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Global Election Systems Inc · 10SB12G/A · On 9/17/98

Filed On 9/17/98   ·   Accession Number 950134-98-7655   ·   SEC File 0-24725

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 9/17/98  Global Election Systems Inc       10SB12G/A              2:204K                                   Bowne of Dallas I..01/FA

Amendment to Registration of Securities of a Small-Business Issuer   —   Form 10-SB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10SB12G/A   Amendment No. 1 to Form 10SB12G                       97    393K 
 2: EX-10       Consent of Staley, Okada, Chandler & Scott             1      5K 


10SB12G/A   —   Amendment No. 1 to Form 10SB12G
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Description of Business
9Competition
11Patents
21Item 2. Management's Discussion and Analysis
30Item 3. Description of Property
31Item 4. Security Ownership of Certain Beneficial Owners and Management
33Item 5. Directors, Executive Officers, Promoters and Control Persons
35Item 6. Executive Compensation
38Item 7. Certain Relationships and Related Transactions
40Item 8. Description of Securities
"Common Shares
41Preferred Shares
47Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters
48Item 2. Legal Proceedings
"Item 3. Changes in and Disagreements With Accountants
49Item 4. Recent Sales of Unregistered Securities
"Item 5. Indemnification of Directors and Officers
52Item 1. Index to Exhibits
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As filed with the Securities and Exchange Commission on September 17, 1998, File No. 000-24725 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 AMENDMENT NO. 1 TO FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES ACT OF 1934 GLOBAL ELECTION SYSTEMS INC. (Name of Small Business Issuer in Its Charter) BRITISH COLUMBIA, CANADA 85-0394190 (Other Jurisdiction of Incorporation) (IRS Employer Identification No.) 1611 WILMETH ROAD, MCKINNEY, TX 75069 (Address of Principal Executive Offices) (Zip Code) 972-542-6000 Registrant's Telephone Number, Including Area Code Securities to be registered pursuant to Section 12(b) of the Act: ================================================================================ Title Of Each Class Name of Each Exchange On Which To Be So Registered Each Class Is To Be Registered -------------------------------------------------------------------------------- ================================================================================ Securities to be registered pursuant to Section 12(g) of the Act: NO PAR VALUE COMMON STOCK (Title of Class) 1
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CERTAIN OF THE INFORMATION IN THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG THESE FACTORS ARE: GENERAL BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; THE INTERACTION WITH GOVERNMENTAL ENTITIES IN THE UNITED STATES AND WORLDWIDE WHICH PURCHASE THE COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE SEC. PART I  ITEM 1. DESCRIPTION OF BUSINESS COMPANY OVERVIEW Global Election Systems Inc. (the "Company") is the leading manufacturer and seller, through its wholly-owned United States subsidiary, Global Election Systems Inc., ("Global USA") of state of the art computerized electronic election management systems designed for convenient voting. Its compact systems permit efficient early voting and non-geographic voting. Unlike other systems which require terminals to be configured to the polling district, the Company's systems are stand-alone and offer every ballot style required for a voting jurisdiction, even for an entire state. The Company's signature products are the ES-2000 AccuVote Voting System ("AccuVote"), and the paperless Accu-Touch touch screen voting system ("Accu-Touch") using the Voter Access Card "smart card" ("Smart Card"). The AccuVote Voting System and the Accu-Touch system are each complete voting systems which are both a precinct count and central accumulation system and which permit management control of the voting process from ballot preparation to verification of results. The Smart Card and the AccuTouch, which are both "paperless DRE", or direct record equipment, were added to the Company's product line 2
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in 1997 when the Company acquired all of the assets of I-Mark Systems, Inc. The Company was formed in British Columbia, Canada on November 22, 1991, through the amalgamation of North American Professional Technologies B.C. Ltd. and Macrotrends International Ventures Inc. Global USA was incorporated in Delaware in 1991. The address of the Company's executive offices is 1611 Wilmeth Road, McKinney, TX 75069; and its telephone number is (972) 542-6000. The Company's no par value common stock ("Common Stock") is traded on the Toronto Exchange under the symbol GSM. References in this document to the "Company" include its wholly-owned subsidiary, Global USA, unless the context otherwise requires. All funds are reported in U.S. dollars unless otherwise specified. Canadian funds are designated by "C$". INDUSTRY OVERVIEW All over the world, elections are held under the auspices of various governmental systems, especially those in democratic countries. Until the 1960's, almost all elections were conducted with paper ballots and lever voting machines which were mechanical counters. These machines, which were bulky and heavy and the mechanisms of which had many moving parts, required significant maintenance, and were expensive to warehouse. This method of voting and tallying votes, in addition to being cumbersome and inefficient, was susceptible to inaccuracies in tallying, significant time delays, and other not insignificant difficulties. In 1964, the punch card voting system was patented. While this system has not been built in quantity since about the mid-1980's, it remains the most used system in the world. By the early 1980's, a scanning system which could read ballots optically was introduced. In recent years, the election industry, characterized by inertia in adoption of new technology, has begun to computerize in response to increased public acceptance and familiarity with using computers. Computers offer the opportunity to count ballots accurately and speedily, as well as a method to offer efficient early voting and to adopt more convenient ways to vote in order to encourage 3
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participation. In addition, service and support have become increasingly important components of technologically advanced newer election systems. In spite of the development of the election systems industry, however, many available election systems have continued to lag in application of state-of-the art computer technology, and have lacked durability, flexible functionality and sufficient pre-election to post-election support. GLOBAL ELECTION'S STRATEGY The Company is the leading manufacturer and seller of state of the art computerized electronic election management systems designed for convenient voting. Its compact systems permit efficient early voting and precinct-based voting. The Company capitalizes on its advanced product design, and customer support to market its election systems to voting jurisdictions in the United States, Canada, and world-wide. Its objective is to become a leading supplier of comprehensive voter registration and election systems to governments in the United States, Canada, and around the world. The Company believes that the continuing need for accurate, efficient election systems and the increasingly recognized need for the voting process to be highly voter accessible and simple to use will provide numerous opportunities for the Company to expand the scope of its activity. * Expand Market Penetration Through Internal Growth. The Company has achieved growth in its market and has expanded its market through continual innovation in and expansion of its product line and aggressive marketing of its election systems to increasingly populous voting jurisdictions. For example, the Company has recently entered into an agreement with King County, Washington. The Company provides election solutions, such as voter registration technology and systems, complimentary to its election system products. It also seeks to apply its products to governmental information management needs outside of the election process but operating similarly, such as vehicle registration. * Compliment Internal Growth Through Acquisition or Selling Arrangements. The Company has developed its business, in part, through acquisition of an election 4
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products company and entering into arrangements with other companies which produce leading edge technology products to offer those products in conjunction with the Company's products . As a result, the Company is able to offer state of the art integrated election systems to its customers, which has permitted it to expand into more populous markets. * Continued Technology Innovation and Integration. The Company conducts on-going research and development to improve product performance and provide innovative solutions to the needs of the voting jurisdictions and other governmental applications. For example, while continually upgrading its existing products, the Company has developed a Windows NT(R)-based, state of the art system which will identify a voter by a finger swipe on the voting screen. All of the products offered by the Company are designed to be used together to integrate the entire election process, from voter registration and election management through tabulation and reporting of election results. * International Sales. The Company seeks to sell its state of the art electronic computerized election systems not only in the United States and Canada, but throughout the world, initially primarily in Latin America, where the Company believes there is demand for election systems perceived to be accurate by the voting public. * Customer Support. Customer support is a significant part of the Company's marketing strategy and its system sales. The Company intends to continue its commitment to, and to enhance, its pre-election through post-election assistance to its customers. It offers service contracts for all aspects of the election process, including election management training, assistance with the conduct of elections, and complete running of the election. GLOBAL ELECTION'S PRODUCTS The products currently offered by the Company are election system products which are comprised of state of the art computerized electronic voting systems and software products such as the voting registration 5
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and election management systems that lay out ballots, tabulate results and print reports. State of the Art Computerized Electronic Voting Systems. The Company's signature product is its patented Accu-Vote ES-2000 Election System. The Accu-Vote system, patented in Canada and the United States, automates all facets of election administration from initial ballot layout through certification of results. The ballot processing unit optically scans marked voted paper ballots and produces printed precinct level results immediately after the polls close. Totals are captured on a memory card and transferred to the counting center or sent from the precinct tabulator directly to the host computer over a modem using common carrier lines. Designed for security and integrity, the ballot processing unit nevertheless is compact and lightweight and is easily transported to and from the polling place. The Accu-Vote Vote Tally System ("VTS") software automates the entire election administration cycle from ballot layout through certification of results. VTS is used to define all election-specific parameters. Smart Card and Electronic Balloting Products. The Company offers additional, technologically-advanced election assistance products through its Smart Card. The "Voter Access Card" is a "smart card" which stores voter identification information, allowing the automatic selection of any ballot style for any voter at any polling place. The Voter Access Card can permit the placement of voting stations in places where people assemble, like shopping malls, rather than in specific precinct locations. The Company's Accu-Touch(TM) ballot station, is designed to eliminate the need for paper ballots. A voter accesses the appropriate ballot screen by inserting the voter's Voter Access Card and votes by touching the screen. Each station can house thousands of ballot styles, accessed on demand for a specific precinct, ward, block, or language. In addition, the Accu-Touch system software permits election officials to design all ballot formats, provide multi-lingual ballots, merge totals from early voting, postal and election-day voting, and customize and generate post-election reports and audits. 6
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Accu-Vote and Accu-Touch can be used as a blended system, permitting flexibility in solving the particular problems and requirements of a voting jurisdiction. For instance, Accu-Touch can be used for early voting, where its capacity to store all ballot styles allows early voters from all precincts to insert Smart Cards into the same unit to select their particular precinct ballot. Accu-Vote systems can be used at the precinct level during the election. The vote tallies from both the Accu-Vote and Accu-Touch units are then sent to a host computer to be combined to determine the election result. Accu-Vote and Accu-Touch systems units have a list price of approximately $6,500 per unit, to which quantity discounts and additional products may be added, depending upon the needs and size of the election district. Other Product Arrangements. The Company occasionally makes arrangements with companies producing other products which are complementary to and enhance the Company's product offering to a particular voting jurisdiction. For instance, in King County, Washington, the Company is providing, through a license, additional voter registration software. These arrangements are generally made on a case-by-case basis, depending on the need and size of a voting jurisdiction. Backlog. At March 31, 1998, nine months into the current fiscal year, the Company had a backlog of approximately $1,500,000, representing 300 units, of orders for its Accu-Vote, Accu-Touch and Smart Card products. This backlog compared to a backlog of $250,000 on June 30, 1997 (short fiscal year) and $1,500,000 at December 31, 1996. Backlogs are principally the result of customer-scheduled shipment dates, which are usually a period of months after the contract date and which may also be in installments. The increase in the backlog is attributable primarily to increased sales and to the timing of delivery schedules. 7
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CUSTOMER SUPPORT SERVICES The Company emphasizes continuing service support to its customers. These services begin with initial equipment acceptance and testing and continue through on-site election day and election night support. Some election-specific services provided by the Company are pre-election consultation, ballot design/layout assistance, precinct worker training, voter education assistance, system testing and verification, and on-site election day and election night support. CUSTOMERS The Company's customers include approximately 600 voting jurisdictions in the United States and Canada. Recent contract awards include the State of North Carolina, King County, Washington, Chatham County, Georgia, Tular County, California, Pima and Yavapi Counties, Arizona, and the State of Alaska. During the six months ended June 30, 1997 (a short fiscal year), Jefferson County, Kentucky, accounted for approximately 30.3% of Company revenues. During the fiscal years ended December 31, 1996, and December 31, 1995, the Company was not dependent on one or a few major customers, nor does it expect to be in the current fiscal year. SALES AND MARKETING The Company markets its products both domestically and internationally to governments. Because of the close involvement of the Company in the use of its election systems by customer governments and the Company's desire to maintain a high level of contact and service, sales are made by salaried, commissioned salespersons employed by the Company and assigned to various territories. Salespersons work directly with the election officials in each territory to close and implement sales. At March 31, 1998, the Company employed 13 of these salespersons, who were assigned to specific territories in the United States and Canada. The Company also has five resellers which are established in the election business and have contracts for specific territories. Sales outside the United States and Canada are supervised by the Company's sales staff. The Company plans to use in-country representatives in these countries, but currently has none. 8
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Payment for sales is typically made in United States and Canadian dollars. As a result, the Company's actual receipts are subject to fluctuation based upon currency exchange rates between the United States and Canada and, should the Company accept payment in another currency, to the fluctuations in that currency's exchange rate. The Company, because it sells election products and services, could tend to operate on a two-year business cycle because in the United States, a substantially larger number of elections for public office are held in even-numbered years than in odd-numbered years. As a result, revenues and underlying production and support activities for a majority of the Company's products and services could significantly increase or decrease in accordance with the election cycle. However, because the Company's fiscal year ends June 30, and because many voting jurisdictions now attempt to purchase election products and services immediately after an election, the Company believes that it has ameliorated the possible effect of the United States' biennial election cycle. Also, in Canada, elections are conducted on an irregular schedule which differs in and among national, provincial and municipal elections. Thus, the Company's Canadian business may also be expected to ameliorate any United States cyclicality. RESEARCH AND DEVELOPMENT The Company expended approximately $184,414, $451,113 and $674,144 for research and development during the fiscal years ended June 30, 1997 (a six month fiscal year due to a fiscal year change), December 31, 1996, and December 31, 1995, respectively. All of the Company's in-house research efforts are conducted at its facilities in Vancouver, Canada, and McKinney, Texas.  COMPETITION The election system market is defined by the voting needs and specifications of voting jurisdictions. In that regard, sales, and therefore competition, are directed to election officials in each voting jurisdiction who issue requests for proposals in which desired specifications are set forth. Responsive bids are submitted to these officials and other specified reviewers for their 9
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evaluation and the selection of the company awarded the project. Competitive factors include accuracy, security and speed of voting and tallying of votes, ease of use of the system, flexibility in ballot preparation, cost and customer support. Because of its ability to offer a complete, state of the art, integrated election system which can be tailored to the customer's needs, the Company believes it is able to compete in all major areas of the election systems market. However, several of the Company's existing and potential competitors have financial, and could develop technological and marketing, resources significantly greater than those of the Company. They may have established relationships with customers or potential customers that afford them a competitive advantage. There can be no assurance that the Company will be able to compete effectively in its current or future markets or that competitive pressures will not adversely affect its business, financial condition or results of operations. In North America, the Company competes primarily with moderately-sized companies (some of which are affiliates of much larger companies) in the overall election system market and with some small companies who offer some aspect otherwise included in the overall system, such as voting equipment. The Company's largest competitors in the North American election system market are Sequoia Pacific Systems, Inc. ("Sequoia"), a subsidiary of Jefferson Smurfit, and ES&S ("ESS"). ESS and Sequioia offer local and state election management systems, optical scan ballot tallying and reporting, and election information management software. Microvote, Inc., of Indianapolis, offers a direct record voting system. The Company also competes with a number of companies, including those mentioned previously, which produce and sell products designed to provide specific election-related functions. MANUFACTURING The Company assembles its Accu-Vote products at its recently-opened plant in McKinney, Texas, and contracts for the assembly of its Accu-Touch system. With the exception of its visible light optical reader (which it obtains from another source but could replace with an in-house product) and its ballot box (for which the Company owns the molds and could obtain an alternate manufacturer), the Company 10
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obtains components for its products largely from various off-the-shelf vendors of electronic components, any of which could be replaced by another vendor should the need present itself. INTELLECTUAL PROPERTY  Patents. The Company holds the United States and Canadian patents, the rights to which it purchased in 1991, on its Accu-Vote ES-2000 system ("Patent"). Except for the Patent, the Company has not sought patent protection for its technology, even though it believes that some of its processes and equipment are proprietary to it. The Company has relied upon industrial know-how, and trade secret laws. The Company cannot assure that its proprietary processes and equipment will provide it with sufficient competitive advantage to overcome its lack of patent protection, nor can it assure that others will not independently develop equivalent or superior products or technology. Also, the Company cannot assure that it will be able to establish trade secret protection or that trade secret obligations will be honored. To the extent that consultants, employees and other parties apply technological information developed independently by them or others to Company projects, disputes may arise as to the proprietary rights to that information, which may not be resolved in favor of the Company. It is also possible that litigation may be necessary to enforce the Company's proprietary rights, to protect its trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement. Litigation of that nature could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operation. Patent applications in the United States are not disclosed until the patents issue; therefore, patent applications could have been filed which relate to the Company's processes and equipment. The Company does not believe that it infringes any patents of which it is aware; however, it cannot assure that patent infringement claims will not be asserted against the Company. These claims, if 11
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asserted, could have a material adverse effect on the Company's business, financial condition or results of operation. If infringement or invalidity claims were to be asserted against the Company, litigation could become necessary to defend the Company against those claims. In certain circumstances, the Company might choose to seek to obtain a license under the third party's intellectual property rights, which the Company cannot assure would be available, if at all, on terms acceptable to the Company. Trademarks and Tradenames. The Company has no registered trademarks or tradenames, but claims proprietary rights to Accu-Vote. A trademark registration application has been filed for Accu-Vote in the United States, but no assurance can be given that this trademark will issue. GOVERNMENT REGULATION The Company's products are sold almost exclusively to governmental units. The Company's Accu-Vote and Accu-Touch election products meet or exceed United States Federal Election Commission ("FEC") standards and are required to be, and are, tested to FEC standards by Wyle Labs, the industry's designated Independent Testing Authority. In the United States, election systems must also be certified in each State where they are used. Currently, one or the other or both of the Company's systems are certified in 34 States. Canada does not require testing and certification. Each governmental unit to which the Company markets its products specifies its own particular requirements for system operation. Without exception, the Company's customers seek, and require, tamper-proof, efficient, confidential and expeditious election equipment and systems. These requirements and others typically are embodied in the customer's Request for Proposal ("RFP"), issued to solicit bids from the Company and others. Because the Company must be able to respond with complying bids to RFP's, the Company must continually monitor, adapt to, anticipate and design for changes in specifications and in the expectations that governmental units have for efficient systems. For example, in the United States, promoting and increasing voter participation is a concern of many jurisdictions. As a result, enhancing convenience and opportunity to vote are increasingly important. The 12
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Company's products are a direct response to these changing needs. To the extent that the Company is or becomes unable to anticipate or respond to the concerns of jurisdictions, its ability to submit responsive bids to RFP's will be impeded. Because the Company is incorporated and does business in British Columbia and its subsidiary, Global USA, is incorporated in the State of Delaware and does business in the United States and internationally, the Company as a whole is subject to both Canadian and United States tax laws. Additionally, the Company must comply with the taxation, export and import, currency, and other laws of each country in which it sells products or otherwise does business. These laws can be burdensome. To the extent that the Company is unable or unwilling to comply, its business in a particular country may be expected to be materially adversely affected. WARRANTIES. Key to all elections is the reliability of the system, including the voting equipment, accuracy of voting results, and accuracy of tallying of results. The Company's equipment is designed to optimize this reliability. The Company warrants its election systems for a period of one year from purchase, unless another period is specified by the RFP from a voting jurisdiction. The Company self-insures against warranty claims. The Company has never been the subject of any material warranty claims and has generally repaired or replaced malfunctioning equipment in the pre-election stage; however, if a claim were to be made and to prevail, a lack or insufficiency of insurance coverage could have a material adverse effect on the Company. However, all contracts with customers require insurance to be in place before execution of the contract. ENVIRONMENTAL COMPLIANCE The Company operates a manufacturing plant in McKinney, Texas. Although its manufacturing consists largely of parts assembly, the Company is required to comply with United States and Texas environmental and Occupational Safety and Health Act requirements applicable to electronics manufacturing operations in general, including, for example, storage, marking, and disposal of various products used for cleaning parts to be assembled. Although the Company takes appropriate measures to comply with these requirements, violations can occur. The Company was cited once by the New York Department of Environmental 13
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Conservation for alleged violation of certain storage, marking and disposal requirements applicable to two of these substances used at its former New York manufacturing facility and responded immediately to correct the situation. The Company believes that its compliance programs are adequate, but cannot assure that no problems will arise in the future, some of which could have a material adverse impact on the Company and its business. EMPLOYEES As of March 31, 1998, the Company had approximately 49 employees, of whom all were full-time, at its 3 locations in Canada and the United States. Of the full-time employees, 9 were in executive and administrative positions, 11 were in sales, marketing and customer relations, 5 were in research and development, 12 were in manufacturing, and 12 were in field customer support. RISK FACTORS In addition to the matters set forth in the foregoing discussion of the Company's business, the operations and financial performance of the Company are subject to the risks, among others, described below. FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced fluctuations in its operating results in the past and may experience those fluctuations in the future. Sales, on both an annual and quarterly basis, are subject to fluctuations as a result of a variety of factors, many of which are beyond the control of the Company. These factors include the timing of customer orders, delays in shipment due to component shortages or defects which must be remedied, production problems, cancellation of orders, and regulatory changes. In addition, the Company, because it sells election products and services, could tend to operate on a two-year business cycle because in the United States, a substantially larger number of elections for public office are held in even-numbered years than in odd-numbered years. As a result, revenues and underlying production and support activities for a majority of the Company's products and services could significantly increase or decrease in accordance with the election cycle. 14
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However, because the Company's fiscal year ends June 30, and because many voting jurisdictions now attempt to purchase election products and services immediately after an election, the Company believes that it has ameliorated the possible effect of the United States' biennial election cycle. Also, in Canada, elections are conducted on an irregular schedule which differs in and among national, provincial and municipal elections. Thus, the Company's Canadian business may also be expected to ameliorate any United States cyclicality. Given the possibility of fluctuations, the Company believes that comparisons of the results of its operations for the preceding year or quarters are not necessarily meaningful and that the results for any particular year or quarter should not be relied upon as an indication of future performance. If the Company's sales or earnings for any year or quarter are less than the level expected by securities analysts or the market in general, the shortfall could have an immediate and significant adverse impact on the market price of the Company's Common Stock. INTEGRATION OF ACQUIRED BUSINESSES AND DISTRIBUTORSHIP. One of the Company's strategies is to increase its scope of business and the product lines it offers by acquiring other election businesses and products or entering into distributorship or similar arrangements with other producers. There can be no assurance that the Company's management and financial controls, personnel, and other corporate support systems will be adequate to manage the increase in the size and diversity of scope of the Company's operations as a result of any such acquisition or distributorship. Also, there can be no assurance that the acquisition or distributorship arrangement will be accretive to earnings. By its nature, a distributorship does not give the Company complete control over the distributed products' manufacturing, shipment or quality, all of which are the responsibility of the manufacturer. Problems in any of these areas should they occur, could materially adversely affect the Company and its business. If and when appropriate acquisition opportunities, some of which could be material, arise, the Company intends to pursue them actively. No assurance can be given that any acquisition by the Company will or will not occur, that if such an acquisition does occur that it will not, despite 15
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the Company's efforts, materially and adversely affect the Company, or that any such acquisition will be successful in enhancing the Company's business. DEPENDENCE ON TESTING AND CERTIFICATION; GOVERNMENTAL IMPACT. In the United States, the Company's ability to respond to RFP's from voting jurisdictions and to make sales to those jurisdictions is dependent upon satisfactory completion of testing of the Accu-Vote and Accu-Touch (and similar future products or variations) by Wylie Labs, the industry's designated Independent Testing Authority and upon certification by each State. The Company's products have never had unsatisfactory testing results; however, if for some reason not now known or anticipated, a product did not test satisfactorily, the Company's business could be materially adversely affected to the extent it was unable to offer and sell that product. Similarly, the failure of a product to be certified in a State would prevent the sale of the product in that State and the voting jurisdictions in that State. Because the Company deals with governmental authorities in making offers and sales of its products, it can also be adversely affected by changes in those authorities, revisions to or promulgation of new requirements and standards in a State, and unanticipated or unforeseen impediments in the bidding, award and implementation process. INTERNATIONAL SALES IN GENERAL. The Company sells its election systems primarily in the United States and Canada, but intends to market actively to other countries throughout the world, particularly in Latin America. Sales of the Company's election systems will subject it to various governmental regulations, exports controls, and the normal risks involved in international sales. Sales of products and services in Latin America and elsewhere are subject to political, economic and other uncertainties, including, among others, risk of war, revolution, expropriation, renegotiation or modification of existing contracts, election laws and regulations, standards and tariffs, and taxation policies, as well as international monetary fluctuations which may make payment in United 16
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States dollars more expensive for foreign customers, and other uncertainties and trade barriers. CHANGES IN EXCHANGE RATES. Substantially all of the Company's revenues to date have been received in United States and Canadian dollars; however, some sales in the future may be in other currencies. Any decline in the value of other currencies in which the Company makes sales against the United States dollar will have the effect of decreasing the Company's earnings when stated in United States dollars. The Company does not engage in any hedging transactions that might have the effect of minimizing the consequences of currency fluctuations (which are not currently material) and does not intend to do so in the immediate future. TRANSFER PRICING. The Company and Global USA have entered into various agreements between themselves with respect to the transfer of technology, services and manufactured product. As the Company is generally subject only to Canadian taxation and Global USA is generally subject only to U.S. taxation, issues of transfer pricing arise. Both the Canadian and U.S. tax authorities generally require that pricing arrangements between the Company and Global USA be entered into on a fair market basis. Further, Canada will now require that contemporaneous documentation be completed evidencing the arrangements. While the Company is attempting to meet its obligations in this regard, the Company could be subject to various penalties, and increased tax, if the taxing authorities take issue with the transfer pricing arrangements reached between the Company and Global USA. Because appropriate transfer prices cannot be arrived at with certainty, there is no assurance that the taxing authorities would agree with the Company's transfer pricing arrangements. POLITICAL INSTABILITY. The political and economic instability in some countries in Latin America and elsewhere could result in the adoption of new trade policies or lead to trade disputes, which could materially adversely affect the Company and its business. The Company has no insurance against political instability.  COMPETITION. The election system market is dependent upon the voting needs and specifications of governmental 17
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jurisdictions. In that regard, sales, and therefore competition, are directed to secretaries of state and election officials in each voting jurisdiction who prepare requests for proposals in which desired specifications are set forth. Responsive bids are submitted to these officials for their evaluation and the selection of the company awarded the project. Competitive factors include accuracy, security and speed of voting and tallying of votes, ease of use of the system, flexibility in ballot preparation, cost and customer support. Because of its ability to offer a complete, state of the art, integrated election system which can be tailored to the customer's needs, or segments of a system if only one function is desired, the Company believes it is able to compete in all major areas of the election system market. However, several of the Company's existing and potential competitors have financial, and could develop technological and marketing, resources significantly greater than those of the Company and may have established relationships with customers or potential customers that afford them a competitive advantage. There can be no assurance that the Company will be able to compete effectively in its future markets or that competitive pressures will not adversely affect its business, financial condition or results of operations. See "--Competition" above. INTELLECTUAL PROPERTY  Patents. The Company holds the United States and Canadian patents, the rights to which it purchased in 1991, on its Accu-Vote ES-2000 system ("Patent"). Except for the Patent, the Company has not sought patent protection for its technology, even though it believes that some of its processes and equipment are proprietary to it. The Company has relied upon industrial know-how, and trade secret laws. The Company cannot assure that its proprietary processes and equipment will provide it with sufficient competitive advantage to overcome its lack of patent protection, nor can it assure that others will not independently develop equivalent or superior products or technology. Also, the Company cannot assure that it will be able to establish trade secret protection or that trade secret obligations will be honored. To the extent that consultants, employees and other parties apply technological information developed independently by them or others to Company projects, disputes may arise as to the proprietary rights to that 18
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information, which may not be resolved in favor of the Company. It is also possible that litigation may be necessary to enforce the Company's proprietary rights, to protect its trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement. Litigation of that nature could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operation. Patent applications in the United States are not disclosed until the patents issue; therefore, patent applications could have been filed which relate to the Company's processes and equipment. The Company does not believe that it infringes any patents of which it is aware; however, it cannot assure that patent infringement claims will not be asserted against the Company. These claims, if asserted, could have a material adverse effect on the Company's business, financial condition or results of operation. If infringement or invalidity claims were to be asserted against the Company, litigation could become necessary to defend the Company against those claims. In certain circumstances, the Company might choose to seek to obtain a license under the third party's intellectual property rights, which the Company cannot assure would be available, if at all, on terms acceptable to the Company. Trademarks and Tradenames. The Company has no registered trademarks or tradenames, but claims proprietary rights to Accu-Vote. A trademark registration application has been filed for Accu-Vote in the United States, but no assurance can be given that this trademark will issue. DEPENDENCE UPON CERTAIN OFFICERS. The success of the Company is dependent upon the services of its President, Mr. Van Pelt, its Vice President of Operations, Mr. Ensminger, and its Vice President of Sales/Marketing/Business Development, Mr. Urosevich. The Company has employment agreements with Mr. Van Pelt and Mr. Urosevich, but not Mr. Ensminger. However, the loss of the services of any one of them for any reason could materially impede the Company's marketing effort and strategic planning. 19
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POTENTIAL DILUTIVE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. As of March 31, 1998, the Company had 1,295,000 options and 166,667 warrants for Common Stock outstanding. To the extent that any outstanding options and warrants for Common Stock are exercised, there will be additional dilution in excess of that resulting from use of common and common equivalent shares in earnings calculations. LACK OF MARKET IN UNITED STATES; VOLATILITY OF STOCK PRICE. The Company's Common Stock is traded on the Toronto (Canada) Exchange and is expected to trade on the Nasdaq electronic bulletin board. While a public market for the Company's Common Stock currently exists in Canada, no such market exists in the United States as yet and, even though the Common Stock will be registered under Section 12(g) of the Securities Exchange Act of 1934, no assurance can be given that any market for the Common Stock will develop in the United States. The number of shares in the Canadian market is, and the number of shares expected to be in the United States market is, about 95% of the 18,457,440 shares of Common Stock outstanding at March 31, 1998. However, trading volume in the four weeks ended March 31, 1998 in Canada averaged 73,745 shares traded per day. Thus, even though a substantial percentage of the Company's outstanding shares could be traded, trading of relatively small blocks of stock can have a significant impact on the price at which the stock is traded. In addition, the Nasdaq electronic bulletin board has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of the Common Stock without regard to the operating performance of the Company. The Company believes that factors such as quarterly and annual fluctuations in financial results, announcements by competitors, or changes in securities analysts' recommendations may cause the market price to fluctuate, perhaps substantially. These fluctuations, as well as general economic conditions, such as recessions or high interest rates, may adversely affect the market price of the Common Stock. See "Part IV. Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters". SHARES ELIGIBLE FOR FUTURE SALE; PREFERRED SHARES. Future sales by existing shareholders could adversely affect the prevailing market price of the Common Stock. At 20
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March 31, 1998, the Company had 18,457,440 shares of Common Stock outstanding, of which about 1,000,000 shares will become eligible for sale under the provisions of Rule 144 under the Securities Act of ("1933 Act") in approximately December 1998 and 1,145,000 shares issued or to be issued under an employee option plan will be eligible for sale under Rule 701 under the 1933 Act 90 days after the effective date of this Registration Statement. In addition, the authorized capital of the Company includes 20,000,000 shares of Preferred Stock, none of which had been issued as of March 31, 1998. See "Item 8. Description of Securities". However, the Board of Directors may determine at any time and from time to time to set the terms and preferences of the Preferred Stock, or a series of it, and to issue it, subject to approval of the Toronto Stock Exchange. ABSENCE OF DIVIDENDS. Since its inception, the Company has not paid cash dividends on its Common Stock. The Company intends to retain future earnings, if any, to provide funds for business operations and, accordingly, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.  ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS The discussion and analysis of the operating results and the financial position of the Company should be read in conjunction with the financial statements and the notes to them set out in this Registration Statement. See "Financial Statements". The financial statements have been prepared in United States dollars in accordance with Canadian GAAP. See Note 17 of the Notes to Consolidated Financial Statements for an explanation of differences between Canadian GAAP and United States GAAP. CONDENSED FINANCIAL INFORMATION: [Enlarge/Download Table] 9 MONTHS 9 MONTHS 6 MONTHS 6 MONTHS ENDED ENDED ENDED ENDED 31-MAR-98 31-MAR-97 30-JUN-97 30-JUN-96 --------- --------- --------- --------- SALES AND OPERATING INCOME $ 12,086,413 $ 7,083,753 $ 6,758,954 $ 1,918,564 OTHER INCOME 90,606 47,835 51,496 27,922 ------------ ----------- ----------- ----------- 12,177,019 7,131,588 6,810,450 1,946,486 ------------ ----------- ----------- ----------- COST OF SALES AND OPERATING EXPENSES 5,764,909 4,135,740 2,815,680 1,372,730 SELLING, ADMINISTRATIVE AND GENERAL EXPENSES 3,344,678 2,374,736 1,655,250 1,284,006 RESEARCH AND DEVELOPMENT EXPENSES 311,464 356,469 184,414 178,522 AMORTIZATION 263,461 86,919 70,472 83,039 INTEREST 72,470 66,996 27,845 8,317 LOSS ON CAPITAL LEASE RECEIVABLE - - - - SETTLEMENT OF LAWSUIT AND LEGAL COSTS - - - - OTHER EXPENSES - 1,104 3,277 400 ------------ ----------- ----------- ----------- 9,756,982 7,021,964 4,756,938 2,927,014 ------------ ----------- ----------- ----------- NET INCOME (LOSS) FOR THE PERIOD $ 2,420,037 $ 109,624 $ 2,053,512 $ (980,528) ------------ ----------- ----------- ----------- YEAR YEAR YEAR ENDED ENDED ENDED 31-DEC-96 31-DEC-95 31-DEC-94 --------- --------- --------- SALES AND OPERATING INCOME $ 6,041,173 $ 5,961,586 $ 4,519,457 OTHER INCOME 66,606 34,834 57,420 ------------ ------------ ------------ 6,107,779 5,996,420 4,576,877 ------------ ------------ ------------ COST OF SALES AND OPERATING EXPENSES 4,216,805 2,757,247 2,423,255 SELLING, ADMINISTRATIVE AND GENERAL EXPENSES 2,969,256 2,650,174 2,544,553 RESEARCH AND DEVELOPMENT EXPENSES 451,113 674,144 464,616 AMORTIZATION 135,140 183,857 169,853 INTEREST 71,166 7,044 1,320 LOSS ON CAPITAL LEASE RECEIVABLE - 550,735 414,175 SETTLEMENT OF LAWSUIT AND LEGAL COSTS - 202,138 6,422 OTHER EXPENSES 956 13,123 60,897 ------------ ------------ ------------ 7,844,436 7,038,462 6,085,091 ------------ ------------ ------------ NET INCOME (LOSS) FOR THE PERIOD $ (1,736,657) $ (1,042,042) $ (1,508,214) ------------ ------------ ------------ RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997 Sales and operating income. In the nine months ended March 31, 1998, sales and operating income increased 70.6%, or $5.0 million, from $7.1 million in the 1997 period to $12.1 million . This increase resulted largely from a significant increase in sales of the Company's AccuVote 21
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Voting System in the United States, reflecting increases in unit volume, new product introductions, and the addition of new customers. Other income. In the nine months ended March 31, 1998, other income increased 89.4%, or $43,000, from $48,000 in the 1997 period to $91,000. This increase resulted largely from more warranties expiring, resulting in the purchase of maintenance agreements. Cost of sales and operating expenses. In the nine months ended March 31, 1998, cost of sales and operating expenses increased 39.4%, or $1.7 million, from $4.1 million in the 1997 period to $5.8 million. This increased amount resulted from the additional expense incurred to support the increased sales of systems during the period. In the 1998 period, cost of sales and operating expenses as a percentage of sales and operating income decreased from 58.4% in the 1997 period to 47.7%, largely as a result of more efficient use of labor and reduction in the cost of parts. Selling, administrative and general expenses. In the nine months ended March 31, 1998, selling, administrative and general expenses increased 40.8%, or $1 million, from $2.4 million in the 1997 period to $3.4 million. This increase was largely due to additional staff. Research and development expenses. In the nine months ended March 31, 1998, research and development expenses decreased 12.6%, or $45,000, from $356,000 in the 1997 period to $311,000. This reduction resulted primarily from reduction in the cost of consulting services. Amortization. In the nine months ended March 31, 1998, amortization increased 203.1%, or $177,000, from $87,000 in the 1997 period to $264,000. This increase was due primarily to the acquisition of $483,000 of capital assets and the capitalization of $1,200,000 of goodwill in the nine months ended March 31, 1998. Interest. In the nine months ended March 31, 1998, interest expense increased 8.2%, or $5,500, from $67,000 to $72,500. This increase resulted primarily from the increase in loans payable to finance operations. 22
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Other expenses. In the nine months ended March 31, 1998, other expenses decreased to none, from $1,100 in the 1997 period. Other expenses generally include fiscal agency fees, loss on sale or disposal of assets. The decrease in the 1998 period was due primarily to no expenses being incurred for that period. SHORT YEAR ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 In this discussion, please note that figures for the six months ended June 30, 1997 have been audited; figures for the six months ended June 30, 1996 are unaudited. Sales and operating income. In the six months ended June 30, 1997, sales and operating income increased 252.3%, or $4.9 million, from $1.9 million in the 1996 period to $6.8 million. This increase resulted largely from a significant increase in sales of the Company's AccuVote Voting System in the United States, reflecting increases in unit volume, and the addition of new customers. Other income. In the six months ended June 30, 1997, other income increased 84.4%, or $23,000, from $28,000 in the 1996 period to $51,000. Other income includes income from maintenance agreements and ballot preparation. This increase resulted primarily from the increase in sales volumes. Cost of sales and operating expenses. In the six months ended June 30, 1997, cost of sales and operating expenses increased 105.1%, or $1.4 million, from $1.4 million in the 1996 period to $2.8 million. This increased amount results from the additional expenses incurred to support the increased sales of systems during the period. In the 1997 period, cost of sales and operating expenses as a percentage of sales and operating income decreased from 71.5% in the 1996 period to 41.7%, largely as a result of economies of scale. Selling, administrative and general expenses. In the six months ended June 30, 1997, selling, administrative and general expenses increased 28.9%, or $0.4 million, from 23
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$1.3 million in the 1996 period to $1.7. This increase was largely due to additional personnel requirements. Research and development expenses. In the six months ended June 30, 1997, research and development expenses increased 3.3%, or $6,000, from $178,000 in the 1996 period to $184,000. This increase resulted primarily from production improvements of hardware and software. Amortization. In the six months ended June 30, 1997, amortization decreased 15%, or $13,000, from $83,000 in the 1996 period to $70,000. This decrease was due primarily to the use of the declining balance method of amortization on capital assets and very minor new acquisitions. Interest. In the six months ended June 30, 1997, interest expense increased 234%, or $19,600, from $8,300 to $27,000. This increase resulted primarily from an increase in loans payable to finance operations. Other expenses. In the six months ended June 30, 1997, other expenses increased 719.3%, or $2,900, from $400 in the 1996 period to $3,300. Other expenses generally include fiscal agency fees, loss on sale or disposal of assets. The increase in the 1997 period was due primarily to increases in built and installed systems. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Sales and operating income. In fiscal 1996, sales and operating income increased 1.3%, or $0.1 million, from $5.9 million in fiscal 1995 to $6.0 million. Sales remained essentially the same for the two fiscal years, largely due to market conditions. Other income. In fiscal 1996, other income increased 91.2%, or $32,000, from $35,000 in fiscal 1995 to $67,000. Other income includes income from maintenance agreements and ballot preparation. In fiscal 1996, the increase resulted largely from the expiration of initial warranty 24
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agreements and the consequent sale of maintenance agreements. Cost of sales and operating expense. In fiscal 1996, cost of sales and operating expense increased 52.9%, or $1.4 million, from $2.8 million in fiscal 1995 to $4.2 million. This increase resulted largely from costly third party manufacturing and increased product cost. Selling, administrative and general expenses. In fiscal 1996, selling, administrative and general expenses increased 12.0%, or $0.3 million, from $2.7 million in fiscal 1995 to $3.0 million. This increase resulted largely from additional personnel and increased operating costs. Research and development expenses. In fiscal 1996, research and development expenses decreased 33.1%, or $223,000, from $674,000 in fiscal 1995 to $451,000. This reduction resulted primarily from a decrease in outside consulting fees. Amortization. In fiscal 1996, amortization decreased 26.5%, or $49,000, from $184,000 in fiscal 1995 to $135,000. This decrease was due primarily to the use of the declining balance method of amortization and very minimal new acquisitions. Interest. In fiscal 1996, interest expense increased 910.3%, or $64,000, from $7,000 to $71,000. This increase resulted primarily from the increase in loans payable to finance operations. Loss on write-down of capital lease receivable. In fiscal 1996, loss on write-down of capital lease receivable decreased 100.0%, or $551,000, from $551,000 in fiscal 1995 to $0. This loss, which was written off in fiscal 1995, resulted from the government of Venezuela's failure to pay for lease of Accu-Vote equipment entered into by a previous government. Settlement of lawsuit and related legal costs. In fiscal 1996, expense incurred in the settlement of lawsuit and related legal costs decreased 100.0%, or $202,000, from $202,000 in fiscal 1995 to $0. This expense was incurred in fiscal 1995 in connection with the settlement of a 25
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lawsuit for alleged breach of contract brought by CEC, Inc. in California. Other expenses. In fiscal 1996, other expenses decreased 92.7%, or $12,000, from $13,000 in fiscal 1995 to $1,000. Other expenses generally include loss on disposal of fixed assets. The decline in fiscal 1996 was due primarily to decreases in loss in fixed asset disposal. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Sales and operating income. In fiscal 1995, sales and operating income increased 31.9%, or $1.4 million, from $4.5 million in fiscal 1994 to $6.0 million. The increase reflected increases in unit sales. Other income. In fiscal 1995, other income decreased 39.3%, or $22,000, from $57,000 in fiscal 1994 to $35,000. Other income includes maintenance agreements and ballot preparation. In fiscal 1995, the decrease resulted largely from a decline in income from ballot preparation. Cost of sales and operating expense. In fiscal 1995, cost of sales and operating expense increased 13.8%, or $0.4 million, from $2.4 million in fiscal 1994 to $2.8 million. This increase resulted largely from increases in supplier prices due to the Company's request for increased product capability. Selling, administrative and general expenses. In fiscal 1995, selling, administrative and general expenses increased 4.2%, or $0.1 million, from $2.5 million in fiscal 1994 to $2.7 million. This increase resulted largely from increases in the sales staff. Research and development expenses. In fiscal 1995, research and development expenses increased 45.1%, or $209,000, from $465,000 in fiscal 1994 to $674,000. This increase resulted primarily from expenditures related to enhancement of reader capability and new product development. Amortization. In fiscal 1995, amortization increased 8.2%, or $14,000, from $170,000 in fiscal 1994 to $184,000. 26
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This increase was due primarily to the acquisition of new capital assets during 1994 and 1995. Interest. In fiscal 1995, interest expense increased 433.7%, or $6,000, from $1,000 in fiscal 1994 to $7,000. This increase resulted primarily from additional borrowing to fund operations. Other expenses. In fiscal 1995, other expenses decreased 78.5%, or $48,000, from $61,000 in fiscal 1994 to $13,000. Other expenses generally include fiscal agency fees and other miscellaneous amounts. The decline in fiscal 1995 was due primarily to decreases in fiscal agency fees paid in the year. LIQUIDITY AND CAPITAL RESOURCES The Company uses a combination of internally generated funds and bank borrowings to finance its acquisitions, working capital requirements, capital expenses and operations. During the short fiscal year ended June 30, 1997 and the last full fiscal year ended December 31, 1996, the Company generated most of its funding needs through cash flow. At June 30, 1997, the Company cash totaled $78,000, a decrease of $402,000 from December 31, 1996, while accounts receivable increased to $4.8 million at June 30, 1997 from $1.2 million at December 31, 1996, in each case reflecting the particular payment schedules of the Company's contracts. Because of the nature of the Company's business, timing of payments on large contracts may vary significantly, causing significant variances from period to period in the mix of cash and other liquid funds and accounts receivable. Likewise, inventory figures may vary significantly, depending upon delivery dates for voting systems. At June 30, 1997, inventory was $1.6 million, very similar to the $1.9 million in inventory at December 31, 1996; however, this may not necessarily be 27
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representative of the figure at the end of any given fiscal period. Also in connection with its contractual arrangements with customers, the Company may extend credit terms for the payment of amounts due for voting systems. At June 30, 1997, loans receivable, less current portion, stood at $900,000, approximately the same amount as was reported at December 31, 1996. These loans are repaid on varying terms and with varying interest rates, determined on a case by case basis. The Company has not historically experienced any default rate in connection with loans due from customers, except for amounts due from Venezuela under a 1991 agreement, which were written off. The Company currently has two loans outstanding, each with Western Bank, Albuquerque, New Mexico. One loan in the amount of $600,000 is secured by Global USA accounts receivable. This loan bears an interest rate of Western Bank of Albuquerque Prime Rate and is due January 6, 1999. The second loan is in the amount of $770,000 and is secured by a specific Global USA contract valued at $2,100,000. This loan bears an interest rate of 1% above the Western Bank of Albuquerque Prime Rate and is payable on November 15, 1998. In order to avoid cash flow constrictions, the Company occasionally enters into short-term loan arrangements. The Company entered into, on March 31, 1998, loans of C$500,000 each with two Canadian individuals. Partial funding of these loans was received on March 31, 1998 and the remaining on April 1, 1998. They were due and payable on March 31, 1999, but were repaid in full on June 1, 1998. The loans were evidenced by promissory notes and bore interest at a rate of 8% per year, calculated and payable on the last day of each month. Each loan was secured by an Accounts Security Agreement, which has since been released which grants to each lender a security interest in Global USA's debts, accounts, claims, demands, monies and choses in action and proceeds therefrom. As additional compensation to the lenders, the Company issued to each of them a Share Purchase Warrant for 83,333 shares and 83,334 respectively, of Common Stock, immediately exercisable at a price of C$1.89 and expiring at 4:00 p.m. local time in Vancouver, B.C. on March 31, 2001. During the Company's three most recently ended fiscal years, the Company has experienced no material impact from 28
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inflation or changing prices on its net sales and revenues or on income from continuing operations. Management believes that financial resources, including internally generated funds and available bank borrowings will be sufficient to finance the Company's current operations and capital expenditures, excluding acquisitions, for the next twelve months. The following table sets out the exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars in effect at the end of the following periods, and the average exchange rates (based on the average of the exchange rates on the last day of each month in those periods) and the range of high and low exchange rates for those periods. [Download Table] YEAR ENDED DECEMBER 31 YEAR ENDED JUNE 30, 1997 (short period) 1993 1994 1995 1996 END OF PERIOD 1.32550 1.40300 1.37135 1.36447 1.37579 AVERAGE FOR PERIOD 1.2092 1.3664 1.3725 1.3849 1.37579 HIGH FOR PERIOD 1.24279 1.31030 1.32849 1.33199 1.33920 LOW FOR PERIOD 1.34429 1.40350 1.42379 1.38220 1.29789 On June 30, 1997, the noon rate of exchange as reported by the Federal Reserve Bank of New York for the conversion of United States dollars into Canadian dollars was $0.724113 (US$1.00=C$1.38799). As of March 31, 1998, the noon rate of exchange as reported by the Federal Reserve Bank of New York for the conversion of United States dollars into Canadian dollars was $0.705219 (US$1.00=C$1.417999). THE YEAR 2000 ISSUE. The year 2000 issue ("Y2K") arises from a computer's inability to recognize the two-digit field "00" as the year 2000 instead of the year 1900. The computer's mistaking "00" as the year 1900 could result in system failures or miscalculations causing disruptions to operations, including manufacturing, a temporary inability 29
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to process transactions, send invoices, or engage in other normal business activities. This is a significant issue for most companies, with far-reaching implications, some of which cannot be anticipated or predicted with any degree of certainty. The Company has completed an assessment of the magnitude of the Y2K issue with respect to the Company's products. The Company's Accu-Vote and Accu-Touch systems are designed to be Y2K compliant, which is generally a requirement in RFP's for voting systems, and the Company does not expect any material problems or difficulties to arise out of its systems. The Company is communicating with its customers to determine the extent of the Company's vulnerability to the failure of third parties to remediate their own Y2K issues. In conjunction with the Company's assessment of Y2K issues which might affect it, the Company is formulating plans to address the Y2K issue, including contingencies to address unforeseen problems. The Company has not been required to incur costs for remedial work and accordingly has not set aside any contingency fund to deal with any contingencies which may arise. The costs for Y2K compliance are based upon management's best estimates, which were derived from numerous assumptions about future events, including third-party modification plans and other factors. However, there can be no guarantee that those estimates will be accurate and actual results could differ materially from those plans. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to identify and correct all relevant computer codes.  ITEM 3. DESCRIPTION OF PROPERTY The Company leases office and manufacturing facilities in McKinney, Texas, in Omaha, Nebraska and Vancouver, British Columbia. The Company's standard practice is to lease its facilities, and to insure the facilities and their contents under an insurance plan. 30
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The McKinney, Texas, leased facility consists of about 13,050 square feet in a stand-alone, one-story building. This facility includes the Company's manufacturing operations and its United States corporate headquarters. The current capacity utilization of the manufacturing area is about 100%. Management anticipates that this facility may be expanded at some time during the next fiscal year. The lease term commenced on August 1, 1997 and continues for a period of five years, with two five-year options to renew. The Vancouver, British Columbia leased facility consists of about 8,150 square feet in an office warehouse, one-story building. This facility houses the Company's Canadian corporate headquarters and most of its research and development activities. The lease term commenced on May 1, 1993 and continued for a period of five years. The Company has executed a Lease Renewal agreement for a term of eight months beginning May 1, 1998 and terminating December 31, 1998 on the same terms and conditions as contained in the original Lease. The Company plans to move its Vancouver operations to smaller premises. The Omaha, Nebraska leased facility consists of approximately 610 square feet. The facility is used for field support. The lease term commenced on September 1, 1997 and continues for a period of two years.  ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership, as of March 31, 1998, of (i) each person known to the Company to own beneficially more than 5% of the Common Stock, (ii) each Director of the Company, (iii) each of the Company's Executive Officers, and (iv) all Officers and Directors as a group. Except as otherwise noted, the Company believes that the persons listed below have sole investment and voting power with respect to the Common Stock owned by them. 31
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[Download Table] NAME SHARES PERCENT OF CLASS BENEFICIALLY OWNED (1) David H. Brown (2) 1,310,067 7.1% Howard Van Pelt (3) 941,469(4) 5.1 Clinton H. Rickards(2) 921,019(5) 5.0 Larry Ensminger (3) 402,835(5) 2.2 Maurice E. Sokulski(3) 215,000(6) 1.6 Robert Urosevich(3) 160,000(7) * George Cobbe (3) 100,000(6) * Nicholas Glass (2) 50,000(5) * All Directors and Officers as a group 4,100,390(8) 22.2% * less than 1% (1) A person is deemed to be the beneficial owner of securities that can be acquired by that person within 60 days from the date of this Registration Statement upon exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by that person and that are exercisable within 60 days from the date of this Registration Statement have been exercised. (2) The address of the shareholder is 1562 Rand Avenue, Vancouver, British Columbia, Canada V6P 3G2. (3) The address of the shareholder is 1611 Wilmeth Road, McKinney, Texas 75069. (4) Includes options for 50,000 shares which are currently exercisable at C$1.25 per share and 9,380 shares owned by Mr. Van Pelt's wife (as to which he disclaims beneficial ownership). The options have been issued subject to Toronto Stock Exchange and shareholder approval. (5) Includes options, for 50,000 shares which are currently exercisable at C$1.25 per share, subject to shareholder approval, and, as Messrs. Rickards and Glass, Toronto Stock Exchange approval. (6) Includes options issued subject to Toronto Stock Exchange and shareholder approval, for 100,000 shares which are currently exercisable at C$1.25 per share (7) Includes options for 120,000 shares which are currently exercisable at C$1.25 per share. (8) Includes options for 520,000 shares which are currently exercisable at C$1.25 per share. 32
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 ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS EXECUTIVE OFFICERS AND DIRECTORS The Executive Officers and Directors of the Company are as follows: [Download Table] David H. Brown 69 Chairman of the Board, Director Howard T. Van Pelt 56 President, Chief Financial Officer of Registrant and of Global USA, Director Clinton H. Rickards 50 Vice President for Canada Sales and Stockholder Relations, Director Larry Ensminger 59 Vice President of Operations Maurice E. Sokulski 54 Treasurer, Controller Robert Urosevich 50 Vice President for Sales/Marketing/New Business George Cobbe 60 Director Nicholas Glass 53 Director David H. Brown has been a Director of the Company since 1991 and its Chairman of the Board since 1993. At his retirement in 1989, Mr. Brown was vice chairman of the investment firm Burns Fry Limited, Toronto, Ontario, Canada. Mr. Brown holds a bachelor of science degree from Concordia University, and a master of business administration from Harvard University. 33
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Howard T. Van Pelt has been President and Chief Financial Officer of the Company since 1993 and of Global USA since 1991, and has been a Director since 1991. In 1970, he became a regional marketing manager for Computer Election Systems Inc., an election voting machine company, and was regional manager, Southern division, of that company when it was sold in 1981 to Hale Bros. From 1964 to 1968, Mr. Van Pelt was a marketing representative for IBM Corporation, and from 1968 to 1970, he was a registered representative for Rauscher Pierce Securities. Mr. Van Pelt attended the University of New Mexico from 1960 to 1964 and the New York Institute of Finance in 1968. Clinton H. Rickards has been the Company's Vice President for Canada Sales and Stockholder Relations since 1993, and a Director since 1991. He has been in the computer industry for almost 30 years. In 1980, he, together with partners he subsequently bought out, founded the private computer company NAPT. This company began the development of the ES-2000, the Company's signature product, in 1986. Larry Ensminger has been the Company's Vice President of Operations since 1997. From 1993 to 1997, he was the manager of sales and operations, and from 1991 to 1993, he was a sales representative, for the Company. Mr. Ensminger holds an Associate of Arts degree in education from Dodge City Community College, and a Bachelor of Science and a Master of Science in engineering from Kansas State College. Maurice E. Sokulski has been Treasurer of the Company since 1994, Controller since 1996, and served as a Director of the Company from 1996 to 1997. From 1993 to 1994, he was controller of Northcoast Building Products Ltd., a British Columbia distributor of lumber products. In 1992, he was controller for Adagio Enterprises Ltd., a British Columbia manufacturer and distributor of lingerie. He is a chartered accountant and holds a bachelor of commerce degree from the University of Alberta. Robert Urosevich has been the Company's Vice President for Sales/Marketing/ Business Development since August 1997. From 1995 to 1997, he was president of I-Mark Systems, Inc., which was acquired by the Company in 1997. From 1994 to 1995, he was president of DATA Duplicating, Inc. Mr. Urosevich attended Coe College from 1966 to 1970. 34
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George Cobbe has been a Director of the Company since 1997. Mr. Cobbe has worked in various marketing and executive capacities for Hewlett-Packard Company since 1961. Since 1993, he has been general manager and director of North American Field Operations for Hewlett-Packard Company, and, since 1995, a vice president of that company. Mr. Cobbe holds a bachelor of science degree in electrical engineering from Stanford University. Nicholas Glass has been a Director of the Company since 1997. Mr. Glass is a member of the Bar of British Columbia, and of England and Wales, and currently practices in the field of labor relations as a mediator and arbitrator. He is a director of CTI Conservation Technologies, a private British Columbia company in the business of powerline carrier communications, is an advisor to the board of directors of Q-Media Software Corporation, a public company traded on the Toronto Stock Exchange which is a manufacturer and distributor to the software industry, and is a director of Belvedere Resources, a public company traded on the Vancouver Stock Exchange which owns mineral rights in Finland. From 1992 to 1996, Mr. Glass was a director of Tradepoint Investment Exchange, a public company traded on AIM in London and the Vancouver Stock Exchange which has started a new electronic stock exchange based in London. From 1972 to 1990, he was a civil trial lawyer at the firm of Swinton and Company in Vancouver. Mr. Glass holds a Master of Arts degree from Trinity College, Oxford University. No Director or Executive Officer of the Company is related to any other by blood or marriage.  ITEM 6. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth an overview of compensation for the fiscal years ended June 30, 1997 (as short fiscal year), and December 31, 1996, and 1995 to the Company's Chief Executive Officer and each of the Company's other Executive Officers whose total compensation exceeded $100,000. 35
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SUMMARY COMPENSATION TABLE [Enlarge/Download Table] Name and Principal Position Annual Compensation Long-Term All Other Compensation Compensation Salary Bonus Restricted Securities Stock Under- Award lying Option (#Shares)* Howard T. Van Pelt (1) 1997 $ 75,000 $ 65,000 -0- -0- $ 1996 150,000 -0- -0- -0- 1,339 1995 150,000 -0- -0- -0- 1,072 Clinton H. Rickards 1997 C68,000 C33,750 1996 C147,083 -0- -0- -0- 324 1995 C150,000 342 Larry Ensminger 1997(2) 90,000 1996 90,000 1995 90,000 Maurice E. Sokulski 1997(3) 27,324 1996 50,000 1995 50,000 Robert Urosevich 1997(4) 115,000 1996 1995 Robert W. Ross,Jr.(5) 1997 29,938 1996 135,000 -0- -0- -0- 5,192 1995 135,000 -0- -0- -0- 4,009 * For information on performance share options granted to certain Directors, officers and employees in November 1991, amended as to term in December 1996, see "Item 7. Certain Relationships and Related Transactions." (1) Effective August 1, 1997, Mr. Van Pelt's salary was adjusted to $180,000 per year. (2) Effective August 1, 1998, Mr. Ensminger's salary was adjusted to $96,000 per year. 36
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(3) Effective July 1, 1997, Mr. Sokulski's salary was adjusted to $75,000 per year. (4) Effective August 1, 1997, Mr. Urosevich's salary was adjusted to $115,000 per year. (5) Mr. Ross resigned from his position as Vice President, U.S., for Manufacturing Operations in December, 1996. Robert W. Ross, Jr., a former Director, received c$41,330 in FY1997, c$191,152 in FY 1996, and c$190,804 in FY1995 in consulting fees from the Company. The Company granted no options for Common Stock and made no awards under long-term incentive plans to named Executive Officers during the fiscal year ended June 30, 1997 (a short fiscal year), or during the previous fiscal year ended December 31, 1996. See Item 4. Security Ownership of Certain Beneficial Owners and Management. The following table sets out information with respect to stock options held by Executive Officers and option values as of June 30, 1997, the end of the fiscal year. Exercisable options are indicated by an "E"; unexercisable options are indicated by a "U". [Enlarge/Download Table] Value of Unexercised Shares Underlying In-The-Money Shares Acquired on Unexercised Options at Name Exercise Value Realized Options at 6/30/97 6/30/97 ---- ------------------ -------------- ------------------ --------------- Howard Van Pelt -0- -0- -0- -0- Clinton Rickards -0- -0- -0- -0- Robert Ross, Jr.(1) -0- -0- -0- -0- (1) Resigned in December, 1996. 37
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COMPENSATION OF DIRECTORS. Non-employee Directors, with the exception of Mr. Brown, are not paid cash compensation for their service. Expenses incurred in connection with attending Board and committee meetings were in fiscal 1997 and are reimbursed. Mr. Brown, as Chairman of the Board, receives, and received in the last fiscal year, a fee of C$50,000. Directors Cobbe and Glass, who joined the Board after the end of the last fiscal year, each received options for Common Stock in connection with their agreement to serve. Option agreements relating to these options have not been executed, pending Toronto Stock Exchange and shareholder approval. See Item 4. Security Ownership of Certain Beneficial Owners and Management. The Company has no other Director compensation plans in place, but is considering cash compensation payments to its other non-employee Board Members. EMPLOYMENT AGREEMENTS The Company has a three-year employment agreement dated August 1, 1997 with its President, Mr. Van Pelt under which he is paid a salary of $180,000 per year and a bonus of 3% of earnings not to exceed $200,000. The employment agreement also provides that Mr. Van Pelt's employment may be terminated only for cause and that upon termination for other than criminal behavior, the Company will pay a severance benefit equal to six months base salary at the time of termination. Under a two-year employment agreement dated September 30, 1996, the Company pays its Vice President of Sales for Canada and Stockholder Relations, Mr. Rickards, an annual salary of C$136,000 plus a bonus of 3% of Canadian sales and 1% of the pre-tax earnings, net of the Canadian gross profit. The agreement may be terminated for cause or not for cause upon six months' notice by either party. The Company has no compensatory plan or arrangement for its Executive Officers with respect to their termination of employment or a change in control of the Company other than as set out in their respective employment agreements.  ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In addition to the employment arrangements discussed under Item 6. Executive Compensation, the Company employs 38
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Larry Ensminger, its Vice President of Operations, at a salary of $96,000 per year. Until the beginning of the current fiscal year, the Company paid Mr. Ensminger a salary of $90,000 per year. The Company employs its Treasurer, Maurice E. Sokulski, at a salary of $75,000 per year; for the previous three fiscal years, the Company paid Mr. Sokulski a salary in the amount of C$75,000. Robert Urosevich, the Company's Vice President for Sales/Marketing/New Business since August 1997, is paid a salary of $115,000 per year pursuant to a three year employment contract which commenced in August of 1997. Until May 1998, when the lease was terminated by agreement of the parties and payment by the Company of a $29,000 termination fee, the Company leased from Robert W. Ross, Jr., a former Director and Vice President who resigned in December 1996, the Company's former manufacturing facility in Honeoye Falls, New York. The Company also leased office space from a company controlled by Howard Van Pelt, a Director. During the fiscal years ended June 30, 1997 and December 31, 1996 and 1995, the Company paid rent in the amount of $18,530. By an agreement dated November 22, 1991, the Company reserved for issuance 4,150,000 treasury shares for issuance as "performance shares". These shares were to be issued at $0.08 per share, and, upon issuance, were to be held in escrow and released to specified employees on the basis of "cumulative cash flow". Two of the original allotees ceased to be employees of the Company and, therefore, were no longer eligible for performance shares. Their 270,000 share allotment was canceled, leaving a balance of 3,880,000 reserved for issuance. During 1996, the Directors resolved to cancel 1,142,000 of the allotted but unissued performance shares and to extend the earn-out period on the remaining 2,738,000 performance shares from January 17, 1997 to January 17, 2000. The Directors' resolution was subsequently approved by shareholders and regulatory authorities. On December 6, 1996, the Company 39
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entered into an Amended and Restated Performance Shares Allotment Agreement with respect to the remaining shares which extended the earn-out time from January 17, 1997 to January 17, 2000, but retained the earn-out requirements of the earlier agreement. Those requirements provided that performance shares would have to be earned out on the basis of one performance share for every C$0.7975 cumulative cash flow. The following Directors and Officers were awarded the following performance shares, subject to the escrow terms: Howard Van Pelt, 2,187,581; David H. Brown, 88,208; and Clinton H. Rickards, 282,267. Subsequent to the end of the last fiscal year, in January 1998, the performance shares were earned, purchased and released from escrow. Of Mr. Van Pelt's allotment, 1,305,492 were issued to other employees, leaving him a balance of 882,089 shares.  ITEM 8. DESCRIPTION OF SECURITIES GENERAL The authorized capital stock of the Company consists of 100,000,000 common shares without par value ("Common Shares") and 20,000,000 convertible voting preferred shares without par value ("Preferred Shares").  COMMON SHARES As of March 31, 1998, 18,457,440 Common Shares were issued and outstanding. All of the authorized Common Shares are of the same class and rank equally as to dividends, voting powers and participation in assets. Holders of Common Shares are entitled to one vote, either in person or by proxy, on all matters that may be voted upon by the registered holders thereof at meetings of shareholders. Holders of Common Shares do not have any pre-emptive rights or rights to subscribe for additional shares of the Company. Pursuant to the Articles of the Company, the Company may, by a resolution of its Directors and in compliance with the Company Act (British Columbia) ("Company Act"), purchase any of the Common Shares at a price and upon the terms specified in that resolution. The 40
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Common Shares are not redeemable and there are no sinking fund provisions.  PREFERRED SHARES The Preferred Shares may be issued at any time and from time to time in one or more series. The Directors may, by resolution, alter the Memorandum of the Company to fix the number of Preferred Shares in, and to determine the designation of Preferred Shares of, that series and alter the Memorandum or Articles to create, define and attach special rights and restrictions to the Preferred Shares of that series relating only to the conversion of those Preferred Shares into Common Shares of the Company. The Company currently has no Preferred Shares outstanding and the Directors have not yet designated any series thereof. The Company has no present plan to issue any Preferred Shares. Each Preferred Share held is entitled to one vote, in person or by proxy, at all general meetings of the Company. Holders of Preferred Shares are entitled, on the distribution of assets of the Company upon liquidation, dissolution or winding-up of the Company or on any other distribution of assets of the Company among its members for the purpose of winding up its affairs, to receive before any distribution to holders of Common Shares or any other shares of the Company ranking junior to the Preferred Shares with respect to repayment of capital, the amount paid up with respect to each Preferred Share held by them. After payment to holders of Preferred Shares of the amounts so payable to them, they are not entitled to share in any further distribution of the property or assets of the Company. No dividends may be paid to the holders of Common Shares or to holders of other shares of the Company ranking junior to the Preferred Shares unless the Directors have previously declared that the holders of the Preferred Shares are entitled to receive dividends in an amount per Preferred Share equal to or greater than any dividend per Common Share which may be paid to the holders of the Common Shares. 41
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No Preferred Shares which are to be convertible into Common Shares may be allocated or issued without the Company first obtaining the written consent of the Toronto Stock Exchange or any other stock exchange on which the securities of the Company are traded. The Preferred Shares are not redeemable and there are no sinking fund provisions. CERTAIN PROVISIONS OF THE BRITISH COLUMBIA COMPANY ACT The Company Act provides that shareholders are entitled to dissent in respect of certain actions proposed to be taken by the Company. If the Company proposes to: (a) continue out of the jurisdiction of the Company Act; (b) offer financial assistance for the purpose of purchasing shares or convertible debt obligations of the Company or on the security of a pledge of or charge on shares of the Company given by that person to the Company, or in any other case, unless there are reasonable grounds for believing that, or the Directors are of the opinion that, the giving of financial assistance is in the best interests of the Company; (c) sell, lease or otherwise dispose of the whole or substantially the whole of the Company's undertaking; (d) alter its Memorandum by altering any restriction on the business carried on or to be carried on by the Company or on its powers; (e) convert from a specially limited company(as defined in Section 243 of the Company Act; (f) amalgamate with another corporation; or (g) transfer or sell the whole or part of its business or property to another company when it is being wound-up and for that transfer or sale, the members of the 42
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Company receive shares, debentures or other similar interests from the other company, or instead or in addition to cash, shares, debentures or other similar interests, have the right to participate in profits of or receive any other benefit from the other company; a shareholder may exercise a right of dissent and is entitled to be paid the fair value of the shareholder's shares as of the day before the date on which the shareholders' resolution approving the transaction was passed. The Company Act further provides that Directors must not sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the Company unless they have the approval of the members by a resolution passed by a majority of not less than three-quarters of the votes cast by those members of the Company voting at a general meeting. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are no governmental laws, decrees or regulations in Canada or the Province of British Columbia that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of the Company's securities, other than withholding tax on dividend payments, as described below under the heading "Taxation". Except as provided in the Investment Canada Act (the "Investment Act") and the British Columbia Company Act (the "Company Act"), there are no limitations under the laws of Canada, the Province of British Columbia or in the charter or any other constituent documents of the Company on the right of foreigners to hold or vote the Common Shares. The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or government agency, corporation, partnership, trust or joint venture that is not a "Canadian" as defined in the Investment Act (a "non-Canadian"), unless after review the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to 43
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Canada. An investment in Common Shares by a non-Canadian (other than an "American" as defined in the Investment Act) will be reviewable under the Investment Act if it is an investment to acquire control of the Company and the value of the assets of the company is then $5 million or more. A non-Canadian will be deemed to acquire control of the Company for the purposes of the Investment Act if he or she acquires a majority of the outstanding Common Shares. A non-Canadian will be presumed to acquire control of the Company if he acquires more than one-third (but less than a majority) of the outstanding Common Shares, unless it can be established that, on the acquisition, the Company is not controlled in fact by the non-Canadian through the ownership of such shares. A non-Canadian will be deemed not to acquire control if he or she acquires less than one-third of the outstanding Common Shares. The Investment Act was amended with the Canada-United States Free Trade Agreement to provide for special review thresholds for "Americans", as defined in the Investment Act. The definition of American includes American-controlled entities, as defined in the Investment Act. Under the Investment Act, as amended, an investment in the Common Shares by an American will be reviewable only if it is an investment to acquire control of the Company and the value of the assets of the Company is equal to or greater than a specified amount (the "Review Threshold"), which increases in stages. The Review Threshold is adjusted annually each year after 1992 to be equivalent to $150 million in constant 1992 dollars (calculated as prescribed in the Investment Act). If a non-Canadian acquires control of the Company by the acquisition of Common Shares, but the transaction is not reviewable as described above, the non-Canadian is required to notify the government and to provide certain basic information relating to the investment. If the business of the Company is then a prescribed type of business activity related to Canada's cultural heritage or national identity, and if the government considers it to be in the public interest to do so, then the government may give a notice in writing within 21 days requiring the investment to be reviewed. 44
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For non-Canadians (other than Americans, as defined in the Investment Act), an indirect acquisition of control, by the acquisition of voting interests of an entity that directly or indirectly controls the Company, is reviewable if the value of the assets of the Company is then $50 million or more. This requirement does not apply to an American, as defined in the Investment Act. As a company incorporated under, and governed by, the provisions of the Company Act, the Company is required to have at least one director resident in the Province of British Columbia and a majority of directors must be residents of Canada. Accordingly, the ability of shareholders to elect directors is constrained to the extent that the board of directors of the Company must at all times meet these requirements. CANADIAN TAXATION OF UNITED STATES PERSONS The following is a summary of the principal Canadian federal income tax considerations generally applicable to the purchase, disposition and ownership of Common Shares of the Company by residents and citizens of the United States and is not a complete analysis or listing of all possible tax consequences of such purchase, disposition or ownership. Nor does this summary deal with all aspects of Canadian federal taxation that may be relevant to particular investors. This summary is general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular person. Holders of Common Shares should seek independent advice from their own tax advisors as to the income tax consequences to them having regard to their particular circumstances. The following summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA") and the regulations thereunder publicly released by the Minister of Finance as of the date hereof. Except for the foregoing, this summary does not take into account or anticipate changes in the law or the administrative or assessing practices of Revenue Canada, Taxation and all proposed amendments to the ITA and the regulations 45
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thereunder publicly released by the Minister of Finance as of the date hereof. Except for the foregoing, this summary does not take into account or anticipate changes in the law or the administrative or assessing practices of Revenue Canada, Taxation whether by legislative, governmental, or judicial action and does not take into account or anticipate provincial, territorial or foreign tax considerations. This summary relates to the principal Canadian federal income tax considerations under the ITA generally applicable to holders of Common Shares who, for purposes of the ITA, are not and will not be or be deemed to be resident in Canada at any time while they hold Common Shares, deal at an arm's length with the Company, will hold their Common Shares as capital property and do not use or hold, and or not deemed under the ITA to use or hold their Common Shares in, or in the course of carrying on a business in Canada. A holder who is not resident in Canada for purposes of the ITA will generally not be subject to tax under the ITA in respect of any capital gain or capital loss realized on the disposition of a Common Share unless such share is "taxable Canadian property" for purposes of the ITA and the holder is not entitled to relief under an applicable tax treaty between Canada and the holder's jurisdiction of residence. A Common Share will be "taxable Canadian property" of the holder, if, at any time during the five year period immediately preceding the disposition of the Common Share, not less than 25% of the issued shares of any class or series of the Company belongs to the holder, to persons with whom the holder did not deal at arm's length or a combination thereof. In addition, the Canada-United States Income Tax Convention (1980) (the "Treaty") will generally exempt a holder who is resident of the United States for purposes of the Treaty from income tax in respect of a disposition of Common Shares provided the value of the shares of the Company is not derived principally from real property (including resource property) situated in Canada and provided such holder does not have and has not had within the twelve month period preceding the disposition a permanent establishment or fixed base available to such holder in Canada. 46
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In general, a holder who receives a dividend in respect of a Common Share will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividend (computed in Canadian dollars), unless such rate is reduced under the provisions of a tax treaty between Canada and the holder's jurisdiction of residence. Under the Treaty, the rate of withholding tax on dividends payable to U.S. resident individuals is reduced to 15%. The Treaty also reduces the rate of withholding tax to 5% for dividends paid to a company which beneficially owns at least 10% of the voting stock of the Company. When a holder dies holding Common Shares, the holder will be deemed for Canadian tax purposes to have disposed of those Common Shares for an amount equal to the fair market value thereof immediately before the holder's death and will be subject to the tax treatment with respect to dispositions described above. Any person who acquires those Common Shares as a consequence of the death of such holder will be deemed to have acquired such shares for the fair market value at that time. There is currently no Canadian federal estate tax. PART II  ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS The Company's Common Stock is traded on the Toronto Stock Exchange under the symbol "GSM". The following table sets forth for the periods indicated the high and low closing prices of the Company's Common Stock as reported by the Toronto Stock Exchange, in Canadian funds. [Download Table] HIGH LOW ---- --- Fiscal Year 1996 Quarter ended March 31, 1996 $ 1.15 0.82 Quarter ended June 30, 1996 1.09 0.74 Quarter ended September 30, 1996 0.93 0.61 Quarter ended December 31, 1996 0.85 0.55 Fiscal Year 1997(as short year) Quarter ended March 31, 1997 0.70 0.51 Quarter ended June 30, 1997 0.68 0.50 Fiscal Year 1998 Quarter ended September 30, 1997 1.50 0.45 Quarter ended December 31, 1997 2.15 1.38 Quarter ended March 31, 1998 2.05 1.35 47
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The last sale price of the Company's Common Stock on September 15, 1998 as reported on the Toronto [Canada] Stock Exchange was C$2.60 per share. As of March 31, 1998, there were approximately 705 holders of record of the Company's Common Stock, of whom approximately 72.1% were in the United States. At that date, approximately 29.8% of the outstanding 18,457,440 shares of Common Stock was held in the United States. Since its inception, the Company has not paid cash dividends on its Common Stock. The Company intends to retain future earnings, if any, to provide funds for business operations and, accordingly, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.  ITEM 2. LEGAL PROCEEDINGS On August 21, 1998, ES&S filed a suit against Global USA in the United States District Court for the District of Nebraska. The suit alleges that Global USA has infringed ES&S's U.S. Patent No. 5,583,329, which covers a direct recording electronic voting machine and voting process ("ES&S Patent"). ES&S has asked for treble monetary damages to be proven at time of trial, declaratory judgment stating that Global USA's products and technology infringe the ES&S Patent, and injunctive relief. Based upon an opinion of patent counsel obtained when the Company acquired assets of I-Mark in 1997, Global USA answered by affirmatively stating that its products and technology do not infringe the ES&S Patent. Global USA intends to defend vigorously against the suit. Except for the ES&S lawsuit, the Registrant is not a party to any material pending legal proceedings and is not aware of any proceeding that a governmental authority is contemplating.  ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS During the Registrant's two most recent fiscal years or any later interim period, the Registrant's principal independent accountants were Staley, Okada, Chandler & Scott, Chartered Accountants, Burnaby, British Columbia, Canada, and that firm is currently retained in that capacity. 48
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 ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES Since July 31, 1995, the Registrant has issued the following securities without registration under the Securities Act of 1933, pursuant to exemptions from registration under that Act: [Enlarge/Download Table] DATE ISSUANCE EXEMPTION RELIED UPON 11/22/96 400,000 shares issued to Clinton Richards upon exercise of Issued under Canadian options law 11/22/96 100,000 shares issued to David Brown upon exercise of options Issued under Canadian law 7/31/97 1,000,000 shares of Common Stock to I-Mark Systems, Inc. in the Section 4(2): Pur- acquisition of the assets of I-Mark Systems, Inc., a Nebraska chaser had access to corporation. all information needed to make an investment decision through its due dili- gence in the acquisi- tion. 1/16/98 2,738,000 performance shares to Directors, Officers and Issued under Canadian selected employees, as approved by the Toronto Stock Exchange law 8/22/97 Options for 1,145,000 shares issued to 26 employees, including Issued under Canadian officers law and, as to U.S. residents, Rule 701. 12/17/97 Options for 50,000 shares issued to Nicholas Glass, a Director Issued under Canadian law 2/13/98 Options for 100,000 shares issued to George Cobbe, a Director Issued under Canadian law 3/31/98 Warrants for 166,667 shares issued to David Ross and Victoria Issued under Canadian Ross law  ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is incorporated pursuant to the Company Act of British Columbia, Canada. Section 128 of the Company Act permits the Company, with the approval of the Supreme Court of British Columbia, to indemnify a person who is a Director, or former Director of the Company against all costs, charges and expenses, including (i) an 49
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amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by the person, (ii) an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which the person is made a party because of having been a Director of the Company, (iii) an action brought by the Company, if the person acted honestly and in good faith with a view to the best interests of the Company, and, in the case of a criminal or administrative action or proceeding, the person had reasonable grounds for believing that the person's conduct was lawful. Part 20 of the Company's Articles embodies the statutory provisions and also provides for indemnification of officers, employees and agents of the Company, as well as for the purchase of insurance for the persons indemnified. Article XI of the Certificate of Incorporation of Global USA provides for limitation of director liability and for indemnification of directors, officers and employees of the corporation. This limitation and indemnification is in addition to that provided under the laws of British Columbia for Directors and Officers of the Company and benefits persons serving Global USA, whether or not they also serve the Company. The directors of Global USA are the same persons who are Directors of the Company. A Global USA director will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for breach of the duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, liability under Section 174 of the Delaware General Corporation Law, or for any transaction from which the Director derives improper personal benefit. The Article also provides that changes in Delaware law further eliminating or limiting liability of Directors will be automatically applied to directors of the corporation. Article XI provides for indemnification of and the purchase of insurance covering directors, officers and employees of Global USA and to those serving in another entity at the request of the corporation to the fullest extent allowed by law. Indemnification includes expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, and may be paid in advance of final 50
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disposition of an action, suit or proceeding. It does not limit other rights to which any person seeking indemnification from the corporation may be entitled under an agreement, vote of stockholders or disinterested directors, or otherwise. The Company also maintains a claims made Directors, Officers and Corporate Liability Policy in the aggregate amount of $5 million. PART FS The following Consolidated Financial Statements of the Registrant are included: Audited: Consolidated Balance Sheet as at 30 June 1997, and 31 December 1996 and 1995. Consolidated Statement of Changes in Shareholders' Equity Consolidated Statement of Income (Loss) for the Six Months Ended 30 June 1997 and the Years Ended 31 December 1996, 1995 and 1994 Consolidated Statement of Cash Flows for the Six Months Ended 30 June 1997, and the Years Ended 31 December 1996, 1995 and 1994 Notes to Consolidated Financial Statements Unaudited: Interim Consolidated Balance Sheet as at 31 March 1998 Interim Consolidated Statement of Changes in Shareholders' Equity Interim Consolidated Statement of Income for the Nine Months Ended 31 March 1998 Interim Consolidated Statement of Cash Flow for the Nine Months Ended 31 March 1998 Notes to Interim Consolidated Financial Statements 51
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PART III  ITEM 1. INDEX TO EXHIBITS Exhibits to this Form 10-SB are as follows: EXHIBIT 2(1) Memorandum and Articles of Incorporation, as amended.* 3 Instruments Defining the Rights of Security Holders * 3(1) Parts 7, 10, 12 and 27 of the Registrant's Memorandum and Articles of Incorporation, as amended, set forth in Exhibit 2(1) * 6 Material Contracts 6(1)(i) Employment Agreement with Howard Van Pelt dated August 1, 1997 * (ii) Employment Agreement, dated October 1, 1996, with Clinton H. Richards* (iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997* 6(2) Amended and Restated Performance Share Allotment Agreement dated December 6, 1996 * 6(3)(i) Lease (Vancouver, British Columbia)* (ii) Lease (McKinney, Texas)* (iii) Lease (Omaha, Nebraska)(to be filed by Amendment)* 6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated July 31, 1997* 6(5) Promissory Notes and associated Accounts Security Agreements and Stock Purchase Warrants, all dated March 31, 1998, to each of David Ross and Victoria Ross. Termination of each Promissory Note.* 6(6) Option agreements: (i) Form of Option Agreement with employees* (ii) Option Agreement dated August 22, 1997 between the Company and Howard T. Van Pelt* 52
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(iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997* 6(2) Amended and Restated Performance Share Allotment Agreement dated December 6, 1996 * 6(3)(i) Lease (Vancouver, British Columbia)* (ii) Lease (McKinney, Texas)* (iii) Lease (Omaha, Nebraska)(to be filed by Amendment)* 6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated July 31, 1997* 6(5) Promissory Notes and associated Accounts Security Agreements and Stock Purchase Warrants, all dated March 31, 1998, to each of David Ross and Victoria Ross. Termination of each Promissory Note.* 6(6) Option agreements: (i) Form of Option Agreement with employees* (ii) Option Agreement dated August 22, 1997 between the Company and Howard T. Van Pelt* (iii) Option Agreement dated August 22, 1997 between the Company and Clinton H. Rickards* (iv) Option Agreement dated August 22, 1997 between the Company and Larry Ensminger* (v) Option Agreement dated August 22, 1997 between the Company and Maurice E. Sokulski* (vi) Option Agreement dated August 22, 1997 between the Company and Robert Urosevich* 6(7) Other material agreements (i) Promissory Note to Western Bank Albuquerque for $770,000.* (ii) Promissory Note to Western Bank Albuquerque for $600,000.* 10 Consent of Staley, Okada, Chandler & Scott Chartered Accountants. 13 Form F-X* * Incorporated by reference to the Registrant's Form 10-SB filed July 31, 1998.
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SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of McKinney, State of Texas, on September 17, 1998. Global Election Systems, Inc. By: /s/ HOWARD T. VAN PELT --------------------------------------------- Howard T. Van Pelt President and Chief Executive Officer
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POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement or amendment thereto has been signed below by the following persons in the capacities and on the dates indicated. [Download Table] SIGNATURE CAPACITY DATE /s/ DAVID H. BROWN* ------------------------------- Chairman of the Board 9/17/98 David H. Brown and Director /s/ HOWARD T. VAN PELT -------------------------------- President, Chief Executive 9/17/98 Howard T. Van Pelt Officer, Chief Financial Officer and Director /s/ CLINTON H. RICKARDS* -------------------------------- Vice President of Marketing, 9/17/98 Clinton H. Rickards Canada, and Stockholder Relations, and Director /s/ MAURICE E. SOKULSKI* ------------------------------- Treasurer, Comptroller 9/17/98 Maurice E. Sokulski /s/ GEORGE COBBE* ------------------------------ Director 9/17/98 George Cobbe /s/ NICHOLAS GLASS* ----------------------------- Director 9/17/98 Nicholas Glass * By: /s/ HOWARD T. VAN PELT ------------------------ 9/17/98 Attorney-in-fact
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GLOBAL ELECTION SYSTEMS INC. CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 and 31 DECEMBER 1996 and 1995 U.S. Funds STALEY, OKADA, CHANDLER & SCOTT Chartered Accountants
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================================================================================ [STALEY, OKADA, CHANDLER & SCOTT LETTERHEAD] ================================================================================ AUDITORS' REPORT -------------------------------------------------------------------------------- To the Directors of Global Election Systems Inc.: We have audited the consolidated balance sheet of Global Election Systems Inc. as at 30 June 1997 and 31 December 1996 and 1995 and the consolidated statements of changes in shareholders' equity, income (loss) and cash flows for the six months ended 30 June 1997 and the years ended 31 December 1996, 1995 and 1994. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at 30 June 1997 and 31 December 1996 and 1995 and the results of its operations and the changes in its financial position for the six months ended 30 June 1997 and years ended 31 December 1996, 1995 and 1994 in accordance with generally accepted accounting principles in Canada. As required by the Company Act of British Columbia, we report that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year. /s/ STALEY, OKADA, CHANDLER & SCOTT Burnaby, B.C. STALEY, OKADA, CHANDLER & SCOTT 8 August 1997 CHARTERED ACCOUNTANTS --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. Statement 1 CONSOLIDATED BALANCE SHEET U.S. Funds [Enlarge/Download Table] 30 JUNE 31 December 31 December ASSETS 1997 1996 1995 (Note 1a) ------------------------------------------------------------------------------------------------------------------------------ CURRENT Cash and short term deposits $ 77,830 $ 479,996 $ 309,973 Accounts receivable 4,762,419 1,220,632 3,586,131 Deposits and prepaid expenses 54,909 72,961 124,927 Inventory (Note 3) 1,632,367 1,917,749 1,511,686 Current portion of loans receivable 426,919 478,480 194,209 ---------------------------------------- 6,954,444 4,169,818 5,726,926 AGREEMENTS RECEIVABLE (Note 4) 884,510 904,697 722,503 CAPITAL ASSETS (Note 5) 183,193 214,527 264,259 OTHER ASSETS (Note 6) 137,286 168,586 231,747 -------------------------------------------------------------------------------------- $8,159,433 $5,457,628 $6,945,435 ============================================================================================================================== LIABILITIES ------------------------------------------------------------------------------------------------------------------------------ CURRENT Bank loan (Note 7) $ 290,000 $ 89,356 $ 419,919 Accounts payable and accrued liabilities 1,163,558 939,163 1,037,226 Customer deposits 36,219 110,745 -- Deferred revenue 324,922 29,785 64,223 Current portion of loans payable 156,239 155,118 -- ---------------------------------------- 1,970,938 1,324,167 1,521,368 LOANS PAYABLE (Note 8) 212,151 210,629 -- -------------------------------------------------------------------------------------- 2,183,089 1,534,796 1,521,368 ====================================================================================== COMMITMENTS (Note 11) CONTINGENCY (Note 12) SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------ SHARE CAPITAL (Note 9) Authorized: 100,000,000 common voting shares, without par value 20,000,000 convertible voting preferred shares, without par value Issued and fully paid: 14,689,440 common shares (1996 - 14,689,440; 1995 - 14,189,440) 9,374,197 9,374,197 9,138,775 DEFICIT - Statement 2 (3,397,853) (5,451,365) (3,714,708) ---------------------------------------- 5,976,344 3,992,832 5,424,067 -------------------------------------------------------------------------------------- $8,159,433 $5,457,628 $6,945,435 ============================================================================================================================== ON BEHALF OF THE BOARD: /s/ ILLEGIBLE , Director ----------------------------- /s/ ILLEGIBLE , Director ----------------------------- - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 2 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY U.S. Funds [Enlarge/Download Table]  Common Shares Shares Amount Deficit Total ================================================================================================================================ Balance - 31 December 1993 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884 Issuance of shares for name and operating assets of Lynro Manufacturing Corporation ($1.74 per share) 250,000 434,626 -- 434,626 Issuance of shares for expenses ($0.83 per share) 58,334 48,594 -- 48,594 Issuance of shares on exercise of options ($0.48 per share) 50,000 23,904 -- 23,904 Loss for the year - Statement 3 -- -- (1,508,214) (1,508,214) ----------------------------------------------------------- Balance - 31 December 1994 13,885,571 8,926,460 (2,672,666) 6,253,794 Issuance of shares on exercise of warrants ($0.77 per share) 203,869 156,538 -- 156,538 Issuance of shares on exercise of options ($0.56 per share) 100,000 55,777 -- 55,777 Loss for the year - Statement 3 -- -- (1,042,042) (1,042,042) ----------------------------------------------------------- Balance - 31 December 1995 14,189,440 9,138,775 (3,714,708) 5,424,067 Issuance of shares on exercise of options ($0.47 per share) 500,000 235,422 -- 235,422 Loss for the year - Statement 3 -- -- (1,736,657) (1,736,657) ----------------------------------------------------------- Balance - 31 December 1996 14,689,440 9,374,197 (5,451,365) 3,922,832 Net income for the period - Statement 3 -- -- 2,053,512 2,053,512 ----------------------------------------------------------- Balance - 30 June 1997 (Note 1a) 14,689,440 $ 9,374,197 $(3,397,853) $ 5,976,344 ================================================================================================================================ - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 3 CONSOLIDATED STATEMENT OF INCOME (LOSS) U.S. Funds [Enlarge/Download Table] SIX MONTHS Year Year Year ENDED Ended Ended Ended 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 (Note 1a) ================================================================================================================================ REVENUES Sales and operating income (Note 15) $ 6,758,954 $ 6,041,173 $ 5,961,586 $ 4,519,457 Other income 51,496 66,606 34,834 57,420 ----------------------------------------------------------------- 6,810,450 6,107,779 5,996,420 4,576,877 ------------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES Cost of sales and operating expenses 2,815,680 4,216,805 2,757,247 2,423,255 Selling, administrative and general expenses 1,655,250 2,969,256 2,650,174 2,544,553 Research and development expenses 184,414 451,113 674,144 464,616 Amortization 70,472 135,140 183,857 169,853 Interest 27,845 71,166 7,044 1,320 Loss on write-down of capital lease receivable -- -- 550,735 414,175 Settlement of lawsuit and related legal costs -- -- 202,138 6,422 Other expenses 3,277 956 13,123 60,897 ----------------------------------------------------------------- 4,756,938 7,844,436 7,038,462 6,085,091 ------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) FOR THE PERIOD $ 2,053,512 $ (1,736,657) $ (1,042,042) $ (1,508,214) ================================================================================================================================ EARNINGS (LOSS) PER SHARE Basic $ 0.14 $ (0.12) $ (0.07) $ (0.11) Fully diluted 0.12 N/A N/A N/A ================================================================================================================================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,689,440 14,242,865 14,104,530 13,850,090 ================================================================================================================================ - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 4 CONSOLIDATED STATEMENT OF CASH FLOWS U.S. Funds [Enlarge/Download Table] SIX MONTHS Year Year Year ENDED Ended Ended Ended 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 (Note 1a) =========================================================================================================================== OPERATING ACTIVITIES Net income (loss) for the period $ 2,053,512 $(1,736,657) $(1,042,042) $(1,508,214) Item not affecting cash Amortization 70,472 135,140 183,857 169,853 -------------------------------------------------------------- 2,123,984 (1,601,517) (858,185) (1,338,361) Changes in non-cash working capital Accounts receivable (3,541,787) 2,365,499 (1,247,551) 1,344,585 Deposits and prepaid expenses 18,052 51,966 25,913 (113,232) Inventory 285,382 (406,063) 566,588 (747,094) Accounts payable and accrued liabilities 224,395 (98,063) 400,274 161,164 Customer deposits (74,526) 110,745 -- -- Deferred revenue 295,137 (34,438) 1,973 (5,722) -------------------------------------------------------------- (669,363) 388,129 (1,110,988) (698,660) ----------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital assets acquired (8,032) (22,247) (88,406) (136,830) Proceeds on sale of capital assets 194 -- -- 15,090 Agreements receivable 71,748 (466,465) (37,739) (878,973) -------------------------------------------------------------- 63,910 (488,712) (126,145) (1,000,713) ----------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Bank loan 200,644 (330,563) 419,919 -- Loans payable 2,643 365,747 -- (822,029) Common shares issued -- 235,422 212,315 507,124 -------------------------------------------------------------- 203,287 270,606 632,234 (314,905) ----------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH (402,166) 170,023 (604,899) (2,014,278) Cash position - Beginning of period 479,996 309,973 914,872 2,929,150 ----------------------------------------------------------------------------------------------------------- CASH POSITION - END OF PERIOD $ 77,830 $ 479,996 $ 309,973 $ 914,872 =========================================================================================================================== - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared using generally accepted accounting principles of Canada as follows: a) PERIOD OF OPERATIONS The company has adopted a new year-end of 30 June which results in a six month period of operations for the period ended 30 June 1997. b) NATURE OF OPERATIONS The company markets a complete electronic voting system which includes vote tally and voter registration software. c) CONSOLIDATION These financial statements include the accounts of the company and its wholly-owned subsidiary, Global Election Systems, Inc., a company incorporated in Delaware and operating in New Mexico, U.S.A. The purchase method of accounting has been applied to this acquisition. d) FOREIGN CURRENCY TRANSLATION The accounts of the company were prepared in Canadian funds through to 30 June 1997 as follows: i) Monetary assets and liabilities at year-end rates, ii) All other assets and liabilities at historical rates, and iii) Revenue and expense items at the average rate of exchange prevailing during the year. Exchange gains and losses arising from these transactions were reflected in income or expense in the year. Subsequent to 30 June 1997, the company adopted the U.S. currency as its reporting currency and accordingly, has prepared its financial statements on that basis. Accordingly, all prior years' figures are recast in the U.S. currency through a "translation of convenience" whereby all amounts appearing are restated from Canadian to U.S. currency using the exchange rate prevailing at 30 June 1997. e) INVENTORY Inventory of finished goods and work-in-progress is valued at the lower of cost and net realizable value as estimated by management. Raw materials, which consist of parts and components, are valued at average cost less any allowances for obsolescence. Inventory of goods taken in trade is valued at the lesser of trade-in value and net realizable value as estimated by management. f) AMORTIZATION Capital assets are recorded at cost and the company provides for amortization on the following basis: Demonstration and computer equipment - 20% to 30% declining balance method Manufacturing equipment - 20% declining balance method Furniture and equipment - 20% declining balance method Leasehold improvements - straight- line over 5 years One-half of the rate is applied in the year of acquisition.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES - Continued g) PATENTS Patents are recorded at cost and the company provides for amortization on a straight-line basis over 10 years. h) GOODWILL Goodwill is recorded at cost and the company provides for amortization on a straight-line basis over 5 years. i) REVENUE RECOGNITION Revenue from sales of products and supplies is recognized at the time of shipment of products and supplies to customers. Revenue from sales of services is recognized on completion of the related services. The company defers a portion of revenue received related to contracted future services to match against management's estimate of the future costs of providing these services to customers. j) WARRANTY RESERVE Provisions for future estimated warranty costs are recorded in the accounts based upon historical maintenance records. Management periodically reviews the warranty reserve to determine the adequacy of the provision. k) RESEARCH AND DEVELOPMENT TAX CREDITS Research and development tax credits are applied against research and development expenses in the period in which the tax credit is received. l) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share computations are based on the weighted average number of shares outstanding during the year. Fully diluted earnings per share are based on the actual number of shares outstanding at the end of the year plus performance shares, and share purchase options and warrants as if they had been issued as at the beginning of the year. Fully diluted loss per share is not presented for the comparative years as the effect of outstanding performance shares, options and warrants is anti-dilutive. -------------------------------------------------------------------------------- 2. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and short term deposits, accounts receivable, deposits, loans receivable, bank loans, accounts payable and customer deposits approximates their fair value due to their short term maturity or capacity of prompt liquidation. --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 3. INVENTORY Details are as follows: [Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 --------------------------------------------------------------------------- Supplies $ 457,707 $ 685,308 $ 656,178 Work-in-progress 5,857 52,462 76,540 Trade-in goods 761,380 146,690 144,927 Finished goods 407,423 1,033,289 634,041 --------------------------------------------------------------------------- $ 1,632,367 $ 1,917,749 $ 1,511,686 =========================================================================== -------------------------------------------------------------------------------- 4. AGREEMENTS RECEIVABLE Details of amounts receivable from customers are as follows: [Enlarge/Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 ----------------------------------------------------------------------------------------- Sales agreement receivable with interest at 5% per annum, repayable in 60 equal monthly payments commencing 15 December 1995, secured by the underlying goods (i) $ 600,285 $ 677,133 $ 839,625 Sales agreement receivable with interest at 10% per annum, commencing 1 June 1997 and due in full by 31 December 1998 78,020 77,460 77,087 Sales agreement receivable with interest at 5% per annum commencing 20 November 1996, repayable at $250,000 on 20 November 1997 and the balance on 20 November 1998 (ii) 500,000 496,414 -- Sales agreement receivable with interest at 9% per annum commencing 25 June 1996, repayable at $33,646 per annum for principal and interest on 1 July 1997 to 1 July 2001 (ii) 133,124 132,170 -- ----------------------------------------------------------------------------------------- 1,311,429 1,383,177 916,712 Less: Current portion (426,919) (478,480) (194,209) ----------------------------------------------------------------------------------------- $ 884,510 $ 904,697 $ 722,503 ========================================================================================= (i) The sales agreement receivable has been pledged as security for the bank loan (Note 7). (ii) The sales agreement receivable has been pledged as security for the related loan payable (Note 8). Scheduled principal repayments on the sales agreement receivable are as follows: [Download Table] 1998 $ 426,919 1999 529,301 2000 212,497 2001 108,665 2002 34,047 --------------------------------------------------------------------------- $ 1,311,429 =========================================================================== --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 5. CAPITAL ASSETS Details are as follows: [Enlarge/Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 Accumulated NET BOOK Net Book Net Book Cost Amortization VALUE Value Value --------------------------------------------------------------------------------------------- Demonstration and computer equipment $ 323,115 $ 227,988 $ 95,127 $ 115,168 $ 138,290 Manufacturing equipment 125,703 68,875 56,828 63,619 79,523 Furniture and equipment 82,748 52,150 30,598 33,998 42,498 Leasehold improvements 11,027 10,387 640 1,742 3,948 --------------------------------------------------------------------------------------------- $ 542,593 $ 359,400 $ 183,193 $ 214,527 $ 264,259 ============================================================================================= -------------------------------------------------------------------------------- 6. OTHER ASSETS Details are as follows: [Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 Accumulated NET BOOK Net Book Net Book Cost Amortization VALUE Value Value --------------------------------------------------------------------------- Patents $ 144,621 $ 79,542 $ 65,079 $ 72,311 $ 86,773 Goodwill 240,689 168,482 72,207 96,275 144,974 --------------------------------------------------------------------------- $ 385,310 $ 248,024 $ 137,286 $ 168,586 $ 231,747 =========================================================================== -------------------------------------------------------------------------------- 7. BANK LOAN Details are as follows: [Enlarge/Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 ------------------------------------------------------------------------------------------- Line of credit, bearing interest at bank prime, interest payments due quarterly beginning 16 March 1997, due in full by 16 December 1997, secured by the $600,285 loan receivable (Note 4) $ 290,000 $ 89,356 $ 419,919 ------------------------------------------------------------------------------------------- The maximum approved line of credit is U.S. $600,000. -------------------------------------------------------------------------------- 8. LOANS PAYABLE Details are as follows: [Enlarge/Download Table] 30 JUNE 31 December 31 December 1997 1996 1995 --------------------------------------------------------------------------------------------- Note payable, bearing interest at bank prime, repayable at $137,602 plus interest on 15 November 1997 and the balance due in full on 15 November 1998, secured by the $500,000 sales agreement receivable (Note 4) $ 275,203 $ 273,228 $ -- Note payable, bearing interest at bank prime payable quarterly commencing 12 December 1996, repayable at $18,637 per annum commencing 1 July 1997, secured by the $133,124 sales agreement receivable (Note 4) 93,187 92,519 -- --------------------------------------------------------------------------------------------- 368,390 365,747 -- Less: Current portion (156,239) (155,118) -- --------------------------------------------------------------------------------------------- $ 212,151 $ 210,629 $ -- ============================================================================================= Scheduled principal repayments on the loans payable are as follows: [Download Table] 1998 $ 156,239 1999 156,239 2000 18,637 2001 18,637 2002 18,638 --------------------------------------------------------------------------- $ 368,390 =========================================================================== --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds ------------------------------------------------------------------------------- 9. SHARE CAPITAL a) The authorized share capital is 120,000,000 shares divided into 100,000,000 voting common shares without par value and 20,000,000 convertible voting preferred shares without par value. The issued and outstanding share capital consists of: [Download Table] Common Shares Unit Value Amount ----------------------------------------------------------------------------- Balance - 31 December 1993 13,527,237 $8,419,336 Acquisition of name and operating assets of Lynro Manufacturing Corporation 250,000 $ 1.74 434,626 Fiscal agency fees 58,334 $ 0.83 48,594 Options exercised 50,000 $ 0.48 23,904 ----------------------------------------------------------------------------- Balance - 31 December 1994 13,885,571 8,926,460 Warrants exercised 203,869 $ 0.77 156,538 Options exercised 100,000 $ 0.56 55,777 ----------------------------------------------------------------------------- Balance - 31 December 1995 14,189,440 9,138,775 Options exercised 500,000 $ 0.47 235,422 ----------------------------------------------------------------------------- Balance - 31 December 1996 and 30 June 1997 14,689,440 $9,374,197 ----------------------------------------------------------------------------- b) By agreement dated 22 November 1991, the company reserved for issuance 4,150,000 treasury shares. These shares were to be issued at $0.06 per share, and upon issuance, were to be held in escrow and released on the basis of "cumulative cash flow" (as defined). Two of the original allottees are no longer employees nor directors of the company and therefore have ceased to be eligible for performance shares and accordingly 270,000 of the original shares reserved for issuance have been cancelled leaving a balance of 3,880,000 shares reserved for issuance. During 1996, the directors passed a resolution to cancel 1,142,000 of the allotted but unissued performance shares and to extend the earn-out period on the remaining 2,738,000 performance shares from 17 January 1997 to 17 January 2000. The resolution was then passed by the shareholders at an extraordinary general meeting on 6 December 1996 and subsequently approved by the regulatory authorities. On 6 December 1996, the company entered into an Amended and Restated Performance Shares Allotment Agreement on the remaining 2,738,000 allotted but unissued treasury shares under the same release provisions as the original 22 November 1991 agreement. Based upon the "cumulative cash flow" of the company to 30 June 1997, the 2,738,000 performance shares may be issued from escrow upon payment of the $0.06 per share and upon receipt of regulatory approval.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds ------------------------------------------------------------------------------- 9. SHARE CAPITAL - Continued c) STOCK OPTION PLAN The company has a stock option plan which covers its officers and directors. The options are granted for varying terms ranging from three to five years and are immediately vested upon grant. The following is a schedule of the activity pursuant to this stock option plan: [Download Table] Number Price per of Shares Share Expiration Date ($ CDN) ------------------------------------------------------------------------- 500,000 $ 0.65 22 November 1996 30,000 $ 0.75 4 February 1997 100,000 $ 2.30 22 April 1997 200,000 $ 0.77 9 February 1998 200,000 $ 2.40 17 September 1998 100,000 $ 3.10 15 November 1998 150,000 $ 1.89 20 September 1999 100,000 $ 1.33 1 November 1999 ------------------------------------------------------------------------- Balance - 31 December 1994 1,380,000 $ 0.65 to $ 3.10 Options exercised (100,000) $ 0.77 9 February 1998 Options expired (100,000) $ 0.77 9 February 1998 Options expired (80,000) $ 3.10 15 November 1998 Options expired (20,000) $ 1.89 20 September 1999 New options granted 100,000 $ 1.35 22 February 2000 New options granted 100,000 $ 1.00 17 August 2000 ----------------------------------------------------------------------- Balance - 31 December 1995 1,280,000 $ 0.65 to $ 3.10 Options exercised (500,000) $ 0.65 22 November 1996 Options expired (200,000) $ 2.40 17 September 1998 Options expired (100,000) $ 1.00 17 August 2000 ----------------------------------------------------------------------- Balance - 31 December 1996 480,000 $ 1.33 to $ 3.10 Options expired (30,000) $ 0.75 4 February 1997 Options expired (100,000) $ 1.35 22 February 2000 Options expired (100,000) $ 2.30 22 April 1997 ----------------------------------------------------------------------- Balance - 30 June 1997 250,000 $ 1.33 to $ 3.10 ----------------------------------------------------------------------- d) SHARE PURCHASE WARRANTS The following is a schedule of the activity pursuant to share purchase warrants: [Download Table] Number Price per of Shares Share Expiration Date ----------------------------------------------------------------------- Balance - 31 December 1994 869,565 $ 0.77 12 March 1995 Warrants exercised (203,869) $ 0.77 12 March 1995 Warrants expired (665,696) $ 0.77 12 March 1995 ----------------------------------------------------------------------- Balance - 31 December 1995, 31 December 1996 and 30 June 1997 NIL ----------------------------------------------------------------------- -------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 10. INCOME TAXES a) A summary of the taxable income of the company for the six months ended 30 June 1997 is as follows: [Enlarge/Download Table] Canadian U.S. Parent Subsidiary Total ------------------------------------------------------------------------------------ Net income before taxes per financial statements $ 1,795,726 $ 257,786 $ 2,053,512 Application of losses carried forward (219,052) (257,786) (476,838) Application of unclaimed scientific research and experimental development deductions (1,576,674) -- (1,576,674) ------------------------------------------------------------------------------------ Taxable income $ -- $ -- $ -- ------------------------------------------------------------------------------------ Accordingly, no provision for income taxes has been recorded in these financial statements. b) The company has unclaimed scientific research and experimental development deductions, for Canadian tax purposes, in the amount of $104,000 which may be carried forward to be applied against future taxable income. The future tax benefits, if any, of these deductions have not been recognized in the accounts. c) The company has unclaimed investment tax credits, for Canadian tax purposes, arising from its research and development activities in the amount of $425,000 which may be carried forward to be applied against future federal taxes payable. The future tax benefits, if any, of these tax credits have not been recognized in the accounts and expire as follows: [Download Table] Year Amount ------------------------------------------------------------------------ 1998 $ 109,000 1999 85,000 2000 37,000 2003 68,000 2004 126,000 ------------------------------------------------------------------------ $ 425,000 ------------------------------------------------------------------------ d) As at 30 June 1997, the company's subsidiary has tax losses, for U.S. tax purposes, of approximately $4,089,000 which may be carried forward to be applied against future taxable income. The future benefits, if any, of these tax losses have not been recognized in the accounts of the company and expire as follows: [Download Table] Year Amount ------------------------------------------------------------------------ 2008 $ 1,285,000 2009 1,118,000 2010 1,686,000 ------------------------------------------------------------------------ $ 4,089,000 ------------------------------------------------------------------------ --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds ------------------------------------------------------------------------------- 11. COMMITMENTS a) By way of a management services agreement, the company has secured the services of a key employee for a term expiring 30 September 1998. The contract contains fixed annual compensation totalling $100,000 per annum plus a bonus of: i) 3% of Canadian sales; and ii) 1% of the net profits before taxes for all sales (excluding those in Canada) of the company. b) Under the terms of a lease agreement dated 1 May 1993, the company is committed to minimum annual lease payments of $37,668 plus its share of common area costs. The lease is for a five year term to 30 April 1998 with a 5 year renewal option at an annual lease amount to be negotiated representing a lease commitment of $31,389 for the year ending 30 June 1998. c) The company's United States subsidiary has agreed to lease 20,000 square feet of the Lynro Manufacturing premises for 5 years, expiring 31 December 1998, for $100,000 per annum representing a lease commitment of: [Download Table] Year Amount ----------------------------------------------------------------------- 1998 $ 100,000 1999 50,000 ------------------------------------------------------------------------ $ 150,000 ------------------------------------------------------------------------ Management has decided to relocate its manufacturing operations. Accordingly, during 1997 the company will vacate the Lynro Manufacturing premises and will seek to negotiate a settlement or sublease. d) The company's United States subsidiary has agreed to lease office space in Albuquerque, New Mexico for 2 years, expiring 30 September 1997, for $22,848 per annum representing a lease commitment of $5,712 for the year ending 30 June 1998. e) By an agreement dated 4 March 1997, the company's United States subsidiary has agreed to lease 13,050 square feet of general office and warehouse space in McKinney, Texas for five years from 1 July 1997. The annual lease amount is $110,272 representing a minimum lease commitment of: [Download Table] Year Amount ------------------------------------------------------------------------ 1998 $ 110,272 1999 110,272 2000 110,272 2001 110,272 2002 110,272 ------------------------------------------------------------------------ $ 551,360 ------------------------------------------------------------------------ The landlord has agreed to fund up to $188,709 of leasehold improvements to the premises and will allow the company to use up to $100,000 of this amount to buy-down the monthly rental payments. The lease may be extended for two additional terms of five years with the rate to be the lesser of a consumer price adjustment or a fair rental value adjustment. --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 12. CONTINGENCY By an agreement dated 25 November 1991, the company retained Overseas Management Services, Inc. ("OMS") as its exclusive sales and marketing representative for Venezuela for an initial term of 5 years. OMS was to receive a 20% commission on all sales of the product within Venezuela and was responsible for its own out-of-pocket costs. Management believes OMS breached certain conditions of its agreement with the company and has given OMS the required 30 day notice of cancellation. OMS collected approximately U.S. $96,000 of the U.S. $209,700 commission it has claimed on the Consejo capital lease. The balance of the commission payable to OMS has not been recorded in these consolidated financial statements due to the alleged breach of contract. The company has initiated a lawsuit against OMS for damages resulting from the alleged breaches by OMS of the 25 November 1991 agreement. The outcome of this case and the amount of damages to be received by the company, if any, cannot be reasonably determined at this time. OMS has filed a counter-claim against the company in New Hampshire alleging, interalia, a claim for future commissions on the capital lease. -------------------------------------------------------------------------------- 13. RELATED PARTY TRANSACTIONS In addition to items disclosed elsewhere in these consolidated financial statements, the company conducted the following transactions with related parties: a) EXPENDITURES Details are as follows: [Enlarge/Download Table] 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 -------------------------------------------------------------------------------------- Paid/accrued salaries and fees to four directors all of whom are officers of the company $236,086 $346,919 $432,230 $392,231 Paid salary to a former director 29,938 138,466 -- -- Paid rent for premises to a company controlled by a director -- -- 13,423 17,809 Paid rent (at fair market value) to a company controlled by a former director 50,000 100,000 100,000 100,000 ------------------------------------------------------------------------------------ $316,024 $585,385 $545,653 $510,040 ------------------------------------------------------------------------------------ b) SHARE CAPITAL During 1996, two directors exercised 500,000 options for cash in the amount of $235,422 (Note 9a). Included in the 203,869 warrants exercised during 1995 (Note 9a) were 135,869 exercised by a director for cash in the amount of $104,619. -------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. FUNDS ------------------------------------------------------------------------------- 14. SUBSEQUENT EVENTS a) By an agreement dated 31 July 1997, subject to regulatory approval, the company agreed to acquire the assets, business and name of I-Mark Systems, Inc., a Nebraska corporation. Consideration for the acquisition is $1,000,000 cash and 1,000,000 common shares of the company on closing. The closing date for the agreement shall be after receipt of regulatory approval but in no event later than 1 September 1997. Should regulatory approval not be obtained by 1 September 1997, the agreement will be terminated. b) Subject to regulatory approval, the company has negotiated an agency arrangement in order to complete a private placement of 3,652,174 Series A preferred shares at $0.83 per share to raise $3,042,375 (CDN $1.15 per share to raise CDN $4,200,000). The shares will pay a quarterly dividend at the rate of 6% per annum and will be convertible into common shares, after the first year of their term, at $1.08 (CDN $1.495) per common share for a maximum issuance of 2,809,364 common shares on full conversion of the preferred shares. The agent will receive a fee of 10% of the total proceeds raised plus a 3% non-accountable out-of-pocket fee on the total proceeds raised. To 8 August 1997, no proceeds have been raised from this private placement pending receipt of regulatory approval and successful placement of the preferred shares. ---------------------------------------------------------- 15. SALES AND OPERATING INCOME Details of sales and operating income generated from customers which account for more than 10% of that period's consolidated sales and operating income are as follows: [Download Table] SIX MONTHS Year Year Year ENDED Ended Ended Ended 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 -------------------------------------------------------------------------------- Number of Large Customers 1 4 2 5 -------------------------------------------------------------------------------- Amount of Sales to Large Customers $2,051,000 $2,737,000 $1,411,000 $3,066,000 ================================================================================ Total Consolidated Sales and Operating Income $6,759,000 $6,041,000 $5,962,000 $4,519,000 ================================================================================ Total Percentage of Consolidated Sales and Operating Income Generated from Large Customers 30.3% 45.3% 23.7% 67.8% ================================================================================ Due to the nature of the company's business, large sales to individual customers are generated on a non-recurring basis. As a result, the company is not dependent on any single customer or small group of customers such that the loss of any of these would have a material adverse effect on the future results of the company. -------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 16. SEGMENTED INFORMATION The company operated in only one industry segment in Canada and the United States as follows: [Enlarge/Download Table] Canada United States 1997 1996 1995 1997 1996 1995 (6 MONTHS) (12 Months) (12 Months) (6 MONTHS) (12 Months) (12 Months) -------------------------------------------------------------------------------------------------------------------------- Sales to customers $ 1,929,744 $ 846,024 $ 5,584 $ 4,829,210 $ 5,195,149 $ 5,956,002 Sales between the segments 1,351,707 1,332,707 $ 1,683,581 -- -- -- -------------------------------------------------------------------------------------------------------------------------- Total sales revenue $ 3,281,451 $ 2,178,731 $ 1,689,165 $ 4,829,210 $ 5,195,149 $ 5,956,002 -------------------------------------------------------------------------------------------------------------------------- Operating profits $ 2,392,744 $ 1,599,698 $ 1,644,696 $ 1,602,026 $ 276,390 $ 1,386,142 -------------------------------------------------------------------------------------------------------------------------- General corporate expenses Interest Loss on write down of capital lease Net income (loss) -------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 12,194,499 $ 10,404,753 $ 9,537,808 $ 7,377,940 $ 4,839,672 $ 6,601,518 -------------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 7,837 16,501 $ 18,558 $ -- $ 5,746 $ 69,847 -------------------------------------------------------------------------------------------------------------------------- Amortization of capital assets $ 13,832 29,159 $ 30,915 $ 56,640 $ 105,981 $ 152,942 -------------------------------------------------------------------------------------------------------------------------- Elimination Consolidated 1997 1996 1995 1997 1996 1995 (6 MONTHS) (12 Months) (12 Months) (6 MONTHS) (12 Months) (12 Months) ----------------------------------------------------------------------------------------------------------------------------- Sales to customers $ -- $ -- $ -- $ 6,758,954 $ 6,041,173 $ 5,961,586 Sales between the segments (1,351,707) (1,332,707) (1,683,581) -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Total sales revenue $ (1,351,707) $(1,332,707) $(1,683,581) $ 6,758,954 $ 6,041,173 $ 5,961,586 ----------------------------------------------------------------------------------------------------------------------------- Operating profits $ -- $ 14,886 $208,335 $ 3,994,770 $ 1,890,974 $ 3,239,173 ------------------------------------------------------------------------------------ General corporate expenses (1,913,413) (3,556,465) (3,723,436) Interest (27,845) (71,166) (7,044) Loss on write down of capital lease -- -- (550,735) ------------------------------------- Net income (loss) $ 2,053,512 $(1,736,657) $(1,042,042 ----------------------------------------------------------------------------------------------------------------------------- Identifiable assets $(11,413,006) $(9,786,797) $(9,193,891) $ 8,159,433 $ 5,457,628 $ 6,945,435 ----------------------------------------------------------------------------------------------------------------------------- Capital expenditures $ -- $ -- $ -- $ 7,837 $ 22,247 $ 88,405 ----------------------------------------------------------------------------------------------------------------------------- Amortization of capital assets $ -- $ -- $ -- $ 70,472 $ 135,140 $ 183,857 ----------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada. Any differences in United States accounting principles as they pertain to the accompanying consolidated financial statements are not material except as follows: a) COMPENSATION EXPENSE Under accounting principles generally accepted in the United States, there is a compensation expense associated with the release of escrowed shares of the company, as those shares become eligible for release. No compensation expense is applied under accounting principles generally accepted in Canada. b) FINANCIAL STATEMENT RECONCILIATION [Enlarge/Download Table] SIX MONTHS Year Year Year ENDED Ended Ended Ended 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------------------- i) Share capital - Canadian basis $ 9,374,197 $ 9,374,197 $ 9,138,775 $ 8,926,460 Add: Escrow share compensation expense - prior years 3,194,621 3,194,621 3,194,621 3,194,621 ---------------------------------------------------------------------------------------------------------------------------- Share capital - U.S. basis $ 12,568,818 $ 12,568,818 $ 12,333,396 $ 12,121,081 ---------------------------------------------------------------------------------------------------------------------------- ii) Deficit - Canadian basis $ (3,397,853) $ (5,451,365) $ (3,714,708) $ (2,672,666) Less: Escrow share compensation expense - prior years (3,194,621) (3,194,621) (3,194,621) (3,194,621) ---------------------------------------------------------------------------------------------------------------------------- Deficit - U.S. basis $ (6,592,474) $ (8,645,986) $ (6,909,329) $ (5,867,287) ---------------------------------------------------------------------------------------------------------------------------- iii) Canadian GAAP consolidated statement of shareholders' equity Common Shares Shares Amount Deficit Total ---------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1993 - Canadian basis 13,527,237 $ 8,419,336 $ (1,164,452) $ 7,254,884 Escrow share compensation expense - prior years -- 3,194,621 (3,194,621) -- ---------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1993 - U.S. basis 13,527,237 11,613,957 (4,359,073) 7,254,884 Issuance of shares for name and operating assets of Lynro Manufacturing Corporation ($1.74 per share) 250,000 434,626 -- 434,626 Issuance of shares for expenses ($0.83 per share) 58,334 48,594 -- 48,594 Issuance of shares on exercise of options ($0.48 per share) 50,000 23,904 -- 23,904 Loss for the year -- -- (1,508,214) (1,508,214) ---------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1994 - U.S. basis 13,885,571 12,121,081 (5,867,287) 6,253,794 Issuance of shares on exercise of warrants ($0.77 per share) 203,869 156,538 -- 156,538 Issuance of shares on exercise of options ($0.56 per share) 100,000 55,777 -- 55,777 Loss for the year -- -- (1,042,042) (1,042,042) ---------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1995 - U.S. basis 14,189,440 12,333,396 (6,909,329) 5,424,067 Issuance of shares on exercise of options ($0.47 per share) 500,000 235,422 -- 235,422 Loss for the year -- -- (1,736,657) (1,736,657) ---------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1996 - U.S. basis 14,689,440 12,568,818 (8,645,986) 3,922,832 Net income for the period -- -- 2,053,512 2,053,512 ---------------------------------------------------------------------------------------------------------------------------- Balance - 30 June 1997 - U.S. basis 14,689,440 $ 12,568,818 $ (6,592,474) $ 5,976,344 ----------------------------------------------------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 1997 AND 31 DECEMBER 1996 AND 1995 U.S. Funds -------------------------------------------------------------------------------- 17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - Continued c) EARNINGS PER SHARE - BASIC OR PRIMARY Under accounting principles generally accepted in the United States, stock options and stock warrants are treated as common stock equivalents in the determination of basic or primary earnings per share if they would have a dilutive effect. Stock options and stock warrants are not treated as common stock equivalents in the determination of basic or primary earnings per share in Canada. Reconciliation of Canadian to U.S. basis - Basic Earnings Per Share: [Enlarge/Download Table] SIX MONTHS Year Year Year ENDED Ended Ended Ended 30 JUNE 31 December 31 December 31 December 1997 1996 1995 1994 --------------------------------------------------------------------------------------------------------------- Weighed average number of common shares outstanding - Canadian basis 14,689,440 14,242,865 14,104,530 13,850,090 Add: Dilutive stock options 250,000 N/A N/A N/A --------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding - U.S. basis 14,939,440 14,242,865 14,104,530 13,850,090 --------------------------------------------------------------------------------------------------------------- Net income (loss) for the period $ 2,053,512 $ (1,736,657) $ (1,042,042) $ (1,508,214) =============================================================================================================== Basic earnings (loss) per share - U.S. basis $ 0.14 $ (0.12) $ (0.07) $ (0.11) --------------------------------------------------------------------------------------------------------------- - Canadian basis $ 0.14 $ (0.12) $ (0.07) $ (0.11) ---------------------------------------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 UNAUDITED - SEE NOTICE TO READER U.S. FUNDS STALEY, OKADA, CHANDLER & SCOTT Chartered Accountants
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NOTICE TO READER -------------------------------------------------------------------------------- We have compiled the interim consolidated balance sheet of Global Election Systems Inc. as at 31 March 1998 and the interim consolidated statements of changes in shareholders' equity, income and cash flow for the nine months then ended from information provided by management. We have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Readers are cautioned that these statements may not be appropriate for their purposes. Burnaby, B.C. STALEY, OKADA, CHANDLER & SCOTT 25 June 1998 CHARTERED ACCOUNTANTS --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. Statement 1 INTERIM CONSOLIDATED BALANCE SHEET AS AT 31 MARCH U.S. Funds Unaudited - See Notice to Reader [Enlarge/Download Table] ASSETS 1998 1997 -------------------------------------------------------------------------------------------------------------- CURRENT Cash and short term deposits $ 1,120,041 $ 503,716 Accounts receivable 7,166,869 3,015,552 Deposits and prepaid expenses 126,621 63,731 Inventory (Note 3) 3,598,180 1,631,585 Current portion of loan receivable 447,129 498,837 ------------ ------------ 12,458,840 5,713,421 AGREEMENTS RECEIVABLE (Note 4) 480,430 871,170 CAPITAL ASSETS (Note 5) 435,857 198,531 OTHER ASSETS (Note 6) 1,209,498 152,930 ------------ ------------ $ 14,584,625 $ 6,936,052 ============ ============ LIABILITIES -------------------------------------------------------------------------------------------------------------- CURRENT Bank loan (Note 7) $ 370,000 $ 190,538 Accounts payable and accrued liabilities 2,688,408 1,274,615 Deferred revenue 164,172 312,884 Current portion of loans payable 2,179,410 156,680 ------------ ------------ 5,401,990 1,934,717 ------------ ------------ LOANS PAYABLE (Note 8) 55,912 212,750 ------------ ------------ SHAREHOLDERS' EQUITY -------------------------------------------------------------------------------------------------------------- SHARE CAPITAL Authorized: 100,000,000 common voting shares, without par value 20,000,000 convertible voting preferred shares, without par value Issued and fully paid: 18,457,440 common shares (1997 - 14,689,440) 10,104,539 9,374,197 DEFICIT - Statement 2 (977,816) (4,585,612) ------------ ------------ 9,126,723 4,788,585 ------------ ------------ $ 14,584,625 $ 6,936,052 ============ ============ ON BEHALF OF THE BOARD: , Director ------------------- , Director ------------------- - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 2 INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY U.S. Funds Unaudited - See Notice to Reader [Enlarge/Download Table]  Common Shares Shares Amount Deficit Total ------------------------------------------------------------------------------------------------------------------------- Balance - 31 December 1993 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884 Issuance of shares for name and operating assets of Lynro Manufacturing Corporation ($1.74 per share) 250,000 434,626 -- 434,626 Issuance of shares for expenses ($0.83 per share) 58,334 48,594 -- 48,594 Issuance of shares on exercise of options ($0.48 per share) 50,000 23,904 -- 23,904 Loss for the year -- -- (1,508,214) (1,508,214) ----------- ----------- ----------- ----------- Balance - 31 December 1994 13,885,571 8,926,460 (2,672,666) 6,253,794 Issuance of shares on exercise of warrants ($0.77 per share) 203,869 156,538 -- 156,538 Issuance of shares on exercise of options ($0.56 per share) 100,000 55,777 -- 55,777 Loss for the year -- -- (1,042,042) (1,042,042) ----------- ----------- ----------- ----------- Balance - 31 December 1995 14,189,440 9,138,775 (3,714,708) 5,424,067 Issuance of shares on exercise of options ($0.47 per share) 500,000 235,422 -- 235,422 Loss for the year -- -- (1,736,657) (1,736,657) ----------- ----------- ----------- ----------- Balance - 31 December 1996 14,689,440 9,374,197 (5,451,365) 3,922,832 Net income for the period -- -- 2,053,512 2,053,512 ----------- ----------- ----------- ----------- Balance - 30 June 1997 (Note 1a) 14,689,440 9,374,197 (3,397,853) 5,976,344 Issuance of shares for name and operating assets of I-Mark Systems, Inc. ($0.55 per share) 1,000,000 548,148 -- 548,148 Issuance of performance shares from escrow ($0.06 per share) 2,738,000 155,562 -- 155,562 Issuance of shares on exercise of options ($0.89 per share) 30,000 26,632 -- 26,632 Net income for the period - Statement 3 -- -- 2,420,037 2,420,037 ----------- ----------- ----------- ----------- Balance - 31 March 1998 18,457,440 $10,104,539 $ (977,816) $ 9,126,723 =========== =========== =========== =========== - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 3 INTERIM CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 31 MARCH U.S. Funds Unaudited - See Notice to Reader [Download Table] 1998 1997 -------------------------------------------------------------------------------- REVENUES Sales and operating revenues $12,086,413 $ 7,083,753 Other income 90,606 47,835 ----------- ----------- 12,177,019 7,131,588 ----------- ----------- COSTS AND EXPENSES Costs of sales and operating expenses 5,764,909 4,135,740 Selling, administrative and general expenses 3,344,678 2,374,736 Research and development expenses 311,464 356,469 Amortization 263,461 86,919 Interest 72,470 66,996 Other expenses -- 1,104 ----------- ----------- 9,756,982 7,021,964 ----------- ----------- NET INCOME FOR THE PERIOD $ 2,420,037 $ 109,624 =========== =========== EARNINGS PER SHARE Basic $ 0.14 $ 0.01 Fully diluted $ 0.13 $ 0.01 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 16,766,344 14,689,440 Fully diluted 18,114,677 17,478,810 =========== =========== - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. Statement 4 INTERIM CONSOLIDATED STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED 31 MARCH U.S. Funds Unaudited - See Notice to Reader [Download Table] CASH RESOURCES PROVIDED BY (USED IN) 1998 1997 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period $ 2,420,037 $ 109,624 Item not affected by cash Amortization 263,461 86,919 ----------- ----------- 2,683,498 196,543 Changes in non-cash working capital (3,114,094) 634,756 ----------- ----------- (430,596) 831,299 ----------- ----------- INVESTING ACTIVITIES Capital assets acquired (483,058) (9,678) Other assets acquired, net (682,506) -- Proceeds on sale of capital assets 125,375 -- Agreements receivable 383,870 (526,231) ----------- ----------- (656,319) (535,909) ----------- ----------- FINANCING ACTIVITIES Bank loan 80,000 (396,526) Loans payable 1,866,932 369,430 Common shares issued 182,194 235,422 ----------- ----------- 2,129,126 208,326 ----------- ----------- NET INCREASE IN CASH 1,042,211 503,716 Cash position - Beginning of period 77,830 -- ----------- ----------- CASH POSITION - END OF PERIOD $ 1,120,041 $ 503,716 =========== =========== - See Accompanying Notes -
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES These interim consolidated financial statements have been prepared using generally accepted accounting principles of Canada as follows: a) PERIOD OF OPERATIONS The company adopted a new year-end of 30 June which resulted in a six month period of operations for the period ended 30 June 1997. These interim consolidated financial statements are for the nine month period of operations to 31 March 1998. The comparative figures have been compiled from the records of the company and cover the operations of the company for the nine months ended 31 March 1997. b) NATURE OF OPERATIONS The company markets a complete electronic voting system which includes vote tally and voter registration software. c) CONSOLIDATION These interim consolidated financial statements include the accounts of the company and its wholly-owned subsidiary, Global Election Systems, Inc., a company incorporated in Delaware and operating in New Mexico, U.S.A. The purchase method of accounting has been applied to this acquisition. d) FOREIGN CURRENCY TRANSLATION The accounts of the company were prepared in Canadian funds through to 30 June 1997 as follows: o Monetary assets and liabilities at year-end rates, o All other assets and liabilities at historical rates, and o Revenue and expense items at the average rate of exchange prevailing during the year. Exchange gains and losses arising from these transactions were reflected in income or expense in the year. Subsequent to 30 June 1997, the company adopted the U.S. currency as its reporting currency and accordingly, has prepared its financial statements on that basis. Accordingly, all prior years' figures are recast in the U.S. currency through a "translation of convenience" whereby all amounts appearing are restated from Canadian to U.S. currency using the exchange rate prevailing at 30 June 1997. e) INVENTORY Inventory of finished goods and work-in-progress is valued at the lower of cost and net realizable value as estimated by management. Raw materials, which consist of parts and components, are valued at average cost less any allowances for obsolescence. Inventory of goods taken in trade is valued at the lesser of trade-in value and net realizable value as estimated by management.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES - Continued f) AMORTIZATION Capital assets are recorded at cost and the company provides for amortization on the following basis: Demonstration and computer equipment - 20% to 30% declining balance method Manufacturing equipment - 20% declining balance method Furniture and equipment - 20% declining balance method Leasehold improvements - straight-line over 5 years One-half of the rate is applied in the year of acquisition. g) PATENTS Patents are recorded at cost and the company provides for amortization on a straight-line basis over 10 years. h) GOODWILL Goodwill is recorded at cost and the company provides for amortization on a straight-line basis over 5 years. i) REVENUE RECOGNITION Revenue from sales of products and supplies is recognized at the time of shipment of products and supplies to customers. Revenue from sales of services is recognized on completion of the related services. The company defers a portion of revenue received related to contracted future services to match against management's estimate of the future costs of providing these services to customers. j) WARRANTY RESERVE Provisions for future estimated warranty costs are recorded in the accounts based upon historical maintenance records. Management periodically reviews the warranty reserve to determine the adequacy of the provision. k) RESEARCH AND DEVELOPMENT TAX CREDITS Research and development tax credits are applied against research and development expenses in the period in which the tax credit is received. l) EARNINGS PER SHARE Basic earnings per share computations are based on the weighted average number of shares outstanding during the year. Fully diluted earnings per share are based on the actual number of shares outstanding at the end of the year plus performance shares, and share purchase options and warrants as if they had been issued as at the beginning of the year. --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 2. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and short term deposits, accounts receivable, deposits, loans receivable, bank loans, accounts payable and customer deposits approximates their fair value due to their short term maturity or capacity of prompt liquidation. -------------------------------------------------------------------------------- 3. INVENTORY Details are as follows: [Download Table] 1998 1997 ---------- ---------- Supplies $ 769,259 $1,313,367 Work-in-progress 25,320 18,639 Trade-in goods 1,491,240 227,431 Finished goods 1,312,361 72,148 ---------- ---------- $3,598,180 $1,631,585 ---------- ---------- -------------------------------------------------------------------------------- 4. AGREEMENTS RECEIVABLE Details of amounts receivable from customers are as follows: [Enlarge/Download Table] 1998 1997 ----------- ----------- Sales agreement receivable with interest at 5% per annum, repayable in 60 equal monthly payments commencing 15 December 1995, secured by the underlying goods (i) $ 488,080 $ 658,863 Sales agreement receivable with interest at 10% per annum commencing 1 June 1997 and due in full by 31 December 1998 78,020 78,020 Sales agreement receivable with interest at 5% per annum commencing 20 November 1996, repayable on 20 November 1998 (ii) 250,000 500,000 Sales agreement receivable with interest at 9% per annum commencing 25 June 1996, repayable at $33,646 per annum for principal and interest on 1 July 1997 to 1 July 2001 (ii) 111,459 133,124 ----------- ----------- 927,559 1,370,007 Less: Current portion (447,129) (498,837) ----------- ----------- $ 480,430 $ 871,170 ----------- ----------- (i) The sales agreement receivable has been pledged as security for the bank loan (Note 7). (ii) The sales agreement receivable has been pledged as security for the related loan payable (Note 8).
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 4. AGREEMENTS RECEIVABLE - Continued Scheduled principal repayments on the sales agreements receivable are as follows: [Download Table] 31 March 1999 $447,129 31 March 2000 287,130 31 March 2001 182,779 31 March 2002 10,521 -------- $927,559 -------- -------------------------------------------------------------------------------- 5. CAPITAL ASSETS Details are as follows: [Download Table] 1998 1997 Accumulated NET BOOK Net Book Cost Amortization VALUE Value -------- ------------ -------- -------- Demonstration and $539,418 $292,477 $246,941 $106,581 computer equipment Manufacturing equipment 95,278 69,441 25,837 58,461 Furniture and equipment 242,779 84,510 158,269 32,298 Leasehold improvements 18,361 13,551 4,810 1,191 -------- -------- -------- -------- $895,836 $459,979 $435,857 $198,531 -------- -------- -------- -------- -------------------------------------------------------------------------------- 6. OTHER ASSETS Details are as follows: [Download Table] 1998 1997 Accumulated NET BOOK Net Book Cost Amortization VALUE Value ---------- ------------ ---------- ---------- Patents $ 165,000 $ 103,125 $ 61,875 $ 78,375 Goodwill 1,450,960 303,337 1,147,623 74,555 ---------- ---------- ---------- ---------- $1,615,960 $ 406,462 $1,209,498 $ 152,930 ---------- ---------- ---------- ---------- -------------------------------------------------------------------------------- 7. BANK LOAN Details are as follows: [Enlarge/Download Table] 1998 1997 --------- -------- Line of credit, bearing interest at bank prime, interest payments due quarterly beginning 6 January 1998, due in full by 6 January 1999, secured by the $488,080 agreement receivable (Note 4) $ 370,000 $190,538 --------- -------- The maximum approved line of credit is U.S. $371,450 --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 8. LOANS PAYABLE Details are as follows: [Enlarge/Download Table] 1998 1997 ----------- ----------- Note payable, bearing interest at bank prime, repayable in full $ 137,602 $ 275,204 on 15 November 1998, secured by the $250,000 sales agreement receivable (Note 4) Note payable, bearing interest at bank prime payable quarterly 74,550 94,226 commencing 12 December 1996, repayable at $18,637 per annum commencing 1 July 1997, secured by the $111,459 sales agreement receivable (Note 4) Note payable, bearing interest at bank prime plus 1%, repayable 770,000 -- at $632,100 plus interest on 11 June 1998 and the balance due in full on 15 November 1998, secured by a blanket assignment of accounts receivable Note payable, bearing interest at bank prime plus 1%, repayable 570,000 -- in full plus interest on 28 April 1998, secured by a blanket assignment of accounts receivable Note payable, bearing interest at 8% per annum, repayable by 31 341,585 -- March 1999 plus bonus interest of $15,713, secured by an accounts security agreement covering all assets of the company Note payable, bearing interest at 8% per annum, repayable by 31 341,585 -- March 1999 plus bonus interest to a minimum of $15,713, secured by an accounts security agreement covering all assets of the company ----------- ----------- 2,235,322 369,430 Less: Current portion (2,179,410) (156,680) ----------- ----------- $ 55,912 $ 212,750 ----------- ----------- Scheduled principal repayments on the loans payable are as follows: 31 March 1999 $ 2,179,410 31 March 2000 18,637 31 March 2001 18,637 31 March 2002 18,638 ----------- $ 2,235,322 ----------- --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 9. SHARE CAPITAL a) The authorized share capital is 120,000,000 shares divided into 100,000,000 voting common shares without par value and 20,000,000 convertible voting preferred shares without par value. The issued and outstanding share capital consists of: [Download Table] Common Unit Shares Value Amount ---------- ----- ----------- Balance - 31 December 1993 13,527,237 $ 8,419,336 Acquisition of name and operating assets 250,000 $1.74 434,626 of Lynro Manufacturing Corporation Fiscal agency fees 58,334 $0.83 48,594 Options exercised 50,000 $0.48 23,904 ----------- ----- ----------- Balance - 31 December 1994 13,885,571 8,926,460 Warrants exercised 203,869 $0.77 156,538 Options exercised 100,000 $0.56 55,777 ----------- ----- ----------- Balance - 31 December 1995 14,189,440 9,138,775 Options exercised 500,000 $0.47 235,422 ----------- ----- ----------- Balance - 31 December 1996 and 30 June 1997 14,689,440 9,374,197 Acquisition of name and operating assets 1,000,000 $0.53 548,148 of I-Mark Systems, Inc. Issuance of performance shares 2,738,000 $0.06 155,562 Options exercised 30,000 $0.89 26,632 ----------- ----- ----------- Balance - 31 March 1998 18,457,440 $10,104,539 ----------- ----- ----------- b) By agreement dated 22 November 1991, the company reserved for issuance 4,150,000 treasury shares. These shares were to be issued at $0.06 per share, and upon issuance, were to be held in escrow and released on the basis of "cumulative cash flow" (as defined). Two of the original allottees are no longer employees nor directors of the company and therefore have ceased to be eligible for performance shares and accordingly 270,000 of the original shares reserved for issuance have been cancelled leaving a balance of 3,880,000 shares reserved for issuance. During 1996, the directors passed a resolution to cancel 1,142,000 of the allotted but unissued performance shares and to extend the earn-out period on the remaining 2,738,000 performance shares from 17 January 1997 to 17 January 2000. The resolution was then passed by the shareholders at an extraordinary general meeting on 6 December 1996 and subsequently approved by the regulatory authorities. On 6 December 1996, the company entered into an Amended and Restated Performance Shares Allotment Agreement on the remaining 2,738,000 allotted but unissued treasury shares under the same release provisions as the original 22 November 1991 agreement. Based upon the "cumulative cash flow" of the company to 30 June 1997, the 2,738,000 performance shares were approved for release by the regulatory authorities and were issued on 27 January 1998 upon receipt of $155,562 from the holders of the performance shares.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 9. SHARE CAPITAL - Continued c) STOCK OPTION PLAN The company has a stock option plan which covers its officers and directors. The options are granted for varying terms ranging from three to five years and are immediately vested upon grant. The following is a schedule of the activity pursuant to this stock option plan: [Enlarge/Download Table] Price per Number of Share Shares (CDN $) Expiration Date ---------------------------------------------------------------------------------------------------------- 500,000 $0.65 22 November 1996 30,000 $0.75 04 February 1997 100,000 $2.30 22 April 1997 200,000 $0.77 09 February 1998 200,000 $2.40 17 September 1998 100,000 $3.10 15 November 1998 150,000 $1.89 20 September 1999 100,000 $1.33 01 November 1999 ---------------------------------------------------------------------------------------------------------- Balance - 31 December 1994 1,380,000 $0.65 to $ 3.10 Options exercised (100,000) $0.77 09 February 1998 Options expired (100,000) $0.77 09 February 1998 Options expired (80,000) $3.10 15 November 1998 Options expired (20,000) $1.89 20 September 1999 New options granted 100,000 $1.35 22 February 2000 New options granted 100,000 $1.00 17 August 2000 ---------------------------------------------------------------------------------------------------------- Balance - 31 December 1995 1,280,000 $0.65 to $ 3.10 Options exercised (500,000) $0.65 22 November 1996 Options expired (200,000) $2.40 17 September 1998 Options expired (100,000) $1.00 17 August 2000 ---------------------------------------------------------------------------------------------------------- Balance - 31 December 1996 480,000 $1.33 to $ 3.10 Options expired (30,000) $0.75 04 February 1997 Options expired (100,000) $1.35 22 February 2000 Options expired (100,000) $2.30 22 April 1997 ---------------------------------------------------------------------------------------------------------- Balance - 30 June 1997 250,000 $1.33 to $ 3.10 New options granted 1,075,000 $1.25 22 August 2002 New options granted 50,000 $1.49 17 December 2002 New options granted 100,000 $1.80 07 January 2003 Options cancelled (20,000) $3.10 15 November 1998 Options cancelled (130,000) $1.89 20 September 1999 Options exercised (30,000) $1.25 22 August 2002 ---------------------------------------------------------------------------------------------------------- Balance - 31 March 1998 1,295,000 $1.25 - $1.80 ----------------------------------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 9. SHARE CAPITAL - Continued d) STOCK PURCHASE WARRANTS During the period ended 31 March 1998 the company granted stock purchase warrants as an incentive to arrange short-term financing as follows: [Download Table] Price per Number of Share Expiration Date Shares (CDN $) ------------------ --------- --------- --------------- 166,667 $ 1.88 31 March 2001 ------------------ -------- ------- -------------- -------------------------------------------------------------------------------- 10. INCOME TAXES a) A summary of the taxable income of the company for the nine months ended 31 March 1998 is as follows: [Enlarge/Download Table] Canadian Parent U.S. Subsidiary Total --------------- --------------- ----------- Net income (loss) before taxes per $ (186,905) $ 2,606,942 $ 2,420,037 financial statements Application of losses carried forward -- (2,606,942) (2,606,942) ------------------------------------------- ----------- ----------- ----------- Taxable income (loss) $ (186,905) $ -- $ (186,905) ------------------------------------------- ----------- ----------- ----------- Accordingly, no provision for income taxes has been recorded in these interim consolidated financial statements. b) The company has unclaimed scientific research and experimental development deductions, for Canadian tax purposes, in the amount of $104,000 which may be carried forward to be applied against future taxable income. The future tax benefits, if any, of these deductions have not been recognized in the accounts. c) The company has unclaimed investment tax credits, for Canadian tax purposes, arising from its research and development activities in the amount of $425,000 which may be carried forward to be applied against future federal taxes payable. The future tax benefits, if any, of these tax credits have not been recognized in the accounts and expire as follows:
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 10. INCOME TAXES - Continued c) Continued [Download Table] 1998 $109,000 1999 85,000 2000 37,000 2003 68,000 2004 126,000 -------- $425,000 -------- d) The company has tax losses, for Canadian tax purposes, of approximately $186,905 which may be carried forward to be applied against future taxable income. The future benefits, if any, of these tax losses have not been recognized in the accounts of the company and expire in 2005. e) The company's subsidiary has tax losses, for U.S. tax purposes, of approximately $1,482,000 which may be carried forward to be applied against future taxable income. The future benefits, if any, of these tax losses have not been recognized in the accounts of the company and expire in 2010. -------------------------------------------------------------------------------- 11. COMMITMENTS a) By way of a management services agreement, the company has secured the services of a key employee for a term expiring 30 September 1998. The contract contains fixed annual compensation totalling $100,000 per annum plus a bonus of: i) 3% of Canadian sales; and ii) 1% of the net profits before taxes for all sales (excluding those in Canada) of the company. b) Under the terms of a lease agreement dated 1 May 1993, the company is committed to minimum annual lease payments of $37,668 plus its share of common area costs. The lease was for a five year term to 30 April 1998 and the lease has been extended for an additional 8 month term to 31 December 1998 on the same terms representing a lease commitment of $28,251 for the 12 month period ending 31 March 1999.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 11. COMMITMENTS - Continued c) By an agreement dated 4 March 1997, the company's United States subsidiary has agreed to lease 13,050 square feet of general office and warehouse space in McKinney, Texas for five years from 1 July 1997. The annual lease amount is $110,272 representing a minimum lease commitment of: [Download Table] 31 March 1999 $ 110,272 31 March 2000 110,272 31 March 2001 110,272 31 March 2002 110,272 31 March 2003 27,568 --------- $ 468,656 --------- The lease may be extended for two additional terms of five years with the rate to be the current base rental plus the lesser of a consumer price adjustment or a fair rental value adjustment. -------------------------------------------------------------------------------- 12. CONTINGENCY By an agreement dated 25 November 1991, the company retained Overseas Management Services, Inc. ("OMS") as its exclusive sales and marketing representative for Venezuela for an initial term of 5 years. OMS was to receive a 20% commission on all sales of the product within Venezuela and was responsible for its own out-of-pocket costs. Management believes OMS breached certain conditions of its agreement with the company and has given OMS the required 30 day notice of cancellation. OMS collected approximately U.S. $96,000 of the U.S. $209,700 commission it has claimed on the Consejo capital lease. The balance of the commission payable to OMS has not been recorded in these consolidated financial statements due to the alleged breach of contract. The company has initiated a lawsuit against OMS for damages resulting from the alleged breaches by OMS of the 25 November 1991 agreement. The outcome of this case and the amount of damages to be received by the company, if any, cannot be reasonably determined at this time. OMS has filed a counter-claim against the company in New Hampshire alleging, interalia, a claim for future commissions on the capital lease. --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 13. RELATED PARTY TRANSACTIONS In addition to items disclosed elsewhere in these consolidated financial statements, the company conducted the following transactions with related parties: a) EXPENDITURES Details are as follows: [Download Table] 1998 1997 -------- -------- Paid/accrued salaries and fees to four directors all of $382,712 $257,254 whom are officers of the company Paid rent for premises to a company controlled by a 5,765 17,294 director Paid rent (at fair market value) to a company controlled 75,000 75,000 by a former director -------- -------- $463,477 $349,548 -------- -------- b) SHARE CAPITAL During the nine months ended 31 March 1998, the company issued 2,558,056 shares to directors of the 2,738,000 performance shares issued in the period for cash in the amount of $145,338. During the nine months ended 31 March 1998, the company granted directors 350,000 share purchase options at exercise prices ranging from $1.25 to $1.80 and option expiry dates ranging from 22 August 2002 to 7 January 2003. -------------------------------------------------------------------------------- 14. I-MARK SYSTEMS, INC. By an agreement dated 31 July 1997, the company acquired the assets, business and the name of I-Mark Systems, Inc., a Nebraska corporation. Consideration for the acquisition was $1,000,000 cash (paid) and 1,000,000 common shares of the company (issued at a deemed amount of $548,148). The consideration given was allocated to the net identifiable assets acquired as follows: [Download Table] Capital assets o Furniture and fixtures $ 68,148 o Demonstration and computer equipment 280,000 Goodwill 1,200,000 ----------- $ 1,548,148 ----------- --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 15. SALES AND OPERATING INCOME Details of sales and operating income generated from customers which account for more than 10% of that period's consolidated sales and operating income are as follows: [Enlarge/Download Table] 1998 1997 ----------- ----------- Number of large customers 1 1 ----------- ----------- Amount of sales to large customers $ 2,024,080 $ 1,090,233 ----------- ----------- Total consolidated sales and operating income $12,086,413 $ 7,083,753 ----------- ----------- Total percentage of consolidated sales and operating income generated from large customers 16.7% 15.4% ----------- ----------- Due to the nature of the company's business, large sales to individual customers are generated on a non-recurring basis. As a result, the company is not dependent on any single customer or small group of customers such that the loss of any of these would have a material adverse effect on the future results of the company. --------------------------------------------------------------------------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 16. SEGMENT INFORMATION The company operated in only one industry segment in Canada and the United States as follows: [Enlarge/Download Table] Canada United States 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Sales to customers $ 466,212 $ 1,860,590 $11,620,202 $ 5,223,163 Sales between the segments 802,880 327,376 3,095,970 1,470,248 ----------- ----------- ----------- ----------- Total sales revenue $ 1,269,092 $ 2,187,966 $14,716,172 $ 6,693,411 ----------- ----------- ----------- ----------- Operating profits $ 269,660 $ 202,695 $ 5,567,536 $ 2,793,153 ----------- ----------- ----------- ----------- General corporate expenses Interest Net income Identifiable assets $ 1,088,312 $ 2,919,743 $13,518,920 $ 4,038,916 ----------- ----------- ----------- ----------- Capital expenditures $ 15,696 $ -- $ 1,698,016 $ 9,678 ----------- ----------- ----------- ----------- Amortization of capital and other assets $ 20,071 $ 6,954 $ 243,390 $ 79,965 ----------- ----------- ----------- ----------- Elimination Consolidated 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Sales to customers $ -- $ -- $12,086,414 $ 7,083,753 Sales between the segments (3,898,850) (1,797,624) -- -- ----------- ----------- ----------- ----------- Total sales revenue $(3,898,850) $(1,797,624) $12,086,414 $ 7,083,753 ----------- ----------- ----------- ----------- Operating profits $ -- $ -- 5,837,196 2,995,848 ----------- ----------- General corporate expenses 3,344,678 2,819,228 Interest 72,480 66,996 ----------- ----------- Net income $ 2,420,038 $ 109,624 ----------- ----------- Identifiable assets $ (22,607) $ (22,607) $14,584,625 $ 6,936,052 ----------- ----------- ----------- ----------- Capital expenditures $ -- $ -- $ 1,713,712 $ 9,678 ----------- ----------- ----------- ----------- Amortization of capital and other assets $ -- $ -- $ 263,461 $ 86,919 ----------- ----------- ----------- -----------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada. Any differences in United States accounting principles as they pertain to the accompanying interim consolidated financial statements are not material except as follows: a) COMPENSATION EXPENSE Under accounting principles generally accepted in the United States, there is a compensation expense associated with the release of escrowed shares of the company, as those shares become eligible for release. No compensation expense is applied under accounting principles generally accepted in Canada. b) FINANCIAL STATEMENT RECONCILIATION [Enlarge/Download Table] 1998 1997 ------------ ------------ i) Share capital - Canadian basis $ 10,104,539 $ 9,374,197 Add: Escrow share compensation expense - prior years 3,194,621 3,194,621 ------------ ------------ Share capital - U.S. basis $ 13,299,160 $ 12,568,818 ------------ ------------ ii) Deficit - Canadian basis $ (977,816) $ (4,185,612) Less: Escrow share compensation expense - prior years (3,194,621) (3,194,621) ------------ ------------ Deficit - U.S. basis $ (4,172,437) $ (7,380,233) ------------ ------------
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - Continued b) FINANCIAL STATEMENT RECONCILIATION - Continued iii) U.S. GAAP consolidated statement of shareholders' equity [Enlarge/Download Table]  Common Shares Shares Amount Deficit Total ----------- ----------- ----------- ----------- Balance - 31 December 1993 - Canadian 13,527,237 $ 8,419,336 $(1,164,452) $ 7,254,884 basis Escrow share compensation expense - -- 3,194,621 (3,194,621) -- prior years ----------- ----------- ----------- ----------- Balance - 31 December 1993 - U.S. basis 13,527,237 11,613,957 (4,359,073) 7,254,884 Issuance of shares for name and 250,000 434,626 -- 434,626 operating assets of Lynro Manufacturing Corporation ($1.74 per share) Issuance of shares for expenses ($0.83 58,334 48,594 -- 48,594 per share) Issuance of shares on exercise of options ($0.48 per share) 50,000 23,904 -- 23,904 Loss for the year -- -- (1,508,214) (1,508,214) ----------- ----------- ----------- ----------- Balance - 31 December 1994 - U.S. basis 13,885,571 12,121,081 (5,867,287) 6,253,794 Issuance of shares on exercise of 203,869 156,538 -- 156,538 warrants ($0.77 per share) Issuance of shares on exercise of 100,000 55,777 -- 55,777 options ($0.56 per share) Loss for the year -- -- (1,042,042) (1,042,042) ----------- ----------- ----------- ----------- Balance - 31 December 1995 - U.S. basis 14,189,440 12,333,396 (6,909,329) 5,424,067 Issuance of shares on exercise of options ($0.47 per share) 500,000 235,422 -- 235,422 Loss for the year -- -- (1,736,657) (1,736,657) ----------- ----------- ----------- ----------- Balance - 31 December 1996 - U.S. basis 14,689,440 12,568,818 (8,645,986) 3,922,832 Net income for the period -- -- 2,053,512 2,053,512 ----------- ----------- ----------- ----------- Balance - 30 June 1997 - U.S. basis 14,689,440 12,568,818 (6,592,474) 5,976,344 Issuance of shares for name and operating assets of I-Mark Systems, Inc. ($0.55 per share) 1,000,000 548,148 -- 548,148 Issuance of performance shares from escrow ($0.06 per share) 2,738,000 155,562 -- 155,562 Issuance of shares on exercise of options ($0.89 per share) 30,000 26,632 -- 26,632 Net income for the period -- -- 2,420,037 2,420,037 ----------- ----------- ----------- ----------- Balance -31 March 1998 - U.S. basis 18,457,440 $13,299,160 $(4,172,437) $ 9,126,723 ----------- ----------- ----------- ----------- c) EARNINGS PER SHARE - BASIC OR PRIMARY Under accounting principles generally accepted in the United States, stock options and stock warrants are treated as common stock equivalents in the determination of basic or primary earnings per share if they would have a dilutive effect. Stock options and stock warrants are not treated as common stock equivalents in the determination of basic or primary earnings per share in Canada.
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GLOBAL ELECTION SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 31 MARCH 1998 U.S. Funds Unaudited - See Notice to Reader -------------------------------------------------------------------------------- 17. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - Continued c) EARNINGS PER SHARE - BASIC OR PRIMARY - Continued Reconciliation of Canadian to U.S. basis - Basic Earnings per Share: [Download Table] 1998 1997 ----------- ----------- Weighted average number of common shares outstanding - 16,766,344 14,689,440 Canadian basis Add: Dilutive stock options 1,348,333 250,000 ----------- ----------- Weighted average number of common shares outstanding - U.S. 18,114,677 14,939,440 basis ----------- ----------- Net income for the period $ 2,420,037 $ 109,624 ----------- ----------- Primary earnings per share $ 0.13 $ 0.01 - U.S. basis ----------- ----------- - Canadian basis $ 0.14 $ 0.01 ----------- ----------- --------------------------------------------------------------------------------
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INDEX TO EXHIBITS [Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 2(1) Memorandum and Articles of Incorporation, as amended.* 3 Instruments Defining the Rights of Security Holders * 3(1) Parts 7, 10, 12 and 27 of the Registrant's Memorandum and Articles of Incorporation, as amended, set forth in Exhibit 2(1) * 6 Material Contracts 6(1)(i) Employment Agreement with Howard Van Pelt dated August 1, 1997 * (ii) Employment Agreement, dated October 1, 1996, with Clinton H. Richards* (iii) Employment Agreement with Robert J. Urosevich dated August 1, 1997* 6(2) Amended and Restated Performance Share Allotment Agreement dated December 6, 1996 * 6(3)(i) Lease (Vancouver, British Columbia)* (ii) Lease (McKinney, Texas)* (iii) Lease (Omaha, Nebraska)(to be filed by Amendment)* 6(4) Purchase Agreement between the Registrant and I-Mark Systems, Inc. dated July 31, 1997* 6(5) Promissory Notes and associated Accounts Security Agreements and Stock Purchase Warrants, all dated March 31, 1998, to each of David Ross and Victoria Ross. Termination of each Promissory Note.* 6(6) Option agreements: (i) Form of Option Agreement with employees* (ii) Option Agreement dated August 22, 1997 between the Company and Howard T. Van Pelt* (iii) Option Agreement dated August 22, 1997 between the Company and Clinton H. Rickards* (iv) Option Agreement dated August 22, 1997 between the Company and Larry Ensminger* (v) Option Agreement dated August 22, 1997 between the Company and Maurice E. Sokulski* (vi) Option Agreement dated August 22, 1997 between the Company and Robert Urosevich* 6(7) Other material agreements (i) Promissory Note to Western Bank Albuquerque for $770,000.* (ii) Promissory Note to Western Bank Albuquerque for $600,000.* 10 Consent of Staley, Okada, Chandler & Scott Chartered Accountants. 13 Form F-X* * Incorporated by reference to the Registrant's Form 10-SB filed July 31, 1998.

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10SB12G/A Filing   Date First   Last      Other Filings
5/1/9331
12/31/9426
7/31/9549
12/31/95839
3/31/9647
6/30/9623
9/30/9638
10/1/965297
12/6/963997
12/31/96739
1/17/973940
3/31/9721
6/30/97739
7/1/9737
7/31/975297
8/1/973197
8/22/975297
9/1/9731
3/31/98797
4/1/9828
5/1/9831
6/1/9828
7/31/98539710SB12G
8/1/9836
8/21/9848
9/15/9848
Filed On / Filed As Of9/17/98154
11/15/9828
12/31/983110QSB
1/6/9928
3/31/992810QSB
1/17/003940
3/31/012810QSB, NT 10-Q
 
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