AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
VIA EDGAR ON DECEMBER 3, 1999
REGISTRATION NO. 333 -_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 1,756,624 (3) $5.6875 9,990,792 $3,027.51
(1) Represents shares of the Company's Common Stock which may be offered by
certain Selling Security Holders. See "SELLING SECURITY HOLDERS."
(2) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the bid and asked prices per share
of the Company's common stock as reported on the OTC Bulletin Board on
November 29, 1999.
(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.
2
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 DECEMBER 3, 1999
PRELIMINARY PROSPECTUS
CNF TECHNOLOGIES, INC.
1,756,624 Shares of Common Stock
The Selling Security Holders identified on page 46 of this Prospectus, may
offer and sell, from time to time, up to 1,756,624 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 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 OTC Bulletin Board under the symbol
"CNFT". The last reported bid price of our Common Stock on November 29, 1999 on
the OTC Bulletin Board was $5.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 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 December 3, 1999
3
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY................................................................................................1
THE OFFERING......................................................................................................3
SUMMARY CONSOLIDATED FINANCIAL DATA...............................................................................4
RISK FACTORS......................................................................................................5
USE OF PROCEEDS..................................................................................................13
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS......................................................13
CAPITALIZATION...................................................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................16
DESCRIPTION OF BUSINESS..........................................................................................25
MANAGEMENT.......................................................................................................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................41
DESCRIPTION OF SECURITIES........................................................................................43
SELLING SECURITY HOLDERS.........................................................................................46
PLAN OF DISTRIBUTION.............................................................................................47
LEGAL MATTERS....................................................................................................48
EXPERTS..........................................................................................................49
WHERE YOU CAN GET MORE INFORMATION...............................................................................49
FINANCIAL STATEMENTS............................................................................................F-1
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. This Preliminary Prospectus is
subject to completion prior to this offering.
i
PROSPECTUS SUMMARY
The following information is intended to summarize the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. This section is not intended to be a complete
description of all aspects of our business or the Common Stock being offered by
the Selling Security Holders. Investors should carefully consider the
information set forth under the caption "RISK FACTORS" beginning at page 5 of
this Prospectus. Unless the context otherwise requires, all references to "CNF,"
the "Company," "we," "us" or "our" refer to CNF Technologies, Inc. and our
subsidiaries.
About CNF Technologies, Inc.
We design, manufacture and market portable computer peripherals and
accessories for laptop computers to notebook PC vendors, wholesale distributors,
computer resellers, computer retail stores and corporate end users. Our devices
are designed to bring the functionality and power of desktop computers to
portable computer users.
Our core products
o Internal high-capacity removable storage devices for various notebook
computers (including Zip and LS/120 Super Disk drives)
o Portable DVD-ROM drives
o Portable CD-ROM drives
o Universal bay replicators branded as deviceDOCK's(TM)
o Monitor stands
o Numeric keypads
o Proprietary and universal auto adapters
o Universal port replicators
In addition to the core products described above, we plan to introduce a
universal docking station to complement our universal port replicator during the
next fiscal year. The universal port replicator and the universal docking
station are product devices which enable users of almost any make or model of
portable computer to transform their laptop into a desktop computer. These
products are designed to link a laptop to a network, a full-size monitor,
keyboard and mouse, as well as an array of external and internal peripherals.
Industry and market information
According to International Data Corporation, a market research firm,
portable computers are currently the fastest growing segment of the personal
computer market. This growth has
1
been fueled by advances in computer technology and the increasing demand for
computer mobility. International Data Corporation also predicts that the
portable computer market will grow at a compound annual rate of 15%, from 14.1
million units in 1997 to approximately 25 million units by 2001.
We market our products through wholesale distributors, original equipment
manufacturers ("OEMs"), resellers, and to a lesser extent, directly to corporate
end users throughout the United States, Canada, Australia, Japan and Europe. The
market for personal computers and computer peripherals is subject to intense
competition and characterized by both rapid technological change and shifting
consumer demands. In order to effectively compete in this industry, we must
continually develop and introduce new products with improved features in a
timely and cost-efficient manner. This requires us to maintain superior research
and development, comprehensive market research and effective communication
channels with manufacturers, distributors and corporate end users.
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.
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 ("CNF, Inc."), by merger (the "Merger") and assumed the historic
operations of CNF, Inc. In connection with the Merger, we changed our name to
CNF Technologies, Inc. ("CNF") and changed the name of our wholly owned
subsidiary to CNF Mobile Solutions, Inc. Prior to the Merger, we were an
inactive company whose 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.
2
THE OFFERING
Common Stock offered by the Selling Security
Holders: 1,756,624 Shares
Common Stock currently outstanding: 11,352,830 Shares(1)
Common Stock to be outstanding after the Offering: 11,502,830 Shares(1)(2)
Use of Proceeds: We will not receive any of the proceeds from the sale of
shares by the Selling Security Holders.
Trading Symbol (OTC Bulletin Board): "CNFT"
- --------------------------
(1) The number of outstanding shares includes 2,000,000 shares which are subject
to possible cancellation upon the terms set forth in an escrow agreement
entered into in connection with the Merger. These shares will be released
from escrow based on the proceeds we receive in a private placement of our
Common Stock which terminates on February 15, 2000 and the principal amount
of outstanding indebtedness, if any, which is converted into shares of our
Common Stock on or before February 15, 2000. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - Material Escrow Arrangements."
The number of outstanding shares does not include:
o 4,163,188 or more shares issuable upon the conversion of 4,163,188
outstanding shares of the Company's Series A Convertible Preferred
Stock (the "Series A Preferred Stock");
o 792,440 or more shares issuable upon exercise of outstanding options to
purchase 792,440 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;
o 200,000 shares issuable upon exercise of outstanding warrants; and
o up to 200,000 shares issuable upon exercise of warrants issuable upon
completion of a private placement transaction. Warrants to purchase
66,667 of such shares have been issued.
See "DESCRIPTION OF SECURITIES" and "MANAGEMENT - Outstanding Options;
Stock Incentive Plan."
(2) Includes 150,000 shares being offered hereunder which are issuable upon
conversion of outstanding shares of Series A Preferred Stock.
3
SUMMARY CONSOLIDATED FINANCIAL DATA (1)
The following table sets forth our summary financial data. This table does
not present all of our financial information. You should read this information
together with our financial statements and the notes to those statements
beginning on page F-1 of this Prospectus and the information under "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Statement of Operations Data:
Year Ended March 31 Six Months Ended September 30
1999 1998 1999 1998
----------- ----------- ---------- ----------
Revenues $9,425,947 $7,726,484 $6,114,459 $6,593,389
Gross Profit 3,337,398 3,265,540 2,249,198 2,281,809
Loss before income taxes (3,119,725) (58,167) (2,360,679) (443,995)
Net Loss (3,074,525) (79,267) (2,360,679) (443,995)
Basic and Diluted loss per share: (2) (1.23) (0.03) (0.31) (0.18)
Basic and Diluted Weighted average
number of shares outstanding: 2,500,250 2,500,000 7,518,457 2,500,000
Balance Sheet Data:
As of
March 31, 1999 As of September 30, 1999
-------------- ------------------------
Actual Actual ProForma(3)
----------- ----------- ------------
Working capital (deficiency) $(3,062,743) $(3,460,854) $ (45,854)
Total assets 3,538,687 4,789,207 6,529,207
Total liabilities 6,265,324 7,835,082 6,160,082
Stockholders equity (deficit) (2,726,637) (3,045,875) 369,125
- -------------------
(1) The financial data presented above reflect the relevant Statement of
Operations Data of CNF, Inc. CNF, Inc. was acquired by us pursuant to the
Merger in which CNF, Inc. was merged with and into our wholly owned
subsidiary JLL Ventures Acquisition Corp., a Delaware corporation. Upon
completion of the Merger, JLL Ventures Acquisition Corp. changed its name to
CNF Mobile Solutions, Inc. Because the former stockholders of CNF, Inc.
acquired a controlling interest in the Company (the Company was inactive at
the time), the Merger has been accounted for as a "reverse acquisition."
Accordingly, for financial statement presentation purposes, CNF, Inc. is
viewed as the continuing entity and the related business combination is
viewed as a recapitalization of CNF, Inc., rather than an acquisition by the
Company.
(2) Basic income (loss) per common share is based upon the weighted average
number of common shares outstanding for each period presented. Diluted
income (loss) per common share is based upon the weighted average number of
common shares plus the dilutive effect of the existing convertible
securities outstanding for each period presented. Convertible securities
have not been included as their effect would be anti-dilutive.
(3) Gives effect to the following events which occurred after September 30,
1999:
o the retirement of 1,000,000 shares of Series A Preferred Stock
o the receipt of net proceeds of $1,740,000 from the sale of 666,667
shares of Common Stock in a private placement transaction which closed
on November 26, 1999
o the issuance of 1,005,000 shares of Common Stock upon the conversion of
$1,675,000 of short-term indebtedness.
4
RISK FACTORS
An investment in our Common Stock involves a high degree of risk and should
only be made by investors who can afford to lose their entire investment. You
should carefully consider the risks and uncertainties described below and other
information in this Prospectus before deciding to invest in our Common Stock. If
any of the following risks actually occur, our business, results of operations
and financial condition could be materially, adversely affected. This could
cause the trading price of our Common Stock to decline and a loss of part or all
of any investment in our Common Stock.
FORWARD LOOKING STATEMENTS
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 HAVE A HISTORY OF LOSSES FROM OPERATIONS AND ANTICIPATE FUTURE LOSSES
WILL OCCUR
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 six months ended September 30, 1999
as we sustained additional net losses of $2,360,679. 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 FINANCIAL CONDITION RAISES 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 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
5
our current obligations, raise significant additional capital and ultimately
attain profitable operations.
WE HAVE EXPERIENCED, AND EXPECT TO CONTINUE TO EXPERIENCE, SIGNIFICANT
FLUCTUATIONS IN OPERATING RESULTS
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.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND OUR PRODUCTS
COULD BECOME OBSOLETE
The portable computer industry is characterized by rapid technological
change, frequent introduction of new products, continuing changes in consumer
demand, shall produce 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 FACE INTENSE COMPETITION IN THE MARKETS IN WHICH WE OPERATE
As the markets for portable computers and associated peripherals continue
to grow, we expect the markets for our products to become more competitive. The
principal competitive factors in the computer peripherals industry are:
o product innovation
o design
o functionality
o performance
o ease of use
o price and availability
6
Our principal competitors are large, nationally recognized OEMs as well as more
specialized computer peripheral manufacturers. Many of our competitors have
established reputations and significantly greater financial, marketing,
personnel and other resources than we do. As a result, these competitors may be
in a better position than us to quickly respond to rapid technological change
and consumer demand. For example, large OEMs, particularly those manufacturing
notebook PCs, not only have advance knowledge of technological improvements to
their own products, but also greater resources which may permit them to develop
superior peripheral products faster than we can. This could render our products
obsolete for portable computers manufactured or marketed by such OEMs. For these
and other reasons, we may not be able to compete effectively in the markets in
which we operate.
WE COULD BE AFFECTED BY A DECLINE IN INDUSTRY GROWTH RATE
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 material adverse effect
on our business.
THE SALES OF A PRINCIPAL PRODUCT LINE ARE LIKELY TO DECREASE
Our CD-ROM sales constitute a substantial percentage of our sales (5%
during the six months ended September 30, 1999, 19% during the six months ended
September 30, 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 products may be 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.
WE RELY ON THIRD-PARTY SUPPLIERS TO PROVIDE COMPONENTS THAT ARE CRITICAL TO
OUR BUSINESS
We are currently dependent on two main product lines (CD-ROMs and Zip
Drives) which accounted for approximately 80% of our revenue during the six
months ended September 30, 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 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
7
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.
WE HAVE LIMITED INTELLECTUAL PROPERTY PROTECTION
Our success and ability to compete are dependent, in part, upon proprietary
technology. We rely primarily on a combination of patent, copyright and
trademark laws, trade secrets and technical measures to protect our proprietary
rights. We have been issued one patent and have five patent applications pending
with notification that one of those pending patents will likely be issued within
the next 60 days. We cannot be certain that patents pending or future patent
applications will issue, or that if issued, we would have the resources to
protect any such issued patent from infringement. We also enter into
confidentiality, non-compete and/or work for hire invention assignment
agreements with our key employees and limit the access to and distribution of
our product design documentation and other proprietary information. We cannot
assure you that these efforts will deter misappropriation or to prevent an
unauthorized third party from obtaining or using information which we deem to be
proprietary. Although we believe that our technology does not currently infringe
upon patents held by others, we cannot assure you that such infringements do not
exist or will not exist in the future, particularly as the number of products
and competitors in our industry segment grows.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF THIRD-PARTY DISTRIBUTORS, OEMS AND
PRINCIPAL CUSTOMERS
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 represent 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 89% of our revenues during
the six months ended September 30, 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/customers are good, we cannot assure you that any or all of them
will continue to do business with us in the future.
WE ARE AT RISK OF PRODUCT DEFECTS AND EXPOSURE TO POTENTIAL PRODUCT
LIABILITY CLAIMS
Given the complex nature of our products, they may contain undetected
errors or performance problems particularly when new products are introduced.
Although our products undergo extensive testing prior to introduction to the
market, it is typical in the computer industry for such products to contain
errors and performance problems which are discovered after commercial
introduction. To the extent these defects and errors are discovered after
shipment, they could result in a loss of sales revenues, delay in market
acceptance, product returns, warranty claims and the loss of a potential market
all of which could have a material
8
adverse effect on our business. In addition, components and other products
manufactured and distributed by others which are incorporated into our products
may also contain such defects and errors which could substantially reduce the
performance of our products. We are also at risk of exposure to potential
product liability claims from distributors and end users for damages resulting
from a defect in products that we distribute. Although we maintain product
liability insurance we cannot assure you that this insurance will be adequate to
cover any claims brought against us. To the extent these claims are not covered
by insurance, they severely and negatively impact our business.
THE LOSS OF SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD HARM OUR
OPERATIONS
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 or otherwise leaving our Company. 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 be certain 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
The public trading market for our Common Stock recently commenced on the
OTC Bulletin Board. There is minimal supply of shares eligible for public resale
(100,000 shares) and trading has been extremely limited. 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
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 1,756,624 shares of Common Stock covered by this Prospectus. Although it is
impossible to predict market influences and prospective values for securities,
it is possible that, in and of itself, the substantial increase in the number of
shares available for public sale could have a depressive effect on the market.
Until a more seasoned trading market develops, if at all, the market price for
our Common Stock is likely to be volatile and factors such as success in
developing new products, competition and fluctuations in operating results may
all have a significant effect. In addition, the stock markets generally have
experienced, and continue to experience, extreme price and volume fluctuations
which have affected the market price of many small capitalization companies and
which have been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of our Common Stock.
THE ABILITY TO TRADE OUR SHARES COULD BE ADVERSELY EFFECTED IF THE TRADING
PRICE FALLS BELOW $5.00 PER SHARE
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
9
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 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 SHARES MAY NOT BE ELIGIBLE TO TRADE ON THE OTC BULLETIN BOARD AFTER
JANUARY 12, 2000
During January 1999, the National Association of Securities Dealers, Inc.
("NASD") adopted a rule to preclude "non-reporting" public companies from
trading on the OTC Bulletin Board. Under the new rule in order for securities to
be eligible for trading on the OTC Bulletin Board they must be registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Since our
shares were eligible for trading prior to the effective date of the new rule,
our Common Stock remains eligible for trading on the OTC Bulletin Board even
though our shares are not registered under the Exchange Act. In order to
maintain such trading, we must secure Exchange Act registration by no later than
January 12, 2000. Otherwise, our Common Stock would only be eligible to be
traded in the illiquid "pink sheet" system.
OUR COMMON STOCK WILL LIKELY BE SUBJECT TO ADDITIONAL DILUTION
We are in need of substantial additional financing. This will entail the
issuance of additional shares of Common Stock or common stock equivalents which
will have the effect of increasing the number of shares outstanding. In
connection with other business matters, we will likely undertake the issuance of
additional shares of Common Stock. This may be done in order to, among others,
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, in conjunction with the
Merger, we issued 5,163,188 shares of Series A Preferred Stock (of which
1,000,000 have been surrendered) and options to purchase 836,790 shares of
Series A Preferred Stock (of which 44,350 have been cancelled). Each share of
Series A Preferred Stock is initially convertible into one (1) share of Common
Stock. Depending on our financial performance during the fiscal year ended March
31, 2000, each share of Series A Preferred Stock is convertible into up to 2.25
shares of Common Stock. Accordingly, no later than June 30, 2000, the Series A
Preferred Stock will convert into a minimum of 4,163,188 and a maximum of
9,367,173, shares of Common Stock. In addition, the options could be exercised
10
for up to 671,065 (currently vested) or 1,782,990 (upon full vesting) additional
shares of Common Stock. 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.
WE ARE CONTROLLED BY A LIMITED NUMBER OF STOCKHOLDERS.
As of the date of this Prospectus, our officers, directors and a limited
number of principal stockholders beneficially own more than approximately 65% of
our outstanding voting shares. These stockholders will be in a position to elect
all of our directors and control the outcome of other corporate matters without
the approval of our other stockholders.
WE MAY BE ADVERSELY AFFECTED IF OUR PRODUCTS AND TECHNOLOGY ARE NOT YEAR 2000
COMPLIANT.
We are presently attempting to respond to Year 2000 issues. Year 2000
issues are the result of computer programs being written using two digits rather
than four to define the applicable year associated with the program or an
associated computation. Any such two-digit computer programs may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities.
To address such "Year 2000" issues, we established a Year 2000 Project
Team. We have successfully completed testing of current products and products
under development and do not believe there is significant risk of noncompliance.
We are uncertain that certain previous releases of our products, which are no
longer under support, will prove to be Year 2000 compliant. We have completed
initial evaluation, analysis and testing of our core internal systems. We do not
currently expect any significant issues to be identified during further review,
however, further inquiry and review is expected to continue throughout 1999.
Failure on our part to correct any issues with internal systems could result in
material disruption to our operations. We have completed our initial assessment
of the readiness of third-party business partners, including significant vendors
and customers. The assessment of the compliance of third party business partners
is on-going and is also expected to continue throughout 1999. Even where
assurances are received from third parties there remains a risk that failure of
systems and products of other companies on which we rely could have a material
adverse effect on us.
Our total cost for these Year 2000 compliance issues is not anticipated to
be material to our financial position or results of operations in any given
year. These costs and the date on which we plan to complete the Year 2000
modification and testing processes are based on our best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, we are uncertain that these estimates will be achieved and
actual results could differ from those plans. In addition, because many
companies may need to upgrade or replace computer systems and software to comply
with Year 2000 requirements, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies 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
11
as those offered by us, which could have a material adverse effect on our
business, results of operations and cash flows.
DELAWARE'S ANTI-TAKEOVER LAW MAY DISCOURAGE CHANGE IN CONTROL TRANSACTIONS.
As our shares become more widely held, listed on NASDAQ or on a
national exchange, we will become subject to 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 (3) 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" include mergers, asset sales and other
transactions resulting in a financial benefit to our stockholders. An
"interested stockholder" is a person who, together with its affiliates and
associates, owns, or within three (3) years, did own fifteen percent (15%) or
more of a corporation's voting stock. To the extent this provision of Delaware
law becomes applicable to us, it could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of our existing
management. This could deter or delay unsolicited changes in control of our
Company by discouraging open market purchases of our stock or a non-negotiated
tender or exchange offer for such stock. Since takeover transactions frequently
afford stockholders the opportunity to sell their shares at a premium over
current market prices, these provisions may be disadvantageous to a majority of
our stockholders who may otherwise desire to participate in such a transaction
and receive a premium for their shares.
12
USE OF PROCEEDS
The Company 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
Since October 7, 1998, our Common Stock has been listed for quotation on
the OTC Bulletin Board under the symbol "CNFT." 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.
In order for our Common Stock to remain eligible for quotation on the OTC
Bulletin Board, our Common Stock must be registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") by no later than January
12, 2000. Upon the 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. Accordingly, if
this Prospectus is not declared effective by the SEC prior to January 12, 2000,
our shares will no longer be eligible for quotation on the OTC Bulletin Board.
The following table sets forth the range of the high and low closing bid
prices per share of our Common Stock during each of the calendar quarters
identified below. These bid prices were obtained from the National Quotations
Bureau, Inc. 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 (through November 29, 1999) $6.00 $5.00
* No bids reported
- ------------------------------
The closing bid price of our Common Stock as of November 29, 1999 was $5.00
per share.
13
Holders
As of November 29, 1999, we had approximately 110 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 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 11,352,830 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 - 600,000 shares
o November 26, 2000 - 1,161,249 shares
We have agreed to register the public resale of 2,423,291 of the shares
identified above; 1,756,624 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 up to 400,000 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 792,440 shares of Series
A Preferred Stock of which 298,251 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 200,000 shares of Common
Stock all of which are currently exercisable. In connection with a
14
private placement transaction, we have agreed to issue warrants to our placement
agent to purchase up to an additional 200,000 shares of Common Stock which will
be immediately exercisable. As of the date of the Prospectus, we have issued
warrants to purchase 66,667 of these shares. Finally, we have issued an
aggregate of 4,163,188 shares of Series A Preferred Stock which are initially
convertible into one (1) share of our Common Stock. Depending on our financial
performance during the fiscal year ending March 31, 2000, each share of Series A
Preferred Stock is convertible into up to 2.25 shares of our Common Stock.
Accordingly, the shares of Series A Preferred Stock are convertible into a
minimum of 4,163,188 shares of Common Stock and a maximum of 9,367,173 shares of
Common Stock.
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual basis and on a pro forma basis, giving effect to the pro forma
adjustments discussed within the Summary Consolidated Financial Data table. This
table should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere in this
Prospectus.
Actual Pro Forma
------ ---------
Long -term debt $251,881 $251,881
Preferred Stock 516 416
Common Stock 959 1,135
Additional paid in capital 2,048,466 5,463,390
Accumulated deficit (5,095,816) (5,095,816)
Total stockholders' equity (deficiency) (3,045,875) 369,125
---------- ----------
Total capitalization (2,793,994) 621,006
---------- ----------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations 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 the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's 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 and SuperDisk Drives
o universal bay replicators branded as Device Docks
o portable optical storage devices like DVD and CD-ROM drives
o external numeric keypads
o monitor stands
o auto adapters
We have in the past derived most of our revenue from the sale of internal
Zip and SuperDisk 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, an array 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.
In fiscal 1999 and the first six months of fiscal 2000, 73% and 80%,
respectively, of our revenue was derived from sales of the Inner Bay Notebook
Zip 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 Inner Bay Notebook Zip
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 the universal docking products. See "RISK FACTORS."
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 six
16
months of fiscal 2000 was derived from sales to distributors and resellers.
Certain of our products, in particular our Inner Bay Notebook Zip Drives, and
Device DOCK products, are sold to OEMs and we intend to increase our sales to
OEMs 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 six months of fiscal 2000, sales to Ingram Micro accounted for 33%
of our revenue and sales to Merisel America accounted for 51% 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. See "RISK FACTORS."
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 Notebook Zip Drives will
decline as a result of a shift in product mix toward lower the priced solutions.
We seek to mitigate the effects of declining prices by improving product design
and reducing costs, primarily manufacturing and component costs. See "RISK
FACTORS."
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 the 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
17
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 Six Month Period Ended September 30, 1999 to the Six
Month Period Ended September 30, 1998
Total Revenue
Revenue for the six months ended September 30 1999 amounted to $6,114,459
compared to $6,593,389 for the six months ended September 30, 1998, a decrease
of 7%. The decrease is attributable to a number of factors including an
inability to fulfill orders as a result of working capital deficiencies, as well
as a change in product mix towards lower priced products (in recognition of
competitive pricing pressure). Sales were also adversely affected by a temporary
delay in product shipments caused by weather-related problems suffered by one of
our principal suppliers. Anticipated decreases in the sale of CD-ROMs are
expected to be offset in part by sales 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 gross profit percentage during the six months ended
September 30, 1999 amounted to $2,249,198 and 37%, respectively, as compared to
$2,281,809 and 35%, respectively, during the six months ended September 30,
1998. Our cost of revenue for the six months ended September 30, 1999 was
$3,865,261 or 63% of revenue as compared to $4,311,580 or 65% of revenue during
the six months ended September 30, 1998. The increase in gross profit and
corresponding decrease in cost of revenue during the six months ended September
30, 1999 was principally due to a shift in our product mix to higher gross
profit
18
products, primarily monitor stands. The increase was offset, in part, by
increased sales of zip drives, which provide a lower gross profit.
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 $631,735 during the
six months ended September 30, 1999 as compared to $487,963 during the six
months ended September 30, 1998, an increase of 29%. The increase in research
and development costs is primarily due to increased staffing, 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 expenses and marketing generally consist of salaries, commissions and
other personnel costs of the Company's sales, marketing and support personnel,
advertising, promotions and travel. Marketing and sales expenses during the six
months ended September 30, 1999 amounted to $550,403 as compared to $506,536
during the six months ended September 30, 1998, an increase of 9%. As a
percentage of revenue, such expenses increased from 8% during the six months
ended September 30, 1998 to 9% during the six months ended September 30, 1999.
The increase was primarily attributable to promotional costs associated with the
introduction of the universal port replicator and trade shows. The Company
expects 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 $2,728,589 during the six months ended
September 30, 1999 from $1,683,039 during the six months ended September 30,
1998. As a percentage of revenue, general and administrative expenses increased
from 26% to 45%. 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 six months ended September 30, 1999 increased by
$650,884 to $699,150 from $48,266 in the six months ended September 30, 1998.
The increase in other expenses was attributable to $709,243 of interest expense,
which includes $544,439 attributable to equity incentives associated with bridge
financing beginning in April 1999.
19
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 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 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 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 activities. We expect
marketing and revenue expenses to increase in the future, although such expenses
may vary as a percentage of revenue.
20
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. Net cash used in operating activities
amounted to $2,698,440 during the six months ended September 30, 1999. Net cash
used in operating activities amounted to $52,726 during the six months ended
September 30, 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 and $444,212 during Fiscal 1999 and Fiscal 1998,
respectively. 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 ("DSO") 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 OEM
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 $85,874 and $155,232
during the six months ended September 30, 1999 and 1998, respectively. The
decrease is primarily attributable to a reduction in property and equipment
purchases. Net cash used in investing activities amounted to $211,044 and
$273,929 during Fiscal 1999 and Fiscal 1998, respectively. The increase
primarily reflects the net purchase of property and equipment used in
operations.
Net cash provided by financing activities amounted to $2,766,326 and
$47,196 during the six months ended September 30, 1999 and 1998, respectively.
The increase was primarily due to an increase in notes payable and the Merger
with JLL. Net cash provided by financing activities amounted to $869,116 and
$620,195 during Fiscal 1999 and Fiscal 1998, respectively. The increase was
primarily from 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%,
21
respectively. As of September 30, 1999, the outstanding amounts due under these
lines of credit totaled $229,713. The lines of credit were paid in full on
October 6, 1999.
Prior to the Merger, we issued Bridge Notes (aggregate principal amount of
$1,775,000) and certain additional promissory notes at an interest rate of 10%
per annum paid annually in arrears.
Bridge Notes in the principal amount of $1,075,000 at an interest rate of
10% are due at the earlier of (i) one year from the date of issuance; or (ii)
our completion of an equity financing transaction of at least $3,000,000. The
holders of $925,000 principal amount of these Bridge Notes have converted such
notes into common stock. Bridge Notes in the principal amount of $700,000 at an
interest rate of 10% are due on the earlier of (i) one year from the date of
issuance; or (ii) our completing a financing transaction in the amount of
$4,000,000. The holder of $550,000 principal amount of these Bridge Notes has
converted such notes into common stock.
We issued additional promissory notes in the aggregate principal amount of
$778,259 at an interest rate of 10% due on the earlier of (i) one year from the
date of issuance; and (ii) our completing a financing transaction in the amount
of $4,000,000. The holders of these notes have converted $547,253 of outstanding
indebtedness due thereunder into an aggregate of 359,081 shares of Common Stock.
Finally, during July and August 1999, we issued promissory notes in the
aggregate principal amount of $650,000 at an interest rate of 10% which is due
on the earlier of (i) two years from the date of issuance; and (ii) our
completing a financing transaction in the amount of $5,000,000. The holders of
$200,000 principal amount of these Bridge Notes have converted such notes into
Common Stock.
Upon completion of the Merger, 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 (the "Private
Offering") of shares of our Common Stock seeking to raise a minimum of
$2,000,000 and a maximum of $6,000,000. On November 26, 1999, we conducted the
initial closing of the Private Offering pursuant to which we obtained gross
proceeds of $2,000,000 from the sale of 666,667 shares of Common Stock. The
Private Offering will continue until February 15, 2000.
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 likely require
additional sources of liquidity to fund future growth. Such sources of liquidity
may include additional equity offerings or debt financing. In the normal course
of business, we evaluate acquisitions of businesses, products and technologies
that complement our business.
22
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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field which recognized "00" as
1900 rather than 2000. These date code fields will need to accept four digit
year entries to distinguish 21st century dates from 20th century dates. To
address such "Year 2000" issues, we established a Year 2000 Project Team which
is currently in phase four of its five-phase plan to assess the Company's Year
2000 compliance. In prior phases, we identified the following three key areas
critical to successful Year 2000 compliance: products, financial and information
systems and third-party relationships.
We have successfully completed testing of current products and products
under development and do not believe there is significant risk of noncompliance.
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 completed our initial evaluation, analysis and testing of our core
internal systems and we do not currently expect any significant issues to be
identified during further review, however, further inquiry and review is
expected to continue throughout 1999. Our failure to correct any issues with
internal systems could result in material disruption to our operations.
We have completed our initial assessment of the readiness of third-party
business partners, including significant vendors and customers. The assessment
of the compliance of third party business partners is on-going and is also
expected to continue throughout 1999. Even where assurances are received from
third parties there remains a risk that failure of systems and products of other
companies on which we rely could have a material adverse effect on us.
Contingency plans will be developed if it appears that we, or our key
suppliers, will not be year 2000 compliant, and such noncompliance is expected
to have a material adverse impact on our operations. Since no material
non-compliance has been detected, no contingency plans have been developed.
Based on the work done to date, we have not incurred material costs and do
not expect to incur future material costs to address the Year 2000 problem for
our systems and products. At this time, we cannot reasonably estimate the
potential impact on our financial position, results of operations and cash flows
if internal systems are found to be noncompliant or if key suppliers, customers
and other business partners do not become Year 2000 compliant on a timely basis.
23
Because many companies may need to upgrade or replace computer systems and
software to comply with Year 2000 requirements, we believe that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues as companies 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.
The foregoing statements are based upon our best estimates at the present
time, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors.
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). See "DESCRIPTION OF BUSINESS -
Seasonality And Other Fluctuations Of Revenue."
INFLATION
We do not believe that inflation has to date had a material impact on our
operations.
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.
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. On a preliminary
basis, we do not believe that eventual adoption will have a significant impact
on our financial statements.
24
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 and LS/120 SuperDisk drives)
o portable DVD-ROM drives
o portable CD-ROM drives
o universal bay replicators branded as deviceDOCK's(TM)
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 computer to essentially turn their
portable 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 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 docking solutions to their customers without
stocking a multitude of different products. Third, we believe
25
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, a market research firm
("IDC"), 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 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.
26
Currently, close to 100% of the docking station market is served internally
by the various portable computer OEMs ("Original Equipment Manufacturers").
These OEMs 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 OEMs 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 OEMs are generally expensive, lack
configuration flexibility and are often available only well after the computer
model is launched. Additionally, OEMs 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.
Products
We currently offer seven major product lines: (i) internal Zip and
SuperDisk 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
current fiscal year, we plan to introduce a universal docking station. The key
features of the our products are summarized in the following table:
- --------------------------------------------------------------------------------
Product Features
- ------- --------
InnerBay(TM) Notebook Zip Drives
- --------------------------------
Toshiba Tecra 8000 series, Tecra 520-550 and 100 MB storage; 400% faster than an external parallel port Zip
Satellite Pro 440-490 drive; 40% faster than an external SCSI Zip drive; designed for
HP OmniBook 4100 and 900 series the portable computer with low power consumption and
Dell Latitude CP series durability in mind
InnerBay(TM) SuperDisk LS-120 Drives
- ------------------------------------
Toshiba Tecra 8000, 520-550, Satellite Pro 440- 120 MB storage; 500% faster than a floppy drive. Backwards
490 and Satellite 220-225 compatible with 1.44MB floppy disks.
deviceDOCK(TM) - External Bay Replicator
- ----------------------------------------
Toshiba Tecra SelectBay1 Allows simultaneous use of multiple internal devices transforms
IBM 755, 760, 765 UltraBay1 proprietary devices into universally compatible devices;
- --------------------------------------------------------------------------------
27
- --------------------------------------------------------------------------------
Product Features
- ------- --------
eliminates need to purchase new peripherals when changing
portable computers. Attaches though PC Card interface.
Portable DVD & CD-ROM Drives
- ----------------------------
cardport 20x, 24x and 32x CD-ROM 20x, 24x and 32x CD-ROM; 2x generation DVD-ROM; draws
cardportDVD - with software MPEG-2 power directly from the portable computer via the PCMCIA
connection; Plug and Play; compatible with most major portable
computers.
Universal Docking Products
- --------------------------
theBUS Universal Port Replicator - School Bus Works on most portable computers with a Type II
Yellow or Transit Black PCMCIA/CardBus slot providing 10Base-T Ethernet, video port,
theBUS Universal Port Replicator - with serial port, parallel port, keyboard and mouse ports.
Ethernet
Universal Docking Station (Yet to be
- -------------------------
announced)
Universal Keypads
- -----------------
PS/2 Numeric Keypad Black 18-key numeric keypad; connects via serial or PS/2 port;
PS/2 Numeric Keypad White professional typist tactile feel.
PS/2 Numeric Keypad Grey
PS/2 Numeric Keypad for IBM ThinkPad
Serial Numeric Keypad - Black
Serial Numeric Keypad - Ivory
Universal Monitor Stands
- ------------------------
Monitor Stand Black Creates space for portable computer on the desktop with access
to all ports; supports a 150 pound monitor, ergonomically height
adjustable.
Auto Adapters
- -------------
Pocket Power II 100w - Universal Auto Generates AC power from 12V DC cigarette plug; the most
Adapter compact, lightweight 100-watt inverter on the market.
Panasonic Auto Adapter
- ---------------------- Powers select Panasonic notebooks with a simple connection to a
Panasonic Auto Adapter- Hard Wire cigarette plug.
- --------------------------------------------------------------------------------
28
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 OEM customer, for
example, we developed the idea to design and develop an InnerBay(TM) Zip drive
for the customer's line of portable computers. The customer had been unable to
develop a Zip drive for its line because the Zip drive mechanism was too large
to fit into the inner bay of the portable computer. CNF's InnerBay(TM) Zip
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 OEM customers.
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
("CAD") 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 CAD 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 machining and some hand processing. The
29
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. See "RISK FACTORS."
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. See
"RISK FACTORS."
Sales And Marketing
Prior to 1998, we marketed and sold our products primarily through direct
sales to OEMs and corporate users of portable computers. Since 1998, we have
marketed and sold our products primarily through indirect channels, including
wholesale distributors, OEMs and resellers.
Our key distributors include Ingram Micro and Merisel Americas,
Incorporated. During the six months ended September 30, 1999, sales to Ingram
Micro accounted for 33% of our revenue and sales to Merisel America accounted
for 51% 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.
30
In international markets, we have agreements with 22 distributors located
in more than 18 foreign countries. During the six months ended September 30,
1999, international sales represented 7% 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.
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 OEM 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 plan to introduce new OEM products during the second half of
calendar 1999.
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.
31
We believe that our sales strategy of working closely with OEM's 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. Like other firms in the information
technology industry, we anticipate that during the second half of calendar 1999,
revenues may be adversely affected by the postponement or cancellation of
information technology spending due to concerns relative to Year 2000 issues.
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 give no assurance that we can 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 OEMs.
These OEMs, as well as a number of our potential non-OEM competitors, generally
have larger technical
32
staffs, more 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 give no assurance 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. We can give no assurance 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 Universal
Docking and Port Replication Technologies. On or about October 28, 1999 the
Australian Patent Office issued us a patent for our Digitari 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 Device Dock
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
33
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 December 1, 1999, we had approximately 66 employees (approximately 21
in operations, 14 in engineering, 23 in sales and marketing and 8 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.
34
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 Directors
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.
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. Prior to joining the Company, he was the Chief
Financial Officer and Vice President of Information for International Computer
Graphics, Inc. ("ICG"), a leading wholesale distributor of computer monitors and
video cards. Prior to joining ICG, 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. Prior to joining the Company, he was the worldwide Product
Manager for notebook Zip products at Iomega Corporation where he was responsible
for the development and marketing of the notebook Zip drive. Prior to his
position with Iomega, Mr. Rudich held various marketing positions at Compaq
Computer Corporation and Matrox Electronics. He graduated
35
from McGill University in Montreal, Canada with a Bachelor of Commerce degree in
Marketing and International Business and earned an MBA from Yale University.
Frank Layland has served as the Company's Director of Operations since
August 1998. Between 1985 and 1998, Mr. Layland served as a Project Operations
Manager for Lockheed Martin Corporation 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.
Mr. Charles is currently the sole director of the Company. In conjunction
with the Merger, the Company agreed to maintain a Board of Directors in which
Mr. Charles would have one (1) designee, provided the Board consists of less
than five (5) members, and two (2) designees if the Board consists of five (5)
or more members. 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.
36
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) (the "Named
Executive Officers") 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 $50,000 or
10% of the total annual salary and bonus reported for such executive
officer.
(2) Mr. Charles resigned his position as President and Chief Executive Officer
of the Company effective November 15, 1999.
(3) Mr. Thompson commenced his employment with CNF on January 1, 1998. Effective
November 15, 1999, Mr. Thompson was appointed as the interim Chief Executive
Officer of the Company.
(4) Consists of options to purchase shares of Series A Preferred Stock which
were issued in exchange for options to purchase shares of CNF common stock
in connection with the Merger.
(5) Mr. Rudich commenced his employment with CNF on December 1, 1997.
37
OPTION/SAR GRANTS TABLE
Option/SAR Grants in the Last Fiscal Year
======================================================================================================================
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
% of Total
Options/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year ($/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,
$125,000, $208,000, $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. Rudich's salary will be increased to $120,000, upon the Company
reporting two consecutive profitable quarters. 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. See "DESCRIPTION OF
SECURITIES - Preferred Stock." Mr. Rudich's agreement provides for the payment
of a commission equal to $0.35 for each unit of CNF InnerBay ZIP(TM), CNF
Digitari 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
executive may be terminated without cause at the discretion of the Board of
Directors of the Company. In
38
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 (the "CNF Plan"). The CNF 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. The CNF Plan provided for the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") 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 CNF
Plan also provided for the issuance of restricted stock awards.
As of the closing of the Merger, CNF, Inc. had granted options (the "CNF
Options") to purchase an aggregate of 405,658 shares of CNF, Inc.'s common stock
to certain officers and employees of CNF, Inc. The CNF 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. The CNF
Options were issued at exercise prices ranging from $.50 to $2.50 per share. In
connection with the Merger, the Company assumed the CNF 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) 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 the CNF
Option 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.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Officers
In February 1997, the Company 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. See "MANAGEMENT - Employment
Arrangements," - "Outstanding Options; Stock Incentive Plan" and "Executive
Compensation."
Amendment to Merger Agreement
Effective November 15, 1999, the Company entered into an agreement with
Paul Charles and Synergy Group International, Inc., a principal stockholder of
the Company ("Synergy"), which amended certain provisions of the Merger
Agreement. Specifically, Mr. Charles agreed to resign his position as Chief
Executive Officer and to surrender 1,000,000 of the shares of Series A Preferred
Stock issued to him in the Merger. The agreement also amended the provisions of
the Merger Agreement relating to the private financing obligations. These
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
Synergy and others to secure the funding obligations. 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 will be 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. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- Material
Escrow Arrangements."
40
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 29, 1999 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 4,157,000(2) 26.8%
7722 East Gray Road
Scottsdale, AZ 85260
David Thompson 134,299(3) 1.2%
7722 East Gray Road
Scottsdale, AZ 85260
R. Daniel Rudich 80,579(4) *
7722 East Gray Road
Scottsdale, AZ 85260
Frank Layland 12,033(5) *
7722 East Gray Road
Scottsdale, AZ 85260
Vincent J. Marold 1,477,500(6) 12.8%
c/o Synergy Group
International, Inc.
3725 East Sunrise Drive
Tucson, AZ 85718
Fincord Holding Corp. 725,000 6.4%
P.O. Box 4608
Great Neck, NY 11203
Geneco Investment Corp. 578,000 5.1%
220 E. 42nd Street, 12th Floor
New York, NY 10017
Godwin Finance Limited 700,000(7) 6.2%
Whitehill House
Newby Road
Hazel, Cheshire
England SK7 50A
William J. Meris 765,000 6.7%
8652 East Carrie Drive
Scottsdale, AZ 85200
All Directors 4,383,911 27.8%
And Executive Officers as a Group (4
persons)
- ---------------
*Represents less than 1% of the outstanding shares of Common Stock.
41
(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
11,352,830 shares of Common Stock outstanding as of November 29, 1999.
(2) Consists of 4,157,000 shares issuable upon conversion of Series A Preferred
Stock. The number of shares issuable upon conversion is subject to
adjustment up to a maximum of 9,353,250 shares. See "DESCRIPTION OF
SECURITIES."
(3) Consists of shares issuable upon exercise of options to purchase 134,299
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of Common Stock. The number of shares issuable upon such
conversion is subject to adjustment to a maximum of 302,173. See
"DESCRIPTION OF SECURITIES." Does not include 204,978 shares issuable upon
exercise of options to purchase 204,978 shares of Series A Preferred Stock
which are subject to vesting.
(4) Consists of shares issuable upon exercise of options to purchase 80,579
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of Common Stock. The number of shares issuable upon such
conversion is subject to adjustment to a maximum of 181,303. See
"DESCRIPTION OF SECURITIES." Does not include 122,986 shares issuable upon
exercise of options to purchase 122,986 shares of Series A Preferred Stock
which are subject to vesting.
(5) Consists of shares issuable upon exercise of options to purchase 12,033
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of Common Stock. The number of shares issuable upon such
conversion is subject to adjustment to a maximum of 27,074. See "DESCRIPTION
OF SECURITIES." Does not include 29,223 shares issuable upon exercise of
options to purchase 29,223 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
2,000,000 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, including Vincent J.
Marold, 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
42
released based on the gross proceeds realized by the Company completion of the
private placement and conversion of indebtedness and the conversion of certain
indebtedness. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Amendment To
Merger Agreement."
2,000,000 of the shares of Series A Preferred Stock issued to Mr. Charles
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. Pursuant
to an amendment to the Merger Agreement, Mr. Charles agreed to surrender for
cancellation the 1,000,000 shares which were subject to release from escrow on
or about December 8, 2000. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Amendment To Merger Agreement."
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.0001 par value per share, of which 11,352,830 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. The Board of Directors of the Company
has authorized the designation of 6,000,000 shares of Preferred Stock as "Series
A Convertible Preferred Stock" of which 4,163,188 are outstanding. The Company
has also issued options to purchase an additional 792,440 shares of Series A
Preferred Stock. The following describes the
43
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 the Company's
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
(the "Audited Financial Statements") as follows:
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.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The 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 the Board of
Directors.
44
Delaware Anti-Takeover Law and Provisions of Company's Certificate of
Incorporation
As the Company's shares become more widely held, listed on NASDAQ or on a
national exchange, to which there can be no assurance, the Company will be
governed by Section 203 of the General Corporation Law of the State of Delaware
(the "GCL"), 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 the corporation's voting stock. The provisions regarding
certain business combinations under the GCL could have the effect of delaying,
deferring or preventing a change in control of the Company or the removal of
existing management. A takeover transaction frequently affords stockholders the
opportunity to sell their shares at a premium over current market prices.
As described above, the Company's 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 the Board of Directors could be utilized,
under certain circumstances, to make an attempt to gain control of the 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 the
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.
45
SELLING SECURITY HOLDERS
The Selling Security Holders identified in the following table are offering
for sale 1,756,624 shares of Common Stock. These shares include:
o 1,606,624 shares of Common Stock
o 150,000 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 1,756,624 share of Common Stock being offered by the Selling
Security Holders, 852,082 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.
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. See "PLAN OF DISTRIBUTION."
The following table sets forth as of November 29, 1999 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
- ------------------------------- ------ ------- ------------------ ------ -------
Paul Charles (3) 4,157,000 26.8% 150,000 4,007,000 26.1%
Enrico E. DiVito, DDS 35,918 * 35,918 0 -
Michael G. Glynn 97,500 * 87,500 10,000 *
Keith and Carol Henrichsen 11,507 * 5,754 5,753 *
Imperium Capital Corporation 250,000 2.2% 250,000 0 -
Lawrence Kaplan 347,574 3.1% 173,787 173,787 1.53
Allen and Jane Kelsey 35,890 * 35,890 0 -
Lindzon Capital Partners (4) 186,562 1.6% 126,562 60,000 *
Meris Capital Partners, L.P. (5) 750,000 5.97% 700,000 50,000 *
Blair Portigal 71,822 * 71,822 0 -
Harold Rubenstein 113,151 1.01% 83,151 30,000 *
Rochelle and Shelden Terman 36,240 * 36,240 0 -
TOTAL 1,756,624
=========
- -------------
* Represents less than 1% of the outstanding shares of Common Stock
(1) Applicable percentage of ownership is based on 11,352,830 shares of Common
Stock outstanding as of November 29, 1999, plus any common stock equivalents
held by such holder.
(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.
46
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.
(3) Mr. Charles is the Chairman of the Board of Directors and a principal
stockholder of the Company. See "MANAGEMENT" and "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
(4) 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.
(5) Under applicable SEC Rules, these shares are deemed to be beneficially owned
by William J. Meris, a principal stockholder of the Company. SEE "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Under agreements with the Selling Security Holders, the Company 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. Such sales may be made on
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.
47
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, 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 1,756,624 shares of Common Stock being offered by the Selling
Security Holders, 852,082 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.
48
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 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.
49
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 25, 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
SEPTEMBER 30, 1999 AND MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
March 31,
September 30, -----------------------
ASSETS 1999 1999 1998
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 166,675 $ 184,663 $ 229,419
Accounts receivable - trade (net of allowance of $390,000,
$390,000 and $330,000 at September 30, 1999, March 31, 1999
and 1998, respectively) 2,043,536 834,383 1,084,527
Accounts receivable - employees and other 4,326 31,736 118,128
Inventories (Note 2) 1,647,513 1,656,001 1,505,140
Prepaid expenses and other current assets 164,580 112,782 314,729
Income tax receivable 95,717 95,717 30,732
----------- ----------- -----------
Total current assets 4,122,347 2,915,282 3,282,675
PROPERTY AND EQUIPMENT - Net (Note 3) 628,581 582,233 338,261
NOTE RECEIVABLE FROM RELATED PARTY (Note 9) 7,609 9,906 95,000
OTHER ASSETS 30,670 31,266 14,054
----------- ----------- -----------
TOTAL $ 4,789,207 $ 3,538,687 $ 3,729,990
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,764,547 $ 3,642,535 $ 2,101,691
Accounts payable - related party 345 10,000
Lines of credit (Note 4) 229,713 682,120 672,135
Short-term obligations (Note 5) 503,259
Short-term obligations - related parties (Note 5) 2,675,000 397,551
Accrued compensation 311,483 225,716 144,626
Accrued expenses 515,923 437,050 139,113
Current portion of capital leases (Note 7) 32,379 17,826
Current portion of notes payable (Note 5) 54,156 71,623 62,279
----------- ----------- -----------
Total current liabilities 7,583,201 5,978,025 3,129,844
CAPITAL LEASES (Note 7) 84,416 67,136
NOTES PAYABLE (Note 5) 167,465 220,163 259,758
----------- ----------- -----------
Total liabilities 7,835,082 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;
5,163,188 shares issued and outstanding at September 30, 1999 516
Common stock, par value of $.0001: 50,000,000 shares authorized;
9,591,981 shares issued and outstanding at September 30, 1999 959
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 2,048,466 7,500
(Deficit) retained earnings (5,095,816) (2,735,137) 339,388
----------- ----------- -----------
Total shareholder's (capital deficiency) equity (3,045,875) (2,726,637) 340,388
----------- ----------- -----------
TOTAL $ 4,789,207 $ 3,538,687 $ 3,729,990
=========== =========== ===========
See notes to financial statements.
F-3
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended
September 30, Years Ended March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
(Unaudited)
REVENUES (Note 11) $ 6,114,459 $6,593,389 $ 9,425,947 $7,726,484
COST OF REVENUES 3,865,261 4,311,580 6,088,549 4,460,944
----------- ---------- ----------- ----------
Gross profit 2,249,198 2,281,809 3,337,398 3,265,540
----------- ---------- ----------- ----------
OPERATING EXPENSES:
General and administrative 2,728,589 1,683,039 3,960,673 1,916,877
Research and development 631,735 487,963 1,200,939 890,944
Sales and marketing 550,403 506,536 1,086,265 480,170
----------- ---------- ----------- ----------
Total operating expenses 3,910,727 2,677,538 6,247,877 3,287,991
----------- ---------- ----------- ----------
LOSS FROM OPERATIONS (1,661,529) (395,729) (2,910,479) (22,451)
----------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income 1,863 177 20,528 1,070
Interest expense (709,243) (60,149) (248,342) (68,552)
Other income 8,230 11,706 18,568 31,766
----------- ---------- ----------- ----------
Other expense - net (699,150) (48,266) (209,246) (35,716)
----------- ---------- ----------- ----------
LOSS BEFORE INCOME TAX (BENEFIT)
PROVISION (2,360,679) (443,995) (3,119,725) (58,167)
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 8) (45,200) 21,100
----------- ---------- ----------- ----------
NET LOSS $(2,360,679) $ (443,995) $(3,074,525) $ (79,267)
=========== ========== =========== ==========
BASIC AND DILUTED LOSS PER SHARE -
Applicable to common shareholders $ (0.31) $ (0.18) $ (1.23) $ (0.03)
=========== ========== =========== ==========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING - Basic and diluted 7,518,417 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)
Net loss (unaudited) (2,360,679) (2,360,679)
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) 5,163,188 $ 516 516
Common stock
(unaudited) 9,591,981 959 2,040,966 2,041,925
--------- ----- ---------- ------ ---------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1999
(unaudited) 5,163,188 $ 516 9,591,981 $ 959 $2,048,466 $(5,095,816) $(3,045,875)
========= ===== ========== ====== ========== =========== ===========
See notes to financial statements.
F-5
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
Six Months
Ended September 30, Years Ended March 31,
-------------------------- -------------------------
1999 1998 1999 1998
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,360,679) $(443,995) $(3,074,525) $ (79,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 84,085 60,838 140,323 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 satisfied with issuance of common stock 60,174 7,500
Expenses associated with merger (50,250)
Changes in assets and liabilities:
Accounts receivable - trade (1,209,153) (67,253) 250,144 (802,276)
Accounts receivable - other 27,409 27,159 86,392 (102,926)
Inventories 8,488 641,561 (150,861) (931,665)
Prepaid expenses and other assets (51,202) (173,126) 184,735 (248,997)
Accounts payable - trade 122,012 (143,584) 1,540,844 1,654,744
Accounts payable - related party (345) (9,510) (9,655)
Income tax receivable (64,985) (24,806)
Accrued compensation 85,767 24,520 81,090 25,310
Accrued expenses 78,873 32,073 297,937 17,431
----------- --------- ----------- ----------
Net cash used in operating activities (2,698,440) (52,726) (702,828) (444,212)
----------- --------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (88,171) (250,232) (296,138) (273,929)
Loan to officer (9,906)
Collection of note receivable 2,297 95,000 95,000
----------- --------- ----------- ----------
Net cash used in investing activities (85,874) (155,232) (211,044) (273,929)
----------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on lines of credit, net (452,407) 8,668 9,985 672,135
Loan and note payable 36,892 540,151
Notes payable - related party 2,302,449 39,000 397,551
Equity transaction (Note 13) 1,000,000
Principal payments on capital leases (4,178) (4,032) (11,429)
Principal payments on notes payable (79,538) (33,332) (67,142) (51,940)
----------- --------- ----------- ----------
Net cash provided by financing activities 2,766,326 47,196 869,116 620,195
----------- --------- ----------- ----------
NET DECREASE IN CASH (17,988) (160,762) (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 $ 166,675 $ 68,657 $ 184,663 $ 229,419
=========== ========= =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 45,185 $ 60,149 $ 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 $ 528,259 $ -- $ -- $ --
=========== ========= =========== ==========
Capital expenditures financed through obligations under
capital leases $ 45,384 $ 69,641 $ 96,391 $ --
=========== ========= =========== ==========
See notes to financial statements.
F-6
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 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 six
months ended September 30, 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 results of
operations and cash flows. The results of operations for the six months ended
September 30, 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 six months ended September 30, 1999 and the
years ended March 31, 1999 and 1998, the Company incurred net losses of
$2,360,679 (unaudited), $3,074,525 and $79,267, respectively, and, as of
September 30, 1999 and March 31, 1999, the Company's current liabilities
exceeded its current assets by $3,460,854 (unaudited) and $3,062,743,
respectively, and its total liabilities exceeded its total assets by $3,045,875
(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 generally
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, accruals 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 September 30, 1999, reserves of $390,000 (unaudited)
were recorded by the Company for estimated future returns and bad debts. At
March 31, 1999 and 1998, reserves of $390,000 and $330,000, 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,
September 30, -------------------------
1999 1999 1998
------------- ---------- ----------
(Unaudited)
Raw materials $ 962,876 $1,011,970 $ 575,675
Work in process 91,494 47,169
Finished goods 593,143 596,862 929,465
---------- ---------- ----------
Inventories $1,647,513 $1,656,001 $1,505,140
========== ========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31,
September 30, -----------------------
1999 1999 1998
------------- --------- ---------
(Unaudited)
Equipment $ 849,825 $ 737,195 $ 414,872
Furniture and fixtures 48,557 30,754 23,818
Leasehold improvements 7,806
Vehicles 38,025 38,025 1,624
---------- --------- ----------
Total 936,407 805,974 448,120
Accumulated depreciation and
amortization (307,826) (223,741) (109,859)
---------- --------- ----------
Property and equipment - net $ 628,581 $ 582,233 $ 338,261
========== ========= =========
Assets recorded under capital leases consist of the following:
September 30, March 31,
1999 1999
------------- ---------
(Unaudited)
Equipment $141,774 $ 96,391
Accumulated amortization (24,156) (12,932)
-------- --------
Total $117,618 $ 83,459
======== ========
Depreciation and amortization expense was $84,085 and $60,838 for the six months
ended September 30, 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.
F-9
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 September 30, 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 consist of the following:
September 30, 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 $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
at 10%.
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. 975,000
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. 700,000
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. 650,000
---------- --------
Total related-party short-term obligations 2,675,000 397,551
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 $2,675,000 $900,810
========== ========
F-11
Long-term debt obligations consist of the following:
September 30, March 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 $ 200,914 220,871 257,037
Other notes payable 20,707 25,915
--------- -------- --------
Total long-term obligations 221,621 291,786 322,037
Less current portion (54,156) (71,623) (62,279)
--------- -------- --------
Total long-term obligations $ 167,465 $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.
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.
F-12
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).
Subsequent to March 31, 1999, the Company issued 9,591,981 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:
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)
============
F-13
The following summarizes certain weighted average information on options
outstanding at September 30, 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 8.57 $0.24 268,112 $0.24
$1.21 20,628 9.42 $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 six months ended September 30, 1999 would have been adjusted to the pro
forma amounts indicated below:
Net loss - as reported $ (2,360,679)
============
Net loss - pro forma $ (2,372,958)
============
Basic and diluted loss per share - as reported $ (0.31)
============
Basic and diluted loss per share - pro forma $ (0.32)
============
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
December 6, 1999 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 $197,413 and $192,634 for the six months ended September 30,
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:
September 30, March 31,
----------------------------
1999 1999 1998
--------- ----------- --------
(Unaudited)
Computed expected tax benefit $(759,854) $(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 759,854 977,525 136,322
--------- ----------- --------
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:
September 30, March 31,
---------------------------
1999 1999 1998
---------- ----------- ---------
(unaudited)
Net operating loss $1,773,635 $ 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 1,873,701 1,113,847 136,322
Valuation allowance (1,873,701) (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 September 30, 1999, the balance was paid in full.
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 and September 30, 1999, including interest, was $9,906 and $7,609,
respectively.
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 six months ended September 30, 1999.
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 84 percent of revenues for the six months ended
September 30, 1999 (Customer E accounted for 51 percent and Customer C for 33
percent). Three customers accounted for 72 percent of revenues for the six
months ended September 30, 1998 (Customer A accounted for 32 percent, Customer B
for 21 percent and Customer D for 19 percent). Two customers accounted for 99
percent of accounts receivable (Customer E accounted for 68 percent and Customer
C for 31 percent) at September 30, 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.
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 September 30, 1999 (unaudited).
F-18
Event Subsequent to the Interim Period Ended September 30, 1999 (unaudited)
On October 6, 1999, the Company paid the final installment on its lines of
credit.
During October and November 1999, the Company converted $1,704,164 of bridge
loans ($1,675,000 principal amount and $29,164 of interest) for 1,019,582 shares
of common stock.
On November 15, 1999, the Company entered into an agreement with Paul Charles
and Synergy Group International, Inc. a principal stockholder of the Company.
The agreement 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 1,000,000 of the shares of Series A
Preferred Stock issued to him in the Merger, all of which were being held in
escrow to secure Mr. Charles' indemnification obligation under the Merger.
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.
* * * * *
F-19
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.
1,756,624 Shares
[LOGO]
CNF TECHNOLOGIES, INC.
Common Stock
-------------------
P R O S P E C T U S
-------------------
December __, 1999
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.......................................... $ 3,027
Printing and Engraving........................................ $20,000
Accountants' Fees and Expenses................................ $15,000
Legal Fees and Expenses....................................... $30,000
Other Offering Expenses....................................... $ 5,000
-------
Total.................................................... $73,027
=======
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Recent Sales of Unregistered Securities
1. 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 66,667 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 Regulation D promulgated
thereunder to the following accredited investors:
Name Number of Shares
---- ----------------
Donald Parvin & Philip Parvin JTROS 8,333
Pueblo Properties L.L.C. 8,333
Daljit S. Buttar 108,333
Michael K. Havrilesko 83,333
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
2. Effective November 26, 1999, the Company issued 419,583 shares of Common
Stock in consideration of the cancellation of $675,000 of outstanding
indebtedness, $29,164 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 payment of
underwriting discounts or commissions to the following accredited investors:
Name Number of Shares
---- ----------------
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 419,583
II-2
3. On November 2, 1999, the Company issued 600,000 shares of Common Stock
in consideration of the cancellation of $1,000,000 of outstanding indebtedness
and additional equity incentives and 75,000 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 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
payment of underwriting discounts or commissions to the following accredited
investor:
Name Number of Shares
---- ----------------
Meris Capital Partners, L.P. 600,000
Imperium Capital Corporation 75,000
-------
Total 675,000
4. During July 1999, the Company issued 359,081 shares of Common Stock in
consideration of the cancellation of $547,253 of outstanding indebtedness. 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 payment of underwriting discounts or commissions
to the following accredited investors:
Name Number of Shares
---- ----------------
Larry Kaplan 347,574
Keith and Carol Henrichsen 11,507
5. 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 payment of underwriting discounts
or commissions to the following accredited investors:
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
6. 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 in the aggregate principal amount of $1,675,000. 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
payment of underwriting discounts or commissions. These shares were issued to
the following accredited investors in consideration of
II-3
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
7. On June 8, 1999, the Company issued 5,163,188 shares of Series A
Preferred Stock to the holders of all outstanding shares of Common Stock of CNF,
Inc. in connection with the Merger. These shares 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:
Name Number of Shares
---- ----------------
Paul Charles 5,157,000
Howard Lindzon 6,188
8. 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 Regulation D promulgated thereunder. This offering was
undertaken by the Company without payment of underwriting discounts or
commissions prior to the closing of the Merger. At that time the Company was an
inactive Company 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
Capital Growth Trust 175,000
II-4
Name Number of Shares
---- ----------------
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
Troy Funding Corp. 212,000
II-5
Name Number of Shares
---- ----------------
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 REPORT:
Exhibit No. Description Method of Filing
----------- ----------- ----------------
2.1 Agreement and Plan of Merger (the "Merger Agreement") dated April Filed herewith
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 Filed herewith
2.3 Agreement dated November 1, 1999 (resulting in a second amendment Filed herewith
to Merger Agreement)
3.1 Certificate of Incorporation Filed herewith
3.2 Certificate of Amendment to Certificate of Incorporation Filed herewith
3.3 Certificate of Designation of Series A Convertible Preferred Stock Filed herewith
3.4 By-Laws, as amended to date Filed herewith
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 Company Filed herewith
and Paul Charles
10.2 Addendum to Employment Agreement dated November 2, 1999 by and
between the Company and Paul Charles
10.3 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith
and David Thompson
II-6
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.4 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith
and R. Daniel Rudich
10.5 Addendum to Employment Agreement dated November 2, 1999 by and Filed herewith
between the Company and R. Daniel Rudich
10.6 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith
and Frank Layland
10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Filed herewith
Company, Synergy Group International, Inc. and certain
shareholders of the Company (as amended by Exhibit 2.3)
10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Filed herewith
Company and Paul Charles (as substantially amended by Exhibit 2.3)
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
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.
II-7
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.
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.
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
December 3, 1999.
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.
II-8
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 December 3, 1999
- ---------------------------------
Paul D. Charles
II-9
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger (the "Merger Agreement") dated 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
2.3 Agreement dated November 1, 1999 (resulting in a second amendment
to Merger Agreement)
3.1 Certificate of Incorporation
3.2 Certificate of Amendment to Certificate of Incorporation
3.3 Certificate of Designation of Series A Convertible Preferred Stock
3.4 By-Laws, as amended to date
5.1 Opinion of Buchanan Ingersoll Professional Corporation*
10.1 Employment Agreement dated May 19, 1999 by and between the Company
and Paul Charles
10.2 Addendum to Employment Agreement dated November 2, 1999 by and
between the Company and Paul Charles
10.3 Employment Agreement dated May 19, 1999 by and between the Company
and David Thompson
10.4 Employment Agreement dated May 19, 1999 by and between the Company
and R. Daniel Rudich
10.5 Addendum to Employment Agreement dated November 2, 1999 by and
between the Company and R. Daniel Rudich
10.6 Employment Agreement dated May 19, 1999 by and between the Company
and Frank Layland
Exhibit No. Description
----------- -----------
10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, the
Company, Synergy Group International, Inc. and certain
shareholders of the Company (as amended by Exhibit 2.3)
10.8 Escrow Agreement dated June 8, 1999 by and among, inter
alia, the Company and Paul Charles (as substantially
amended by Exhibit 2.3)
21.1 Subsidiaries of the Registrant
23.1 Consent of Buchanan Ingersoll Professional Corporation*
23.2 Consent of Deloitte and Touche LLP
27.1 Financial Data Schedule
- ---------------
* To Be Filed By Amendment.