (Patent # 5,420,984) covering peripheral
controllers and methods for rapid task switching and memory caching, which was
issued on May 30, 1995. The Company has applied for other patents covering the
following technologies: (1) high-speed data buffer using a virtual first-in
first-out register and (2) buffer memory with parallel data and transfer
instruction buffering.
The Company has requested the following trademarks: (1) GENROCO, (2) SOLSTOR,
(3) TURBOFIBRE, and (4) TURBOSTOR. Any use of the marks by others on U.S.
products in other classes may cause dilution of the mark and the goodwill the
Company has created in the mark.
RESEARCH AND DEVELOPMENT ACTIVITIES
Research and development costs are expensed as incurred. Research and
development expenses for 1999 were $1,134,000 compared to $1,044,000 in 1998 and
$713,000 in 1997, or 24.3%, 18.0% and 19.2% of net sales for 1999, 1998 and
1997, respectively. The Company expects to incur similar levels of research
and development costs in 2000 and thereafter.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment as a developer, marketer and
manufacturer of high-speed data communication computer hardware.
RISK FACTORS
MARKET FOR THE COMPANY'S PRODUCTS MAY NOT DEVELOP
A market for the Company's products may not develop. If a significant
market for SAN's and SAN switching products does not develop, the
Company's business may fail. The Company's growth will be limited if
SAN technology and solutions do not become widely accepted. The
Company's product development and marketing efforts are focused on the
SAN market, which has only recently begun to develop and is evolving
rapidly. The markets for new technology frequently develop more
slowly than the technology targeted to these markets. Organizations
often implement SAN's in connection with their deployment of new
storage systems and servers and, as a result, the Company is dependent
on the storage systems and server markets. Potential end-user
customers who have invested substantial resources in their existing
data storage and management systems may be reluctant or slow to adopt
a new approach. The Company has no assurance that SAN's will ever
achieve widespread market acceptance or that the market will develop
as quickly as anticipated.
TECHNOLOGICAL CHANGES
The data storage market is subject to rapid technological change.
These include changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards. The
Company's success depends in part on its ability to keep pace with
technological developments and emerging industry standards. The
Company must also respond to evolving customer requirements by
enhancing its current products and developing new products. There is
a risk that if the Company fails to anticipate or respond rapidly to
advances in technology by adapting its products appropriately, its
products may become obsolete. If this occurs, the business could be
adversely affected. As the Company introduces new or enhanced
products, it will also need to manage successfully the transition from
older products to minimize disruption in its customers' ordering
patterns, to avoid excessive levels of older product inventories and
to ensure that enough supplies of new products can be delivered to
meet customer demand. If the Company fails to develop and introduce
successfully new products and product enhancements, revenue could be
reduced, or substantial charges against earnings could be incurred.
CUSTOMERS
The demands of customers are constantly changing. The increased
demand of customers and the increasing presence of the internet in
everyday markets are creating a customer base that demands a quicker
response time. This customer expectation coupled with the global
economies make meeting these expectations a constant challenge,
especially for small companies who may not be able to attract the
capital resources needed to meet these demands.
The Company's customer portfolio is composed of a few global companies
issuing purchase orders that do not provide the luxury of large multi-
year contracts. The Company's dependence on key customers exposes it
to sporadic order rates, which require higher than normal inventory
levels to support the business.
INDUSTRY SEGMENTS
The Company only operates in one segment. The Company operates in one
industry segment as a developer, marketer and manufacturer of high-
speed data communication computer hardware, and thus the Company can
be significantly impacted by changes in the industry.
INABILITY TO PENETRATE THE NETWORK-INDEPENDENT SAN MARKET
The Company's ability to penetrate the network-independent SAN market
is a function of its:
1. Success in implementation of ST software drivers for various
platforms
2. Ability to join with an appropriate Redundant Arrays of
Independent Disks ("RAID") supplier
3. Finding an integration, installation, and maintenance
partner
Failure to accomplish any one or all of the above could cause the
business to fail.
COMPETITIVE PRICING PRESSURES MAY INCREASE
Because of competitive pricing pressures, the average price of the
Company's products may decline, resulting in a decrease in revenues
and gross margins. The Company expects that the average price of its
products will decrease in the future in response to competitive
pricing pressures and changes in product mix and other factors. If
the Company is unable to offset these decreases by increasing its
sales volumes, its revenues will decline. In addition, to maintain
its gross margins, the Company must develop and introduce new products
and product enhancements, and it must continue to reduce the
manufacturing cost of its products. If the Company fails to do this,
its business could suffer.
NEW PRODUCTS MAY CONTAIN UNDETECTED HARDWARE AND SOFTWARE ERRORS
New products the Company develops may contain undetected hardware and
software errors, which could require significant expenditures of time
and money to correct, harm its relationships with existing customers
and negatively impact its reputation in the industry.
Like other complex products, the Company's SAN switches, bridges and
routers may contain undetected hardware or software errors when first
introduced or when new versions of existing products are released.
Despite its testing and quality control efforts, the Company
anticipates that errors may be found from time to time in new or
enhanced products after commercial introduction. In addition, the
Company's products are combined with products from other vendors. As
a result, when problems occur, it may be difficult to identify the
source of the problem. If the Company is unable to rapidly correct
any errors, this could result in the following consequences, among
others:
1. Delay or loss of market acceptance of the Company's products
2. Significant warranty or other liability claims
3. Diversion of engineering and other resources from product
development efforts
4. Significant customer relations problems
5. Loss of credibility in the market
6. Inability to sell its products until any errors are
corrected
Moreover, the occurrence of hardware and software errors, whether
caused by the Company's products or another vendor's SAN products,
could delay or prevent the development of the SAN market. The
Company's growth depends on its SAN products and if any of the above
events occur, the Company's business could be adversely impacted.
SUPPLIERS
If the Company's subcontractors do not meet its manufacturing needs,
it may not be able to produce and sell its products. The Company
subcontracts a majority of its production activities, including the
manufacture and assembly of products. The Company currently depends
upon qualified suppliers to deliver high-quality products in a timely
manner, but it cannot assure that these suppliers will continue to
perform satisfactorily. The Company currently does not have a long-
term supply contract with any of its subcontractors. The Company
subcontractors are not obligated to supply products for any specific
period, or in any specific quantity, except as may be provided in a
particular purchase order. The Company generally places orders with
its subcontractors between one and three months before scheduled
delivery of products to customers. Accordingly, if the Company
inaccurately forecasts demand for its products, it may be unable to
obtain adequate manufacturing capacity from its subcontractors to meet
its customers' delivery requirements, or it may accumulate excess
inventories. Poor performance by one of the Company's subcontractors
would have a material adverse effect on business until it finds an
alternative subcontractor. The Company cannot assure that it would be
able to find an alternative subcontractor to deliver quality products
at an acceptable price. If the Company experiences problems with any
of its subcontractors, the Company's business could be materially
adversely affected.
In addition, future growth may cause the Company to increase orders to
its subcontractors. If this happens, the Company may not be able to
accurately forecast its needs or manage its relationship with its
subcontractors during the transition.
Frequently, manufacturers encounter delays or difficulties in
beginning volume production of new product lines. If the Company or
its subcontractors is not able to effectively manage the anticipated
increase in production volumes, the Company's business could suffer.
COMPONENTS
The Company's dependence on a limited number of suppliers and the
possible unavailability of some key components may prevent it from
being able to produce its products.
Some of the components the Company uses in its products are available
only from a single supplier, or from a limited number of suppliers.
For example, the Company purchases Super HIPPI Media Access Controller
("SuMAC") and First-In First-Out ("FIFO") integrated circuits from
single sources and other key components from limited sources. These
components may occasionally be in short supply or unavailable from a
sole source supplier. The following factors could each have a
material adverse effect on the Company's ability to obtain components
for the Company's products:
1. Scarce quantities of components
2. A reduction or interruption in component supply
3. A disruption of existing supplier relationships
4. An inability to develop alternative sources
5. A significant increase in the price of components
If the Company is unable to purchase components on a timely basis, it
may not be able to produce its products.
FAILURE TO DESIGN PRODUCTS THAT BECOME AN ACCEPTED STANDARD
If the Company fails to comply with evolving regulatory approvals or
government regulations or the emerging FC, GSN, ST and other ANSI
standards, it may be unable to sell its products. The Company's
products must comply with various regulations and standards defined by
the Federal Communications Commission and Underwriters Laboratories in
the United States. Products sold internationally will also be
required to comply with standards established by authorities in
various countries.
QUARTERLY FLUCTUATIONS
Quarterly revenues and operating results may fluctuate. The Company's
quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future, due to
several factors. The primary factors that may affect quarterly
results include the following:
1. The overall strength of the economy, timing, size and terms
of customer orders
2. Changes in customer buying patterns
3. Uncertainties associated with the introduction of any new
product or product enhancement
4. The timing of the announcement and introduction of new
products by the Company or its competitors
5. The mix of products sold and the mix of distribution
channels through which products are sold
6. Deferrals of customer orders in anticipation of new
products, services or product enhancements introduced by the
Company or its competitors
7. Technological developments affecting the data communication
network and storage market
FLUCTUATIONS IN STOCK PRICE
As a result of the variability in operating results, the Company's
stock price has fluctuated and may continue to fluctuate in the
future. It is likely that in some future period the Company's
operating results will be below expectations or those of public market
analysts. If operating results are lower than expected, the market
for the Company's stock price could respond negatively.
In addition to changes in stock price resulting from operating
results, the Company's stock price may fluctuate due to the following
factors:
1. Changes in market valuations of other technology companies
2. Gain or loss of significant original equipment manufacturer
customers
3. Short-selling of our common stock
4. Announcements of business developments by us or our
competitors
5. Public perception regarding FC's market status
6. Developments or disputes concerning proprietary rights
7. Technological innovations or newly introduced products
8. General conditions in the data communications network
industry and the economy.
9. Comments about the Company or its markets posted on the
internet
10. Changes in financial estimates by securities analysts
LOSS OF KEY PERSONNEL OR THE INABILITY TO HIRE ADDITIONAL QUALIFIED
PERSONNEL WOULD NEGATIVELY IMPACT BUSINESS
The loss of the services of any key management employees or inability
to attract and retain qualified personnel or delays in hiring required
personnel, particularly engineers and sales personnel, could delay the
development and introduction of, and negatively impact the Company's
ability to sell, its products. In addition to key management
personnel, the Company's success depends on its ability to attract and
retain highly skilled managerial, engineering, sales and marketing and
other personnel. Competition for these personnel is intense. In
recent years, there has been a strong demand for qualified skilled and
unskilled employees in the Wisconsin area, where the Company's main
operations are located, and in other areas where it operates. There
is a risk that it will be unsuccessful in attracting and retaining the
personnel it needs for its business.
INTELLECTUAL PROPERTY MAY NOT PROTECT THE COMPANY
The Company's business is dependent on its intellectual property
relating to high speed data transfer methods, and its failure to
protect its intellectual property could negatively affect its ability
to compete.
To establish and protect the Company's intellectual property rights,
the Company must rely on a combination of patent, copyright, trademark
and trade secret laws and restrictions on disclosure. The Company
also enters into confidentiality or license agreements with
consultants, customers and corporate partners. The Company cannot be
certain that the steps it takes to protect its intellectual property
will adequately protect its proprietary rights, or that others will
not independently develop or otherwise acquire equivalent or superior
technology. In addition, the laws of some of the countries in which
the Company's products are, or may be sold, may not protect the
Company's proprietary rights as fully as the laws of the United
States.
The Company may be a party to intellectual property litigation, which
may result in significant costs and be time consuming.
In the future, the Company may be a party to intellectual property
litigation, either to protect its intellectual property or as a result
of an alleged infringement of others' intellectual property. Any
litigation or dispute, regardless of its success would likely result
in substantial costs and be time consuming. An adverse determination
could:
1. Subject the Company to significant liabilities from third
parties
2. Invalidate the Company's proprietary rights and require it
to seek licenses from or pay royalties to third parties
3. Require the Company to develop appropriate alternative
technology
4. Require the Company to stop using the challenged
intellectual property or stop selling its products that
incorporate it
Any of these events could have a material adverse effect on our
business, financial condition and results of operations.
REPORTS TO SECURITY HOLDERS
Beginning with its year ending March 31, 2000, the Company will send an annual
report to its shareholders, including audited financial statements.
WHERE YOU CAN FIND MORE INFORMATION
The Company will file annual, quarterly and special reports, proxy statements
and other information with the SEC. These SEC filings are available to the
public over the Internet at the SEC's web site - http:\\www.sec.gov. and through
the Company's web site at www.genroco.com. The public may also read and copy
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any document the Company files at the SEC's public reference rooms in
Washington, D.C., New York, and Chicago. The public can call the SEC at 1-800-
732-0330 for further information about the public reference rooms.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company's objective is to maximize stockholder value by executing strategies
that focus on a balance of three priorities: growth, profitability and
liquidity.
In 1998 the Company focused its efforts on expanding its business through
existing customers and consequently sales increased. During 1999 senior
management of the Company made significant investments in product development
thus increasing expenses as all of the product development costs are expensed as
incurred. As a result, 1999 income decreased as sales decreased because senior
management was focused on new product development. A very large part of
research and development expense for 1999 was dedicated to designing and
demonstrating a Gigabyte System Network Storage Array sustaining data transfers
of approximately 700 megabytes per second - approximately eight times the speed
of current disk arrays generally used by customers. The Company has
demonstrated that its products have met this standard in 1999. During 2000 the
Company plans on continuing to invest approximately 18% of sales in technology
capable of being used as building blocks for very high performance, ST enabled
SANs that will allow GigE and ATM clients to access storage directly, without
intermediate servers.
RESULTS OF OPERATION
YEARS ENDED MARCH 31, 1999, 1998 and 1997
Net sales for 1999 (Fiscal Year ended March 31, 1999) were $4,658,000 compared
to $5,788,000 and $3,710,000 for 1998 and 1997, respectively. The Company's
19.5% decline in revenue in 1999 can be attributed to approximately $1,500,000
in reduced revenues from two of the Company's largest customers (in 1998). The
Company's 56.0% increase in revenue from 1997 to 1998 was largely due to
increased sales of its TURBOfibre(R) family of Fibre Channel (FC) and Digital
Video Broadcast (DVB) product lines to its customers for use in digital
television data transmission and related high I/O performance applications. The
Company's products are typically sold to major supercomputer and superserver
platform vendors, who in turn utilize these host adapter cards to increase the
I/O speed of their systems. The customers' products, which typically sell for
more than $1,000,000 per system, are used to receive and archive satellite
images, edit weather maps, control newsroom production facilities, edit video
films, etc.
Cost of goods sold for 1999 was $1,831,000 compared to $2,346,000 and $1,261,000
for 1998 and 1997, respectively, and was comprised of parts and labor associated
with production and testing of circuit boards shipped to customers.
Gross profit for 1999 was $2,827,000 compared to $3,442,000 and $2,449,000 for
1998 and 1997 respectively. The resulting gross margin percentages were 60.7%,
59.5%, and 66.0% of net sales for 1999, 1988 and 1997, respectively. The
increase in 1999 was due to a change in product mix together with reduced costs
related to producing products for higher volume accounts. The decline in 1998
was primarily due to price concessions made to the Company's largest customer
which represented 28%, 41%, and 17% of total revenue in 1999, 1998 and 1997,
respectively.
The Company's major source of costs is driven by the number of people employed,
most of whom are highly skilled and thus relatively expensive due to the present
status of the labor market. Personnel costs traditionally represent
approximately 65% of total overhead costs and expenses.
Research and development expenses for 1999 were $1,134,000 compared to
$1,044,000 in 1998 and $713,000 in 1997 or 24.3%, 18.0% and 19.2% of net sales
for 1999, 1998 and 1997, respectively.
Selling, general and administrative expenses for 1999 were $1,584,000 compared
to $1,713,000 in 1998 and $1,240,000 in 1997 or 34.0%, 29.6% and 33.4% of net
sales for 1999, 1998 and 1997, respectively. The increases are primarily
associated with additional personnel costs related to the areas of sales and
marketing. If sales increase in future periods, these expenses are expected to
decline as a percentage of total sales.
Income from operations in 1999 was $109,000 compared to income from operations
of $685,000 in 1998 and $496,000 in 1997 or 2.3%, 11.8% and 13.4% of net sales
for 1999, 1998 and 1997, respectively.
Other income (expense) for 1999 was ($35,000) compared to $154,000 in 1998 and
$5,000 in 1997. The $154,000 of income in 1998 is primarily the result of
achieving a favorable outcome in litigation against a former business partner.
The Company's provision for income taxes totaled $28,000 in 1999 versus $205,000
in 1998 and zero in 1997. The effective tax rate in 1999, 1998 and 1997 was
38.0%, 24.4%, and 0.0% respectively, versus the combined Federal and State
effective statutory rate of 39%, due to the utilization of net operating loss
carryforwards in 1998 and 1997 that were previously fully reserved. Only
minimal net operating loss carry-forwards associated with the state of Wisconsin
remain available for future use.
Net income was $45,000 compared to $634,000 in 1998 and $501,000 in 1997 or
1.0%, 11.0%, and 13.5% of net sales for 1999, 1998 and 1997, respectively.
SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
During the first six months of 2000, the Company stayed focused on its objective
to become a major supplier of technology and products for the growing Storage
Area Network (SAN) market. While the Company will continue to provide Fibre
Channel and HIPPI Host Bus Adapter (HBA) cards to customers with unique
applications, it has diverted its marketing focus to a new family of switch,
bridge and router products. The Company believes that its ability to provide
these new products for network independent SAN's will allow customers with very
large storage systems to move up to significantly higher levels of performance
and flexibility.
Revenue for the six months ended September 30, 1999 increased 16.6 % to
$2,286,000, compared to $1,960,000 for the six months ended September 30, 1998.
The Company experienced a net loss of $28,000 or $(0.01) per share for the six
months ended September 30, 1999 compared to a net gain of $10,000 or $0.00 per
share for the six months ended September 30, 1998. The Company's increase in
revenues was the result of increased sales of its Fibre Channel products to
customers in the United States and Europe. The decrease in earnings during the
first six months of 2000, as compared to the first half of 1999. was the direct
result of increased operating expenses associated with developing and marketing
the Company's new family of SAN products.
The Company's objectives for the current fiscal year 2000 include developing
strategic alliances with at least five major vendors/integrators of storage
products in the US and Japan, installing switch and bridge products in a number
of large government laboratory accounts, generating revenues in excess of the
$4,658,000 reported for 1999 and reporting nominal profitability for the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at September 30, 1999 was approximately $493,000 as
compared to approximately $524,000 at March 31, 1999. During the six months
ended September 30, 1999, net cash provided by operating activities was $209,000
versus $85,000 for the six months ended September 30, 1998.
At September 30, 1999, the Company had a revolving line of credit with a bank
of up to $700,000 based on a borrowing base relating to eligible accounts
receivable. Funds borrowed under this agreement bear interest at the rate of
LIBOR plus 2.50% (approximately 7.785% at September 30, 1999). This agreement
terminates on July 31, 2001 and has restrictive covenants including an
obligation to maintain tangible net worth in excess of $1,500,000 and $1,250,000
at March 31, 2001 and 2000, respectively. Amounts borrowed at September 30,
1999, March 31, 1999 and March 31, 1998 were $300,000, $425,000 and $291,000,
respectively.
Stockholders' investment increased 22.7% to $1,311,000 at September 30 1999,
compared to $1,233,000 at March 31, 1999 and $1,005,000 at March 31, 1998.
GENROCO's ratio of current assets to current liabilities (current ratio) was
2.98 to 1 on September 30, 1999 versus 3.65 to 1 at March 31, 1999 and 2.51 to 1
at March 31, 1998.
Expenditures for plant and equipment during the six months ended September 30,
1999 were $178,000, compared to $87,000 and $237,000 in 1999 and 1998,
respectively.
In October of 1999, the Company acquired a previously leased 22,000 square foot
single story brick facility. The Company entered into loan agreements with a
bank and the former property owner. Each agreement contains a mortgage lien
against the building. The primary debt agreement with a bank is a mortgage of
$1,110,000, bearing interest at an annual rate of 8.5%, being amortized over 20
years, with a balloon payment of approximately $823,000 due in 2006. The
secondary debt agreement with the former property owner of $200,000 bears annual
interest at 9.0%, is amortized over 20 years with a balloon payment due of
approximately $153,000 in April 2001.
Management believes that cash on hand together with funds available under the
line of credit and projected cash generated from operations will be sufficient
to satisfy its short term 2000 operating requirements in the present mode of
operation. In order to meet long term cash flow requirements and to increase
the levels of expenditure relating to product development and sales promotion
activities, the Company is seeking to raise an aggregate of $2,500,000 through
a private placement of shares at GENROCO'S common stock. There can be no
assurances that this effort to raise additional working capital will be
successful and in the event that the Company is not successful, its ability to
aggressively market its family of SAN products will be limited.
YEAR 2000 READINESS
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to accurately
process certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company has analyzed the Year
2000 readiness issues related to its computer systems and determined that all
systems critical to managing the business are Year 2000 compliant.
The Company's worst-case Year 2000 scenario would be a situation whereby
critical single-source parts are not received on time because of Year 2000
problems at a supplier's integrated circuit foundry or production facility. In
anticipation of such an event, the Company has entered into arrangements with
its suppliers, indicating anticipated usage levels, in return for assurances
from them that they have the programs in place to meet the requirements.
The Company also has identified its critical component and service providers and
has contacted each vendor to assess that vendor's Year 2000 readiness. Because
the Company is relying solely on information provided by these vendors, it
cannot conclusively provide assurances that all of its critical vendors are or
will be Year 2000 ready. Therefore, the Company cannot provide assurances that
the Company will not be adversely affected by the Year 2000 change.
The Company has analyzed the Year 2000 readiness status of the products
manufactured by the Company. The Company's current product offerings meet the
Company's Year 2000 readiness standards. The Company expects that the total
costs of its Year 2000 readiness program will approximate $40,000 and will not
be material to its financial condition or results of operations. All costs
(exclusive of capital equipment costs) are charged to expense as incurred and do
not include potential costs related to any customer or other claims in the
normal course of business.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's primary physical presence in the United States is its corporate
headquarters in Slinger, Wisconsin.
In fiscal 2000, the Company acquired for its corporate headquarters the
previously leased 22,000 square foot single story brick facility designed and
built specifically for its needs. In conjunction with the acquisition of the
building, the Company entered into loan agreements with a bank and the former
property owner.
GENROCO currently occupies approximately 16,000 square feet of this space. The
6,000 square foot balance at the facility is used for warehousing and is
available for future growth. The building is being depreciated over a period of
20 years using the straight-line method for book purposes and accelerated method
for tax purposes. Annual property taxes are expected to be approximately
$17,000 per year.
In the opinion of management, the property is adequately covered by insurance
and adequately provides for the operations of the Company's business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at September 30, 1999 with
respect to the number of shares of common stock beneficially owned by (i) each
person known to the Company to own beneficially more than 5% of the common
stock; (ii) each director of the Company; (iii) the Chief Executive Officer, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise noted, each person listed below has sole voting and investment power
with respect to his or her shares. The address for each individual set forth
below is 255 Info Highway, Slinger, WI 53086.
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME OF BENEFICIAL OWNER (1)<F1> SHARES SHARES
--------------------------------- --------- -------------
Carl A. Pick (husband of Barbara) 1,009,631 24.9%
Barbara Pick (wife of Carl) 998,004 24.6%
Chris Good 307,956 7.6%
Keith Brue 200,340 4.9%
All directors and executive
officers as a group (6 people) 2,853,989 71.3%
(1)<F1> The securities "beneficially owned" by a person are determined
in accordance with the definition of "beneficial ownership"
set forth in the regulations of the Securities and Exchange
Commission and, accordingly, may include securities owned by
or for, among others, the spouse, children or certain other
relatives of such person as well as other securities as to
which the person has or shares voting or investment power or
has the right to acquire within 60 days.
The Company has had an Employee Stock Ownership Plan (ESOP) since April of 1989,
which owns 540,600 shares (13.3%) of the 4,057,392 total outstanding shares of
GENROCO, Inc. common stock.
All employees of GENROCO, Inc are members of the plan. The ESOP provides for a
five year vesting schedule, except that in the event of the sale of the Company
all employees become 100% vested.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following is a listing of all directors and executive officers of the
Company. An officer remains in office until he or she resigns, dies or a
different person is appointed to the office. Directors shall hold office until
the next annual shareholders' meeting and until the director's successor has
been elected or until his or her resignation, death or removal.
NAME AGE POSITION
-------------- --- ----------------------------------------
Carl A. Pick 51 Chairman, Chief Executive Officer,
President and Director
Keith Brue 62 Executive Vice President, Chief
Financial Officer, Chief Operations
Officer, Secretary and Director
Don Woelz 52 Vice President of Sales and Marketing
Joe Nordman 37 Vice President of Engineering
Barbara Pick 48 Director
Chris Good 48 Director
CARL A. PICK - Chairman, Chief Executive Officer, President and Director. He is
responsible for corporate development, marketing strategy, and overall corporate
management of the Company. Mr. Pick graduated from Yale University in 1971 with
a Bachelor's degree in Computer Engineering. He received a Master's degree in
Computer Science from Yale in 1974. He, along with Barbara Pick, his wife,
founded General Robotics Corporation ("GRC") in August 1974 and reorganized GRC
into GENROCO, Inc. in 1987. Mr. Pick is married to Barbara R. Pick. Mr. Pick
is the Chairman and Marketing Director of the High Speed Networking Forum.
KEITH BRUE - Executive Vice President, Chief Operations Officer, Chief Financial
Officer, and Secretary since March, 1997. He has been a director of the Company
since 1986. He is responsible for manufacturing, materials, logistics,
accounting and finance. Mr. Brue received his MBA degree from the University
of Chicago and has extensive operations experience with a focus on dealing
with mergers, acquisitions and business systems processes. He began his career
in public accounting with a predecessor to Ernst & Young LLP and has over 20
years of experience with several different high technology companies, including
two which were publicly held and traded on NASDAQ, as the result of Initial
Public Offerings.
DON WOELZ - Vice President of Sales and Marketing. He is responsible for
technology and market evaluations, trade shows and technology presentations, and
marketing communications. Mr. Woelz graduated from Marquette University in 1970
with a degree in Electrical Engineering and conducted his post-graduate studies
in Electrical Engineering and Computer Science at the University of Wisconsin -
Milwaukee. He joined GRC in April of 1977 and has held the positions of Sales
Engineer, National Sales Manager, General Manager - CAD Systems Division, Vice
President of Engineering, and Vice President of Sales.
JOSEPH NORDMAN - Vice President of Engineering. He is responsible for hardware
development and management. Mr. Nordman graduated from the University of
Wisconsin in 1984 with a degree in Electrical Engineering. He joined GRC in
February 1985.
BARBARA PICK - Director of GENROCO. Chief Executive Officer and President of
VideoPropulsion, Inc. since incorporation on October 1, 1999. She also served
as a Vice President of Sales for GENROCO since incorporation in 1974 to
September 30, 1999 and DVB Product manager for DVB and President of GENROCO from
1997 to September 30, 1999. Ms. Pick is married to Carl A. Pick.
CHRIS GOOD - Director of GENROCO. Executive Vice President and Chief Technical
Officer of VideoPropulsion, Inc. since incorporation on October 1, 1999. He
graduated with an honors degree in Mathematics and Physics from King's College,
University of London in 1971. He was formerly with ITT, then Compaq Computer
Corporation, UK. He also served as Executive Vice President and Chief Technical
Officer of GENROCO, Inc. from 1987 to September 30, 1999.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to
executives for services rendered during 1999, 1998 and 1997.
All Other
Compensation ($) -
Name and Principal Position Salary ($) (1)<F2>
------------------------------------ ---------- ------------------
Carl A. Pick, CEO 1999 $95,953 $2,838
1998 175,208 2,444
1997 134,859 2,456
Barbara Pick, President 1999 95,953 2,527
1998 175,208 2,444
1997 134,859 2,264
Chris Good, CTO 1999 83,678 4,850
1998 99,400 4,690
1997 94,010 4,709
Keith Brue, CFO / COO 1999 84,117 7,639
1998 107,886 6,552
1997 8,574 2,312
(1)<F2> These amounts are related to the value of health and life
insurance premiums paid by the Company on behalf of the employee.
DIRECTORS' COMPENSATION
The Company pays director fees to each of its four directors. Directors
compensation varies each year, and by individual based on performance of the
Company and at the discretion of the board. The following table illustrates the
total amount of director fees paid to each director for 1999, 1998 and 1997.
1999 1998 1997
------- ------- -------
Carl Pick $30,795 $37,500 $29,450
Barbara Pick 30,795 37,500 29,450
Chris Good 4,090 12,500 48,125
Keith Brue 4,000 2,500 0
EMPLOYMENT CONTRACTS
STOCK PURCHASE AGREEMENT
The Company has no stock option plans in place. The Company has, from time to
time, entered into stock purchase agreements with certain key employees, whereby
the Company agreed to loan the employee the funds required to purchase common
stock from the Company at fair market value on the date of the agreement.
Under the terms of the loan agreements, the employee is obligated to remain in
the employment of the Company for a period of three years. The employee's
obligation to pay principal and interest on the related note payable is waived
at the annual anniversary of the note over a 3-year period and treated as
taxable income to the employee and compensation expense to the Company.
A summary of employees stock purchase agreement transactions is set forth below:
Number of Fair Market Aggregate
Agreement Dates Shares Issued Value / Share Market Value
--------------- ------------- ------------- ------------
November 1997 144,000 $1.16 $168,000
August 1998 364,500 1.88 686,475
July 1999 223,200 1.83 409,200
At March 31, 1999 and 1998, the notes receivable from employees were $608,000
and $154,000, respectively. The 1998 and 1997 notes are receivable over terms
ranging from 15 to 24 months and bear interest at 5.8%. The 1999 notes are due
over 36 months and bear interest at 5.8%.
The following table summarizes the shares included in the above totals for all
executive officers outlining the total shares (adjusted for the 3 for 1 stock
split on September 28, 1999 for all shareholders of record as of September 21,
1999), the period over which the note will be waived, original value and the
remaining outstanding balance on the notes as of September 30, 1999.
Remaining
note balance at
Number of Amortization Total original September 30,
Name shares Period value 1999
- --------------- --------- ------------ -------------- ---------------
Carl Pick 90,000 36 months $169,500 $103,583
Barbara Pick 90,000 36 months 169,500 103,583
Chris Good 37,500 36 months 70,625 43,160
Keith Brue 181,500 36 months 238,625 74,160
The stock purchase agreements do not provide for any acceleration upon change in
control of the Company.
CONFIDENTIALITY AND NON-COMPETE AGREEMENTS
All GENROCO employees have signed a comprehensive non-compete agreement which
stipulates that the employee shall not directly or indirectly use, disseminate,
disclose, lecture upon or publish any confidential information (as defined
therein) while employed by the Company and for a period of two years thereafter.
The agreement provides that for a period ending two years after the termination
of employment with the Company for whatever reason, the employee shall not,
whether for his own account or for the account of any other individual,
partnership, firm, corporation or other entity, intentionally solicit, endeavor
to entice away from the Company, or otherwise interfere with the relationship of
the Company, any person who is employed by or otherwise engaged to perform
services for the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has notes receivable outstanding to employees and executive officers
for the purchase of shares under the stock purchase agreements outlined above in
Item 6 of this registration statement. Exact dates and amounts of the shares
are outlined in Part II Item 4 of this registration statement. There are no
other related party transactions with the Company.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The description of the Company's capital stock contained herein is qualified by
reference to the Company's Articles of Incorporation, as amended to date, and
By-Laws. The Company's authorized capital stock consists of 5,000,000 common
stock shares, par value $0.02 per share and 1,000,000 preferred stock shares, no
par value.
COMMON STOCK
As of September 30, 1999, the Company has 4,057,392 (post split) shares of
common stock issued and outstanding. The Company has authorized only one class
of common stock. The holders of the common stock are entitled to one vote for
each share on all matters voted upon by the Company's shareholders, including
election of directors, and there is no cumulative voting. The holders of the
common stock are also entitled to such dividends as may be declared at the
discretion of the Board of Directors out of funds legally available therefore.
See "Dividend Policy". Holders of common stock are entitled to share ratably in
the net assets of the Company upon liquidation after payment or provision for
all liabilities. The holders of common stock have no preemptive rights to
purchase shares of stock of the Company. Shares of common stock are not subject
to any redemption provisions and are not convertible into any other securities
of the Company.
PREFERRED STOCK
The Board of Directors of the Company, without further action by the Company's
shareholders, is authorized to issue preferred stock or other senior equity
securities in one or more class or series and to determine preferences as
dividends and in liquidation, and conversion, redemption and other rights of
each such series. The Company's Board of Directors could issue a class or
series of preferred stock or other senior equity securities with rights more
favorable with respect to dividends, voting and liquidation than those held by
the holders of common stock. The Company has not issued any preferred stock or
other senior equity securities and the Company has no present plans to issue
such stock or securities.
ANTITAKEOVER PROVISIONS
Sections 180.1140 to 180.1144 of the "Wisconsin Business Combination Law(the
"WBCL") regulate a broad range of "business combinations" between a "resident
domestic corporation" (which the Company is) and an "interested shareholder."
The Wisconsin Business Combination Statute defines a "business combination" to
include a merger or share exchange, sale, lease, exchange, mortgage, pledge,
transfer, or other disposition of assets equal to at least 5% of the market
value of the stock or assets of the company or 10% of its earning power, or
issuance of stock or rights to purchase stock with a market value equal to at
least 5% of the outstanding stock, adoption of a plan of liquidation, and
certain other transactions involving an "interested shareholder." An "interested
shareholder" is defined as a person who beneficially owns, directly or
indirectly, 10% of the voting power of the outstanding voting stock of the
corporation or who is an affiliate or associate of the corporation and
beneficially owned 10% of the voting power of the then outstanding voting stock
within the last three years. The Wisconsin Business Combination Statute
prohibits a corporation from engaging in a business combination (other than a
business combination of a type specifically excluded from the coverage of the
statute) with an interested shareholder for a period of three years following
the date such person becomes an interested shareholder, unless the board of
directors approved the business combination or the acquisition of the stock that
resulted in a person becoming an interested shareholder before such acquisition.
Accordingly, the Wisconsin Business Combination Statute's prohibition on
business combinations cannot be avoided during the three-year period by
subsequent action of the board of directors or shareholders. Business
combinations after the three-year period following the stock acquisition date
are permitted only if (I) the board of directors approved the acquisition of the
stock prior to the acquisition date, (ii) the business combination is approved
by a majority of the outstanding voting stock not beneficially owned by the
interested shareholder, or (iii) the consideration to be received by
shareholders meets certain requirements of the statute with respect to form and
amount.
In addition, the WBCL provides, in Sections 180.1130 to 180.1133, that certain
mergers, share exchanges or sales, leases, exchanges or other dispositions of
assets in a transaction involving a "significant shareholder" and a "resident
domestic corporation" (as defined below) are subject to a supermajority vote of
shareholders (the "Wisconsin Fair Price Statute"), in addition to any approval
otherwise required. A "significant shareholder," with respect to an issuing
public corporation, is defined as a person who beneficially owns, directly or
indirectly, 10% or more of the voting stock of the corporation, or an affiliate
of the corporation which beneficially owned, directly or indirectly, 10% or more
of the voting stock of the corporation within the last two years. Such business
combinations must be approved by 80% of the voting power of the corporation's
stock and at least two-thirds of the voting power of the corporation's stock not
beneficially held by the significant shareholder who is party to the relevant
transaction or any of its affiliates or associates, in each case voting together
as a single group, unless the following fair price standards have been met: (I)
the aggregate value of the per share consideration is equal to the higher of (a)
the highest price paid for any common shares of the corporation by the
significant shareholder in the transaction in which it became a significant
shareholder or within two years before the date of the business combination, (b)
the market value of the corporation's shares on the date of commencement of any
tender offer by the significant shareholder, the date on which the person became
a significant shareholder or the date of the first public announcement of the
proposed business combination, whichever is higher, or (c) the highest
liquidation or dissolution distribution to which holders of the shares would be
entitled, and (ii) either cash, or the form of consideration used by the
significant shareholder to acquire the largest number of shares, is offered.
Under Section 180.1150 (the "Wisconsin Control Share Statute") of the WBCL,
unless otherwise provided in the articles of incorporation (which is not the
case with respect to the Company's Amended and Restated Articles of
Incorporation), the voting power of shares, including shares issuable upon
conversion of convertible securities or exercise of options or warrants, of an
issuing public corporation held by any person or persons acting as a group in
excess of 20% of the voting power in the election of directors is limited (in
voting on any matter) to 10% of the full voting power of those shares. This
restriction does not apply to shares acquired directly from the resident
domestic corporation, in certain specified transactions, or in a transaction
with respect to which the corporation's shareholders have approved restoration
of the full voting power of otherwise restricted shares. In light of the 10%
threshold contained in the Wisconsin Business Combination Statute, the Wisconsin
Control Share Statute threshold of 20% may not be implicated unless the board of
directors approves a transaction that permits the shareholder to exceed the 10%
ownership level.
Section 180.1134 (the "Wisconsin Defensive Action Restrictions") of the WBCL
provides that, in addition to the vote otherwise required by law or the articles
of incorporation of a resident domestic corporation, the approval of the holders
of a majority of the shares entitled to vote is required before such corporation
can take certain action while a takeover offer is being made or after a takeover
offer has been publicly announced and before it is concluded. Under the
Wisconsin Defensive Action Restrictions, shareholder approval is required for
the corporation to (i) acquire more than 5% of the outstanding voting shares at
a price above the market price from any individual or organization that owns
more than 3% of the outstanding voting shares and has held such shares for less
than two years, unless a similar offer is made to acquire all voting shares, or
(ii) sell or option assets of the corporation which amount to at least 10% of
the market value of the corporation, unless the corporation has at least three
independent directors (directors who are not officers or employees) and a
majority of the independent directors vote not to have this provision apply to
the corporation. The Company will have, following the distribution, no
independent directors, so the restrictions described in clause (ii) will
initially apply to the Company. The restrictions described in clause (i) above
may have the effect of deterring a shareholder from acquiring the Company's
shares with the goal of seeking to have the Company repurchase such shares at a
premium over the market price.
The Company believes that it will qualify as a resident domestic corporation
because it is headquartered in Wisconsin. Accordingly the Company will have the
above antitakeover protection discussed above.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Articles of Incorporation and By-Laws may
have significant anti-takeover effects, including the inability of shareholders
to remove directors without cause, and the limitation on the number of
directors.
The explicit grant in section 180.0827 of the WBCL, the "Wisconsin Stakeholder
Provisions" of discretion to directors to consider nonshareholder constituencies
could, in the context of an active "auction" of the Company, has anti-takeover
effects in situations where the interests of stakeholders of the Company,
including employees, suppliers, customers and communities in which the Company
does business, conflict with the short-term maximization of shareholder value.
The Wisconsin Control Share Statute may deter any shareholder from acquiring in
excess of 20% of the outstanding stock of the Company and the Wisconsin Fair
Price Statute may discourage any attempt by a shareholder to squeeze out
shareholders without offering an appropriate premium purchase price. In
addition, the Wisconsin Defensive Action Restrictions may have the effect of
deterring a shareholder from acquiring the Company's shares with the goal of
seeking to have the Company repurchase the shares at a premium.
The statutory provisions and the Company's Articles of Incorporation and By-Law
provisions referenced above are intended to encourage persons seeking to acquire
control of the Company to initiate such an acquisition through arms-length
negotiations with the Company's Board of Directors, and to ensure that
sufficient time for consideration of such a proposal, and any alternatives, is
available. Such measures are also designed to discourage investors from
attempting to accumulate a significant minority position in the Company and then
use the threat of a proxy contest as a means to pressure the Company to
repurchase shares at a premium over the market value. To the extent that such
measures make it more difficult for, or discourage, a proxy contest or the
assumption of control by a holder of a substantial block of the Company's stock,
they could increase the likelihood that incumbent directors will retain their
positions, and may also have the effect of discouraging a tender offer or other
attempt to obtain control of the Company, even though such attempt might be
beneficial to the Company and its shareholders.
Forms of the Company's Articles of Incorporation and By-Laws are attached to
this Registration Statement as Exhibits 2.1 and 2.4, respectively, and are
incorporated herein by reference. The foregoing description of certain
provisions of the Amended and Restated Articles of Incorporation and the By-Laws
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Amended and Restated Articles of Incorporation and
the By-Laws, including definitions of certain terms in each respective document.
DIVIDEND POLICY
To date the Company has paid no cash dividends on its Common Stock. The Company
intends to retain its future earnings, if any, to finance the expansion of its
business and for general corporate purposes. The Company does not anticipate
paying any cash dividends on its common stock in the future. Any payment of
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that the Company's
Board of Directors deems relevant.
TRANSFER AGENT
The transfer agent for the Company's common stock is Fidelity Transfer Company,
1800 Southwest Temple Suite #301, Box 53, Salt Lake City, UT 84115.
PART II.
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's common stock has been traded on the OTC Bulletin Board as a non-
reporting company since 1988. On December 1, 1999, the Company's common stock
began trading on the Electronic Pink Sheet. The amount of shares in the hands
of non-employee shareholders has historically been less than 20% of total shares
outstanding. Trading volume has historically been negligible. The high and low
bid prices at the close of each fiscal quarter for the past 14 quarters are as
follows (adjusted for 3 for 1 stock split as of September 21, 1999):
Bid
----------------------
QUARTER ENDED High Low
-------------------- ------ ------
June 30, 1996 NA NA
September 30, 1996 NA NA
December 30, 1996 1.375 0.328
March 31, 1997 1.000 0.672
June 30, 1997 0.672 0.672
September 30, 1997 1.672 0.672
December 31, 1997 3.328 1.672
March 31, 1998 2.672 1.922
June 30, 1998 2.328 1.672
September 30, 1998 3.000 1.828
December 31, 1998 2.250 1.672
March 31, 1999 2.328 1.672
June 30, 1999 2.171 1.672
September 30, 1999 11.000 1.672
Quarter through November 30, 1999 14.000 7.625
Source: Dow Jones News Retrieval Service (Invest-text database)
These quotations represent bid prices without retail markup, markdown, or
commission, and may not reflect actual transactions.
As of September 30, 1999, there were approximately 169 shareholders of record of
the Company's common stock.
The Company has not paid any cash dividends for the past three fiscal years or
during the interim period presented and has no intention to pay a dividend.
ITEM 2. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the normal
course of its business. The Company believes that none of these actions will
have a material adverse effect on the financial condition or results of
operations of the Company. Currently there are no litigation claims open.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
From fiscal 1997 through September 30, 1999, all of the sales of the Company's
securities by the Company have been unregistered. The following table
summarizes all stock sales (post split) that have occurred during this time.
All sales or grants were made to employees of the Company.
<TABLE>
Purchase Date Number of shares Per Share Amount Total Value Type of Transaction Exemption
- ------------- ---------------- ---------------- ----------- ------------------- ---------
<S> <C> <C> <C> <C> <C>
June 1996 3,000 $0.58 $1,750 Stock Grant 701
August 1996 186,000 0.33 62,000 Cash sale 4(2)
October 1996 3,000 0.33 1,000 Stock Grant 701
November 1996 3,000 0.33 1,000 Cash Sale 4(2)
September 1997 27,000 1.16 31,500 Sale in exchange for note 4(2)
October 1997 1,500 1.16 1,750 Stock Grant 701
November 1997 6,522 1.16 7,609 Cash Sale 4(2)
November 1997 144,000 1.16 168,000 Sale in exchange for note 4(2)
January 1998 4,311 3.08 13,292 Cash Sale 4(2)
February 1998 1,506 2.42 3,649 Cash Sale 4(2)
May 1998 11,766 1.96 23,121 Cash Sale 4(2)
June 1998 3,000 2.25 6,750 Stock Grant 701
August 1998 3,000 2.18 6,550 Stock Grant 701
August 1998 364,500 1.88 686,475 Sale in exchange for note 4(2)
July 1999 223,200 $1.83 $408,456 Sale in exchange for note 4(2)
</TABLE>
Each sale, including those exempt pursuant to Section 4(2) listed above, is
between the Company and an officer or employee based upon face to face
discussions and negotiations. Each purchaser represented that they are
acquiring the common stock for their own account and understand the issuance is
based upon an exemption from registration under the Securities Act of 1993, as
amended. Such purchasers met with management and asked questions, received
financial information about the Company, and had an opportunity to ask
management about the Company and its prospects. Each such purchaser confirmed
in writing that he or she was acting as an accredited investor or is a
sophisticated investor or had such knowledge and experience in financial
business matters as to be capable of evaluating the relative merits and risks of
such purchase of Company Common Stock.
The Company has determined its per share amount based on the trailing 30 day
average midpoint between the ask and bid price as listed on the OTC Bulletin
Board.
On September 28, 1999, the Company issued 2,704,928 shares of common stock in
response to having declared a share dividend at the rate of two shares of
authorized but unissued common stock, $0.02 par value, of the Company for each
share of common stock issued and outstanding at the close of business on
September 21, 1999 (the "Effective Date"), so as to effect a 3 for 1 forward
stock split in the form of a share dividend (the "Stock Split").
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON LIABILITY OF DIRECTORS
Under the WBCL, director immunity from liability to a corporation or its
shareholders for monetary liabilities applies automatically unless it is
specifically limited by a corporation's articles of incorporation (which is not
the case with the Company's Articles of Incorporation). Excepted from that
immunity are: (i) a willful failure to deal fairly with the corporation or its
shareholders in connection with a matter in which the director has a material
conflict of interest; (ii) a violation of criminal law (unless the director had
reasonable cause to believe that his or her conduct was lawful or no reasonable
cause to believe that his or her conduct was unlawful); (iii) a transaction from
which the director derived an improper personal profit; and (iv) willful
misconduct.
INDEMNIFICATION AND INSURANCE
Under Section 180.0851 (1) of the WBCL, the Company is required to indemnify a
director or officer to the extent such person is successful on the merits or
otherwise in the defense of a proceeding, for all reasonable expenses incurred
in the proceeding if such person was a party because he or she was a director or
officer of the Company. In all other cases, the Company is required by Section
180.0851 (2) of the WBCL to indemnify a director or officer against liability
incurred in a proceeding to which such person was a party because he or she was
an officer or director of the Company, unless it is determined that he or she
breached or failed to perform a duty owed to the Company and the breach or
failure to perform constitutes: (i) a willful failure to deal fairly with the
Company or its shareholders in connection with a matter in which the director or
officer has a material conflict of interest; (ii) a violation of criminal law,
unless the director or officer had reasonable cause to believe his or her
conduct was lawful or no reasonable cause to believe his or her conduct was
unlawful; (iii) a transaction from which the director or officer derived an
improper personal profit; or (iv) willful misconduct. Section 180.0858 (1) of
the WBCL provides that, subject to certain limitations, the mandatory
indemnification provisions do not preclude any additional right to
indemnification or allowance expenses that a director or officer may have under
the Company's articles of incorporation, bylaws, a written agreement or a
resolution of the Board of Directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the State
of Wisconsin to require or permit indemnification, allowance of expenses and
insurance to the extent required or permitted under Sections 180.0850 to
180.0858 of the WBCL for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a director
is not liable to a corporation, its shareholders, or any person asserting rights
on behalf of the corporation or its shareholders, for damages, settlements,
fees, fines, penalties or other monetary liabilities arising from a breach of,
or failure to perform, any duty resulting solely from his or her status as a
director, unless the person asserting liability proves that the breach or
failure to perform constitutes any of the four exceptions to mandatory
indemnification under Section 180.0851 (2) referred to above.
Under Section 180.0833 of the WBCL, the directors of the Company against whom
claims are asserted with respect to the declaration of an improper dividend or
other distribution to shareholders to which they assented are entitled to
contribution from other directors who assented to such distribution and from
shareholders who knowingly accepted the improper distribution, as provided
therein.
Article VIII of the Company's By-Laws contains provisions that generally
parallel the indemnification provisions of the WBCL and cover certain procedural
matters not dealt with in the WBCL.
Directors and officers of the Company are not covered by directors' and
officers' liability insurance under which they would be insured against expenses
and liabilities arising out of proceedings to which they could be parties by
reason of being or having been directors or officers.
GENROCO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
CONTENTS
Report of Public Accountants 27
Consolidated Financial Statements
Consolidated Balance Sheets 28
Consolidated Statements of Operations 29
Consolidated Statements of Cash Flows 30
Consolidated Statements of Stockholders' Investment 31
Consolidated Notes to Financial Statements 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
GENROCO, Inc.:
We have audited the accompanying consolidated balance sheets of GENROCO, Inc. (a
Wisconsin corporation) and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' investment and cash
flows for each of the three years in the period ended March 31, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GENROCO, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
May 7, 1999.
Except for Note 2(k), as to which the date is
October 13, 1999
GENROCO, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
(Unaudited)
Year ended March 31, Six months ended September 30,
--------------------------- -------------------------------
ASSETS 1999 1998 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $524,359 $506,186 $493,308 $211,945
Accounts receivable, net of allowance of $3,000 904,373 533,353 692,793 728,507
Inventories 458,608 680,516 632,454 551,284
Prepaid expenses 56,504 65,275 134,213 62,271
Employee advances 13,482 10,000 54,995 16,070
Deferred tax asset 34,000 - 34,000 -
---------- ---------- ---------- ----------
Total current assets 1,991,326 1,795,330 2,041,763 1,570,077
PLANT AND EQUIPMENT, at cost:
Leasehold improvements 10,593 10,593 10,593 10,593
Machinery and equipment 577,223 851,284 755,148 497,603
---------- ---------- ---------- ----------
587,816 861,877 765,741 508,196
Less- Accumulated depreciation and amortization 264,039 516,409 326,521 206,819
---------- ---------- ---------- ----------
Net plant and equipment 323,777 345,468 439,220 301,377
OTHER ASSETS 28,314 9,825 37,226 14,563
---------- ---------- ---------- ----------
Total assets $2,343,417 $2,150,623 $2,518,209 $1,886,017
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
-----------------------------------------
CURRENT LIABILITIES:
Accounts payable $145,323 $254,544 $356,647 $223,425
Income taxes payable 48,373 165,479 - 199,298
Current portion of capital leases payable 98,264 96,878 128,153 84,919
Accrued payroll and payroll taxes 180,392 126,899 114,609 87,433
Other accrued liabilities 72,815 70,444 85,824 119,232
---------- ---------- ---------- ----------
Total current liabilities 545,167 714,244 685,233 714,307
DEFERRED TAX LIABILITY 34,800 - 34,800 -
LONG-TERM DEBT:
Line of credit 425,000 291,000 300,000 162,242
Capital leases payable 105,080 140,206 187,433 105,317
---------- ---------- ---------- ----------
Total liabilities 1,110,047 1,145,450 1,207,466 981,866
STOCKHOLDERS' INVESTMENT:
Preferred stock, 1,000,000 shares authorized, no
shares outstanding at June 30, 1999,
March 31, 1999 and 1998 - - - -
Common stock, $.02 par value, 5,000,000 shares
authorized, 4,057,392, 3,847,086, 3,482,820
shares outstanding at September 30, 1999,
March 31, 1999 and 1998, respectively 76,941 69,657 81,148 77,302
Paid-in capital 1,586,078 897,341 1,968,607 1,612,592
Notes receivable from stockholders (608,316) (154,008) (862,701) (802,346)
Advance to ESOP (58,946) - (85,981) (185,247)
Retained earnings 237,613 192,183 209,670 201,850
---------- ---------- ---------- ----------
Total stockholders' investment 1,233,370 1,005,173 1,310,743 904,151
---------- ---------- ---------- ----------
Total liabilities and stockholders' investment $2,343,417 $2,150,623 $2,518,209 $1,886,017
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
GENROCO, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
(Unaudited)
Years ended March 31, Six months ended September 30,
------------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $4,657,993 $5,788,365 $3,709,808 $2,286,175 $1,959,870 $3,636,749
COST OF GOODS SOLD 1,831,371 2,346,115 1,261,062 847,830 834,647 1,441,785
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 2,826,622 3,442,250 2,448,746 1,438,345 1,125,223 2,194,964
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Research and development 1,134,007 1,044,424 712,902 546,984 503,223 535,824
Selling 880,260 817,490 425,951 536,443 294,087 416,986
Customer service 52,517 63,035 46,101 27,576 21,973 27,083
General and administrative 650,952 832,499 767,653 365,619 283,421 608,071
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 2,717,736 2,757,448 1,952,607 1,476,622 1,102,704 1,587,964
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations 108,886 684,802 496,139 (38,277) 22,519 607,000
OTHER (EXPENSE) INCOME (35,456) 153,866 5,123 (7,666) (8,852) 127,551
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 73,430 838,668 501,262 (45,943) 13,667 734,551
PROVISION (CREDIT) FOR INCOME TAXES 28,000 204,770 - (18,000) 4,000 190,770
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $45,430 $633,898 $501,262 $(27,943) $ 9,667 $543,781
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE $0.01 $0.19 $0.16 $(0.01) $0.00 $0.16
FULLY DILLUTED EARNINGS PER SHARE $0.01 $0.19 $0.16 $(0.01) $0.00 $0.16
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
GENROCO, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
<TABLE>
(Unaudited)
Years ended March 31, Six months ended September 30,
-------------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $45,430 $633,898 $501,262 $(27,943) $ 9,667 $543,781
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 109,888 86,256 57,300 62,482 50,798 36,423
Provision for deferred taxes 800 - - - - -
Compensation expense from
forgiveness of notes
receivable from stockholders 221,667 80,542 - 154,815 86,523 -
Compensation expense from
Grants of common stock 36,420 1,750 2,750 - - -
Change in-
Accounts receivable (371,020) (119,268) (221,078) 211,580 (195,154) 40,121
Inventories 221,908 (34,692) (377,735) (173,846) 129,232 (115,678)
Prepaid expenses and
employee advances 5,289 (13,977) 1,064 (119,222) (3,066) (59,121)
Other assets (19,265) 13,929 (8,316) (8,912) (4,738) (31,394)
Accounts payable (109,221) (238,627) 231,469 211,324 (31,119) (133,755)
Accrued ESOP contributions - (175,105) 85,168 - - -
Accrued liabilities (61,242) 198,749 9,620 (101,147) 43,141 664,163
Accrued litigation costs - (356,051) - - - (249,051)
---------- ---------- ---------- ---------- ---------- ----------
Total adjustments 35,224 (556,494) (219,758) 237,074 75,617 151,708
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used
in) operating activities 80,654 77,404 281,504 209,131 85,284 695,489
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (87,421) (236,731) (157,492) (177,925) (6,709) (74,240)
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in
investing activities (87,421) (236,731) (157,492) (177,925) (6,709) (74,240)
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,397,690 505,032 144,882 175,453 600,242 318,931
Principal payments of long-term debt (1,297,430) (136,912) (73,973) (188,211) (775,848) (294,699)
(Sale) Purchase of common stock (16,374) (14,875) - (22,464) (11,965) (1,313)
Payment of notes receivable
from stockholders - 25,710 90,403 - - -
Advance to ESOP (58,946) - - (27,035) (185,245) (175,105)
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used
in) financing activities 24,940 378,955 161,312 (62,257) (372,816) (152,186)
---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 18,173 219,628 285,324 (31,051) (249,241) 469,063
CASH AND CASH EQUIVALENTS,
beginning of period 506,186 286,558 1,234 524,359 506,186 286,558
---------- ---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of Period $524,359 $506,186 $286,558 $493,308 $211,945 $755,621
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
GENROCO, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
----------------------------------------------------
<TABLE>
Notes Total
Common Stock Receivable Retained Stockholders'
---------------------- Paid-in From Advance Earnings Equity
Shares Amount Capital Stockholders to ESOP (Deficit) (Deficit)
------- -------- ------- ------------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 3,099,981 $62,001 $617,822 $(53,113) $ - $(942,977) $(316,267)
Net income - - - - - 501,262 501,262
Issuance--sale to officers 189,000 3,780 59,220 (63,000) - - -
Issuance--grants to directors 3,000 60 1,690 - - - 1,750
Issuance--grants to employees 3,000 60 940 - - - 1,000
Payments on notes
receivable from stockholders - - - 90,403 - - 90,403
--------- ------- ---------- --------- -------- -------- ----------
BALANCE, March 31, 1997 3,294,981 65,901 679,672 (25,710) - (441,715) 278,148
Net income - - - - - 633,898 633,898
Retirement of purchased shares (6,000) (120) (14,755) - - - (14,875)
Issuance--sale to directors 144,000 2,880 165,120 (168,000) - - -
Issuance--sale to employees 48,339 966 65,584 (66,550) - - -
Issuance - grant to employees 1,500 30 1,720 - - - 1,750
Forgiveness of notes receivable
from stockholders - - - 80,542 - - 80,542
Payments on notes receivable
from stockholders - - - 25,710 - - 25,710
--------- ------- ---------- --------- -------- -------- ----------
BALANCE, March 31, 1998 3,482,820 69,657 897,341 (154,008) - 192,183 1,005,173
Net income - - - - - 45,430 45,430
Retirement of purchased shares (18,000) (360) (26,514) 10,500 - - (16,374)
Issuance--sale to officers 255,000 5,100 475,150 (480,250) - - -
Issuance--sale to employees 109,500 2,190 204,035 (206,225) - - -
Issuance--grants to employees 17,766 354 36,066 - - - 36,420
Forgiveness of notes
receivable from stockholders - - - 221,667 - - 221,667
Advance to ESOP - - - - (58,946) - (58,946)
--------- ------- ---------- --------- -------- -------- ----------
BALANCE, March 31, 1999 3,847,086 76,941 1,586,078 (608,316) (58,946) 237,613 1,233,370
Net loss - - - - - (27,943) (27,943)
Retirement of purchased shares (12,894) (258) (22,206) - - - (22,464)
Issuance--sale to officers 132,300 2,646 239,904 (242,550) - - -
Issuance--sale to employees 90,900 1,819 164,831 (166,650) - - -
Forgiveness of notes
receivable from stockholders - - - 154,815 - - 154,815
Advance to ESOP - - - - (27,035) - (27,035)
--------- ------- ---------- --------- -------- -------- ----------
BALANCE, September 30, 1999 4,057,392 $81,148 $1,968,607 $(862,701) $(85,981) $209,670 $1,310,743
--------- ------- ---------- --------- -------- -------- ----------
--------- ------- ---------- --------- -------- -------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
GENROCO, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 1999 AND 1998
-----------------------
(1) Description of the Company-
--------------------------
GENROCO, Inc. and its subsidiaries (collectively the "Company") is a
Wisconsin corporation. The Company is engaged in the design, manufacture
and service of computer components to customers who are engaged in the
production and sale of high performance computers and workstations as well
as providing engineering and design services to customers on a worldwide
basis. These services include complex software and engineering designs for
applications specific products requiring very high data transfer rates (in
excess of 80 MB per second). The Company operates as a single segment.
Net sales for components were approximately 96% of total Company net sales
in 1999.
The Company had three customers that individually accounted for 34%, 28%
and 19% of net sales in 1999. The Company had four customers that
individually accounted for 41%, 14%, 11% and 11% of net sales in 1998. The
Company had five customers that individually accounted for 27%, 17%, 12%,
12% and 9% of net sales in 1997.
Sales to foreign customers accounted for a significant portion of Company
sales. Sales to foreign countries were as follows:
Year Ended Year Ended Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
-------------- -------------- --------------
France $1,599,000 $474,000 $ 330,000
Japan $ 887,000 $828,000 $1,038,000
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) Interim financial information-
-----------------------------
The accompanying financial statements as of March 31, 1999 and 1998
are audited and the six-month periods ending September 30, 1999, 1998
and 1997 are unaudited. In the opinion of management of the Company,
the interim unaudited financial statements reflect all adjustments,
consisting only of normal and recurring adjustments necessary for a
fair presentation of the financial statements. The results of
operations for the six-month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the
full year ending March 31, 2000.
(b) Revenue recognition-
-------------------
Revenue from product sales is recognized when the products are
shipped. Service revenue from engineering and design work is
recognized as the services are provided.
(c) Principles of consolidation-
---------------------------
The consolidated financial statements include the accounts of GENROCO,
Inc. and its wholly owned subsidiary, GENROCO International, Inc.
which serves as the operating entity of the Company. The consolidated
financial statements do not display the results of operations of
VideoPropultion, Inc., as a stand alone entity, as this subsidiary was
not formed until October 1, 1999. All significant intercompany
accounts and transactions have been eliminated.
(d) Cash and cash equivalents-
-------------------------
Cash equivalents are defined as short-term investments, which have an
original maturity of three months or less and are readily convertible
into cash.
(e) Inventories-
-----------
Inventories are stated at the lower of average cost, determined using
the first-in, first-out method, or market. Inventories consist of:
<TABLE>
(Unaudited)
March 31, September 30 ,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Raw materials and work-in-process $335,528 $602,321 $458,098 $409,873
Reserve for obsolescence (46,762) (66,075) (24,806) (37,485)
Finished goods 169,842 144,270 199,162 178,896
-------- -------- -------- --------
$458,608 $680,516 $632,454 $551,284
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(f) Plant and equipment-
-------------------
Plant and equipment are stated at cost. The related depreciation and
amortization expense has been provided using the straight-line method
over the estimated lives of the machinery and equipment (3 to 5 years)
and over the shorter of five years or the life of the lease for
leasehold improvements. Equipment leases that meet the criteria of
capital leases have been capitalized and are being amortized over the
lesser of the estimated lives of the machinery and equipment or the
term of the lease. Depreciation and amortization expense was
approximately $110,000, $86,000, and $57,000 for 1999, 1998 and 1997,
respectively.
(g) Other assets-
------------
Other assets are composed of the following:
<TABLE>
(Unaudited)
March 31, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Patent (net of accumulated amortization of $4,294 and $3,519
as of March 31, 1999 and 1998, and $5,182 and $3,906 as of
September 30, 1999 and 1998 respectively) $13,913 $7,604 $13,025 $12,341
Cash surrender value on insurance policies (net of loans of
$84,244 and $87,723 as of March 31, 1999 and 1998, and
$84,244 and $85,502 as of September 30, 1999 and 1998
respectively) 14,401 2,221 24,201 2,222
------- ------ ------- -------
$28,314 $9,825 $37,226 $14,563
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(h) Research and development costs-
------------------------------
Research and development costs are expensed as incurred and shown
separately as a component of operating expenses on the Consolidated
Statements of Operations.
(i) Use of estimates-
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(j) Net income per common share-
---------------------------
The Company accounts for earnings per share according to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" for purposes of calculating earnings per share.
Basic earnings per share of common stock is computed by dividing net
income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share of common stock is
computed by dividing net income by the average number of common shares
and common equivalent shares related to the assumed exercise of stock
options and warrants. Average common shares for computation of basic
earnings per share were 1,256,086, 1,118,722 and 1,073,135 in 1999,
1998 and 1997, respectively. The Company does not have any common
stock equivalents and therefore diluted earnings per share are
identical to basic earnings per share.
(k) Stock Split-
-----------
On September 28, 1999 the Company issued two additional shares of
stock to all shareholders of record as of September 21, 1999. All
stock disclosures have been restated to effect this split.
(l) Reclassifications-
-----------------
Certain reclassifications have been made to the prior year amounts for
consistency with the current year presentation.
(3) Revolving Credit Agreement-
--------------------------
During 1998, the Company entered into a revolving credit agreement with a
major bank, which allows the Company to borrow up to $500,000 based on a
borrowing base, as defined. The agreement bears interest at the rate of
LIBOR plus 2.75% (approximately 7.72% at March 31, 1999), terminates on
July 31, 2000, and has restrictive covenants including an obligation to
maintain tangible net worth in excess of $1,000,000 and $1,250,000 for 1999
and 2000, respectively. The agreement is collateralized by current
accounts receivable balances.
The balance outstanding was $425,000 and $291,000 as of March 31, 1999 and
1998, respectively. The revolver is classified as long-term as the Company
believes that it has the ability to maintain a borrowing base level during
the next year sufficient to support the outstanding balance.
(4) Long-Term Debt-
--------------
Long-term debt consists of:
<TABLE>
(Unaudited)
March 31, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Line of credit (See Note 3) $425,000 $291,000 $300,000 $162,242
Capital leases 203,344 237,084 315,586 190,236
-------- -------- -------- --------
628,344 528,084 615,586 352,478
Less- Current portion (98,264) (96,878) (128,153) (84,919)
-------- -------- -------- --------
Total long-term debt $530,080 $431,206 $487,433 $267,559
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The capital leases are for machinery and equipment. These leases range
from 36 to 60 months and bear interest ranging from 9.65% to 17.12%.
The maturities of long-term debt outstanding as of March 31, 1999 are as
follows:
Fiscal Year Maturity
----------- --------
2000 $ 98,264
2001 491,921
2002 26,152
2003 6,556
2004 5,451
--------
$628,344
--------
--------
(5) Income Taxes-
------------
The Company accounts for income taxes according to provisions of Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Components of the deferred income taxes are as follows:
March 31,
---------------------
1999 1998
------ ------
Current deferred tax asset-
Warranty reserve $975 $975
Accrued employee benefits 7,239 8,021
Inventory adjustments 22,651 33,036
Bad debt reserve 1,170 1,170
Other 2,765 4,398
-------- --------
Total current deferred tax asset 34,800 47,600
Noncurrent deferred tax liability-
Property, plant and equipment $(34,800) $(32,900)
-------- --------
Net deferred tax asset $ - $14,700
Valuation allowance - (14,700)
-------- --------
Net deferred tax liability $ - $ -
-------- --------
-------- --------
The following is a summary of components of the provision for income taxes:
March 31,
---------------------------------
1999 1998 1997
-------- -------- --------
Pretax book income $73,430 $838,668 $ 501,262
------- -------- ---------
------- -------- ---------
Federal tax $20,400 $285,147 $ 209,290
State tax 6,800 43,065 48,630
Reversal of valuation allowance - (14,812) (257,920)
Business tax credits - (108,630) -
------- -------- ---------
Current 27,200 204,770 -
Deferred 800 - -
------- -------- ---------
Total provision $28,000 $204,770 $ -
------- -------- ---------
------- -------- ---------
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
March 31,
---------------------------------
1999 1998 1997
-------- -------- --------
Federal statutory rate 34.0% 34.0% 34.0%
State income tax, net of
Federal benefit 5.2 5.2 5.2
Reversal of valuation allowance - (1.8) (39.2)
Business tax credits and other (1.1) (13.0) -
----- ----- -----
Effective income tax rate 38.1% 24.4% -%
----- ----- -----
----- ----- -----
(6) Supplemental Disclosure of Cash Flow Information-
------------------------------------------------
March 31,
1999 1998 1997
-------- -------- --------
Cash paid during the year for-
Interest $ 31,646 $22,064 $ 8,977
Income taxes $174,066 $39,291 $ -
Noncash items-
Issuance of common stock for
notes receivable from
stockholders $686,475 $234,550 $63,000
Forgiveness of notes receivable
from stockholders $221,667 $ 80,542 $ -
(Unaudited) September 30,
1999 1998 1997
-------- -------- --------
Cash paid during the six month
period for-
Interest $18,464 $13,158 $8,178
Income taxes $ - $ - $7,000
Noncash items-
Issuance of common stock for
notes receivable from
stockholders $409,200 $686,475 $ -
Forgiveness of notes receivable
from stockholders $154,815 $ 86,523 $ -
(7) Transactions with Related Parties-
---------------------------------
As of March 31, 1999 and 1998, the notes receivable from stockholders were
$608,316 and $154,008, respectively. The 1998 notes are payable over terms
ranging from 15 to 24 months, and bear interest at 5.8%. The 1999 notes
are payable over 36 months and bear interest at 5.8%.
(8) Lease Commitments-
-----------------
The Company leases its operating facility located in Slinger, Wisconsin,
under an agreement expiring October 31, 1999. The Company has options to
renew the lease agreement. The Company also has options to rent additional
adjacent space upon 90 days notice and to buy the entire building at the
end of the lease term or at any time during the lease term (or extended
term). Total rent expense was approximately $109,000, $103,000 and $52,000
in 1999, 1998 and 1997, respectively.
As of March 31, 1999, the approximate future minimum lease payments under
operating leases are as follows:
Year Amount
---- ------
2000 $43,000
(9) Employee Benefit Plans-
----------------------
The Company has an Employee Stock Ownership Plan and Trust (the "Plan"),
covering substantially all domestic employees. The Company's contribution
to the Plan is discretionary and is determined annually by the Board.
Expense recorded under the Plan was approximately $131,000, $92,000 and
$150,000 in 1999, 1998 and 1997, respectively.
The Company funded the current year contribution of $131,000, and made an
advance to the Plan of approximately $59,000 that is included as a
component of stockholders' investment on the balance sheet.
The Plan owned 558,600 and 486,105 shares of Company stock as of March 31,
1999 and 1998, respectively.
(10) Stock Options-
-------------
The Company granted executive stock options on March 1, 1997 that vested
over three years beginning April 1, 1997. During 1998, these options were
cancelled prior to any options being exercised.
The Company accounts for its option grants using the intrinsic value based
method pursuant to APB Opinion No. 25 and Statement of Financial Accounting
Standards No. 123 (SFAS No. 123) under which no compensation expense was
recognized in 1999 and 1998. All options granted in 1997 were terminated
in 1998 and as such there was no compensation cost recognized for these
options pursuant to the fair value method under SFAS No. 123. No options
were granted during 1999 or 1998.
<TABLE>
(Unaudited)
Six months ended
September 30, 1999 1999 1998
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - - $ - 24,000 $ -
Granted - - - - - -
Exercised - - - - - -
Forfeited - - - - (24,000) -
-------- -------- -------- -------- -------- --------
Outstanding at end of year - $ - - $ - - $ -
-------- -------- -------- -------- -------- --------
Exercisable at end of period - $ - - $ - - $ -
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
(11) Capital Stock-
-------------
Preferred stock authorized is 1,000,000 shares. As of March 31, 1999 and
1998, respectively, no preferred stock had been issued. Common stock
authorized is 5,000,000 shares. There were 3,847,086, 3,482,820 and
3,294,981 shares outstanding (adjusted for 3 for 1 stock split in September
1999) as of March 31, 1999, 1998 and 1997, respectively.
Stock grants awarded during 1999 and 1998 were valued using an average of
the bid and ask price for the thirty days prior to the grant date.
(12) Contingencies and Liabilities-
-----------------------------
During 1997, a court granted a summary judgment against the Company in
favor of Avnet, Inc. ("AVNET") in the amount of $217,891. The Company
established a reserve relating to certain claims and counter claims, in the
amount of $356,051 as of March 31, 1997. During 1998, the case was settled
and a payment of $75,000 was made in full settlement of all claims and
counter claims and the balance of the reserve was recognized as
nonoperating income during 1998.
PART III
ITEM 1. INDEX TO EXHIBITS
The exhibits listed in the following table have been filed as part of this
Registration Statement and may be found on the following sequential page
numbers.
2.1 Articles of Incorporation of the Company, as amended and
restated to date *<F3>
2.2 Articles of Merger *<F3>
2.3 Agreement and Plan of Merger *<F3>
2.4 By-Laws of the Company *<F3>
3.1 Specimen form of the Company's Common Stock Certificate *<F3>
6.1 Building Purchase Agreement *<F3>
6.2 $1,000,000 Mortgage Note- M&I Bank *<F3>
6.3 $110,000 Mortgage Note - M&I Bank *<F3>
6.4 Mortgage - former property owner *<F3>
10.1 Consent of Arthur Andersen LLP
27 Financial Data Schedules
*<F3> These items were previously filed with the Form 10-SB and are
incorporated herein by reference.
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 31, 1999
-----------------
GENROCO, Inc.
By /s/ Carl A. Pick
-----------------------------------
Carl A. Pick
Chief Executive Officer
By /s/ Keith E. Brue
-----------------------------------
Keith E. Brue
Chief Financial Officer
EXHIBIT 10.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin.
December 31, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 493,000
<SECURITIES> 0
<RECEIVABLES> 693,000
<ALLOWANCES> 3,000
<INVENTORY> 632,000
<CURRENT-ASSETS> 2,042,000
<PP&E> 766,000
<DEPRECIATION> 327,000
<TOTAL-ASSETS> 2,518,000
<CURRENT-LIABILITIES> 685,000
<BONDS> 0
0
0
<COMMON> 1,311,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,518,000
<SALES> 2,286,000
<TOTAL-REVENUES> 2,286,000
<CGS> 848,000
<TOTAL-COSTS> 848,000
<OTHER-EXPENSES> 1,477,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> (46,000)
<INCOME-TAX> (18,000)
<INCOME-CONTINUING> (28,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,000)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
