U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number 0-14692
______________________________________________
Global MAINTECH Corporation
Minnesota 41-1523657
State of Incorporation I.R.S. Employer Identification No.
6468 City West Parkway, Eden Prairie, MN 55344
Telephone Number: (612) 944-0400
______________________________________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was requiredto file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No______
______________________________________________
On April 15, 1997 there were 15,254,147 shares of the Registrant's no par value
common stock outstanding.
Transitional small business issuer format: No
Page 1 of 11
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that
may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the uncertainty in the
Company's ability to continue to operate profitably in the future; failure
of the Company to meet its future additional capital requirements; loss of key
personnel; failure of the Company to respond to evolving industry standards and
technological changes; inability of the Company to compete in the industry in
which it operates; lack of market acceptance of the Company's products;
failure of the Company to secure adequate protection for the Company's
intellectual property rights; and the Company's exposure to product liability
claims. The forward-looking statements are qualified in their entirety by the
cautions and risk factors set forth in Exhibit 99, under the caption
"CautionaryStatement," to this Quarterly Report on Form 10-KSB for the year
ended December 31, 1996.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 253,655 $ 32,890
Accounts receivable, less allowance for
doubtful accounts of $15,000 938,608 451,599
Other receivables 21,369 21,519
Inventory 256,656 217,943
Prepaid expenses and other 50,744 26,706
--------- ---------
Total current assets 1,521,032 750,657
Property and equipment, net 67,123 31,221
Leased equipment, net 83,060 82,377
Patent costs, net 73,279 61,779
Software development costs, net 628,650 425,519
--------- ---------
TOTAL ASSETS $2,373,144 $1,351,553
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 2 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 306,669 $ 396,004
Current portion of notes payable 149,360 211,613
Convertible subordinated debentures 101,172 151,750
Accrued liabilities
Compensation and payroll taxes 83,516 79,655
Interest 3,323 13,960
Other 52,625 38,325
Deferred revenue 172,036 259,747
--------- ---------
Total current liabilities 868,701 1,151,054
Notes payable, less current portion - 16,600
--------- ---------
Total liabilities 868,701 1,167,654
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A,
convertible into one common stock share for each
preferred share, no par value; 887,980 shares
authorized;365,185 shares issued and
outstanding;total liquidation preference
of outstanding shares-$685,000 171,259 328,601
Common stock, no par value; 49,112,020 shares
authorized; 15,248,816 shares issued and
outstanding - -
Additional paid-in-capital 3,504,817 2,243,438
Notes receivable-officers (324,500) (324,500)
Accumulated deficit (1,847,133) (2,063,640)
--------- ---------
Total stockholders' equity 1,504,443 183,899
--------- ---------
$2,373,144 $1,351,553
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 3 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net sales $ 706,551 $ 492,347
Cost of sales 120,580 199,432
--------- ---------
Gross profit 585,971 292,915
Operating expenses
Selling, general and administrative 316,091 111,673
Research and development 104,326 53,637
--------- ---------
Income from operations 165,554 127,605
Other income (expense):
Interest expense 16,547 24,189
Interest income - -
Other - 464
--------- ---------
Total other expense, net 16,547 24,653
--------- ---------
Income from continuing operations
before income taxes 149,007 102,952
Provision for income taxes 2,500 -
--------- ---------
Income from continuing operations 146,507 102,952
Recovery of discontinued operations 70,000 -
--------- ---------
Net income $ 216,507 $ 102,952
--------- ---------
Net earnings (loss) per common and common
equivalent share:
Continuing operations $0.009 $0.010
Discontinued operations 0.004 -
--------- ---------
Net earnings/(loss) $ 0.013 $0.010
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 16,732,492 10,423,448
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
page 4 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 216,507 $ 102,952
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 82,598 9,586
Changes in operating assets and liabilities:
(Increase) decrease in accounts
and other receivables (486,859) (187,486)
Increase in inventory (38,713) (586)
Increase in leased equipment (10,729) -
Increase in prepaid expenses (24,038) (5,493)
Decrease in accounts payable (82,548) (74,290)
Increase (decrease) in accrued expenses (4,277) 38,192
Decrease in deferred revenue (87,711) -
Increase in other - -
--------- ---------
Cash used by operating and discontinued
activities (435,770) (117,125)
Cash flows from investing activities:
Purchase of property and equipment (42,454) -
Investment in software development costs (263,131) -
Investment in patent costs (17,500) -
--------- ---------
Cash used by investing activities (323,085) -
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,104,037 164,710
Decrease in short-term notes payable (107,817) (2,750)
Decrease in long-term notes payable (16,600) (58,000)
--------- ---------
Cash provided (used) by financing activities 979,620 103,960
--------- ---------
Net increase (decrease) in cash 220,765 (13,165)
Cash and cash equivalents at beginning of
period 32,890 39,365
--------- ---------
Cash and cash equivalents at end of period $ 253,655 $ 26,200
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page of 5 of 11
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GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
At the Company's annual shareholders meeting on May 15, 1995, the shareholders
approved, among other things, the change of its name to Global MAINTECH
Corporation from Mirror Technologies, Incorporated.
Global MAINTECH, Inc. ("MAINTECH") is the operating entity resulting from
the merger between MAINTECH and Mirror Technologies, Incorporated
("Mirror") effective January 1, 1995 (see note 2). In late 1994,
the Company became the exclusive distributor, outside of Japan, of the
monitoring system of Circle Corporation of Japan. In 1995, the Company
adapted this monitoring system which is oriented to single-unit
users and to simple functions, to meet the more complex requirements
of the U. S. market. While the Company continues to buy some
hardware and software from Circle Corporation, the Company has added
significant architecture, compiling and source code. The updated system
provides enhanced operational control over computer hardware and software. In
1995, the Company made its first three installations of this system, now
called the Virtual Command Center or VCC, in the data centers of a large
industrial and financial company. In 1996 the Company sold an additional 7
systems and added two additional customers.
The VCC is a tool designed to do three functions: the first is to consolidate
consoles (computer terminals with access to the internal operation
of a computer) into one monitor, a "virtual console" or single point
of control; the second is to monitor and control the computers
connected to the virtual console; and, the third is to automate most,
if not all, of the routine processes performed by computer operators in
data centers. The VCC can be operated from a remote location and
accepts multiple computer platforms and operating systems. It is an
external system that monitors and controls the subject mainframe
and other data center computers from a workstation quality RISC
computer, which is housed separately from the computers it controls. VCC
users are able to reduce staffing levels, consolidate all data center
operations and technical support functions to a single location regardless of
the physical location of the data center(s) and achieve improved
levels of operational control and system availability.
Basis of Presentation
The interim consolidated financial statements are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair
presentation of results for such periods. All such adjustments are of a
normal recurring nature.
The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996.
Reverse Stock Split
The Company effected a 1-for-5 reverse stock split of the Company's common
stock and series A preferred stock on November 12, 1996. As a result,
the aggregate number of authorized shares of the Company was reduced
from 250,000,000 to 50,000,000 shares. Excluding the preferred stock, the
aggregate number of authorized shares is now 49,112,020.
Common Equivalent Shares Outstanding
The preferred stock is, because of its terms and the circumstances under
which it was issued, in substance a common stock equivalent. The preferred
stockholders can convert, at their option, to common stock on a one-for-one
basis and can expect to participate in the appreciation of the value of
the common stock. Accordingly, the weighted average common and common
equivalent shares outstanding for the quarter ended March 31, 1997 include the
Page 6 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
weighted average of 13,736,390 common shares outstanding, 365,185 shares of
preferred stock outstanding since their issuance on September 13, 1994,
and stock options and warrants which have a dilutive effect. The stock
options and warrants included as common equivalent shares outstanding total
2,630,917 shares and are computed by application of the treasury stock method.
Capitalized Computer Software Costs
In the quarter ended March 31, 1997, the Company recorded software
development costs, net of amortization, of approximately $628,650, which
represent costs incurred after technological feasibility has been established
in connection with the development of enhancements to one or more particular
software programs. The establishment of technological feasibilty and the
ongoing assessment of the recoverablity of these costs require considerable
judgment by management with respect to certain external factors, including,
but not limited to, anticipated future gross product revenues, estimated
economic life, and changes in software and hardware technology. The software
development costs are being amortized over a 36 month period using the
staight-line method.
Patent Costs
Patents are stated at cost and are amortized over a 36 month period using the
straight-line method.
Operating Leases
The Company began leasing its Virtual Command Center (VCC) to Customers in
1996. The Company offers flexible lease terms to meet its customers'
preferences. In some cases the lease may be classified as an operating
lease on the Company's financial statements. Generally, a lease will be
classified as an operating lease if the lease extends for a term less than
the full economic life of the product and the Company retains a residual
interest at the end of the lease term. Operating leases require the
lessee to pay fair market value for the product if it chooses to
purchase the VCC at the end of the lease term. Since the Company is the
manufacturer and seller of the VCC, the Company is comfortable with
the risk of retaining a residual interest. The net investment in leased
equipment was $117,869 less accumulated depreciation of $34,809 for a
total of $83,060.
A majority of the Company's VCC leases were assigned to a third party, on a
non-recourse basis, for a lump sum payment to the Company in 1996.
Under the terms of this assignment, the Company retained a residual value in
the equipment under lease. The present value of the cash received was
recorded as deferred revenue, and is being recognized into revenue over
the term of the lease. Lease revenue assigned to third parties
recorded in 1996 and the quarter ended March 31, 1997 was $91,000
and $28,500, respectively. The annual lease revenue in 1997 and 1998
is $114,000 and $23,000, respectively.
Page 7 of 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net cash used in operating and discontinued activities for the first quarter
ended March 31, 1997 was approximately $436,000 compared to a use of
cash of approximately $117,000 for such activities in the quarter
ended March 31, 1996. Cash was provided from net income, depreciation and
amortization totaling approximately $299,000. Cash was used to fund
the approximate increases in accounts receivable of $487,000, inventory of
$39,000, prepaid expenses of $24,000 and leased equipment of $11,000. Cash
was also used to reduce accounts payable by approximately $83,000,
deferred revenue of approximately $88,000 and accrued expenses of
approximately $4,000. In the three month period ended March 31, 1996,
the Company used cash to fund an increase in accounts receivable and
to reduce accounts payable which were partially offset by cash sources
such as income and depreciation.
Sales from continuing operations for the first quarter ended March 31, 1997
were approximately $707,000 compared to sales of continuing
operations for the first quarter of 1996 of approximately $492,000.
The $215,000 increase is primarily related to licensing fees of
$144,000 and consulting fees of nearly $70,000 which were non-
existent in the first quarter of 1996. In both comparative periods the
Company recorded two unit sales of the Virtual Command Center (VCC).
Cost of sales in the first quarter of 1997 were lower
primarily due to reduced unit costs. As a result, the gross margin in
the first quarter of 1997 was 82.9% compared to 59.5% in the first quarter
of 1996.
Selling, general and administrative costs in the first quarter of 1997
were approximately $316,000 compared to $112,000. The increase of
$204,000 is primarily due to an increase in salaries of $97,000. The salary
increase is entirely due to an increase in employees the majority of
which is due to an increase in the areas of sales and sales support.
The remaining portion of the $204,000 increase is primarily due to increases
in professional and technical costs of approximately $45,000,
marketing and advertising costs of approximately $39,000, and travel and
entertainment costs of approximately $15,000. The increase in professional
costs is related to increases in audit and tax fees and financial public
relations costs. The increases in travel and marketing costs is related to
increased sales activity and the need to promote the Company's technology
to facilitate sales efforts.
Research and development costs in the first quarter of 1997 were approximately
$104,000 compared to $54,000
in the first quarter of 1996, one year ago. The $50,000 increase is due to
amortization of capitalized software
development costs.
Non-operating expenses in both periods under comparison consisted of
interest expense which declined due to a decrease in debt between
March 31, 1996 and March 31, 1997.
Cash used by investing activities of approximately $323,000 reflects
investments of $263,000 in capitalized computer software development
costs, which represent costs incurred after technological feasibility
has been established in connection with the development of
enhancements to one or more particular software programs, and
approximately $17,500 of patent costs. The Company also purchased $42,000 of
additions to machinery and equipment during the first quarter of 1997.
During the first quarter ended 1996, there was no cash used by investing
activities.
Net cash provided by financing activities in the first quarter of 1997 was
approximately $980,000. This is due to the receipt of net proceeds from
the issuance of common stock of approximately $1,100,000 at a per share price
of $0.75 in connection with a private offering of such securities. Offsetting
this increase was a $124,000 use of cash to reduce notes payable. In the
prior first quarter of 1996, the Company raised $165,000 from the issuance
of common stock which was offset by a reduction of notes payable of $61,000.
Liquidity and Capital Resources
As of March 31, 1997, the Company had positive working capital of
approximately $652,000 compared to negative working capital as of
December 31, 1996 of $400,000. The positive working capital was substantially
enhanced by the net proceeds of approximately $1,100,000 received in
January and February 1997 from the issuance of common stock in
connection with a private offering of such securities. As of March 31, 1997,
the Company remained delinquent in making principal payments on its
convertible subordinated debentures of approximately $101,000.
Page 8 of 11
<PAGE>
During the quarter ended March 31, 1997, the Company's liquidity and capital
resources were substantially improved. As a result of the positive
working capital, the Company believes it has sufficient working capital to pay
its current liabilities. This depends, partially, on the Company's ability
to collect its accounts receivable and to continue to make sales sufficient
to realize the full value of its current inventory. Since the Company has
demonstrated its ability to realize gross margins of 70% or greater on its
sales and has not experienced any bad debts on its accounts receivable,
management believes the Company's financial health will continue to improve as
additional sales are realized. To that end, the Company has continued to
purchase additional inventory in anticipation of additional sales.
The Company's operating plan for the year ending December 31, 1997 anticipates
an increase in sales over the year ended December 31, 1996 with a commensurate
increase in net income. As a result, this operating plan projects
a significant increase in the liquidity and capital resources of the Company.
While the Company believes in the viability of its operating plan
and currently anticipates that its operating plan will be
achieved, there can be no assurances to that effect. To the extent this plan
is delayed, the Company will seek the continued forbearance of its creditors
or will seek to raise additional capital, however, there can be no
assurance such additional capital can be raised on terms favorable to the
Company.
Page 9 of 11
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the first quarter of 1997, the
Company issued 1,652,801 shares of common stock to certain accredited
and non-accredited investors at a purchase price of $0.75 per share in a
private offering pursuant to the terms of a private placement memorandum
dated November 25, 1996, as amended on February 10, 1997 (the
"Memorandum"). Maven Securities, Inc. ("Maven") acted as placement agent for
such sale and was paid a 10% commission and a 3% fee for expenses.
As additional compensation, the Company issued Maven a warrant to
purchase up to 10% of the number of shares of common stock issued in
connection with such offering at an exercise price of $0.75 per share.
The aggregate offering price for such shares was $1,239,600.75 and the
aggregate placement agent commissions and expenses were $161,148.10. The
shares issued pursuant to the Memorandum were exempt from registration
under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
ITEM 3. DEFAULT UPON SENIOR DEBT AND CONVERTIBLE SUBORDINATED DEBENTURES
The Company is more than thirty days in default on principal payments of
convertible subordinated debentures, all of which matured on July 1, 1996.
During the first quarter of 1997, the Company made principal payments of
$50,578 on this debt. As of March 31, 1997,the principal payments in
default had been reduced to $101,172. In addition, interest payments have
been disbursed monthly for the period July 1996 through April 1997 on the
applicable delinquent principal amount.
The company is not delinquent on any other debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27--Financial Data Schedule
99--Cautionary Statement
(b) Reports on Form 8-K
None.
Page 10 of 11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GLOBAL MAINTECH CORPORATION
May 13, 1997 By: /s/ James Geiser
James Geiser
Chief Financial and
Chief Accounting Officer
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
May 13, 1997 By: /s/ David McCaffrey
David McCaffrey
Chief Executive Officer
Page 11 of 11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1997 SEC Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000783738
<NAME> GLOBAL MAINTECH CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 254
<SECURITIES> 0
<RECEIVABLES> 960
<ALLOWANCES> 0
<INVENTORY> 257
<CURRENT-ASSETS> 1521
<PP&E> 67
<DEPRECIATION> 0
<TOTAL-ASSETS> 2373
<CURRENT-LIABILITIES> 307
<BONDS> 0
0
171
<COMMON> 3180
<OTHER-SE> (1847)
<TOTAL-LIABILITY-AND-EQUITY> 2373
<SALES> 707
<TOTAL-REVENUES> 707
<CGS> 121
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 149
<INCOME-TAX> 2
<INCOME-CONTINUING> 147
<DISCONTINUED> 70
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217
<EPS-PRIMARY> 0.013
<EPS-DILUTED> 0.013
</TABLE>
Exhibit 99
CAUTIONARY STATEMENT
The Company, or persons acting on behalf of the Company, or outside reviewers
retained by the Company, or underwriters, from time to time, may make,
in writing or orally, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended. When used in conjunction
with an identified forward-looking statement, this Cautionary Statement
is for the purpose of qualifying for the "safe harbor" provisions of such
sections and is intended to be readily available written document that
contains factors which could cause results to differ materially from such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to
in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations
or prospects, financial or otherwise, of the Company. Reference
to this Cautionary Statement in the contest of a forward-looking statement
or statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from
those in such forward-looking statement or statements:
Doubt as to the Company's ability as a Going Concern. The Company had
suffered losses prior to 1996. On January 4, 1995, MAINTECH Resources, Inc.
was merged with a wholly-owned subsidiary of the Company. MAINTECH Resources,
Inc. incurred a substantial loss in 1994, and, on a post-merger basis,
the Company had negative working capital and its liabilities exceeded its
assets. As of December 31, 1996, the Company had negative working capital
but assets exceeded liabilities by a moderate amount and the Company was
delinquent in making principal payments on its convertible
subordinated debentures. These aforementioned conditions raise doubt
about the Company's ability to continue as a going concern.
Management believes that the Company will continue as a going concern and
that the Company is currently operating on a profitable basis.
The working capital deficit declined from approximately $2 million as of
December 31, 1994, to approximately $1 million as of December 31, 1995,
to $400,000 as of December 31, 1996 and as of March 31, 1997 the Company
had positive working capital of approximately $436,000. Although management
believes sales of the VCC product will continue to increase and will
provide additional operating capital to satisfy the Company's ongoing
requirements, there can be no assurance that either sufficient sales
increases will occur or that, if sales are insufficient, the Company will
be able to raise additional capital. If the Company is not successful in
one or both of these areas, the affect on the business would be
material and adverse.
The Company's 11% Subordinated Convertible Debentures (the "Debentures") are
in payment default. The Debentures matured on June 30, 1996 and have
been paid in full. An event of Default may be waived but only if all of
the debentureholders consent. The Company has not received, nor sought, a
waiver of the Payment Event of Default. As a result the Company remains in
default on the Debentures which through negotiation, conversion and pro-rata
payments have been reduced from $261,750 to $101,172 in principal.
Liquidity and Capital Resources. As of March 31, 1997, the Company had positive
working capital of approximately $436,000. The Company has recently been
and intends to continue to meet its cash requirements by structuring
the Debentures for delayed payment and operating the Company at a profit.
While there can be no assurance the Company will be successful with any of
its plans, the Company expects its working capital position to continue to
improve during 1997.
Reliance Upon Key Personnel. The Company will be relying heavily upon the
abilities of key personnel, in particular, two technicians, Jeff Jensen and
Norm Freedman, and division head Bob Donaldson, to further develop the VCC.
If any of these employees should cease to be employed by the Company or for any
reason be unable to continue in their respective capacities as employees of
the Company, the Company would be required to hire a comparable employee.
There can be no assurance that it would be able to do so quickly and at an
affordable compensation rate. While these three employees have incentive
options and are bound by a confidentiality requirement, the Company does
not have "key man" insurance for them and cannot guarantee their continued
employment.
Competitive Conditions. The Company's industry is characterized by rapidly
evolving technology and intense competition. The Company is aware of
several other competitors. These competitors have substantially greater
resources and experience in research and development and marketing than the
Company and may therefore represent significant competition for the Company.
However, unlike the Company, no competitor produces a complete enterprise
computing system, but rather components that could be combined to form
such a system. The Company's management believes that the Company's
ability to produce an integrated whole gives the Company a competitive
advantage. Nevertheless, there can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies
and products that are more effective than those developed or marketed by the
Company or that would render the Company's technology and products
obsolete or noncompetitive.
New Product with Uncertain Demand. The concept of an external monitor and
control system for compute hardware is relatively new, and the demand for
the product is not yet fully known. It is difficult to project
the overall size of the future market for such a product. The Company
estimates the market size for internal systems to be several billion
dollars per year. The Company believes the market for an external system
could be much larger based upon the fact that external control systems also
soon could be used to solve networking problems associated with linking
computers containing different processors together, a process
commonly called enterprise computing. Based on recent feedback from the
Company's current and potential customers, management believes the
demand for the VCC is large. However, to date, the Company has sold
only five customers (General Electric Capital Corporation, Burlington
Northern Santa Fe, Storage Technology Corporation, Ferntree Computer
Corporation and another unnamed company); and there is no certainty that
additional customers will purchase the Company's products.
Product Under Development. The Company currently is developing a software
product which monitors networking and communication devices used by mainframes.
Although preliminary tests indicate that this product will perform as
intended and can be integrated with the VCC, there can be no assurance
that it will do so or, even if it does, that the Company will be able
to establish a market for such a product.
Future Capital Requirements; No Assurance Future Capital Will Be Available.
The proceeds of the Company's recent equity offerings are expected
to fund the Company's operations through June 1997. The Company may
require additional funds to continue the marketing of its
product and meet its working capital requirements. In order to meet
its needs, the Company may be required to raise additional funding
through public or private financings, including equity financings. Any
additional equity financings may be dilutive to the shareholders of the
Company, and debt financing, if available, may involve restrictive
covenants. Adequate funds for the Company's operations, whether from financial
markets or from other sources, may not be available when needed
on terms attractive to the Company, or at all. Whether the Company would
be able to secure such financing and, if so, whether such financing would be
available at reasonable rates and terms is uncertain. Failure to secure
such additional financing could adversely affect the Company.
Intellectual Property Rights. The Company holds no patents. However,
applications have been completed, and the Company believes the VCC will be
protected by patents that are currently under review by the U.S.
Patent and Trademark Office. Another patent was filed by Circle Corporation,
a Japanese corporation, on December 28, 1993 and the Company licenses a
portion of the product from Circle Corporation. The license agreement
provides the Company with exclusive distribution rights outside of Japan.
Dependence on Diversification of Product Offerings. The Company currently has
a limited number of product offerings, and existing customers of the
Company's products are not required to purchase additional products but
each of them pays certain license fees to the Company. Accordingly,
a significant portion of the Company's revenues are generated from
non-recurring revenue sources, and the success of the Company is dependent,
in part, on its ability to develop sustained demand for its current
products and to develop and sell additional products. There can be no
assurance that the Company will be successful in developing and maintaining
such demand or in developing and selling additional products.
Fluctuations in Operating Results. The Company's future operating results
may vary substantially from quarter to quarter. At its current stage
of operations, the Company's quarterly revenues and results of operations
may be materially affected by the timing of the development and market
acceptance of the Company's products. Generally, operating expenses
will be higher during periods in which product development costs are
incurred and marketing efforts are commenced. Due to these and
other factors, including the general economy, stock market
conditions and announcements by the Company or its competitors, the market
price of the Company's securities may be highly volatile.
Lack of Product Liability Insurance. The Company may face a risk of
exposure to product liability claims in the event that use of its products
is alleged to have resulted in damage to its customers. The Company
does not currently carry product liability insurance. There can be
no assurance that such assurance that such insurance, even if obtained,
would adequately covers any product liability claim. A product liability or
other claim with respect to uninsured liabilities or in excess of
insured liabilities or in excess of insured liabilities could have
a material adverse effect on the business and prospects of the
Company.
