AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
VIA EDGAR ON MARCH 2, 2000
REGISTRATION NO. 333-92087
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
CNF TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 3577 23-2997171
-------- ---- ----------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
CNF Technologies, Inc.
7722 East Gray Road
Scottsdale, Arizona 85260
(480) 718-4065
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office and
principal place of business)
Mr. David G. Thompson
7722 East Gray Road
Scottsdale, Arizona 85260
(480) 718-4065
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
(215) 665-3873
----------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
following effectiveness of this Registration Statement.
-----------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement in the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Per Aggregate Amount of
of Securities to be Registered Registered(1) Share(2) Offering Price(2) Registration Fee(2)
------------------------------ ------------- ------------------ ------------------ -------------------
common stock,
.0001 par value 3,106,623(3) $6.03 $18,732,937 $4,946
(1) Represents shares of the Company's common stock which may be offered by
certain selling security holders.
(2) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the high and low sale prices per
share of the Company's common stock as reported on the National Quotation
Bureau Pink Sheets on February 23, 2000, the last day prior to March 2,
2000 for which a trade was reported.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also includes additional shares of common stock
issuable upon stock splits, stock dividends or similar transactions.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED MARCH 2, 2000
PRELIMINARY PROSPECTUS
CNF TECHNOLOGIES, INC.
3,106,623 shares of common stock
The selling security holders identified in this prospectus, may offer and
sell, from time to time, up to 3,106,623 shares of common stock of CNF
Technologies, Inc. The shares were issued by us in private placement
transactions. The selling security holders may sell all or a portion of their
shares on a best efforts basis through public or private transactions at
prevailing market prices or at privately negotiated prices. We will not receive
any part of the proceeds from sales of these shares by the selling security
holders.
Our common stock is traded on the National Quotation Bureau Pink Sheets
under the symbol "CNFT". The last reported sale price of our common stock on
February 23, 2000 on the Pink Sheets was $6.00 per share.
Investing in our common stock involves a high degree of risk. See "RISK
FACTORS" beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this preliminary prospectus is March 2, 2000.
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................................................................1
The Offering......................................................................................................2
Summary Consolidated Financial Data...............................................................................3
Risk Factors......................................................................................................4
Use Of Proceeds...................................................................................................8
Market For Our Common Stock And Related Stockholder Matters.......................................................8
Capitalization...................................................................................................11
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................11
Description Of Business..........................................................................................19
Management.......................................................................................................28
Certain Relationships And Related Transactions...................................................................33
Security Ownership Of Certain Beneficial Owners And Management...................................................35
Description Of Securities........................................................................................37
Selling Security Holders.........................................................................................39
Plan Of Distribution.............................................................................................41
Legal Matters....................................................................................................42
Experts..........................................................................................................42
Where You Can Get More Information...............................................................................43
Financial Statements............................................................................................F-1
i
PROSPECTUS SUMMARY
About this prospectus
This prospectus is part of a registration statement we filed with the
United States Securities and Exchange Commission. You should rely only on the
information provided in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Applicable SEC rules may require us
to update this prospectus in the future. This preliminary prospectus is subject
to completion prior to this offering.
About CNF Technologies, Inc.
We design, manufacture and market portable computer peripherals and
accessories for laptop computers to original equipment manufacturers, wholesale
distributors, computer resellers, computer retail stores and corporate end users
throughout the United States, Canada, Australia, Japan and Europe. Our principal
products consist of internal high-capacity removable storage devices, portable
DVD-ROM and CD-ROM drives, patented universal bay replicators branded as
deviceDOCK(R) and universal port replicators. We plan to introduce a universal
docking station within the next six to nine months. These devices are designed
to bring the functionality and power of a desktop computer to users of any make
or model of a portable computer.
Corporate information
We were incorporated under the laws of Florida on September 23, 1996 as JLL
Ventures Corp. and on April 1, 1999, reincorporated into the State of Delaware.
Thereafter, our wholly owned subsidiary acquired CNF, Inc., a California
corporation, by merger and assumed the historic operations of CNF, Inc. In
connection with the merger, we changed our name to CNF Technologies, Inc. and
changed the name of our wholly owned subsidiary to CNF Mobile Solutions, Inc.
Prior to the merger, we were an inactive company and our shares were listed for
quotation on the OTC Bulletin Board.
Our principal executive offices are located at 7722 East Gray Road,
Scottsdale, Arizona 85260 and our telephone number is (480) 718-4065.
1
THE OFFERING
Common stock offered by the selling
security holders: 3,106,623 shares
Common stock currently outstanding: 11,975,063 shares which includes
1,000,000 shares which are subject to
possible cancellation upon the terms set
forth in an escrow agreement entered
into in connection with our merger with
CNF, Inc. The number of outstanding
shares of common stock does not include:
o 3,675,537 shares issuable upon the
conversion of 3,675,537
outstanding shares of our Series A
Convertible Preferred;
o 780,091 shares issuable upon
exercise of outstanding options to
purchase 780,091 shares of Series
A Preferred Stock at exercise
prices ranging from $.24 to $1.21
per share which vest over a four
(4) year period commencing on the
date of grant; and
o 266,667 shares issuable upon
exercise of outstanding warrants.
Common stock to be outstanding after
the offering: 12,625,063 shares as a result of the
conversion of 650,000 shares of our
Series A Preferred Stock
Use of Proceeds: We will not receive any of the proceeds
from the sale of shares by the selling
security holders.
Trading Symbol (National Quotation "CNFT"
Bureau Pink Sheets):
- ----------------------------------------
2
SUMMARY CONSOLIDATED FINANCIAL DATA
Statement of Operations Data:
Year Ended March 31 Nine Months Ended December 31
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ---------- ---------- -----------
Revenues $9,425,947 $7,726,484 $8,510,873 $7,578,878
Gross Profit 3,337,398 3,265,540 2,462,701 2,512,317
Loss before income taxes (3,119,725) (58,167) (5,824,690) (1,887,883)
Net Loss (3,074,525) (79,267) (5,824,690) (1,887,883)
Basic and Diluted loss per share: (2) (1.23) (0.03) (0.69) (0.76)
Basic and Diluted Weighted average
number of shares outstanding: 2,500,250 2,500,000 8,490,496 2,500,000
Balance Sheet Data:
As of As of
March 31, 1999 December 31, 1999
-------------- -----------------
Actual Actual
----------- -----------
Working capital (deficiency) $(3,062,743) $(1,736,116)
Total assets 3,538,687 3,919,551
Total liabilities 6,265,324 5,227,159
Stockholders equity (deficit) (2,726,637) (1,307,608)
3
RISK FACTORS
You should not rely on any of the forward-looking statements contained in this
prospectus.
The words "may," "will," "expect," "anticipate," "believe," "continue,"
"estimate," "project," "intend," and similar expressions used in this prospectus
are intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
made. We undertake no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events. You
should also know that such statements are not guarantees of future performance
and are subject to risks, uncertainties and assumptions. Should any of these
risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may differ materially from those included within the
forward-looking statements.
We are in need of substantial additional financing to execute our business plan
and we cannot assure you that we will be able to raise the necessary financing.
We currently have very limited cash resources and need approximately
$5,000,000 to execute our business plan. In order to raise such financing, we
will likely need to issue additional debt or equity securities. We cannot assure
you that any such financing will be available or whether it will be available on
terms that are acceptable to us. In addition, we are required to obtain the
consent of two of our shareholders prior to issuing any additional shares of our
common stock or other securities convertible into shares of our common stock.
This may make it more difficult for us to raise the necessary financing.
Unless our level of operations increases, we will require significant additional
capital, and anticipate that our losses will continue for the foreseeable
future.
During the fiscal year ended March 31, 1998 we sustained a net loss of
$79,267. During the fiscal year ended March 31, 1999 we sustained a net loss of
$3,074,525. This trend continued during the nine months ended December 31, 1999
as we sustained additional net losses of $5,824,690. Our operating losses will
likely continue at these levels if operations remain at current levels. Our
business plan assumes a significant increase in sales as we expect our new
products to achieve commercial acceptance and gain market share. This plan
requires us to make significant investments in operations to support
technological development as well as marketing and sales activities. This will
result in continued and substantial increases in our operating expenses. To
execute this plan we need to generate significant additional revenue from new
products and raise substantial additional capital. Since we are uncertain that
we will be able to secure any financing or generate sufficient cash flow from
operations, our operating losses may continue.
Our negative net worth, negative cash flow and history of losses raise
substantial doubt about our ability to sustain operations.
As of March 31, 1999, our current liabilities exceeded our current assets
by $3,062,743 and our total liabilities exceeded our total assets by $2,726,637.
As a result, our financial
4
condition raises uncertainty as to our ability to continue as a going concern.
Our long-term viability will depend upon our ability to generate sufficient cash
flow from operations to meet our current obligations, raise significant
additional capital and ultimately attain profitable operations.
Due to the novel nature of our key products and rapid technological change in
our markets, we can not accurately predict our future revenues and we expect
significant fluctuations in our operating results which will make managing our
cash flow and financing needs more difficult.
We recently introduced one new product and intend to introduce another new
product during the next fiscal year. These new products are designed to provide
universal connectivity for almost any make or model of a PC-based portable
computer. Since there are no similar products widely available in the market, it
is difficult or impossible for us to predict the future revenues which could be
generated by these products. In addition, given the intense competition, rapid
technological change, substantial swings in consumer demand and short product
life cycles, the continued acceptance of and the revenues generated by our
existing products are difficult or impossible to predict. The development of
superior products by our competitors could also render our existing products
obsolete. As a result, our revenues and operating results are likely to
fluctuate significantly which will make it more difficult to manage our cash
flow and assess our financing needs.
We may not have the financial and human resources necessary to keep up with
rapid technological changes in our chosen markets which may result in our
products becoming obsolete.
The portable computer industry is characterized by rapid technological
change, frequent introduction of new products, continuing changes in consumer
demand, short product life cycles and rapidly evolving industry standards. The
introduction of products utilizing new technology or the emergence of new
industry standards can render existing products obsolete and unmarketable very
quickly. Our future success will depend in large part upon our ability to
satisfy changing customer needs by continuing to develop new products and
upgrade existing products as quickly and efficiently as possible. Any failure by
us to anticipate or respond to such technological developments or shifting
consumer requirements or any significant delay in product development or
introduction could substantially and adversely impact our competitive position
in the market. We can not assure you that we will have the financial and human
resources necessary to do this.
A decline in the demand for laptop computers would result in a decrease in our
sales.
Our future success is dependent not only on our own growth rate but also
the growth rate of the portable computer notebook industry. Even though
notebooks are one of the fastest growing segments of the personal computer
market, we are uncertain whether this growth will continue. An overall decrease
in the demand for portable computers would result in a decrease in our revenues.
5
We can no longer rely on CD-ROM sales to sustain our business and unless we
develop replacement products such as DVD technology and realize substantial
sales from our new universal port replicators and docking stations, our revenues
are likely to decrease.
Our CD-ROM sales have historically constituted a substantial percentage of
our sales (4% during the nine months ended December 31, 1999, 49% during the
nine months ended December 31, 1998, 41% during fiscal year ended March 31, 1998
and 38% during the fiscal year ended March 31, 1999.) Two market factors
indicate that the product life of external CD-ROM is coming to an end. First,
most major notebooks come standard with an internal CD-ROM, making the need for
an external one unnecessary. In fact, Sherwood Research estimates that only 10%
of the notebooks currently being manufactured are shipped without internal drive
capabilities. Second, there appears to be a shift from CD-ROMs to DVD. Since
these trends reduce the demand for CD-ROMs, our sales of CD-ROMs will continue
to decrease. We are currently attempting to respond to these market forces by
focusing on DVD technology. Our future success will, to some extent, depend upon
our continued development of products that incorporate DVD technology and the
commercial acceptable of our new universal port replicators and docking
stations.
Since we rely on two suppliers to provide critical components and we do not have
long term contracts with either of them, if we do not maintain our relationship
with these companies we will not be able to satisfy our customers' orders.
We are currently dependent on two main product lines (CD-ROMs and Zip(R)
drives) which accounted for approximately 71% of our revenue during the nine
months ended December 31, 1999 and approximately 73% of our revenue during the
fiscal year ended March 31, 1999. One supplier provides the main component for
CD-ROMs and another provides the main component for Zip(R) drives. We purchase
these components under purchase orders and do not have a long-term contract with
either supplier. Any termination or disruption of our relationship with either
supplier or any material adverse change to the financial condition of either
supplier would prevent us from filling customer orders. Although we believe that
our relationships with these suppliers are good, we cannot assure you that these
relationships will continue or whether these suppliers will continue to be able
to provide our components in a timely and cost efficient manner. Although
alternate suppliers are available, there are a limited number of such suppliers
and finding and qualifying replacement suppliers could take several months. We
are also dependent upon these suppliers to manufacture and deliver components
that are free from defect, competitive in functionality and cost and in
compliance with our specifications, all of which are beyond our control. Zip(R)
is a registered trademark of Iomega Corporation.
We do not have contracts with any of our customers and the loss of any of our
four key customers would result in a material decrease in our revenues.
We derive a substantial portion of our product sales from distributors. We
do not maintain an exclusive distributorship with any significant distributor
and our distribution agreements can be terminated at any time. Accordingly, our
distributors are not obligated to purchase products from us in the future and
may sell competing lines of products. As a result, the ultimate distribution of
our products to end-users is beyond our control. In addition, four customers
directly or indirectly accounted for 84% of our revenues during the nine months
ended
6
December 31, 1999 and 65% of our revenues during the fiscal year ended March 31,
1999. A loss of any of these customers could substantially reduce our sales.
Although we believe our relations with these distributors are good, we cannot
assure you that any or all of them will continue to do business with us in the
future.
We depend on our key employees and we can not assure you that we will be able to
keep these employees.
A loss of one or more of our current officers or key personnel could
severely and negatively impact our operations. Although we have employment
contracts with most of our key personnel, these contracts do not prevent them
from resigning. Effective product development and innovation is dependent upon
our ability to attract and retain talented technical and marketing personnel.
The market for such persons is extremely competitive. We cannot assure you that
we will have the financial or other resources to attract and retain such
individuals.
Our common stock has a limited market and may be adversely effected by the
influx into the market of the shares covered by this prospectus which could
result in a decrease in the trading price of our shares.
The public trading market for our common stock is very thin. Although our
common stock has historically traded on the OTC Electronic Bulletin Board, it is
currently eligible for quotation only on the less liquid National Quotation
Bureau Pink Sheets. Upon the effectiveness of this prospectus, we anticipate
that our common stock will once again be eligible for trading on the OTC
Bulletin Board. There is minimal supply of shares eligible for public resale
(100,000 shares) and trading has been extremely limited. On or about March 15,
2000, an additional 900,000 shares will become eligible for public trading.
Accordingly, we are uncertain that a regular trading market for our common stock
will develop, and if it develops, whether it can be sustained. By its very
nature, trading on the National Quotation Bureau Pink Sheets and OTC Bulletin
Board provides very limited market liquidity. The trading market for our common
stock may be adversely effected by the influx into the market of the 3,106,623
shares of common stock covered by this prospectus.
The ability to trade our shares could be adversely effected if the trading price
falls below $5.00 per share which could result in a further decrease to our
trading price.
The SEC has adopted regulations imposing limitations upon the manner in
which certain low priced securities (referred to as a "penny stock") are
publicly traded. Under these regulations, a penny stock is defined as any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such exceptions include any equity security listed on a
national exchange, the Nasdaq National Market System or SmallCap Market and any
equity security issued by a company that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000 for the last three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. The regulations also require certain
broker/dealers who recommend such securities to persons other than established
7
customers and certain accredited investors to make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. These requirements make it more difficult to effect
transactions in penny stocks as compared to other securities. Since our common
stock presently trades above $5.00 per share, it is not considered a "penny
stock." We are uncertain that trading prices at this level can be sustained.
Should trading prices fall below $5.00 per share, our shares could be considered
a "penny stock."
Our common stock will likely be subject to substantial additional dilution.
We are in need of substantial additional financing which will likely entail
the issuance of additional shares of common stock or securities convertible into
common stock which will have the effect of increasing the number of shares
outstanding. In connection with these and other business matters, we will likely
undertake the issuance of additional shares of common stock. This may be done in
order to, among other things, acquire assets or stock of another business,
compensate employees or consultants or for other valid business reasons at the
discretion of our Board of Directors. Under applicable Delaware law, we can
issue additional shares without notice to, or approval of, existing
stockholders. In addition, there are 3,675,537 outstanding shares of Series A
preferred Stock and outstanding options to purchase 780,091 shares of Series A
Preferred Stock. No later than June 30, 2000, these shares will convert into
3,675,537 shares of common stock and the options could be exercised for up to
331,351 (currently vested) or 780,091 (upon full vesting) additional shares. We
also intend to adopt a stock option plan pursuant to which we may grant options
to purchase shares of common stock equal to 10% of our then outstanding shares
of common stock.
A limited number of stockholders have a controlling interest in our stock.
As of the date of this prospectus, our officers, directors and a limited
number of principal stockholders beneficially own approximately 41.5% of our
outstanding voting shares. These stockholders may have the ability to control
the election of our directors and the outcome of other corporate matters.
In order to issue additional shares of our common stock, we need to obtain
the consent of two of our shareholders which may make it more difficult for us
to raise the additional financing necessary to execute our business plan.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling security holders.
MARKET FOR OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Market Information
From October 7, 1998 until January 12, 2000, our common stock was listed
for quotation on the OTC Bulletin Board under the symbol "CNFT." Since our
common stock is not registered under the Securities Exchange Act of 1934, it is
no longer eligible for quotation. Upon the
8
effective date of this prospectus, we will be filing a registration statement
for the purpose of registering our common stock under the Exchange Act which
will be effective upon filing with the SEC. Upon such effectiveness, we intend
to apply to reinstate our shares for trading on the OTC Bulletin Board.
Our common stock currently trades on the less liquid National Quotation
Bureau Pink Sheets. The market for our shares is extremely limited. We are
uncertain if a significant trading market for our common stock will develop or,
if developed, will be sustained.
The following table sets forth the range of the high and low closing bid
prices, or last sales prices, per share of our common stock during each of the
calendar quarters identified below. The bid prices were obtained from the
National Quotation Bureau and do not necessarily reflect actual transactions,
retail markups, mark downs or commissions. The transactions include inter-dealer
transactions. Based on the very limited public float and trading in our common
stock, we believe that such data is anecdotal and may bear no relation to the
true value of our common stock or the range of prices that would prevail in a
liquid market.
1998 High Low
---- ---- ---
4th Quarter * *
1999 High Low
---- ---- ---
1st Quarter * *
2nd Quarter $6.00 $5.50
3rd Quarter $6.4375 $4.00
4th Quarter $6.375 $5.00
2000
1st Quarter (through February 23, 2000) $6.50 $.001
*No bids reported
- ------------------------------
The last price of our common stock as reported on the Pink Sheets by the
National Quotation Bureau on February 23, 2000 was $6.00 per share.
Holders
As of February 23, 2000, we had approximately 95 stockholders of record,
although we believe that there are additional beneficial owners of our common
stock who own their shares in "street name."
Dividends
We have not paid any cash dividends, to date, and we have no intention of
paying any cash dividends on our common stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations imposed under the General Corporation
Law of the State of Delaware. The timing, amount and form of
9
dividends, if any, will depend, among other things, on our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our Board of Directors.
Shares Eligible for Public Sale and Registration Rights
As of the date of this prospectus, there are 11,975,063 outstanding shares of
our common stock. Of these shares, 100,000 are eligible for public trading.
Assuming that we comply with the adequate public information disclosure
requirements of SEC Rule 144 promulgated under the Securities Act, a substantial
number of additional shares will be eligible for public resale under Rule 144 on
the dates and in the amounts set forth below:
o March 15, 2000 - 900,000 shares
o June 10, 2000 - 8,167,500 shares
o August 15, 2000 - 424,081 shares
o November 2, 2000 - 675,000 shares
o November 26, 2000 - 1,086,250 shares
o February 2, 2001 - 500,000 shares
We have agreed to register the public resale of 3,773,290 of the shares
identified above; 3,106,623 of which are being registered for public resale
hereunder. We have agreed to file a registration statement with the SEC
permitting the public resale of 666,667 shares of our common stock identified
above by no later than on or about August 26, 2000 and 266,667 additional shares
issuable upon exercise of warrants issued or issuable to our placement agent by
no later than November 26, 2000.
Shares Issuable Upon Exercise or Conversion of Outstanding Options, Warrants
and Preferred Stock
We have issued options to purchase an aggregate of 780,091 shares of Series
A Preferred Stock of which 331,351 are currently exercisable. The remaining
options vest in ratable monthly installments over a three (3) year period. We
have also issued warrants to purchase an aggregate of 266,667 shares of common
stock all of which are currently exercisable. Finally, we have issued an
aggregate of 3,675,537 shares of Series A Preferred Stock which will convert
into 3,675,537 shares of common stock by no later than June 30, 2000.
10
CAPITALIZATION
December 31, 1999
Actual
-----------------
Long -term debt $230,508
Preferred Stock 416
Common Stock 1,145
Additional paid in capital 7,250,658
Accumulated deficit (8,559,827)
Total stockholders' equity (deficiency) (1,307,608)
-----------
Total capitalization $(1,077,100)
===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We design, manufacture and market computer peripheral devices and
accessories. Our product lines include:
o internal Zip(R) and SuperDisk(TM) drives
o universal bay replicators branded as deviceDOCK(R)
o portable optical storage devices including DVD and CD-ROM drives
o external numeric keypads
o monitor stands
o auto adapters
o universal port replicators and docking stations
We have in the past derived most of our revenue from the sale of internal
Zip(R) and SuperDisk(TM) drives and CD-ROMS. We believe that our future growth
will be in our universal docking products. These products enable users of almost
any make or model of PC based portable computer to essentially turn their
portable computer into a desktop computer allowing them to link portable
computers to a network, a full-size monitor, keyboard, mouse and an array
11
of external and internal peripherals. Principal among this product line is the
universal port replicator and the planned introduction of a universal docking
station during the next fiscal year. SuperDisk(TM) is a trademark of Imation
Enterprises Corporation.
In fiscal 1999 (April 1, 1998 to March 30, 1999) and the first nine months
of fiscal 2000 (April 1, 1999 to December 31, 1999), 73% and 71%, respectively,
of our revenue was derived from sales of the InnerBay(R) Notebook Zip(R) drives
and CD-ROMs. We believe that these product lines will decrease as a percentage
of our revenue as our recently introduced universal port replicator achieves
market acceptance. Current trends indicate that the CD-ROM product life is
coming to an end. While we believe that sales of InnerBay(R) Notebook Zip(R)
drives will continue to account for a significant portion of our revenue and
gross profit, our future results of operations will be highly dependent upon the
success of our universal docking products.
We market and sell our products worldwide through multiple indirect
channels, primarily distributors and resellers, and a substantial majority of
our revenue in fiscal 1999 and the first nine months of fiscal 2000 was derived
from sales to distributors and resellers. Certain of our products, in particular
our InnerBay(R) Notebook Zip(R) drives, and deviceDOCK(R) products, are sold to
original equipment manufacturers and we intend to increase our sales to original
equipment manufacturers in the future. We support our indirect channels with our
own sales and marketing organization. Our key distributors include Ingram Micro
and Merisel America. In fiscal 1999, sales to Ingram Micro accounted for 14% of
our revenue. In the first nine months of fiscal 2000, sales to Ingram Micro
accounted for 27% of our revenue and sales to Merisel America accounted for 46%
of our revenue. The loss of, or reduction in sales to, any of our key customers
could have a material adverse effect on our business and results of operations.
We provide price protection rights and limited product return rights for stock
rotation to most of our distributors and resellers.
We recognize revenue when products are shipped to customers. Our cost of
revenue consists primarily of costs associated with components, outsourced
manufacturing of certain subassemblies and in-house labor associated with
assembly, testing, shipping and quality assurance. Our gross margin is affected
by a number of factors including:
o product mix
o competitive product pricing pressures
o manufacturing costs and
o component costs
We anticipate that our gross margin may decline in the future as a result of
shifts in our product mix and competitive pricing pressure. In particular, we
expect our gross margin on sales of the InnerBay(R) Notebook Zip(R) drives will
decline as a result of a shift in product mix toward lower priced solutions. We
seek to mitigate the effects of declining prices by improving product design and
reducing costs, primarily manufacturing and component costs.
12
Our operating results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future on a quarterly and an annual
basis. Prior growth rates that we have experienced in revenue should not be
considered indicative of future growth rates. Factors that could cause our
future operating results to fluctuate include:
o the level of demand for our products
o our success in developing new products
o the timing of new product introductions and product enhancements by us
and our competitors
o market acceptance of our new and enhanced products
o the emergence of new industry standards
o the timing of customer orders
o the mix of products sold
o competition
o the mix of distribution channels through which our products are sold
and general economic conditions
Many of these factors are beyond our control.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our existing products and to develop and
introduce, on a timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving industry
standards. The introduction of new or enhanced products also requires us to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, to avoid excessive levels of older product
inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance that we will
successfully develop, introduce or manage the transition to new products.
RESULTS OF OPERATIONS
Comparison of the Nine Month Period Ended December 31, 1999 to the Nine
Month Period Ended December 31, 1998
Total Revenue
Revenue for the nine months ended December 31, 1999 amounted to $8,510,873
compared to $7,578,878 for the nine months ended December 31, 1998, an increase
of 12%. The increase is attributable primarily to market acceptance of Zip
drives and device docks in fiscal
13
2000. The decrease in sales of the CD-ROMs was offset in part by sale of
products that incorporate DVD technology, as well as the introduction of our
universal docking products.
Gross Profit and Cost of Revenue
Gross profit and cost of revenue remained relatively constant during the
nine months ended December 31, 1999 as compared to the nine months ended
December 31, 1998. Specifically, gross profit and gross profit percentage during
the nine months ended December 31, 1999 amounted to $2,462,701 and 29%,
respectively, as compared to $2,512,317 and 33%, respectively during the nine
months ended December 31, 1998. Our cost of revenue for the nine months ended
December 31, 1999 was $6,048,172 or 71% of revenue as compared to $5,066,561 or
67% of revenue during the nine months ended December 31, 1998.
Research and Development
Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, product supplies and
tooling costs. Research and development expenses amounted to $849,123 during the
nine months ended December 31, 1999 as compared to $800,894 during the nine
months ended December 31, 1998, an increase of 6%. The increase in research and
development costs is primarily due to the development of the universal docking
station, and the release of the universal port replicator during fiscal 2000. We
expect research and development expenses to increase in the future, although
such expenses may vary as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses generally consist of salaries, commissions and
other personnel costs of our sales, marketing and support personnel,
advertising, promotions and travel. Marketing and sales expenses during the nine
months ended December 31, 1999 amounted to $806,325 as compared to $672,912
during the nine months ended December 31, 1998, an increase of 20%. The increase
was primarily attributable to promotional costs associated with the introduction
of the universal port replicator and trade shows. We expect marketing and sales
expense to increase in the future, although such expenses may vary as a
percentage of revenue.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, facility
costs, depreciation and other general operation costs. General and
administrative expenses increased to $4,170,091 during the nine months ended
December 31, 1999 from $2,951,046 during the nine months ended December 31,
1998. As a percentage of revenue, general and administrative expenses increased
from 39% to 49%. This increase is primarily attributable to increased salaries
and wages, employee recruitment costs, insurance and legal fees.
Other Expense, Net
Other expense, net in the nine months ended December 31, 1999 increased by
$2,486,504 to $2,461,852 from $24,652 of other income in the nine months ended
December 31, 1998. The
14
increase in other expenses was attributable to $2,473,296 of interest expense,
which includes $2,056,383 attributable to equity incentives associated with
bridge financing beginning in April 1999.
Fiscal Year Ended March 31, 1999 compared to 1998
Total Revenue
Revenue for the year ended March 31, 1999 ("Fiscal 1999") amounted to
$9,425,947 compared to $7,726,484 for the year ended March 31, 1998 ("Fiscal
1998"), an increase of 22%. The increase in revenue was principally due to
increased unit sales of ZIP(R) drives and increased unit sales of monitor
stands.
As a percentage of revenue, sales of our CD-ROMs amounted to 38% in Fiscal
1999 and 41% in Fiscal 1998, respectively. We believe that unit sales of CD-ROMs
will continue to decline as the product life cycle comes to an end. Revenue from
this product line is expected to decline as a percentage of our revenue as our
other products achieve market acceptance. While we believe that sales of DVD's
will replace some of the decrease in revenue attributable to CD-ROM's, our
future results of operations will be highly dependent upon the success of our
universal docking products.
Gross Profit and Cost of Revenue
Gross profit and gross profit percentage during Fiscal 1999 amounted to
$3,337,398 and 35%, respectively, as compared to $3,265,540 and 42%,
respectively, during Fiscal 1998. Our cost of revenue for Fiscal 1999 was
$6,088,549 or 65% of revenue as compared to $4,460,944 or 58% of revenue during
Fiscal 1998. The decrease in gross profit and corresponding increase in cost of
revenue during Fiscal 1999 was principally due to a shift in our product mix to
lower gross profit products, primarily ZIP(R) drive products. The decrease was
offset, in part, by increased sales of monitor stands, which provide a higher
gross profit.
Research and Development
Research and development expenses amounted to $1,200,939 during Fiscal 1999
as compared to $890,944 during Fiscal 1998. As a percentage of revenue, research
and development costs remained relatively constant. The increase in research and
development expenses during Fiscal 1999 was principally due to increased
personnel costs associated with the development of new products such as the port
replicator and device dock as well as the continuing development of ZIP(R)
products for new notebooks. We expect research and development expenses to
increase in the future, although such expenses may vary as a percentage of
revenue.
Sales and Marketing Expenses
Sales and marketing expenses during Fiscal 1999 amounted to $1,086,265 as
compared to $480,170 during Fiscal 1998, an increase of 126%. As a percentage of
revenue, such expenses increased from 6% in Fiscal 1998 to 12% in Fiscal 1999.
The increase in marketing and sales expenses during Fiscal 1999 was due
primarily to the increase in personnel and promotional
15
activities. We expect marketing and revenue expenses to increase in the future,
although such expenses may vary as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses increased to $3,960,673 during Fiscal
1999 from $1,916,877 during Fiscal 1998. As a percentage of revenue, general and
administrative expenses increased from 25% to 42%. This increase is primarily
attributable to increased personnel costs. Technical personnel, sales
representatives, and a management team were hired in order to guide us through
our projected growth. We also moved our headquarters from Morgan Hill, CA to
Scottsdale, AZ. Our new location contains over 40,000 square feet; 16,000 square
feet of office space and 24,000 square feet of manufacturing and inventory
stockroom. This location is substantially larger than our prior offices. We
expect general and administrative expense to increase in the future, although
such expenses may vary as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations primarily through cash generated
from operations and lending institutions. More recently, we have funded our
operations through the sale of debt and equity securities. Net cash used in
operating activities amounted to $4,474,588 during the nine months ended
December 31, 1999 and $60,729 during the nine months ended December 31, 1998.
The increase in cash used in operating activities is primarily attributed to an
increased net loss. Net cash used in operating activities amounted to $702,828
during Fiscal 1999 and $444,212 during Fiscal 1998. This 58% increase was
primarily the result of an increased net loss and an increase in inventory and
other assets.
Accounts receivable were $834,383 at March 31, 1999, compared to $1,084,527
at March 31, 1998. Days sales outstanding were 37 days at March 31, 1999
compared to 34 days at March 31, 1998. We expect that accounts receivable will
increase as revenue increases and as revenue from international and original
equipment manufacturers customers represent a higher percentage of our total
revenue. While to date we have not experienced significant losses related to
accounts receivable, there can be no assurance that we will not experience
losses related to accounts receivable in the future.
Net cash used in investing activities amounted to $123,615 during the nine
months ended December 31, 1999 and $195,454 during the nine months ended
December 31, 1998. The decrease is primarily attributable to a reduction in
property and equipment purchases. Net cash used in investing activities amounted
to $211,044 during Fiscal 1999 and $273,929 during Fiscal 1998. The decrease
primarily reflects the net purchase of property and equipment used in
operations.
Net cash provided by financing activities amounted to $4,415,040 during the
nine months ended December 31, 1999 and $28,263 during the nine months ended
December 31, 1998. The increase was primarily due to an increase in notes
payable, the June 8, 1999 merger with JLL Ventures (Delaware) Corp. and the
closing of a private placement transaction resulting in gross proceeds of
$2,000,000. Net cash provided by financing activities amounted to $869,116
during
16
Fiscal 1999 and $620,195 during Fiscal 1998. The increase was primarily due to
an increase in notes payable.
As of March 31, 1999, we had two collateralized bank-revolving lines of
credit with balances of $83,000 and $599,120 bearing interest at the lender's
prime rate plus 2.0% and 3.5%, respectively. The lines of credit were paid in
full on October 6, 1999.
Prior to the merger, CNF, Inc. issued promissory notes in the aggregate
principal amount of $1,775,000 at an interest rate of 10% per annum paid
annually in arrears. The holders of $1,375,000 principal amount of these notes
have converted such notes into common stock. The $200,000 outstanding principal
amount of these notes are due on January 30, 2001. After the merger, we issued
additional promissory notes in the aggregate principal amount of $778,259 at an
interest rate of 10%. Holders of $547,253 of these notes have converted such
notes into common stock. The $250,000 outstanding principal amount of these
notes are due January 30, 2001. Finally, during July and August 1999, we issued
promissory notes in the aggregate principal amount of $650,000 at an interest
rate of 10%. The holders of $350,000 principal amount of these notes have
converted such notes into common stock. The $300,000 outstanding principal
amount of these notes are due on January 30, 2001
Upon completion of the merger with CNF, Inc., we obtained $1,000,000;
representing the proceeds from the sale of common stock prior to the merger. The
merger agreement provided for the completion of a private placement to yield
gross proceeds of $2,000,000 to $6,000,000 (including for this purpose the
conversion of certain indebtedness). In this connection, we commenced a private
offering of shares of our common stock and on November 26, 1999, we conducted a
closing resulting in gross proceeds of $2,000,000 from the sale of 666,667
shares of common stock. On February 2, 2000, we issued an additional 250,000
shares of our common stock in a private placement transaction and realized gross
proceeds of $500,000.
We believe that our existing negative working capital and borrowing
capacity, coupled with the funds generated from our operations, will be
insufficient to fund our anticipated working capital, capital expenditures and
debt payment requirements through March 31, 2000. We will require an additional
$5,000,000 in a combination of new capital and the conversion of indebtedness to
execute on our operations plan. In the longer term, unless we can generate
significantly greater cash flow from operations, we will require additional
sources of liquidity to fund future growth. Such sources of liquidity may
include additional equity offerings or debt financing. In order to issue
additional shares of common stock or securities convertible into common stock
we are required to obtain the consent of two of our stockholders, Deremie
Enterprises and Discretionary Investment Trust. In the normal course of
business, we evaluate acquisitions of businesses, products and technologies that
complement our business.
We intend to continue to pursue strategic investment in products,
technologies or distribution networks in order to broaden our product lines and
to provide a more complete solution to the mobile computer user. We may acquire
businesses, products or technologies in the future. There can be no assurance
that we will not require additional financing in the future or, if we were
required to obtain additional financing in the future, that sources of capital
will be available on terms favorable to us, if at all.
17
YEAR 2000 COMPLIANCE
To address "Year 2000" issues, we established a Year 2000 Project Team
which completed a five-phase plan to assess the Company's Year 2000 compliance.
In executing this plan, we tested our current products and products under
development, completed an evaluation, analysis and testing of our core internal
systems and assessed the readiness of third-party business partners, including
significant vendors and customers and concluded that there was no significant
risk of noncompliance. Even where assurances were received from third parties
there remains a risk that the failure of systems and products of other companies
on which we rely could have a material adverse effect on us. In addition, there
can be no assurance that certain previous releases of our products, which are no
longer under support, will prove to be Year 2000 compliant.
We have not incurred any material costs and do not expect to incur future
material costs as a result of the Year 2000 problem for our systems and
products. Accordingly, at this time, we do not expect of any material impact to
our financial position, results of operations and cash flows as a result of Year
2000 problems. Since no material non-compliance has been detected, no
contingency plans have been developed.
Because many companies may need to upgrade or replace computer systems and
software to comply with Year 2000 requirements or remedy Year 2000 problems, we
believe that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies continue to expend significant
resources to upgrade their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by us, which could have a material adverse effect on our
business, results of operations and cash flows.
SEASONALITY
We believe the markets for our products are somewhat seasonal, with a
higher proportional share of total sales occurring in the fourth fiscal quarter
(first calendar quarter) and a sales slowdown commonly occurring during the
first fiscal quarter (second calendar quarter).
INFLATION
We do not believe that inflation has to date had a material impact on our
operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, which establishes accounting and reporting
standards for derivative instruments and hedging activities which are required
for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB
issued an exposure draft, which would have the effect of deferring the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. On July 7, 1999, the FASB adopted the exposure draft SFAS No.
137. This statement requires balance sheet recognition of derivatives as assets
or liabilities measured at fair
18
value. Accounting for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. On a preliminary basis, we do not believe that eventual
adoption will have a significant impact on our financial statements.
DESCRIPTION OF BUSINESS
General Development of Business and Overview
CNF, Inc. was incorporated under the laws of the State of California in
1988 to design, manufacture and market computer peripheral devices and
accessories. Over time our business has evolved so that we currently focus our
resources exclusively on peripherals and accessories for laptop computers. Our
operations are conducted from offices in Scottsdale, Arizona. Prior to our
relocation to Scottsdale, Arizona in July 1998, we operated in Morgan Hill,
California.
From inception in 1988 until the Merger with JLL on June 8, 1999, we
operated as a independent privately held corporation. By virtue of the Merger,
we became a non-reporting public company whose shares are eligible for quotation
on the OTC Bulletin Board.
We design, manufacture and market portable computer peripherals and
accessories. We provide a broad range of affordable, easy-to-use devices that
make the functionality and power of desktop computers available to portable
computer users. Our current products include:
o internal high-capacity removable storage devices for various notebook
computers (including Zip(R) and LS/120 SuperDisk(TM) drives)
o portable DVD-ROM drives
o portable CD-ROM drives
o universal bay replicators branded as deviceDOCK(R)
o monitor stands
o numeric keypads
o proprietary and universal auto adapters
o universal port replicators
o universal docking stations (planned introduction during the next fiscal
year)
Universal Port Replicator and Docking Systems
The universal port replicator and universal docking station enable users of
almost any make or model of PC based portable (laptop) computer to essentially
turn their laptop computer into a desktop computer. These devices link portable
computers to a network, a full-size monitor, keyboard, mouse, an array of
external and internal peripherals using parallel, serial, USB, SCSI-2, EIDE,
etc. connections. The universal docking stations will also include PCI expansion
capability.
Prior to our introduction of universal docking solutions all existing
docking stations were compatible with only one particular PC model. Such
"proprietary" docking solutions are more expensive and less flexible than our
universal docking products. We believe that our universal docking products will
expand the overall size of the estimated docking market for a number of
19
reasons. First, several notebook manufacturers have removed the proprietary
docking connector from their notebooks (e.g., IBM ThinkPad 240 and Toshiba
Satellite 2500). Accordingly, the only way to "dock" with these notebooks is
through a universally compatible product such as ours. Second, since a universal
product requires a retailer to only carry one product, we believe that retailers
can add incremental revenue by offering universal docking solutions to their
customers without stocking a multitude of different products. Third, we believe
that universal solutions open up entirely new applications for docking such as
multi-brand notebook environments, guest offices, hotel rooms, conference
centers, service bureaus and kiosks.
Industry Background
According to International Data Corporation ("IDC"), a market research
firm, the portable computer market is the fastest growing segment of the
personal computer industry. Growth in this market has been fueled by advances in
computer technology and the increasing demand for computer mobility. IDC
predicts that the portable computer market (excluding handheld devices) will
grow at a compounded annual rate of 15% from 14.1 million units in 1997 to
approximately 25 million units in the year 2001. In addition, the handheld
companion market (as defined by IDC) is expected to grow at a compounded annual
rate of over 40% from 3 million units in 1997 to approximately 13 million units
by 2001. We believe this translates to an addressable potential market of at
least $2 billion per year for portable peripheral products.
Coupled with this trend toward portability, there is an increased demand
for computers that are smaller and lighter but have functionality and
convenience similar to the traditional desktop computer. To meet this demand,
there has been an increased use of peripherals and accessories such as high
capacity storage devices, DVD drives, CD-ROM drives, keypads, auto adapters,
monitor stands, port replicators, docking stations, and Universal Serial Bus
(USB) devices which enable users to maximize their computer's portability while
enhancing its functionality. To make these smaller computers more convenient to
use in the office and home, port replicators and docking stations have been
developed to allow users easy connections to networks, full-size monitors,
keyboards, and other peripheral devices providing portable computer users with
all of the features and functionality of a traditional desktop computer. IDC
reported that 74% of all notebook computers sold in 1997 served as the users'
primary computer. Sherwood research reported that 19% of all notebook buyers use
a Docking Station and 22% of users use a Port Replicator.
Port replicators provide users with ports for utilizing peripherals such as
a standard-size keyboard, mouse and monitor, as well as connecting to other
devices such as an Ethernet network, printer, modem, etc. The main function of a
port replicator is to connect peripherals to a notebook in a fast and convenient
manner. This allows users to take their notebook home or on the road with
maximum convenience.
Docking stations include basic port replicator features, as well as more
advanced capabilities such as PC card slots, internal drive bays for storage
devices, and PCI/ISA slots. Docking stations enable the user to expand the
notebook into a virtual desktop computing device. Attaching and releasing the
portable computers from the port replicator or docking station is
20
typically a one-step procedure that takes seconds to complete compared to the
burdensome task of attaching or releasing each external device separately. When
the portable computer is detached from the connectivity product, all external
devices connected to the connectivity product stay in place, ready to be
reattached.
Currently, close to 100% of the docking station market is served internally
by the various portable computer Original Equipment Manufacturers. These
Original Equipment Manufacturers have historically designed port replicators and
docking stations for their makes and models of portable computers and
subcontracted these products for assembly to various vendors. Because computer
Original Equipment Manufacturers primarily focus on providing the latest
technological capabilities with strong price and performance characteristics for
portable computers, their development of port replicators and docking stations
has often been a secondary focus. The port replicators and docking stations
developed by Original Equipment Manufacturers are generally expensive, lack
configuration flexibility and are often available only well after the computer
model is launched. Additionally, original equipment manufacturers generally
retool each generation of portable computers and have not created standardized
port replicators and docking stations that are independent of model or
manufacturer.
Because user demand for high performance portable computers has fueled the
growth in the port replicator and docking station markets, there is a large
opportunity to provide a complete, cost-effective connectivity solution that is
independent of manufacturer and model. In this context, we believe that we have
a significant opportunity to create a new mobile computing product category with
the introduction of our universal port replicators and docking stations, thereby
creating a significant additional market opportunity. We believe that the
universal aspects of these products will open new market segments for docking,
including hotels, kiosks, guest offices and service bureaus.
Our Mission
We believe that current industry trends will lead to an increased demand
for the use of peripherals and accessories designed to maximize the portability
and enhance the functionality of laptop computers and create a substantial
potential market for our products. Our overriding mission is to design,
manufacture and market peripheral products which can integrate any laptop
computer into any network or desktop computer at any time. Our products are
designed to permit laptop computer users to rely exclusively on their laptop by
eliminating the need to rely on a specific stationary office or network. Our
primary focus is to anticipate technological advancements and consumer
preference as far in advance as possible, develop new products and improved
features to meet such market demands and transform ideas from concept to market
as quickly as possible.
Our Products
We currently offer seven major product lines: (i) internal Zip(R) and
SuperDisk(TM) drives; (ii) external bay replicators; (iii) portable optical
storage devices like DVD and CD-ROM drives; (iv) external numeric keypads; (v)
monitor stands; (vi) auto adapters; and (vii) universal port replicators. During
the next fiscal year, we plan to introduce a universal docking station.
21
Product Development
We operate in an industry that is subject to rapid technological change and
shifting consumer demands. As a result, our future success depends in
significant part on our ability to continually develop and introduce, in a
timely manner, new products with improved features and to develop and
manufacture these products at an affordable cost. Accordingly, in order to
maintain our competitive position in the market, we must continually enhance our
existing products and develop new products.
Two elements drive our product development strategy. First, our
ear-to-the-market discipline of proactively exploring which new products are
demanded by our customers. Through discussions with an Original Equipment
Manufacturer, for example, we developed the idea to design and develop an
InnerBay(R) Zip(R) drive for the customer's line of portable computers. The
customer had been unable to develop a Zip(R) drive for its line because the
Zip(R) drive mechanism was too large to fit into the InnerBay(R) of the portable
computer. CNF's InnerBay(R) Zip(R) drives for this customer's line of portable
computers began shipping in December 1998. Our development team has also
provided novel solutions to similar problems experienced by other Original
Equipment Manufacturers.
The second element of our product development strategy is an emphasis on
bringing new products to market quickly. Our development team can take a new
product from concept to prototype in several weeks. Similarly, we believe that,
on average, we can take new products from prototype to beta version in several
months.
Our product development is managed by a team that includes electrical,
mechanical and software engineers, marketing and sales personnel, project
managers and component buyers, as well as manufacturing and operations
representatives. The average industry experience of the team members is in
excess of 10 years, and certain members are individually named in over 10
patents and 25 patent applications.
Our engineers start the design process in-house using computer aided design
workstations. Printed circuit boards are laid out, and the files are sent
electronically to partner printed circuit board houses in the United States and
Taiwan. These partner companies generally return the printed circuit boards
within one to five days. Concurrent with the design of custom printed circuit
boards and metal components, we design prototypes for any plastic components in
the product. For such plastic prototyping, we use stereolithography, a process
that produces an exact replica of a design on a computer aided design
workstation in one to four days. The newly formed parts are then painted and
have the appearance of a final tooled and molded part. While the hardware
components are being designed and manufactured, any software code necessary for
the product is developed by our software team, which includes two individuals
who have in excess of 17 years experience as software developers.
We use product prototypes to begin compatibility testing, regulatory
testing, form and fit testing, ergonomic testing, and thermal tests. We also use
the prototypes to garner early market/customer feedback before hard tooling
takes place. Once any final product changes have been implemented in the design
files, the files are sent electronically to a partner company in Taiwan that
cuts steel molds using computer aided machines and some hand processing. The
22
molding process utilized generally requires approximately 8 to 10 weeks, which
we believe is substantially faster than many of our competitors. After the new
product is developed, but before it begins shipping, we test the product in our
product assurance lab for various issues, including compatibility, power
consumption, drop testing, and software issues.
Although we believe we have the human resources to effectively develop new
products and respond to market forces, we can give no assurance that we will be
successful in developing, manufacturing and marketing new and enhanced products
that meet both the performance and price demands of the market. It is uncertain
that we will have sufficient capital resources to develop and market new
products on a longer-term basis.
Manufacturing
We focus our manufacturing efforts on producing high-quality products while
at the same time minimizing costs. Our manufacturing operations are located at
our headquarters in Scottsdale, Arizona and consist mainly of materials
procurement, final assembly, testing, quality assurance and shipping.
Low-cost suppliers in Taiwan perform the vast majority of the manufacturing
of our products. Local manufacturing is used to ramp up new products and to
satisfy orders requiring the most immediate delivery. Some of our products,
including the monitor stands and external numeric keypads, are manufactured in
their entirety by third parties. Our current significant supplier or third-party
manufacturing relationships include: Goldteck International, Inc.; Ditron
Manufacturing; Iomega; Mitsubishi Electronics; Performance Mold & Engineering;
and TYI Systems Limited. We oversee the Taiwanese manufacturers through a
liaison. We are also able to monitor the manufacturing lines of one of our key
suppliers via live Internet transmissions. Finally, our representatives visit
suppliers on a regular basis.
Certain select components used in our products are currently available from
a limited number of suppliers. Disruption in service by any of our manufacturers
or our suppliers could lead to supply constraints or delays in the delivery of
our products. This could have a material adverse effect on our business.
Sales And Marketing
Prior to 1998, we marketed and sold our products primarily through direct
sales to Original Equipment Manufacturers and corporate users of portable
computers. Since 1998, we have marketed and sold our products primarily through
indirect channels, including wholesale distributors, Original Equipment
Manufacturers and resellers.
Our key distributors include Ingram Micro and Merisel Americas,
Incorporated. During the nine months ended December 31, 1999, sales to Ingram
Micro accounted for 27% of our revenue and sales to Merisel America accounted
for 46% of our revenue. In the year ended March 31, 1999, sales to Ingram Micro
accounted for 14% and sales to Merisel America accounted for 5% of our revenues.
We intend to increase our sales through distributors in the future.
In international markets, we have agreements with 22 distributors located
in more than 18 foreign countries. During the nine months ended December 31,
1999, international sales represented 11% of revenues. During the year ended
March 31, 1999, international sales represented 10% of revenues. We expect that
international sales will continue to comprise a similar proportion of our
revenues in the future.
23
We believe that fostering the distribution of our products through
cooperation agreements and alliances with a variety of key companies within the
computer and consumer electronic industries, is a critical element of our
strategic goal of being "the first name you think of once you buy or sell a
notebook computer."
We work directly with the major portable computer manufacturers to achieve
approval of our products as "Standard" or "Approved" products for use with the
manufacturers' portable computers. In many cases, we agree to place the logo of
the manufacturer of the portable computer for which a given peripheral has been
designed on the approved product. We believe that these approvals result in
increased sales of our products to corporations, which account for 60-70% of US
portable computer sales. Most corporations only allow their employees and
purchasing managers to purchase portable computer peripherals that are approved
by the manufacturer of the portable computer in question.
A significant portion of our products are sold as approved or standardized
products of a given portable computer manufacturer. However, in the year ended
March 31, 1999, 15% of our revenues were derived from Original Equipment
Manufacturers sales, when such sales are strictly defined as direct sales to
portable computer manufacturers. The vast majority of our products, even those
that bear the logo of the portable computer manufacturer, are primarily sold
through indirect industry channels, including distributors and resellers, with
the approval of the portable computer manufacturer.
We support our direct and indirect channels with our own sales and
marketing organization. We manage our sales and marketing activities primarily
from our offices in Scottsdale, Arizona. Our field and in-house sales and
marketing staff is largely responsible for generating end user demand for our
products by soliciting prospective customers, providing technical advice with
respect to our products and working closely with distributors to sell our
products. Our sales and marketing staff actively participate with distributors
and resellers in the selling process, which provides end users with the level of
support needed for the successful integration of solutions in enterprise
networks.
Additionally, our sales force concentrates on providing "Fortune 1000"
companies with solutions for their laptop users. Many of these companies use
"standards lists" to test and approve products and only allow their employees to
purchase products from such lists. The goal of the sales force is to penetrate
these "standards lists."
We provide some of our distributors and resellers with limited product
return rights for stock rotation. We also provide most of our distributors and
resellers with price protection rights. Price protection rights require that we
grant retroactive price adjustments for inventories of our products held by
distributors or resellers if we lower our prices for such products.
24
We believe that our sales strategy of working closely with Original
Equipment Manufacturers to approve products, working with the distributors to
make the product available, and working directly with the corporate end-users to
standardize the product provides us with a competitive advantage.
Backlog
Because our customers typically require prompt delivery of products and a
substantial majority of our sales are booked and shipped in the same quarter,
the timing and volume of customer orders are difficult to forecast. Accordingly,
we typically operate with a relatively small order backlog. Further, sales are
generally made pursuant to standard purchase orders that can be rescheduled,
reduced or canceled with little or no penalty. We believe that our backlog at
any given time is not a meaningful indicator of future revenue.
Seasonality And Other Fluctuations Of Revenue
We believe the markets for our products are somewhat seasonal, with a
higher proportional share of total sales occurring in the fourth fiscal quarter
(first calendar quarter) and a sales slowdown commonly occurring during the
first fiscal quarter (second calendar quarter). Sales in a given period may also
be influenced by new product introductions, component supply availability,
working capital availability, and other factors. Revenues and growth rates for
any prior quarter are not necessarily indicative of revenues or growth rates to
be expected in any future quarter.
Service and Support
We believe that service and support are critical components of end user
satisfaction and the success of our business. Our support includes a toll-free
technical support hotline to provide a range of telephone support to our
distributors, dealers and end-user customers as well as fax back, e-mail and
online Internet support. The service and support group also handles product
returns and updates.
Competition
The market for computer products, in general, is intensely competitive,
subject to rapid technological change, and sensitive to new product
introductions or enhancements, and marketing efforts by industry participants.
The principal competitive factors affecting the markets for our product
offerings include price, corporate and product reputation, innovation with
frequent product enhancement, breadth of integrated product line, product
design, functionality and features, product quality, performance, ease-of-use,
and support. We can not assure you that we will be able to maintain our
competitive position against current or potential competitors, especially those
with greater financial, marketing, service, support, technical or other
competitive resources.
We currently compete primarily with the internal design efforts of Original
Equipment Manufacturers. These Original Equipment Manufacturers, as well as a
number of our potential non- Original Equipment Manufacturers competitors,
generally have larger technical staffs, more
25
established and larger marketing and sales organizations and significantly
greater financial resources than we do. Although we believe that we have a
proprietary position with respect to our technologies which could pose a
competitive barrier for companies seeking to develop or sell competing products
in our markets, we can not assure you that such competitors will not be able to
respond more quickly to new or emerging technologies and changes than we can, or
develop products that are superior to our products or that achieve greater
market acceptance. In addition, we can not assure you that we will be able to
compete successfully against our competitors or that the competitive pressures
that we face will not have a material adverse effect on our business, results of
operations and financial condition.
Our competitors include notebook manufacturers such as Toshiba, IBM and
Compaq, as well as third party suppliers such as Mobility Electronics, EXP, VST
Technologies, Port/Targus, and Extended Systems.
Our future success will depend, in large part, upon our ability to increase
our share of our target market and to sell additional products and product
enhancements to existing customers. Future competition may result in price
reductions, reduced margins or decreased sales, which, in turn, would have a
material adverse effect on our business, results of operations and financial
condition.
Proprietary Rights
We rely on a combination of patent, copyright and trademark laws, trade
secrets, nondisclosure agreements and technical measures to protect our
technology. While we currently intend to vigorously enforce our intellectual
property rights, we can give no assurance that the steps we take to protect our
technology and enforce our rights will be successful or that we will have the
resources to do so. We have four patents pending in the United States and eight
patents pending in over 21 other countries. The categories of patent
applications include: universal docking and port replication solutions, data
multiplexing, power management, and external and internal device solutions. In
August 1999, we were granted a Notice of Allowance from the United States Patent
and Trademark Office for the issuance of a patent for our Digitari(R) Universal
Docking and Port Replication Technologies. On or about October 28, 1999 the
Australian Patent Office issued us a patent for our Digitari(R) Universal
Docking and Port Replication Technolgies. In August 1999, we were issued a
patent from the United States Patent and Trademark Office for our Universal
deviceDOCK(R) Technologies.
The process of seeking patent protection can be expensive and time
consuming. We can give no assurance that patents will issue from pending or
future applications or that if issued, these patents will not be challenged,
invalidated or circumvented, or that the rights granted to us will provide
meaningful protection or other commercial advantage. Also, we can give no
assurance that any patents that we obtain will provide us with substantial value
or protection, that their validity will not be challenged, that affirmative
defenses to infringement will not be asserted or that we will have the financial
resources to protect such patents.
Due to the rapid technological change that characterizes our industry, we
believe that the success of our products will also depend on the technical
competence and creative skill of our personnel in addition to legal protections
afforded our existing drive and disk technology. As is
26
typical in our industry, from time to time, we have been, and may in the future
be, notified of claims that may be infringing certain patents, trademarks and
other intellectual property rights of third parties. It is not possible to
predict the outcome of these claims and we can give no assurance that these
claims will be resolved in our favor. If one or more of these claims is resolved
unfavorably, we can give no assurance that the outcomes will not have a material
adverse effect on our business or financial results.
Our industry has been characterized by significant litigation relating to
infringement of patents and other intellectual property rights. We can give no
assurance that future intellectual property claims will not result in
litigation. If infringement were established, we could be required to pay
substantial damages or be enjoined from manufacturing and selling the infringing
product(s) in one or more countries, or both. In addition, the costs of engaging
in intellectual property litigation may be substantial regardless of outcome,
and we can give no assurance that we will be able to obtain any necessary
licenses on satisfactory terms. Certain technology used in our products is
licensed on a royalty-bearing basis from third parties. The termination of a
license arrangement could have a material adverse effect on our business and
financial results.
Facilities
Our executive offices and production facilities are located at 7722 East
Gray Road, Scottsdale, Arizona. The office space consists of approximately
16,000 square feet of leased space. The production facility consists of
approximately 24,000 square feet of leased space and houses two production
lines. The warehouse has four overhead truck doors for incoming and outgoing
materials as well as an industrial freight lift. Both facilities are leased
under an agreement which expires in April, 2001. We believe that our present
facilities will provide adequate space for our business activities and
production for the foreseeable future.
Employees
As of February 22, 2000, we had approximately 51 employees (approximately
13 in operations, 15 in engineering, 16 in sales and marketing and 7 in
administration). None of our employees are covered by a collective bargaining
agreement. We consider our relationship with our employees to be good.
Legal Proceedings
We are not a party to any material legal proceedings, although we are
involved from time to time in routine litigation incident to business.
27
MANAGEMENT
Directors and Executive Officers
The following sets forth certain information regarding each of the
directors and executive officers of the Company.
Name Age Position
---- --- --------
Paul Charles 38 Chairman of the Board of Director
Carmine F. Adimando 55 Director
David Thompson 44 Interim Chief Executive Officer, Chief
Financial Officer and Secretary
R. Daniel Rudich 29 Vice President of Marketing
Frank Layland 42 Vice President of Operations
The following is a brief summary of the business experience of each of the
above-named individuals:
Paul Charles founded CNF, Inc. in 1988 and currently serves as Chairman of
the Company's Board of Directors. Mr. Charles had served as President and Chief
Executive Officer of the Company until November 15, 1999. Mr. Charles has been
primarily responsible for product design, development and innovation and has
been instrumental in the development of each of the Company's principal
products. Between 1985 and 1988 Mr. Charles worked for International Business
Machines in cost accounting and inventory control management, where he
distinguished himself by instituting various cost savings initiatives. Mr.
Charles earned a Bachelor's degree in Finance and Accounting from Brigham Young
University in 1985.
Carmine F. Adimando has served as a Director of the Company since February
15, 2000. Since 1996, Mr. Adimando has been the Chairman and President of CARMCO
Investments, LLC, a financial consulting firm specializing in acquisitions,
diversitures, investors relations and strategic investments, where he manages
the firm's diversified portfolio of public and private companies and specializes
in raising capital for start-up and emerging companies. Mr. Adimando is also the
Chairman of Cordiller Asset Management, a Denver, Colorado based money
management firm. Prior to that, he had a 17 year career at Pitney Bowes, Inc.
serving in various executive positions including Vice President-Finance,
Treasurer and Chief Financial Officer. Mr. Adimando is a member of the Board of
Overseers of the University of Connecticut School of Business as well as the
Board of Regents of Sacred Heart University. He earned his Undergraduate Degree
from Saint John's University and his MBA from Stanford University's Graduate
School of Business. Mr. Adimando serves on the Board as the designee of Imperium
Capital Corp. and is a Certified Public Accountant.
28
David Thompson was appointed the Interim Chief Executive Officer of the
Company on November 15, 1999. He has served as the Chief Financial Officer and
Secretary since January 1998. From January 1996 until joining the Company, Mr.
Thompson served as the Chief Financial Officer and Vice President of Information
for International Computer Graphics, Inc., a leading wholesale distributor of
computer monitors and video cards. Between January 1992 and December 1996, Mr.
Thompson operated his own accounting practice where he specialized in working
with closely held corporations involved in mergers, acquisitions, private
placements and other financing transactions. Mr. Thompson graduated from Eastern
Washington University with a Bachelor's degree in Business Administration with
an emphasis in professional accounting.
R. Daniel Rudich has served as the Company's Vice President of Marketing
since December 1997. From 1996 until joining the Company, Mr. Rudich served as
the Worldwide Product Manager for notebook Zip(R) products at Iomega Corporation
where he was responsible for the development and marketing of the notebook
Zip(R) drive. During 1995, Mr. Rudich was a marketing intern at Compaq Computer
Corporation. Between 1993 and 1994, Mr. Rudich held various marketing positions
with Matrox Electronics, a Canadian graphics card manufacturer. Mr. Rudich
graduated from McGill University in Montreal, Canada with a Bachelor of Commerce
degree in Marketing and International Business and earned an MBA from Yale
University in 1996.
Frank Layland has served as the Company's Director of Operations since
August 1998. Between 1985 and 1998, Mr. Layland served in various management
positions for Lockheed Martin Corporation, including Business Operations Manager
and Project Operations Manager where he was principally involved with
governmental contracts. Mr. Layland has experience managing subcontractors,
monitoring costs, production schedules and quality control. He graduated from
Brigham Young University with a Bachelor of Science in Business Management.
Board of Directors
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The Company currently has two directors; Mr. Paul Charles and Mr. Carmine
F. Adimando. Mr. Charles has the right to nominate one (1) director, if the
Board consists of less than five (5) members, and two (2) directors if the Board
consists of five (5) or more members. Imperium Capital Inc. has the right to
nominate one (1) director. It is anticipated that additional persons will be
appointed to the Board of Directors.
Directors Compensation
Directors who are also officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. The Company has not yet
formulated a policy regarding the compensation, if any, of non-employee
directors.
29
Executive Compensation
The following table provides certain summary information concerning
compensation paid to or accrued by CNF's Chief Executive Officer, and all other
executive officers who earned more than $100,000 (salary and bonus) for all
services rendered in all capacities to CNF (and its predecessors) during the
fiscal years ended March 31, 1997, 1998 and 1999:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ----------------------
Restricted
Name and Principal Fiscal Other Annual Stock Options/
Position Year Salary Bonus Compensation(1) Awards SARs (#)
- --------- ---- -------- ----- ------------ ------ --------
Paul Charles(2) 1999 $150,000 -- -- -- --
President and Chief 1998 $117,243 -- -- -- --
Executive Officer 1997 $110,993 $288,871 -- -- --
David Thompson(3) 1999 $150,000 -- -- -- 339,277(4)
Interim Chief Executive 1998 $18,367 -- -- -- --
Officer, Chief Financial
Officer and Secretary
R. Daniel Rudich(5) 1999 $100,000 -- -- -- 203,565(4)
Vice President of Marketing 1998 $ 28,353 -- -- --
- --------------------------
(1) With respect to each of the executive officers named in the table, if not
separately reported, the aggregate amount of perquisites and other personal
benefits, securities or property received was less than either $50,000 or
10% of the total annual salary and bonus reported for such executive
officer.
(2) Mr. Charles resigned his position as President and Chief Executive Officer
of the Company effective November 15, 1999.
(3) Mr. Thompson commenced his employment with CNF on January 1, 1998.
Effective November 15, 1999, Mr. Thompson was appointed as the interim
Chief Executive Officer of the Company.
(4) Consists of options to purchase shares of Series A Preferred Stock which
were issued in exchange for options to purchase shares of CNF common stock
in connection with the Merger.
(5) Mr. Rudich commenced his employment with CNF on December 1, 1997.
30
OPTION/SAR GRANTS TABLE
Option/SAR Grants in the Last Fiscal Year
======================================================================================================================
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
% of Total
Options/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year ($/Sh) Date
- ----------------------------------------------------------------------------------------------------------------------
Paul Charles __ __ __ __
Chairman of the Board of Directors
- ----------------------------------------------------------------------------------------------------------------------
David Thompson 339,277 41% $.24 April 15, 2008
Interim Chief Executive Officer,
Chief Financial Officer and
Secretary
- ----------------------------------------------------------------------------------------------------------------------
R. Daniel Rudich 203,565 25% $.24 April 15, 2008
Vice President of Marketing
======================================================================================================================
(1) Consists of options to purchase shares of Series A Preferred Stock which
were issued in exchange for outstanding options to purchase shares of CNF,
Inc. common stock in connection with the merger.
Employment Arrangements
The Company has entered into employment agreements with Messrs. Charles,
Thompson, Rudich and Layland. The employment agreements are for a term of three
(3) years commencing May 19, 1999, provide for annual base salaries of, $90,000,
$148,000, $85,000 and $85,000, respectively, and an annual merit based
discretionary bonus to be determined by the Board of Directors or Compensation
Committee. Mr. Thompson's salary, within the Company's discretion, may be
increased to $208,000 in the event that the Company reports a net profit during
any fiscal quarter ending after February 15, 2000. Mr. Thompson's agreement
provides for a mandatory bonus for the fiscal year ending March 31, 2000 equal
to $21,000 in the event that the Company achieves the first of the financial
performance targets set forth within the Certificate of Designation for the
Company's Series A Convertible Preferred Stock and an additional $10,500 for
each additional financial performance target the Company's achieves. Mr.
Rudich's salary, within the Company's discretion, may be increased to $120,000
in the event that the Company reports a net profit during any fiscal quarter
ending after February 15, 2000. Mr. Rudich's agreement provides for the payment
of a commission equal to $0.35 for each unit of CNF InnerBay(R) ZIP(R), CNF
Digitari(R) products and all products developed by the Company subsequent to
January 1, 1998 which are sold and paid for subject to a maximum commission of
$200,000 per year.
All executives are entitled to participate in the Company's fringe benefit
programs, any incentive plan adopted by the Company and to reimbursement for
certain company-related travel expenses. Each of the agreements provide for
termination "for cause" which includes failure to achieve individual or
corporate performance goals as determined by the Board of Directors of the
Company or executive management. Commencing on or about May 19, 2000, any
31
executive may be terminated without cause at the discretion of the Board of
Directors of the Company. In the event of a termination without cause, certain
of the executives are entitled to receive severance pay in the form of salary
continuation for an additional period of one year.
The agreements contain standard clauses regarding confidentiality,
non-compete and non-solicitation of customers, suppliers and employees. The
agreements also provide for the executive to disclose all works and inventions
to the Company, assign any and all patents to the Company and for all
copyrightable material created by any executive during the term of his
employment to be the property of the Company.
Outstanding Options; Stock Incentive Plan
In connection with the Merger, the Company assumed CNF, Inc.'s 1997 Equity
Incentive Plan This plan provided for the grant of options to purchase up to
602,026 shares of CNF common stock to employees, officers, directors and
consultants of CNF, Inc. It provided for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended and the grant of non-qualified stock options at exercise prices not less
than the fair market value at the date of grant in the case of incentive stock
options and not less than ninety (90%) of the fair market value at the date of
grant for non-qualified options. The plan also provided for the issuance of
restricted stock awards.
As of the closing of the merger, CNF, Inc. had granted options to purchase
an aggregate of 405,658 shares of CNF, Inc.'s common stock to certain officers
and employees of CNF, Inc. at exercise prices ranging from $.50 to $2.50 per
share. These options were granted during the fiscal year ended March 31, 1999,
expire ten (10) years from the date of grant and vest twenty-five percent (25%)
after the first year and in ratable installments each subsequent month over the
following three (3) years. In connection with the Merger, the Company assumed
these options which now represent the right to purchase an aggregate of up to
836,790 shares of Series A Preferred Stock of the Company (of which 44,350 have
been cancelled and 12,349 have been exercised) at exercise prices ranging from
$.24 to $1.21 per share. At this time, the Company's Board of Directors does not
intend to issue any additional options under this plan.
The Board of Directors does, however, intend to adopt a stock incentive
plan and have such plan approved by the Company's stockholders. It is
anticipated that any such plan will cover the grant of incentive and
non-qualified options as well as the issuance of restricted stock awards and
stock appreciation rights to officers, directors, key employees and consultants
of the Company. The proposed plan will likely cover the issuance of options to
purchase ten percent (10%) of the total number of then outstanding shares of the
common stock of the Company and will be administered by the Board of Directors
or a committee thereof.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Officers
In February 1997, we loaned Paul Charles $195,000 under a promissory note
payable in full on February 14, 2002 at an interest rate of 8% per annum. This
note was paid in full on August 14, 1998.
Agreements with Officers and Directors
The Company has entered into employment and option agreements with Messrs.
Charles, Thompson, Rudich and Layland.
Amendments to Merger Agreement
Effective June 8, 1999, we acquired CNF, Inc. pursuant to a merger
agreement under which we issued 5,163,588 shares of Series A Preferred Stock and
options to purchase 836,790 shares of Series A Preferred Stock to holders of all
outstanding common shares and options of CNF, Inc. By agreements dated November
1, 1999 and February 2, 2000, by and among the Company, Paul Charles, Synergy
Group International, Inc. and others, certain material provisions of the merger
agreement were amended.
Pursuant to the terms of the initial merger agreement, Mr. Charles received
5,157,000 Series A Preferred Stock and entered into an employment agreement to
serve as our Chief Executive Officer. Mr. Charles has resigned his position and
surrendered 1,500,000 of the shares of Series A Preferred Stock issued to him in
the merger. The initial merger agreement provided for 2,000,000 of the shares of
Series A Preferred Stock issued to Mr. Charles to be placed into escrow to
secure his indemnification obligations under the agreement. 1,000,000 of these
shares were subject to release on or about December 8, 1999 and the remainder
were subject to release on or about December 8, 2000. Given that no
indemnification claims have arisen to date, and Mr. Charles' agreement to
surrender a portion of these shares, we agreed to release the remaining 500,000
shares from escrow in order to permit Mr. Charles to privately transfer such
shares.
The initial merger agreement required us to conduct a private placement to
raise net proceeds of at least $5,000,000 in cash or conversion of indebtedness.
In order to secure this obligation, certain of our historic shareholders
including Vincent J. Marold and Synergy Group International, Inc., placed
4,000,000 shares into escrow which were subject to cancellation in the event
that the required proceeds were not raised within approximately six months of
the effective date of the merger. These provisions have been amended to provide
for the release of 2,000,000 shares upon us realizing $2,000,000 of such
financing, an additional 1,000,000 shares upon realizing an aggregate of
$4,000,000 of financing and the remaining 1,000,000 shares upon realizing an
aggregate of $6,000,000 of such financing by no later then May 15, 2000. These
amendments were the result of extensive negotiation with certain of the historic
shareholders and were prompted by certain material changes in our management,
other operational issues and delays in raising the financing on terms acceptable
to us within the time frame required.
33
The initial merger agreement also contained certain corporate governance
provisions requiring a super majority vote of our Board of Directors to approve
certain fundamental transactions involving a change in control of the Company or
the issuance of a material amount of securities. In addition, certain of our
historic shareholders holding an aggregate of 2,100,000 shares of common stock
and Mr. Charles agreed to vote their shares to elect a Board of Directors
consisting of two designees of Mr. Marold and three designees of Mr. Charles. In
connection with Mr. Charles' resignation as our Chief Executive Officer, the
corporate governance provisions described above were eliminated and the voting
provision was amended to provide for these shareholders to vote for the
nomination of Mr. Charles to serve on our board in the event our board consists
of less than five members, for Mr. Charles and an additional designee of Mr.
Charles in the event that our board consists of five or more members and a
designee of Imperium Capital Corporation.
34
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 22, 2000 information
with respect to the securities holdings of all persons which the company,
pursuant to filings with the Securities and Exchange Commission, has reason to
believe may be deemed the beneficial owners of more than 5% of the company
outstanding common stock. Also set forth in the table is the beneficial
ownership of all shares of the company's outstanding stock, as of such date, of
all officers and directors, individually and as a group.
Shares Owned Beneficially Percentage of
Name and Address and of Record (1) Outstanding Shares
---------------- ----------------- ------------------
Paul Charles 3,157,000(2) 20.9%
7722 East Gray Road
Scottsdale, AZ 85260
David Thompson 155,504(3) 1.3%
7722 East Gray Road
Scottsdale, AZ 85260
R. Daniel Rudich 93,302(4) *
7722 East Gray Road
Scottsdale, AZ 85260
Frank Layland 14,612(5) *
7722 East Gray Road
Scottsdale, AZ 85260
Carmine F. Adimando -- --
47 Cherry Gate Lane
Trumbull, CT 06611
Vincent J. Marold 1,477,500(6) 12.3%
c/o Synergy Group
International, Inc.
3725 East Sunrise Drive
Tucson, AZ 85718
Fincord Holding Corp. 725,000 6.1%
P.O. Box 4608
Great Neck, NY 11203
William J. Meris 765,000(7) 6.4%
8652 East Carrie Drive
Scottsdale, AZ 85200
All Directors 3,420,418 22.2%
And Executive Officers as a Group
(5 persons)
- ---------------
*Represents less than 1% of the outstanding shares of common stock.
35
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in the
rules and regulations promulgated under the Exchange Act, and accordingly,
may include securities owned by and for, among others, the spouse and/or
minor children of an individual and any other relative who has the same
home as such individual, as well as other securities as to which the
individual has or shares voting or investment power or which such person
has the right to acquire within 60 days after the date of this prospectus
pursuant to the exercise of options, or otherwise. Beneficial ownership may
be disclaimed as to certain of the securities. This table has been prepared
based on 11,975,063 shares of common stock outstanding as of February 22,
2000.
(2) Consists of 3,157,000 shares issuable upon conversion of Series A Preferred
Stock.
(3) Consists of shares issuable upon exercise of options to purchase 155,504
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of common stock. Does not include 183,773 shares issuable
upon exercise of options to purchase 183,773 shares of Series A Preferred
Stock which are subject to vesting.
(4) Includes shares issuable upon exercise of options to purchase 93,202 shares
of Series A Preferred Stock which shares are convertible into a like number
of shares of common stock. Does not include 110,263 shares issuable upon
exercise of options to purchase 110,263 shares of Series A Preferred Stock
which are subject to vesting.
(5) Consists of shares issuable upon exercise of options to purchase 14,612
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of common stock. Does not include 26,644 shares issuable
upon exercise of options to purchase 26,644 shares of Series A Preferred
Stock which are subject to vesting.
(6) Includes 477,500 shares owned of record by Synergy Group International,
Inc. of which Mr. Marold is the sole shareholder.
(7) Includes 750,000 shares owned of record by Meris Capital Partners, L.P.
which Mr. Meris is deemed to beneficially own.
Material Escrow Arrangements
1,000,000 of our outstanding shares of common stock have been deposited
into escrow and remain subject to cancellation upon the terms set forth in a
certain escrow agreement entered into in connection with our merger with CNF,
Inc. These shares will be released upon us realizing an additional $2,000,000 of
debt or equity financing by no later than May 15, 2000.
Material Voting Arrangements
Until May 19, 2001, certain of our historic shareholders, including Vincent
J. Marold, and Synergy Group International, Inc., who hold an aggregate of
2,100,000 shares of common stock, and Paul Charles who holds 3,157,000 shares of
Series A Preferred Stock, have agreed to vote their shares to elect a designee
of Imperium Capital Corporation to serve on our Board of Directors, to elect
Paul Charles to serve on our board if it consists of less than five directors
and to elect Mr. Charles and an additional designee of Mr. Charles in the event
that our board consists of five or more directors.
36
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 50,000,000 shares of common stock, $.0001 par
value per share, of which 11,975,063 are outstanding as of the date of this
prospectus.
Holders of common stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of common stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company, to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
common stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Within the limits and restrictions provided in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 15,000,000 shares of preferred stock, $.0001
par value per share (the "Preferred Stock"), in one or more series, and to fix,
as to any such series, any dividend rate, redemption price, preference on
liquidation or dissolution, sinking fund terms, conversion rights, voting
rights, and any other preference or special rights and qualifications.
Series A Convertible Preferred Stock. Our Board of Directors has authorized
the designation of 6,000,000 shares of Preferred Stock as "Series A Convertible
Preferred Stock" of which 3,675,537 are outstanding. The Company has also issued
options to purchase an additional 780,091 shares of Series A Preferred Stock.
The following describes the material features of the series A preferred stock
which are more fully set forth in the company's Certificate of Designation on
file with the Delaware Secretary of State.
The Series A Preferred Stock is essentially a common stock equivalent. The
Series A Preferred Stock does not have a liquidation preference, does not
provide for a preferred dividend other than those declared by our board of
directors out of funds legally available therefor and votes on an as converted
into common stock basis. Commencing on the date of issuance, each share of
Series A Preferred Stock is convertible into one (1) share of common stock.
Thereafter, the conversion ratio is subject to upward adjustment based on the
company achieving certain financial performance targets as reflected in the
company's audited results of operation for the fiscal year ending March 31, 2000
as follows:
37
Shares of common stock to be
issued upon conversion of each
Financial Performance Target Share of Series A Preferred Stock
---------------------------- ---------------------------------
Gross Revenues of $22.5 million and Net Income of $900,000 1.5
Gross Revenues of $38.25 million and Net Income of $1.53 million 1.75
Gross Revenues of $51 million and Net Income of $2.04 million 2.00
Gross Revenues of $64 million and Net Income of $2.56 million 2.25
The Financial Performance Targets with respect to gross revenues and net
income shall be considered to have been achieved if actual gross revenues or net
income, as applicable, as reported in the audited financial statements are
within 10% of the targeted amount. All shares of Series A Preferred Stock which
have not been converted shall automatically convert into common stock upon the
earlier of (i) the completion of the audited financial statements; and (ii) June
30, 2000. Based upon the Company's financial performance during the first three
quarters of fiscal 2000, it is unlikely that any of the financial targets will
be achieved.
Dividend Policy
We have never paid cash dividends on our common stock. Our board of
directors does not anticipate paying cash dividends in the foreseeable future as
it intends to retain future earnings, if any, to finance the growth of the
business. The payment of future cash dividends will depend on such factors as
earnings levels, anticipated capital requirements, the operating and financial
condition of the company and other factors deemed relevant by our board of
directors.
Delaware Anti-Takeover Law and Provisions of Company's Certificate of
Incorporation
Anti Takeover Law. As our shares become more widely held, listed on NASDAQ
or on a national exchange, to which there can be no assurance, we will be
governed by Section 203 of the General Corporation Law of the State of Delaware,
an anti-takeover law. In general, the law prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combinations" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with its
affiliates and associates, owns (or within three years, did own) 15% or more of
a corporation's voting stock. The provisions regarding certain business
combinations under the General Corporation Law of the State of Delaware could
have the effect of delaying, deferring or preventing a change in control of our
company or the removal of our existing management. A
38
takeover transaction frequently affords stockholders the opportunity to sell
their shares at a premium over current market prices.
Blank Check Preferred Stock. As described above, our board of directors is
authorized without further stockholder action, to designate any number of series
of preferred stock with such rights, preferences and designations as determined
by the board. Shares of preferred stock issued by our board of directors could
be utilized, under certain circumstances, to make an attempt to gain control of
our company more difficult or time consuming. For example, shares of preferred
stock could be issued with certain rights that might have the effect of diluting
the percentage of common stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid that our
board of directors determines is not in the best interest of the company and its
stockholders. The existence of the preferred stock may, therefore, be viewed as
having possible anti-takeover effects. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices.
Transfer Agent
The transfer agent for the company's securities is StockTrans, Inc., 7 East
Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are offering
for sale 3,106,623 shares of common stock. These shares include:
o 2,456,623 shares of common stock
o 650,000 shares of common stock which may be issued upon the conversion
of series A preferred stock
We previously issued these shares of common stock and series A preferred
stock in private placement transactions. 850,000 of these shares are being
offered by directors, officers or principal stockholders of the company.
Of the 3,106,623 share of common stock being offered by the selling
security holders, 1,453,413 shares are subject to lock-up agreements which
prohibit the offer or sale of these shares until nine (9) months after the date
of this prospectus.
The selling security holders may offer their shares of common stock for
sale from time to time at market prices prevailing at the time of sale or at
negotiated prices, and without payment of any underwriting discounts or
commissions except for usual and customary selling commissions paid to brokers
or dealers.
39
The following table sets forth as of February 22, 2000 the number of shares
being held of record or beneficially by the selling security holders and
provides by footnote reference any material relationship between the company and
the selling security holder, all of which is based upon information currently
available to the company.
Beneficial Ownership of
Selling security Holder Beneficial Ownership of
Prior to Offering (1) Shares After Offering (2)
---------------------------- ------------------------------
Number of Shares
Name of Selling Security Holder Number Percent Offered Hereby (2) Number Percent
- ------------------------------- ------ ------- ------------------ ------ -------
Blair Portigal 71,822 * 71,822 - -
Paul Charles(3) 3,157,000(4) 20.9% 150,000 3,007,000 19.2%
Chenango, Inc. 350,000(5) 2.8% 350,000 - -
Discretionary Investment Trust(6) 350,000 2.9% 350,000 - -
Deremie Enterprises Limited(7) 500,000 4.2% 500,000 - -
Enrico E. DiVito, DDS 35,918 * 35,918 - -
Euroswiss Securities, Ltd. 150,000(8) 1.2% 150,000 - -
Michael G. Glynn 97,500 * 87,500 10,000 -
Keith and Carol Henrichsen 11,507 * 5,753 5,754 *
Imperium Capital Corporation(9) 250,000 2.1% 250,000 - -
Lawrence Kaplan 347,574 2.9% 173,787 173,787 1.4%
Allen and Jane Kelsey 35,890 * 35,890 - -
Lindzon Capital Partners(10) 186,562 1.6% 126,562 60,000 *
Meris Capital Partners, L.P(11) 750,000 6.3% 700,000 50,000 *
Harold Rubenstein 113,151 * 83,151 30,000 *
Rochelle and Shelden Terman 36,240 * 36,240 - -
---------
3,106,623
=========
* Represents less than 1% of the outstanding shares of common stock
(1) Applicable percentage of ownership is based on 11,975,063 shares of common
stock outstanding as of February 22, 2000, plus any securities held by such
holder exercisable for or convertible into common stock within sixty (60)
days after the date of this prospectus.
(2) Assumes that all shares are sold pursuant to this offering and that no
other shares of common stock are acquired or disposed of by the selling
security holders prior to the termination of this offering. Because the
selling security holders may sell all, some or none of their shares or may
acquire or dispose of other shares of common stock, we cannot estimate the
aggregate number of shares which will be sold in this offering or the
number or percentage of shares of common stock that each selling security
holder will own upon completion of this offering. Applicable percentage of
ownership is based on 12,625,063 shares of common stock outstanding after
the offering (11,975,063 shares outstanding as of February 22, 2000, plus
650,000 shares issuable upon the conversion of 650,000 shares of Series A
Preferred Stock), together with any securities held by such holder
exercisable for or convertible into common stock within 60 day after the
date of this prospectus.
(3) Mr. Charles is the Chairman of the Board of Directors and a principal
stockholder of the Company.
(4) Includes 3,157,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(5) Consists of 350,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(6) Pursuant to a February 2, 2000 securities purchase agreement, Discretionary
Investment Trust has the right to consent to the Company's issuance of any
common stock or securities convertible into common stock.
(7) Pursuant to a February 2, 2000 securities purchase agreement, Deremie
Enterprises Limited has the right to consent to the Company's issuance of
any common stock or securities convertible into common stock.
(8) Consists of 150,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(9) Imperium Capital Corporation has the right to designate one person to serve
on the Company's Board of Directors.
40
(10) Lindzon Capital Partners is an investment fund managed by Howard Lindzon
who beneficially owns an additional 332,500 shares of common stock and
6,188 shares of Series A Preferred Stock.
(11) Under applicable SEC Rules, these shares are deemed to be beneficially
owned by William J. Meris, a principal stockholder of the Company.
Under agreements with the selling security holders, we will pay all
offering expenses except the fees and expenses of any counsel and other advisors
that the selling security holders may employ to represent them in connection
with the offering and all brokerage or underwriting discounts or commissions
paid to broker-dealers in connection with the sale of the shares.
PLAN OF DISTRIBUTION
The selling security holders have not advised us of any specific plan for
distribution of the shares offered hereby, but it is anticipated that the shares
will be sold from time to time by the selling security holders or by pledgees,
donees, transferees or other successors in interest on a best efforts basis
without an underwriter. Such sales may be made on the National Quotation
Bureau's Pink Sheets, the OTC Bulletin Board, any exchange upon which our shares
may trade in the future, over-the-counter, or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by one or more of the following:
o a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account pursuant to this
prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in transactions to cover short sales;
o through a combination of any such methods of sale; or
o in accordance with Rule 144 under the Securities Act, rather than
pursuant to this prospectus.
The selling security holders may sell their shares directly to purchasers
or may use brokers, dealers, underwriters or agents to sell their shares.
Brokers or dealers engaged by the selling security holders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions,
discounts or concessions from the selling security holders, or, if any such
broker-dealer acts as agent for the purchaser of shares, from the purchaser in
amounts to be negotiated immediately prior to the sale. The compensation
received by brokers or dealers may,
41
but is not expected to, exceed that which is customary for the types of
transactions involved. Broker-dealers may agree with a selling security holder
to sell a specified number of shares at a stipulated price per share, and, to
the extent the broker-dealer is unable to do so acting as agent for a selling
security holder, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire shares as principal may thereafter resell the shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with
resales of the shares, broker-dealers may pay to or receive from the purchasers
of shares commissions as described above.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in the sale of the shares may be
deemed to be "underwriters" within the meaning of the securities act. In that
event, any commissions received by broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the securities act.
From time to time the selling security holders may engage in short sales,
short sales against the box, puts and calls and other hedging transactions in
our securities, and may sell and deliver the shares in connection with such
transactions or in settlement of securities loans. These transactions may be
entered into with broker-dealers or other financial institutions. In addition,
from time to time, a selling security holder may pledge its shares pursuant to
the margin provisions of its customer agreements with its broker-dealer. Upon
delivery of the shares or a default by a selling security holder, the
broker-dealer or financial institution may offer and sell the pledged shares
from time to time.
Of the 3,106,623 shares of common stock being offered by the selling
security holders, 1,453,413 shares are subject to lock-up agreements with the
company. The lock-up agreements prohibit the offer or sale of these shares until
nine (9) months after the date of this prospectus.
We will not receive any proceeds from the sale of the shares. We will pay
the expenses of preparing this prospectus and the related registration
statement. The selling security holders have been advised that they are subject
to the applicable provisions of the Exchange Act, including without limitation,
Rules 10b-5 and Regulation M there under.
LEGAL MATTERS
Certain legal matters, including the validity of the shares being issued,
will be passed upon for the company by Buchanan Ingersoll Professional
Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia,
PA 19103.
EXPERTS
The financial statements as of March 31, 1999 and 1998 and for each of the
two years in the period ended March 31, 1999 included in this prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report
42
expresses an unqualified opinion and includes an explanatory paragraph regarding
the Company's ability to continue as a going concern), and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement and the exhibits
and schedules thereto as permitted by the rules and regulations of the SEC. For
further information with respect to the company and the shares of common stock
offered hereby, reference is made to the registration statement, including the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete and, where such contract or other document is an exhibit to
the registration statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made. You may
review a copy of the registration statement at the SEC's public reference room
in Washington, D.C., and at the SEC's regional offices in Chicago, Illinois and
New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The registration
statement can also be reviewed by accessing the SEC's Internet site at
http://www.sec.gov. As a result of this offering, we will become subject to the
information and reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC.
43
CNF TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE COMPANY CNF TECHNOLOGIES, INC.
Independent Auditor's Report ................................................F-2
Financial Statements
Balance Sheets...........................................................F-3
Statements of Operations.................................................F-4
Statements of Shareholder's (Capital Deficiency) Equity .................F-5
Statements of Cash Flows ................................................F-6
Notes to Financial Statements ...........................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
CNF Technologies, Inc.
Scottsdale, Arizona
We have audited the accompanying balance sheets of CNF Technologies, Inc.
(formerly CNF, Inc.) (the "Company") as of March 31, 1999 and 1998, and the
related statements of operations, shareholder's (capital deficiency) equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at March 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
working capital, and shareholders' capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are described in Note 13. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 925, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4,
and paragraphs 4, 5 and 7 of Note 13)
F-2
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
March 31,
December 31, ------------------
ASSETS 1999 1999 1998
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,500 $ 184,663 $ 229,419
Accounts receivable - trade (net of allowance of $340,000, $390,000 and
$330,000 at December 31, 1999, March 31, 1999 and 1998, respectively) 1,428,938 834,383 1,084,527
Accounts receivable - employees and other 129 31,736 118,128
Inventories (Note 2) 1,595,550 1,656,001 1,505,140
Prepaid expenses and other current assets 138,701 112,782 314,729
Income tax receivable 95,717 95,717 30,732
------- ------- ------
Total current assets 3,260,535 2,915,282 3,282,675
PROPERTY AND EQUIPMENT - Net (Note 3) 628,346 582,233 338,261
NOTE RECEIVABLE FROM RELATED PARTY (Note 9) 9,906 95,000
OTHER ASSETS 30,670 31,266 14,054
------- ------- ------
TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990
=========== =========== ==========
LIABILITIES AND SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,546,351 $ 3,642,535 $ 2,101,691
Accounts payable - related party 345 10,000
Lines of credit (Note 4) 682,120 672,135
Short-term obligations (Note 5) 503,259
Short-term obligations - related parties (Note 5) 750,000 397,551
Accrued compensation 224,695 225,716 144,626
Accrued expenses 389,450 437,050 139,113
Current portion of capital leases (Note 7) 30,510 17,826
Current portion of notes payable (Note 5) 55,645 71,623 62,279
------- ------- ------
Total current liabilities 4,996,651 5,978,025 3,129,844
CAPITAL LEASES (Note 7) 77,402 67,136
NOTES PAYABLE (Note 5) 153,106 220,163 259,758
-------- -------- -------
Total liabilities 5,227,159 6,265,324 3,389,602
---------- ---------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 10, 12 and 13)
SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY (Note 6):
Preferred stock, par value of $.0001: 15,000,000 shares authorized;
4,163,933 shares issued and outstanding at December 31, 1999 416
Common stock, par value of $.0001: 50,000,000 shares authorized;
11,445,563 shares issued and outstanding at December 31, 1999 1,145
Common stock, no par value: 25,000,000 shares authorized; 2,503,000 and
2,500,000 shares issued and outstanding as of March 31, 1999 and 1998,
respectively 1,000 1,000
Additional paid-in capital 7,250,658 7,500
(Deficit) retained earnings (8,559,827) (2,735,137) 339,388
--------- --------- -------
Total shareholder's (capital deficiency) equity (1,307,608) (2,726,637) 340,388
--------- --------- --------
TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990
=========== =========== ===========
See notes to financial statements.
F-3
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
Nine-Month Periods Ended
December 31, Years Ended March 31,
------------------------ ---------------------
1999 1998 1999 1998
(Unaudited)
REVENUES (Note 11) $ 8,510,873 $ 7,578,878 $ 9,425,947 $ 7,726,484
COST OF REVENUES 6,048,172 5,066,561 6,088,549 4,460,944
---------- ---------- ----------- ---------
Gross profit 2,462,701 2,512,317 3,337,398 3,265,540
---------- ---------- ----------- ---------
OPERATING EXPENSES:
General and administrative 4,170,091 2,951,046 3,960,673 1,916,877
Research and development 849,123 800,894 1,200,939 890,944
Sales and marketing 806,325 672,912 1,086,265 480,170
---------- ---------- ----------- ---------
Total operating expenses 5,825,539 4,424,852 6,247,877 3,287,991
---------- ---------- ----------- ---------
LOSS FROM OPERATIONS (3,362,838) (1,912,535) (2,910,479) (22,451)
---------- ---------- ----------- --------
OTHER INCOME (EXPENSE):
Interest income 3,215 345 20,528 1,070
Interest expense (Notes 5 and 13) (2,473,297) (92,666) (248,342) (68,552)
Other income 8,230 116,973 18,568 31,766
---------- ---------- --------- --------
Other (expense) income - net (2,461,852) 24,652 (209,246) (35,716)
---------- ---------- ------- -------
LOSS BEFORE INCOME TAX (BENEFIT)
PROVISION (5,824,690) (1,887,883) (3,119,725) (58,167)
--------- ---------
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 8) (45,200) 21,100
------ ------
NET LOSS $ (5,824,690) $ (1,887,883) $ (3,074,525) $ (79,267)
============ ============ ============ =========
BASIC AND DILUTED LOSS PER SHARE -
Applicable to common shareholders $ (0.69) $ (0.76) $ (1.23) $ (0.03)
============ ============ ============ =========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING - Basic and diluted 8,490,496 2,500,000 2,500,250 2,500,000
============ ============ ============ =========
See notes to financial statements.
F-4
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Total
Preferred Stock Common Stock Additional Retained Shareholder's
------------------ ---------------- Paid-in Earnings Equity (Capital
Shares Amount Shares Amount Capital Deficit) Deficiency)
BALANCE,
APRIL 1, 1997 2,500,000 $1,000 $ 418,655 $ 419,655
Net loss (79,267) (79,267)
--------- --------
BALANCE,
MARCH 31, 1998 2,500,000 1,000 339,388 340,388
Common stock issued
(Note 5) 3,000 $ 7,500 7,500
Net loss (3,074,525) (3,074,525)
---------- ----------
BALANCE,
MARCH 31, 1999 2,503,000 1,000 7,500 (2,735,137) (2,726,637)
Retirement of
CNF, Inc. stock
(unaudited) (Note 13) (2,503,000) (1,000) (1,000)
Issuance of new stock
(Notes 6 and 13):
Preferred stock
(unaudited) 5,163,933 $ 516 516
Common stock
(unaudited) 11,445,563 1,145 7,243,158 7,244,303
Preferred stock surrendered
(unaudited) (1,000,000) (100) (100)
Net loss (unaudited) (5,824,690) (5,824,690)
---------- ----------
BALANCE,
DECEMBER 31, 1999
(unaudited) 4,163,933 $ 416 11,445,563 $1,145 $7,250,658 $(8,559,827) $(1,307,608)
========= ===== ========== ====== ========== =========== ===========
See notes to financial statements.
F-5
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Nine-Month Periods
Ended December 31, Years Ended March 31,
------------------- ---------------------
1999 1998 1999 1998
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,824,690) $(1,887,883) $(3,074,525) $ (79,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 129,669 100,543 140,323 60,797
Amortization of discount on note payable
subject to 50% conversion (Note 5) 503,259
Loss (gain) on sales of assets 3,122 (1,409) 8,233
Deferred income taxes - net (12,557)
Expenses associated with Private Placement Memorandum (359,846)
Expenses satisfied with issuance of common stock 1,762,489 7,500
Expenses associated with merger (50,250)
Changes in assets and liabilities:
Accounts receivable - trade (594,555) 497,178 250,144 (802,276)
Accounts receivable - other 31,607 51,337 86,392 (102,926)
Inventories 60,451 598,449 (150,861) (931,665)
Prepaid expenses and other assets (25,919) (128,582) 184,735 (248,997)
Accounts payable - trade (104,494) 641,948 1,540,844 1,654,744
Accounts payable - related party (345) (9,510) (9,655)
Income tax receivable (64,985) (24,806)
Accrued compensation (1,021) 37,104 81,090 25,310
Accrued expenses (4,065) 40,096 297,937 17,431
----------- ----------- ---------- ---------
Net cash used in operating activities (4,474,588) (60,729) (702,828) (444,212)
----------- ----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (133,521) (290,454) (296,138) (273,929)
Loan to officer (9,906)
Collection of note receivable 9,906 95,000 95,000
----------- ----------- ----------
Net cash used in investing activities (123,615) (195,454) (211,044) (273,929)
----------- ----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on lines of credit, net (682,120) 9,985 9,985 672,135
Loan and note payable 36,892 540,151
Notes payable - related party 2,302,449 39,000 397,551
Issuance of preferred stock 179
Equity transaction (Note 13) 3,000,000
Principal payments on capital leases (22,434) (7,643) (11,429)
Principal payments on notes payable (83,034) (49,971) (67,142) (51,940)
Principal payments on notes payable - related party (100,000)
-----------
Net cash provided by financing activities 4,415,040 28,263 869,116 620,195
----------- ----------- ---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (183,163) (227,920) (44,756) (97,946)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 184,663 229,419 229,419 327,365
----------- ----------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,500 $ 1,499 $ 184,663 $ 229,419
=========== =========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 150,624 $ 92,666 $ 146,289 $ 68,552
=========== =========== ========= =========
Cash paid for income taxes $ - $ 19,000 $ 20,635 $ 59,429
=========== =========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with the
conversion of notes payable (Note 13) $ 2,353,259 $ - $ - $ -
=========== =========== ========= =========
Capital expenditures financed through obligations under
capital leases $ 45,384 $ 82,891 $ 96,391 $ -
=========== =========== ========= =========
See notes to financial statements.
F-6
CNF TECHNOLOGIES, iNC.
(Formerly CNF, Inc.)
NOTES TO FINANCIAL STATEMENTS
NINE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
AND YEARS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. BUSINESS AND BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Business - CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") was
incorporated in California in June 1988. In July 1998, the Company
relocated its corporate headquarters to Scottsdale, Arizona. The Company
designs, manufactures and markets portable peripherals to notebook PC
vendors, wholesale distributors, computer resellers, computer retail
stores and corporate end users. As described in Note 13, on June 8, 1999,
the Company completed a merger with JLL Ventures (Delaware) Corp., a
Delaware Corporation, (JLL) and JLL ACQUISITIONS CORP., a Delaware
corporation and wholly-owned subsidiary of JLL (JLL ACQUISITIONS). JLL
subsequently changed its name to CNF Technologies, Inc. and JLL
ACQUISITIONS changed its name to CNF Mobile Solutions, Inc.
Interim Period Presentation - The unaudited financial statements for the
nine-month periods ended December 31, 1999 and 1998 have been prepared on
the same basis as the audited financial statements included herein. In the
opinion of management, such unaudited financial statements include all
adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the financial position, results of operations and
cash flows. The results of operations for the nine-month periods ended
December 31, 1999 are not necessarily indicative of results that may be
expected for the year ending March 31, 2000 or any future period.
Basis of Presentation - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, during the nine-month
periods ended December 31, 1999 and the years ended March 31, 1999 and
1998, the Company incurred net losses of $5,824,690 (unaudited),
$3,074,525 and $79,267, respectively, and, as of December 31, 1999 and
March 31, 1999, the Company's current liabilities exceeded its current
assets by $1,736,116 (unaudited) and $3,062,743, respectively, and its
total liabilities exceeded its total assets by $1,307,608 (unaudited) and
$2,726,637, respectively. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply
with the terms and covenants of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to
attain successful operations. Management is continuing its efforts to
obtain additional funds so that the Company can meet its obligations and
sustain operations from sources that are described in Note 13 to the
financial statements.
F-7
Summary of Significant Accounting Policies
a. 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.
b. Cash and cash equivalents consist of cash held in bank demand deposits
and highly liquid investments purchased with initial maturities of
three months or less.
c. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
d. Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets of five to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives or the underlying lease
term. The Company evaluates the recoverability of long-lived assets on
an on-going basis.
e. Income Taxes - The Company accounts for income taxes using the asset
and liability approach. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and operating loss and tax
credit carryforwards measured by applying current enacted tax laws.
f. Revenue Recognition - Revenues, less reserves for returns, are
recognized upon shipment to the customer. Title to the product
transfers upon shipment to the customer. Revenues from sales to
distributors and authorized resellers are subject to terms allowing
certain rights of return and price protection rights. Accordingly,
allowances for estimated future returns are provided for upon
recognition of revenue. Such amounts are estimated based on historical
rates of return, distributor inventory levels and other factors. At
December 31, 1999, reserves of $330,000 and $10,000 (unaudited) were
recorded by the Company for estimated future returns and bad debts,
respectively. At March 31, 1999 and 1998, reserves of $350,000 and
$40,000 and $300,000 and $30,000, respectively, were recorded by the
Company for estimated future returns and bad debts.
g. Certain Significant Risks and Uncertainties - The Company participates
in a dynamic high technology industry and believes that changes in any
of the following areas, among others, could have a material adverse
effect on the Company's future financial position or results of
operations: advances and trends in new technologies and industry
standards; competitive pressures in the form of new products; changes
in certain strategic partnerships; litigation or claims against the
Company based on intellectual property, patent, product, regulatory or
other factors; risk associated with changes in domestic and
international economic and/or political conditions or regulations;
availability of necessary components; risks associated with year 2000
compliance; and the Company's ability to attract and retain employees
necessary to support its growth.
h. Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that an enterprise report, by major components
and as a single total, the change in its net assets from non-owner
sources during the period. There were no differences between net loss
and comprehensive net loss for the years presented.
F-8
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, which establishes accounting and
reporting standards for derivative instruments and hedging activities
which are required for fiscal quarters beginning after June 15, 1999.
On May 20, 1999, the FASB issued an Exposure Draft, which would have
the effect of deferring the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. On
July 7, 1999, the FASB adopted the Exposure Draft as SFAS No. 137.
This statement requires balance sheet recognition of derivatives as
assets or liabilities measured at fair value. Accounting for gains and
losses resulting from changes in the values of derivatives is
dependent on the use of the derivative and whether it qualifies for
hedge accounting. The Company has not yet determined the effect the
adoption of SFAS No. 133 will have on its financial statements.
2. INVENTORIES
Inventories consist of the following:
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
Raw materials $ 806,924 $1,011,970 $ 575,675
Work in process 16,800 47,169
Finished goods 771,826 596,862 929,465
------- -------- -------
Inventories $1,595,550 $1,656,001 $1,505,140
========== ========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
Equipment $ 892,827 $ 737,195 $ 414,872
Furniture and fixtures 50,904 30,754 23,818
Leasehold improvements 7,806
Vehicles 38,025 38,025 1,624
------- ------- -----
Total 981,756 805,974 448,120
Accumulated depreciation and amortization (353,410) (223,741) (109,859)
--------- --------- ---------
Property and equipment - net $ 628,346 $ 582,233 $ 338,261
========= ========= =========
Assets recorded under capital leases consist of the following:
December 31, March 31,
1999 1999
(Unaudited)
Equipment $141,774 $ 96,391
Accumulated amortization (31,245) (12,932)
-------- --------
Total $110,529 $ 83,459
======== ========
F-9
Depreciation and amortization expense was $129,669 and $100,943 for the
nine-month periods ended December 31, 1999 and 1998 (unaudited),
respectively. Depreciation and amortization expense was $140,323 and
$60,797 for the years ended March 31, 1999 and 1998, respectively.
4. LINES OF CREDIT
In August 1997, the Company borrowed $100,000 and $600,000 under two bank
lines of credit, which bear interest at prime (7.75% at March 31, 1999 and
8.5% at March 31, 1998) plus 2 percent and 3.5 percent per annum,
respectively. The Company had outstanding borrowings of $682,120 and
$672,135 under the lines of credit as of March 31, 1999 and 1998,
respectively. As described in Note 13, subsequent to March 31, 1999, the
Company's lines of credit maturity dates were extended under a loan
modification agreement. Per the loan modification agreement, on June 7,
1999 and on June 30, 1999, a $100,000 principal-only installment shall be
due and payable. In addition, a $100,000 principal-only payment shall be
due and payable upon execution of the loan modification agreement.
Interest-only installments will be due and payable on the tenth day of
each month. The remaining balance on the lines of credit was due and
payable on July 31, 1999.
In accordance with the loan modification agreement, the Company made a
$100,000 principal-only payment, as well as a $100,000 payment for
execution of the loan modification agreement, on June 4, 1999.
The Company made an additional principal only payment in August 1999 in
the amount of approximately $152,000 and negotiated a second loan
modification agreement extending the maturity date to December 31, 1999
(unaudited). On October 6, 1999, the Company paid the final installment on
its lines of credit (unaudited).
F-10
5. DEBT
Short-term obligations at December 31, 1999 and March 31, 1999 consist of
the following:
December 31, March 31,
1999 1999
(Unaudited)
Note payable to a shareholder, unsecured, with interest at 10%, payable upon the
earlier of the completion of a $3,000,000 financing transaction by the Company
or March 19, 2000. 3,000 shares of common stock were issued to the investor
as additional consideration. $ 100,000
Notes payable to related-parties, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $4,000,000 financing transaction by
the Company or February 22, 2000 ($250,000) and March 9, 2000 ($25,000).
Holder of the note has the right to convert the note to shares of the
Company's stock at a price equal to a 25% discount from the offering price in
a subsequent offering of the Company's stock, should one occur. On July 15,
1999, one party exercised its option to convert its $25,000 note, plus
accrued interest of $892, to 11,507 shares of the Company's common stock. $ 250,000 275,000
Note payable to the president of the Company, unsecured, with interest
at 10%. 22,551
Notes payable to four shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $3,000,000 financing transaction by
the Company or one year from the date of the note (maturities range from April
7, 2000 to May 6, 2000). 97,500 shares of common stock were issued to the four
shareholders as additional consideration. Holders of the notes have the right
to convert the notes to shares of the Company's stock at a price equal to a
25% discount from the offering price in a subsequent offering of the Company's
stock, should one occur. 50,000
Notes payable to four shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $4,000,000 financing transaction by the
Company or one year from the date of the note (maturities range from
May 26, 2000 to June 4, 2000). 70,000 shares of common stock were issued to
the investors as additional consideration. Holders of the notes have the right
to convert the notes to shares of the Company's stock at a price equal to a
25% discount from the offering price in a subsequent offering of the
Company's stock, should one occur. 150,000
Notes payable to eight shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $5,000,000 financing transaction by
the Company or one year from the date of the note (maturities range from
July 8, 2000 to August 18, 2000). 65,000 shares of common stock were issued
to the investors as additional consideration. 300,000
-------
Total related-party short-term obligations 750,000 397,551
Note payable, unsecured, with interest at 10%, payable upon the earlier
of the completion of a $4,000,000 financing transaction by the Company or
January 8, 2000. Holder of the note had the right to convert the note to
shares of the Company's stock at a price equal to a 50% discount from the
offering price in a subsequent offering of the Company's stock, should one
occur. On July 15, 1999, the holder of the note exercised the option to
convert the $503,259 note, plus accrued interest of $18,102, to
347,574 shares of the Company's common stock. 503,259
--------
Total short-term obligations $ 750,000 $ 900,810
========= =========
F-11
During October, November and December 1999 (unaudited), the Company
converted $1,859,630 of notes payable to 1,112,315 shares of common stock.
As the result of the transaction, the Company recorded interest expense of
$1,477,315 to reflect the financial statement impact of the beneficial
conversion feature of the convertible debt and additional equity
incentives (Note 13).
The maturity dates of all remaining outstanding short-term obligations
have been extended through January 30, 2001 (unaudited).
Long-term debt obligations consist of the following:
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
Note payable to bank, unsecured, with interest at prime plus 2%
(9.75% at March 31, 1999) payable in monthly installments of
$1,068 through May 2001 $ 45,000 $ 65,000
Note payable to bank, unsecured, with interest at prime
plus 2.25% (10% at March 31, 1999) payable in
variable monthly installments through September 2003 $ 190,760 220,871 257,037
Other notes payable 17,991 25,915
------- ------
Total long-term obligations 208,751 291,786 322,037
Less current portion (55,645) (71,623) (62,279)
--------- -------- -------
Total long-term obligations $ 153,106 $220,163 $259,758
========= ======== ========
Future annual maturities of the Company's long-term notes payable for the
years subsequent to March 31, 1999 are as follows:
2000 $ 71,623
2001 77,177
2002 58,134
2003 55,149
2004 29,703
------
Total $291,786
========
6. SHAREHOLDER'S EQUITY
Common Stock
In November 1997, the Board of Directors approved a 250-for-1 split of the
outstanding shares of common stock. All share amounts in these financial
statements have been adjusted to give retroactive effect to the stock
split.
Stock Option Plan
In November 1997, the Board of Directors adopted the 1997 Equity Incentive
Plan (the "Plan"). Under the Plan, the Company may grant options to
purchase up to 602,026 shares of the Company's common stock to employees,
officers, directors, and consultants at prices not less than the fair
market value (as determined by the Board of Directors) at the date of
grant for incentive stock options and not less than 90 percent of the fair
market value at the date of grant for nonqualified stock options.
F-12
During fiscal 1999, the Company granted options of 405,658 shares of common
stock to certain employees of the Company. These options expire ten years
from the date of grant and vest over a four-year period, 25 percent after
the first year and ratably each subsequent month for the balance of the four
years. Vested options must be exercised within 45 days of termination of
employment.
Options Outstanding
---------------------
Options Exercise
Available Price
for Grant Shares Per Share
Balance, April 1, 1997 -
Authorized 602,026
-------
Balance, March 31, 1998 602,026
Granted (405,658) 405,658 $0.50 to $2.50
------- ------- --------------
Balance, March 31, 1999 196,368 405,658 $0.50 to $2.50
======= ======= ==============
In June 1999 (unaudited), the Company issued (i) 5,163,188 shares of Series
A Preferred Stock to the holders of all outstanding shares of common stock
of CNF; and (ii) options to purchase 836,790 shares of Series A Preferred
Stock to the holders of all outstanding options to purchase shares of common
stock of CNF in connection with the merger with JLL and JLL ACQUISITIONS.
The options to purchase shares of preferred stock have a variable conversion
rate to shares of CNF Technologies, Inc. common stock based on financial
performance for the year ending March 31, 2000 (Note 13).
Additionally, in December 1999, employees of the Company purchased 745
shares of the Company's preferred stock (unaudited).
Subsequent to March 31, 1999, the Company issued 11,445,563 shares of common
stock (unaudited). These shares were sold to accredited investors in private
placement transactions.
The following summarizes certain weighted average information on options
outstanding at March 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.50 376,658 9.07 $0.50 0 $0.50
$2.50 29,000 9.83 $2.50 0 $2.50
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. There was no compensation cost charged against
income for its Plan for 1999. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS No. 123, the
Company's net loss and net loss per share for the year ended March 31, 1999
would have been adjusted to the pro forma amounts indicated below:
F-13
Net loss - as reported $ (3,074,525)
============
Net loss - pro forma $ (3,093,583)
============
Basic and diluted loss per share - as reported $ (1.23)
============
Basic and diluted loss per share - pro forma $ (1.24)
============
The following summarizes certain weighted average information on options
outstanding at December 31, 1999 (unaudited):
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.24 771,812 8.32 $0.24 313,345 $0.24
$1.21 20,628 9.17 $1.21 0 $1.21
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS No. 123, the Company's net loss and net
loss per share for the nine-month periods ended December 31, 1999 would have
been adjusted to the pro forma amounts indicated below:
Net loss - as reported $ (5,824,690)
============
Net loss - pro forma $ (5,843,108)
============
Basic and diluted loss per share - as reported $ (0.69)
============
Basic and diluted loss per share - pro forma $ (0.69)
============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants: no dividend yield; expected volatility of 35 percent; risk-free
interest rate of 5 percent; and an expected life of seven years.
Concurrent with the merger discussed in Note 13, the Plan was frozen
subsequent to March 31, 1999 and no additional options will be issued.
On July 14, 1999 (unaudited), the Company issued a Private Placement
Memorandum (the "Private Placement") offering 1,000,000 shares of the
Company's common stock at a price of $3.00 per share, subject to an increase
of up to an additional 1,000,000 shares to cover over-allotments. The
offering period expires on September 14, 1999. However, this date was
extended through February 15, 2000 at the election of the Company (Note 13).
F-14
7. LEASES
The Company's operations utilize leased equipment and facilities. Future
minimum lease payments under noncancellable operating leases and capital
lease payments as of March 31, 1999 consist of the following:
Capital Operating
Leases Leases
2000 $23,366 $319,020
2001 23,689 319,020
2002 20,971
2003 17,807
2004 13,162
Thereafter 323
------- --------
Total 99,318 $638,040
========
Less - interest (14,356)
-------
Present value of minimum capital lease obligation 84,962
Less current portion of capital lease obligation (17,826)
-------
Long-term portion of capital lease obligation $67,136
=======
Rent expense was $293,663 and $304,764 for the nine-month periods ended
December 31, 1999 and 1998 (unaudited), respectively. Rent expense was
$412,567 and $54,371 for the years ended March 31, 1999 and 1998,
respectively.
8. INCOME TAXES
The (benefit) provision for income taxes for the years ended March 31
consists of the following:
1999 1998
Current:
Federal $(45,200) $ 32,122
State 1,535
-------- --------
Total current (45,200) 33,657
Deferred:
Federal (9,769)
State (2,788)
-------- --------
Total deferred (12,557)
-------- --------
Total (benefit) provision from income taxes $(45,200) $ 21,100
======== ========
F-15
A reconciliation of the (benefit) provision for income taxes and the amounts
that would be computed using federal statutory tax rates are as follows:
March 31,
December 31, ---------------------
1999 1999 1998
(Unaudited)
Computed expected tax benefit $(1,980,395) $(1,060,707) $(19,777)
State income taxes - net of federal benefit (827)
Nondeductible expenses and other credits 37,982 (94,618)
Change in valuation allowance 1,980,395 977,525 136,322
----------- ----------- --------
Total $ - $ (45,200) $ 21,100
=========== =========== ========
The following summarizes the effect of deferred income tax items and the
impact of "temporary differences" between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws.
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
March 31,
December 31, ----------------------
1999 1999 1998
(unaudited)
Net operating loss $2,994,176 $ 1,013,781
Credit carryforwards 127,746 127,746 $ 106,873
Temporary differences:
Sales returns 65,000 65,000 42,000
Depreciation (92,680) (92,680) (12,551)
---------- ----------- ---------
Total 3,094,242 1,113,847 136,322
Valuation allowance (3,094,242) (1,113,847) (136,322)
---------- ----------- ---------
Total $ - $ - $ -
========== =========== =========
The valuation allowance is maintained against deferred tax assets as a
result of uncertainties concerning the Company's future ability to realize
the benefits of such deferred tax assets.
9. RELATED PARTY TRANSACTIONS
In February 1997, the Company's President borrowed $195,000 from the Company
under a note payable due in full with interest on February 14, 2002. This
notes interest rate was 8 percent per annum. At March 31, 1999, the balance
was paid in full. The Company's President loaned the Company $39,000 at an
interest rate of 10 percent on August 19, 1998. The balance of this note was
$22,551 as of March 31, 1999. At December 31, 1999, the balance was paid in
full (unaudited).
The Company's Chief Financial Officer borrowed funds during the fiscal year
ended March 31, 1999 totaling $9,700. The note bears interest at an interest
rate of 8.5 percent per annum. Payments are due monthly with the balance to
be paid in full as of November 5, 2000. The balance of the note as of March
31, 1999, including interest, was $9,906. At December 31, 1999, the balance
was paid in full (unaudited).
The Company leased its California facility from its President. For the years
ended March 31, 1999 and 1998, rent expense for such lease was $34,000 and
$42,800, respectively.
F-16
10. EMPLOYEE BENEFIT PLAN
In January 1999, the Company adopted a defined contribution plan under
Section 401(k) of the Internal Revenue Service Code covering all eligible
employees (the "401(k) Plan"). Eligible participants may contribute up to 15
percent of their total compensation. Participants will be immediately vested
in their personal contributions and over a six-year period for amounts
contributed by the Company. The Company did not make any matching
contributions to the 401(k) Plan for the fiscal year ended March 31, 1999 or
the nine-month period ended December 31, 1999 (unaudited).
11. BUSINESS SEGMENTS
The Company's only business activity is the manufacture and sale of
peripheral devices for laptop computers. Therefore, the Company currently
operates within one business segment.
Two customers accounted for 73 percent of revenues for the nine-month
periods ended December 31, 1999 (Customer E accounted for 46 percent and
Customer C for 27 percent). Three customers accounted for 65 percent of
revenues for the nine-month periods ended December 31, 1998 (Customer A
accounted for 28 percent, Customer B for 20 percent and Customer D for 17
percent). Three customers accounted for 89 percent of accounts receivable
(Customer E accounted for 28 percent, Customer C for 40 percent and Customer
I for 21 percent) at December 31, 1999 (unaudited).
Four customers accounted for 65 percent of revenues for the year ended March
31, 1999 (Customer A accounted for 22 percent, Customer B for 16 percent,
Customer C for 14 percent, and Customer D for 13 percent of revenue). One
customer accounted for 13 percent of revenues for the year ended March 31,
1998. Export sales accounted for 10 percent and 17 percent of revenues for
the years ended March 31, 1999 and 1998, respectively. Two customers
accounted for 81 percent (Customer C accounted for 48 percent and Customer E
for 33 percent) and three customers accounted for 45 percent of accounts
receivable (Customer F accounted for 27 percent, Customer G for 18 percent,
and Customer H for 13 percent) at March 31, 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters that management considers
to be in the normal course of business. In management's opinion, all matters
will be settled without material effect on the Company's financial position
or results of operations.
13. SUBSEQUENT EVENTS
On April 16, 1999, the Company entered into a definitive agreement to merge
with JLL Ventures (Delaware) Corp., a Delaware corporation, ("JLL") and JLL
ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of
JLL ("JLL ACQUISITIONS") (the "Merger"). JLL was an inactive public company.
In connection with the Merger, all shares of the Company are to be exchanged
for shares of JLL. JLL held $1,000,000 in cash at the time of the Merger.
The Company will assume no additional liabilities as a result of its merger
with JLL. Furthermore, JLL is required by the merger agreement to assist the
Company in obtaining additional financing in the form of bridge loans from
unrelated parties within 30 days after the Merger closing date. As a result
of the Merger, the shareholders of the Company will maintain a controlling
interest in the Company and the Merger will be accounted for as a "reverse
acquisition." Accordingly, for financial statement presentation purposes,
the Company is viewed as the continuing entity and the related business
combination is viewed as a recapitalization of the Company, rather than an
acquisition by JLL.
F-17
Each of the Company's shareholders will exchange each share of Company's
common stock for 2.06 shares of JLL's preferred stock. The preferred stock
has voting rights and has a variable conversion rate to common stock of CNF
Technologies, Inc. based on financial performance for the year ending March
31, 2000:
Financial Performance Targets with Preferred Stock Conversion Rates
--------------------------------------------------------------------------------
Conversion
Target Rate
Gross revenues of $20.25 million and net income of $810,000 1.50
Gross revenues of $34.43 million and net income of $1.38 million 1.75
Gross revenues of $45.9 million and net income of $1.84 million 2.00
Gross revenues of $57.6 million and net income of $2.30 million 2.25
The Financial Performance Targets are to be derived from the results of
operations reflected within the Company's audited financial statements for
the fiscal year ending March 31, 2000. Prior to that time, preferred stock
can be converted by the holder to common stock on a one-to-one basis. Should
the Company not meet the financial performance targets, the preferred stock
will automatically convert to common stock on a one-to-one basis. In any
event, all shares of preferred stock shall be converted to shares of common
stock no later than June 30, 2000.
Subsequent to March 31, 1999 and prior to the closing of the Merger, in
accordance with the merger agreement, the Company received $975,000 in
bridge loans from four unrelated parties, unsecured, with interest at 10
percent, payable upon the earlier of (i) completion of an unsecured
$3,000,000 financing transaction by the Company or (ii) one year from the
date of the note (maturities range from April 7, 2000 to May 12, 2000).
Also, prior to the closing of the Merger, in accordance with the merger
agreement, the Company received $700,000 in bridge loans from four unrelated
parties, unsecured, with interest at 10 percent, payable upon the earlier of
(i) completion of an unsecured $4,000,000 financing transaction by the
Company or (ii) one year from the date of the note (maturities range from
May 26, 2000 to June 4, 2000). Holders of the notes have the right to
convert the notes to shares of the Company's stock at a price equal to a 25
percent discount from the offering price in a subsequent offering of the
Company's stock, should one occur.
On June 8, 1999, the Merger was completed and JLL ACQUISITIONS changed its
name to CNF Mobile Solutions Inc. On June 11, 1999, JLL changed its name to
CNF Technologies, Inc.
In connection with the anticipated completion of the Merger, the lines of
credit maturity dates were extended under a loan modification agreement. Per
the loan modification agreement, on June 7, 1999 and on June 30, 1999, a
$100,000 principal-only installment shall be due and payable. In addition, a
$100,000 principal-only payment shall be due and payable upon execution of
the loan modification agreement. Interest-only installments will be due and
payable on the tenth day of each month. The remaining balance on the lines
of credit will be due and payable on July 31, 1999.
On June 4, 1999, in accordance with the loan modification agreement, the
Company made the required $100,000 principal-only payment, as well as the
$100,000 principal payment due on execution of the loan modification
agreement.
Unaudited
The Company made an additional principal only payment on its lines of credit
in August 1999 in the amount of approximately $152,000, and negotiated a
second loan modification agreement extending the maturity date to December
31, 1999.
On October 6, 1999, the Company paid the final installment on its lines of
credit.
F-18
Two million shares of the Company's outstanding common stock have been
deposited into escrow and remain subject to cancellation upon the terms set
forth in a certain escrow agreement entered into in connection with the
Merger. Specifically, certain historic shareholders of the Company have
deposited these shares into escrow to secure an obligation under the merger
agreement to complete a private placement which provides the Company with
proceeds of between $2,000,000 and $6,000,000 (inclusive of the conversion
of certain indebtedness) by no later than on or about February 15, 2000.
These shares will be released based on the gross proceeds realized by the
Company's completion of the private placement and conversion of indebtedness
and the conversion of certain indebtedness.
Two million of the shares of Series A Preferred Stock issued to Mr. Paul
Charles, a principal shareholder of the Company, under the merger agreement
were subject to cancellation upon the terms set forth in a separate escrow
agreement by and between the Company and Mr. Charles. These shares were
deposited into escrow to secure Mr. Charles' indemnification obligations
under the merger agreement with respect to certain representations,
warranties and covenants thereunder. Provided that there were no claims for
indemnification under the merger agreement pending against Mr. Charles,
1,000,000 of these shares were subject to release on or about December 8,
1999 and the remainder were subject to release on or about December 8, 2000.
As the result of cash flow considerations, the Company agreed to provide the
holders of certain bridge loans additional equity incentives to exercise
their rights to convert the bridge loans to shares of the Company's common
stock. During October, November, and December 1999, the Company converted
$1,859,630 of bridge loans ($1,825,000 principal amount and $34,630 of
interest) for 1,112,315 shares of common stock. The resulting shares
consisted of 912,500 for the principal amount of the bridge loans, 17,315
shares for the related accrued interest and 182,500 shares provided to the
holders as equity incentives. As the result of the transaction, the Company
recorded interest expense of $1,477,315 to reflect the impact of the
beneficial conversion feature of the convertible debt and equity incentives.
On November 1, 1999, the Company issued 75,000 shares of common stock to
Deremie Enterprises Limited for consideration for a bridge note of $500,000.
As a result of the transaction, the Company recorded interest expense of
$225,000 to record the impact of the consideration given for the bridge
note. The note was repaid on November 26, 1999.
On November 26, 1999, the Company conducted an initial closing of the
Private Placement pursuant to which the Company obtained gross proceeds of
$2,000,000 from the sale of 666,667 shares of common stock. In connection
with the Private Placement, the Company issued warrants to purchase 200,000
shares of common stock, all of which are currently exercisable. In addition,
the Company agreed to issue warrants to the Company's placement agent to
purchase up to an additional 200,000 shares of common stock, which will be
immediately exercisable. On November 26, 1999, the Company issued 66,667 of
these warrants. All warrants have an exercise price of $3.00 and expire in
November 2004.
On November 15, 1999 and February 8, 2000, the Company entered into
agreements with Paul Charles and Synergy Group International, Inc. ("Synergy
Group"), a principal shareholder of the Company, and others which amended
certain provisions of the Merger. Specifically, Mr. Charles agreed to resign
his position as the Chief Executive Officer and President of the Company and
to surrender 1,500,000 of the shares of Series A Preferred Stock issued to
him in the Merger and to transfer an additional 500,000 shares to a
financial consultant. The agreement also amended the provisions of the
Merger relating to the private financing obligations. These amendments
consisted of reducing the minimum required proceeds from $3,000,000 to
$2,000,000, including the conversion of indebtedness as proceeds and
amending the escrow provisions relating to the 4,000,000 shares of common
stock owned by the Synergy Group and others to secure the funding
obligations. Additionally, the Private Placement Memorandum was terminated
and the remaining shares will be released upon certain performance
F-19
criteria from various parties. As amended, 2,000,000 of these shares were
released upon the Company realizing gross proceeds of $2,000,000, an
additional 1,000,000 shares were released upon the Company realizing
$4,000,000 of gross proceeds, and the remaining 1,000,000 shares will be
released upon the Company realizing $6,000,000 of gross proceeds.
On February 8, 2000, the Company issued 250,000 shares of common stock
raising gross proceeds of $500,000. The Company also issued 250,000 shares
of common stock for financial consulting services.
In February 2000, employees of the Company purchased 11,604 shares of the
Company's preferred stock.
* * * * *
F-20
Until ____________ (ninety (90) days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3,106,623 Shares
[LOGO]
CNF TECHNOLOGIES, INC.
Common Stock
-------------------
P R O S P E C T U S
-------------------
March 2, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws reflect the adoption
of the provisions of Section 102(b)(7) of the Delaware General Corporation Law
(the "GCL"), which eliminate or limit the personal liability of a director to
the Company or its stockholders for monetary damages for breach of fiduciary
duty under certain circumstances. If the GCL is amended to authorize corporate
action further eliminating or limiting personal liability of directors, the
Certificate of Incorporation provides that the liability of the director of the
Company shall be eliminated or limited to the fullest extent permitted by the
GCL. The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify any person, who was or is a party to a proceeding by
reason of the fact that he is or was a director, officer, employer or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees) actually
and reasonably incurred by him in connection with such proceeding if he acted in
good faith and in a manner he reasonably believed to be or not opposed to the
best interests of the Company, in accordance with, and to the full extent
permitted by, the GCL. The determination of whether indemnification is proper
under the circumstances, unless made by the Court, shall be determined by the
Board of Directors.
Reference is made to Item 28 for the undertakings of the Registrant with
respect to indemnification of liabilities arising under the Securities Act of
1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
SEC Registration Fee...................................... $ 4,946
Printing and Engraving.................................... $20,000
Accountants' Fees and Expenses............................ $15,000
Legal Fees and Expenses................................... $30,000
Other Offering Expenses................................... $ 5,000
-------
Total..................................................... $74,946
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Recent Sales of Unregistered Securities
1. On or about February 2, 2000 the Company issued 250,000 shares of common
stock at $2.50 per share raising gross proceeds of $500,000. These securities
were sold to two (2) accredited investors in a private placement transaction
exempt from the registration
II-1
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person
as follows:
Name Number of Shares
---- ----------------
Discretionary Investment Trust 100,000
Deremie Enterprises Limited. 150,000
-------
250,000
2. On or about February 2, 2000, the Company issued 250,000 shares of
common stock to one (1) accredited investor in consideration of financial
consulting services. The securities were issued in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4 (2) thereof directly by Company without payment of
underwriting discounts or commissions to any person and without engaging in any
advertising or general solicitation of any kind as follows:
Name Number of Shares
---- ----------------
Discretionary Investment Trust 250,000
3. During January and February 2000, the Company issued 29,500 shares of
common stock together with promissory notes in the aggregate principal amount of
$295,000. These securities were sold in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation and without payment of underwriting discounts or
commissions to one (1) accredited investor, who was known either to the
Company's officers or principal shareholders prior to the offering of such
securities, as follows:
Principal Amount
Name of Note Number of Shares
---- ----------------- ----------------
Larry Kaplan $145,000 14,500
Larry Kaplan 150,000 15,000
-------- ------
TOTAL $295,000 29,500
4. On November 26, 1999, the Company issued 666,667 shares of common stock
at $3.00 per share raising gross proceeds of $2,000,000. The Company paid
brokerage commissions and non accountable expense equal to $260,000 together
with warrants to purchase 266,667 shares of common stock at an exercise price of
$3.00 per share to a registered broker-dealer. These securities were sold in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder solely to a limited number accredited investors without
engaging in any advertising or general solicitation of any kind as follows:
II-3
Number Number
Name of Shares of Warrants
---- --------- -----------
Donald Parvin & Philip Parvin JTROS 8,333
Pueblo Properties L.L.C. 8,333
Daljit S. Buttar 108,333
Michael K. Havrilesko 83,333
Matrose Capital Management, Ltd. 266,667
Myron H. Reinhart 83,333
Steve Katz & Becky Katz JTROS 16,667
David Henry Sutton 8,333
Neil Druks 16,667
Allen Jacobson 16,667
Jacob Roth & Yentil Roth JTROS 16,667
Amro International S.A. 100,000
Balmore Funds 83,334
Austost Anstalt Schaan 83,334
Frederick G. Heumann 33,333
-------
TOTAL 666,667
5. During November and December 1999, the Company issued 512,316 shares of
common stock in consideration of the cancellation of $825,000 of outstanding
indebtedness, $34,630 of accrued interest and additional equity incentives.
These securities were sold to accredited investors in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof directly by the Company without engaging in any
advertising or general solicitation and without payment of underwriting
discounts or commissions solely to accredited investors who had provided
unsecured debt financing to the Company during July and August 1999. These
investors were known either to the officers or principal shareholders of the
Company prior to the offering of the notes.
Name Number of Shares
---- ----------------
Daljit S. Buttar 92,733
Enrico E. DiVito, DDS 30,918
Michael G. Glynn 75,000
Allen and Jane Kelsey 30,890
Lindzon Capital Partners 126,562
Blair Portigal 61,822
Harold Rubenstein 63,151
Rochelle and Shelden Terman 31,240
-------
TOTAL 512,316
6. On October 29, 1999, the Company issued 600,000 shares of common stock
in consideration of the cancellation of $1,000,000 of outstanding indebtedness
incurred during June 1999, and on November 2, 1999 issued 5,000 shares of common
stock in consideration of the advance of a bridge loan in the principal amount
of $500,000. These securities were sold to two (2) accredited investors who had
either previously provided unsecured debt financing to the Company or as an
incentive to provide financing in a private placement transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof directly by the
II-3
Company without payment of underwriting discounts or commissions. Both investors
were either known to the officers or principal shareholders of the Company prior
to the offering of the note.
Name Number of Shares
---- ----------------
Meris Capital Partners, L.P. 600,000
Imperium Capital Corporation 75,000
TOTAL 675,000
7. During July 1999, the Company issued 359,081 shares of common stock in
consideration of the cancellation of $547,253 of outstanding indebtedness.
incurred during June 1999 These securities were sold in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof directly by the without payment of underwriting
discounts or commissions to two (2) accredited investors were known either by
the officers or principal shareholders of the Company prior to the offering of
the notes:
Name Number of Shares
---- ----------------
Larry Kaplan 347,574
Keith and Carol Henrichsen 11,507
8. During July and August 1999, the Company issued 65,000 shares of common
stock together with promissory notes in the aggregate principal amount of
$650,000. These securities were sold in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation and without payment of underwriting discounts or
commissions to a limited number of accredited investors who were known either to
the Company's officers or principal shareholders prior to the offering of such
securities as follows:
Principal Amount Number
Name of Notes of Shares
---- ---------------- ---------
Daljit S. Battar $150,000 15,000
Creative Business (Asia Online Publications) 100,000 10,000
Enrico E. Divito DDS 50,000 5,000
Allen and Jane Kelsey 50,000 5,000
Kerzner Revocable Trust 50,000 5,000
Larfer Family Trust 100,000 10,000
Blair Portigal 100,000 10,000
Myron Reinhart 50,000 5,000
-------- -----
TOTAL $650,000 65,000
9. During February and March 1999, the Company issued promissory notes in
the aggregate principal amount of $778,259. These securities were sold in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation and without payment of
underwriting discounts or commissions to a limited number of
II-4
accredited investors who were known either to the Company's officers or
principal shareholders prior to the offering of such securities as follows:
Principal Amount
Name of Notes
---- ----------------
Sid and Lila Parrish $250,000
Larry Kaplan 503,259
Keith and Carol Henrichsen 25,000
--------
TOTAL $778,259
10. After the completion of the Merger, during June 1999, the Company
issued 167,500 shares of common stock in connection with the issuance of the
promissory notes by CNF, Inc. in the aggregate principal amount of $1,675,000
prior to the merger during April 1999. These shares were sold in a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation and without payment of
underwriting discounts or commissions. These shares were issued to a limited
number accredited investors who were known either to the officers of principal
shareholders of the Company prior to the offering of the notes in consideration
of the substantial additional risk undertaken by such investors by advancing
unsecured funds to CNF, Inc. prior to completion of the Merger.
Principal Amount Number
Name of Notes of Shares
---- ---------------- ---------
Jim Caljeen $ 100,000 10,000
Michael G. Glynn 125,000 12,500
Helen and Jerry Holden 50,000 5,000
Lanny Lahr 100,000 10,000
Meris Capital Partners, LP 1,000,000 100,000
Harold Rubenstein 250,000 25,000
Rochelle and Sheldon Terman 50,000 5,000
---------- -------
TOTAL $1,675,000 167,500
11. On June 8, 1999, the Company acquired CNF, Inc. by merger in
consideration of the issuance of (i) 5,163,188 shares of Series A Preferred
Stock to the holders of all outstanding shares of common stock of CNF, Inc.; and
(ii) options to purchase 836,790 shares of Series A preferred Stock to the
holders of all outstanding options to purchase shares of CNF, Inc. common stock.
These securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
directly by the Company without payment of underwriting discounts or commissions
to the following accredited investors:
Number of Series A
Name Preferred Shares
Paul Charles 5,157,000
Howard Lindzon 6,188
---------
TOTAL 5,163,188
II-5
Number of Shares Number of
of CNF Common Preferred Shares
Stock Issuable Current Issuable Upon Adjusted
Holder of CNF Options Upon Exercise Exercise Price($) Exercise Exercise Price($)
--------------------- ---------------- ----------------- ---------------- -----------------
David Thompson 164,474 0.5 339,277 0.24
Daniel Rudich 98,684 0.5 203,565 0.24
Luis Manriquez 25,000 0.5 51,570 0.24
Jeff Piper 15,000 0.5 30,942 0.24
Al Ingallinera 10,000 0.5 20,628 0.24
Justin Hendrickson 5,000 0.5 10,314 0.24
Jaime Melendez 5,000 0.5 10,314 0.24
Sal Ramirez 500 0.5 1,031 0.24
Jesus Arrazola 500 0.5 1,031 0.24
Nicole Farley 500 0.5 1,031 0.24
Luke Sanfilippo 2,500 0.5 5,157 0.24
Ryan Taylor 2,500 0.5 5,147 0.24
Nick Nebelsky 5,000 0.5 10,314 0.24
Regina Kretschmann 10,000 0.5 20,628 0.24
Pam Long 1,000 0.5 2,063 0.24
Quin Rodriquez 1,000 0.5 2,063 0.24
Frank Layland 20,000 0.5 41,256 0.24
Sami Aljanabe 10,000 0.5 20,628 0.24
Quin Rodriquez 19,000 2.50 39,193 1.21
David Marsh 10,000 2.50 20,628 1.21
------- -------
TOTAL 405,658 836,790
12. During May and June 1999, the Company issued and sold an aggregate
of 8,000,000 shares of common stock raising gross proceeds of $1,120,000. These
shares were issued to accredited investors in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. This
offering was undertaken by the Company to a limited number accredited investors
without engaging in any advertising or general solicitation and without payment
of underwriting discounts or commissions prior to the closing of the merger. At
that time the Company was inactive with no assets or liabilities. Investors in
such offering were, therefore, subject to a number of risks and uncertainties,
including the material contingencies associated with completion of the merger.
Name Number of Shares
---- ----------------
ACA Trading Intermediates 370,000
All Pro Security 65,000
Avalon Financial Services LLC 130,000
Beaumont Investment Holding Ltd. 340,000
Jeff Berman 70,000
Blake Group Inc. 395,000
Boyett Investment Ltd. 318,000
Brookabby Investments Ltd. 5,000
Edmund J. Burgassi 5,000
II-6
Name Number of Shares
---- ----------------
Capital Growth Trust 175,000
Kenny Cook 100,000
Dwyer Investments LP 5,000
EBR Investments 50,000
FAC Enterprises Inc. 292,000
Clifford Feldstein 25,000
Fincord Holding Corp. 425,000
Michele R. Ganz 20,000
Geneco Investment Corp. 578,000
Marvin Gersten 125,000
Michael Glynn 10,000
Godwin Finance Ltd. 400,000
Michael Goldstein 10,000
Carolyn Gordon 5,000
Cathy Graham 45,000
Gunhill Capital Inc. 50,000
Huber Family Trust 12,000
Imperium Capital 175,000
Allan E. Jacobson 15,000
Ron Jaffe 10,000
Jay Josephs 15,000
KAB Investments Inc. 225,000
Robert S. Kant 20,000
Alan and Jan Kelsey 25,000
Kenneth Kirshcenbaum 50,000
Steven Kram 25,000
Jack Leadbeater 100,000
Howard Lindzon 332,500
Lindzon Capital Partners 60,000
Sara L. Marold Bypass Trust 150,000
Vincent J. Marold Exempt Trust 1,000,000
MCZ Corp 48,000
William Meris 15,000
Meris Capital Partners LP 50,000
Anna Maria Mintz 20,000
Carolyn J. Orena 25,000
Robert Perlitz 5,000
Tom Peterson 25,000
RMLH Holding, LLC 120,000
Harold and Beverly Rubenstein 25,000
Lynda Rufo 20,000
Mark Scatterday 45,000
Arthur Van Beuren Seavey 5,000
Seavey Funds Inc. 108,000
Rob Segal 90,000
Michael S. Siegal 35,000
SPH Investments 257,000
Synergy Group 177,500
Patricia Trish Trust 30,000
II-7
Name Number of Shares
---- ----------------
Troy Funding Corp. 212,000
Richard Tully 20,000
Wabering Investment Group Ltd. 400,000
Wexler & Burkhart 30,000
Gordon Douglas Young 10,000
---------
TOTAL 8,000,000
ITEM 27. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REGISTRATION STATEMENT:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
2.1 Agreement and Plan of Merger (the "Merger Agreement") dated (1)
April 16, 1999 by and among JLL Ventures (Delaware) Corp.,
JLL Ventures Acquisition Corp., CNF, Inc. and Paul Charles
2.2 Amendment No. 1 to Merger Agreement dated May 24, 1999 (1)
2.3 Agreement dated November 1, 1999 (resulting in a second (1)
amendment to Merger Agreement)
2.4 Amendment No. 1 to Agreement dated November 1, 1999 Filed herewith
(resulting in a third amendment to Merger Agreement)
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment to Certificate of Incorporation (1)
3.3 Certificate of Designation of Series A Convertible Preferred (1)
Stock
3.4 By-Laws, as amended to date (1)
5.1 Opinion of Buchanan Ingersoll Professional Corporation To be filed by
Amendment
10.1 Employment Agreement dated May 19, 1999 by and between the (1)
Company and Paul Charles
II-8
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.2 Addendum to Employment Agreement dated November 2, 1999 by (1)
and between the Company and Paul Charles
10.3 Employment Agreement dated May 19, 1999 by and between the (1)
Company and David Thompson
10.4 Employment Agreement dated May 19, 1999 by and between the (1)
Company and R. Daniel Rudich
10.5 Addendum to Employment Agreement dated November 2, 1999 by (1)
and between the Company and R. Daniel Rudich
10.6 Employment Agreement dated May 19, 1999 by and between the (1)
Company and Frank Layland
10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1)
the Company, Synergy Group International, Inc. and certain
shareholders of the Company (as amended by Exhibits 2.3 and
2.4)
10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1)
the Company and Paul Charles (as substantially amended by
Exhibits 2.3 and 2.4)
10.9 Lease Agreement dated April 1, 1998 by and between the Filed herewith
Company and Filed herewith City Park LLC
10.10 Distribution Agreement dated February 19, 1998 by and between Filed herewith
the Filed herewith Company and Ingram Micro Inc., as amended
10.11 Distributor Agreement dated January 7, 1999 by and between Filed herewith
the Company and Merisel Americas, Inc.
10.12 Promissory Note evidencing certain outstanding unsecured Filed herewith
indebtedness
10.13 Form of Amendment to Promissory Note evidencing all Filed herewith
outstanding unsecured indebtedness
10.14 Form of Promissory Note evidencing certain additional Filed herewith
outstanding indebtedness
II-9
Exhibit No. Description Method of Filing
----------- ----------- ----------------
21.1 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under
Exhibit 5.1
23.2 Consent of Deloitte and Touche LLP Filed herewith
27.1 Financial Data Schedule Filed herewith
99.1 Notice of Allowance dated August 16, 1999 issued by the Filed herewith
United States Patent and Trademark Office for the Company's
Digitari Universal Docking and Port Replication Technologies
99.2 October 28, 1999 Patent issued by the Australian Patent Filed herewith
Office for the Company's Digitari Universal Docking and Port
Replication Technologies
99.3 Notice of Patent issuance dated August 1999 from the United To be Filed
By Amendment
States Patent and Trademark Office for the Company's Device
Dock Technologies.
- ------------------
(1) Filed as an Exhibit to Registrant's Registration Statement on Form SB-2 on
December 3, 1999.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement which, individually or together,
represent a fundamental change in the information in the registration statement;
and (iii) include any additional or changed material information on the plan of
distribution.
2. For the purpose of determining liability under the Securities Act of
1933, as amended, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration any of
the securities being registered which remain unsold at the termination of the
offering.
II-10
4. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized in the City of Scottsdale, Arizona on
March 2, 2000.
CNF TECHNOLOGIES, INC.
By: /s/ David G. Thompson
-----------------------------------
Interim Chief Executive Officer and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DAVID G. THOMPSON his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement and any related Registration Statements filed
pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ Paul D. Charles Chairman March 2, 2000
- -------------------------
Paul D. Charles
/s/ Carmine F. Adimando Director March 2, 2000
- -------------------------
Carmine F. Adimando
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.4 Amendment No. 1 to Agreement dated November 1, 1999
(resulting in a third amendment to Merger Agreement)
10.9 Lease Agreement dated April 1, 1998 by and between the
Company and City Park LLC
10.10 Distribution Agreement dated February 19, 1998 by and between
the Company and Ingram Micro Inc., as amended
10.11 Distributor Agreement dated January 7, 1999 by and between
the Company and Merisel Americas, Inc.
10.12 Promissory Note evidencing certain outstanding unsecured
indebtedness
10.13 Form of Amendment to Promissory Note evidencing all
outstanding unsecured indebtedness
10.14 Form of Promissory Note evidencing certain additional
outstanding indebtedness
21.1 Subsidiaries of the Registrant
23.2 Consent of Deloitte and Touche LLP
27.1 Financial Data Schedule
99.1 Notice of Allowance dated August 16, 1999 issued by the
United States Patent and Trademark Office for the Company's
Digitari Universal Docking and Port Replication Technologies
99.2 October 28, 1999 Patent issued by the Australian Patent
Office for the Company's Digitari Universal Docking and Port
Replication Technologies