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 September 30, 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 issuer was required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No______
______________________________________________
On November 7, 1997 there were 16,910,221 shares of the issuer'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 Quarterly Report on Form 10-QSB 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; inability of the Company to compete in the industry
in which itoperates; failure of the Company to respond to evolving
industry standards and technological changes; lack of market acceptance of
the Company's products; failure of the Company to secure adequate
protection for the Company's intellectual property rights; failure by the
Company to sustain demand incurrent products or to expand its product
lines to meet demand or to meet the costs associated with product
expansion; 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
"Cautionary Statement," to this Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,597,472 $ 32,890
Accounts receivable, less
allowance for doubtful
accounts of $15,000 1,566,738 451,599
Other receivables 85,622 21,519
Inventory 372,661 217,943
Prepaid expenses and other 81,744 26,706
----------- -----------
Total current assets 4,704,237 750,657
Property and equipment, net 152,089 31,221
Leased equipment, net 58,678 82,377
Patent costs, net 70,525 61,779
Deferred subordinated debt costs 200,898 -
Software development costs, net 832,009 425,519
----------- -----------
TOTAL ASSETS $ 6,018,436 $ 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
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 258,664 $ 396,004
Current portion of notes payable - 211,613
Convertible subordinated debentures - 151,750
Accrued liabilities
Compensation and payroll taxes 92,153 79,655
Interest 70,000 13,960
Other 18,813 38,325
Deferred revenue 44,852 259,747
----------- -----------
Total current liabilities 484,482 1,151,054
Subordinated notes payable,
less current portion 2,000,000 16,600
----------- -----------
Total liabilities 2,484,482 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;
258,780 shares issued and outstanding;
total liquidation preference of
outstanding shares-$485,000 121,368 328,601
Common stock, no par value; 49,112,020
shares authorized; 16,810,221 shares
issued and outstanding - -
Additional paid-in-capital 5,125,184 2,243,438
Notes receivable-officers (294,500) (324,500)
Accumulated deficit (1,418,098) (2,063,640)
----------- -----------
Total stockholders' equity 3,533,954 183,899
----------- -----------
$ 6,018,436 $ 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>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Net sales $ 1,181,043 $ 421,486 $ 2,756,430 $ 1,471,487
Cost of sales 304,020 43,932 701,113 424,961
----------- ----------- ----------- -----------
Gross Profit 877,023 377,554 2,055,317 1,046,526
Operating expenses
Selling, general and
administrative 497,271 197,071 1,199,917 506,054
Research and
development 78,988 39,993 159,995 186,102
----------- ------------ ----------- -----------
Income from operations 300,764 140,491 695,405 354,370
Other income (expense):
Interest expense (72,845) (20,829) (106,791) (39,744)
Other (10,574) - (10,574) (2,554)
----------- ----------- ----------- ------------
Total other expense, net (83,418) (20,829) (117,365) (42,298)
----------- ----------- ----------- -----------
Income from continuing
operations before
income taxes 217,345 119,662 578,040 312,072
Provision for income taxes - 18,500 2,500 18,500
----------- ----------- ----------- -----------
Income from continuing
operations 217,345 101,162 575,540 293,572
Recovery of discontinued
operations - - 70,000 -
----------- ----------- ----------- -----------
Gain from discontinued
operations - - 70,000 -
----------- ----------- ----------- -----------
Net income $ 217,345 $ 101,162 $ 645,540 $ 293,572
Net earnings (loss) per
common and common
equivalent share:
Continuing operations $ 0.012 $ 0.007 $ 0.033 $ 0.021
Discontinued operations - - 0.004 -
------- ------- ------- -------
Net earnings $ 0.012 $ 0.007 $ 0.038 $ 0.021
Weighted average number
of common and common
equivalent shares
outstanding 18,845,064 14,689,871 17,189,261 14,254,034
</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>
<S> <C> <C>
Nine Months Ended
September 30,
1997 1996
Cash flows from operating
activities:
Net income $ 645,540 $ 293,572
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation and amortization 283,849 22,911
Changes in operating assets
and liabilities:
(Increase) decrease in accounts
and other receivables (1,179,242) 278,610
Increase in inventory (154,718) (181,298)
Increase in leased equipment (6,437) (107,140)
Increase in prepaid expenses (55,039) (24,786)
Decrease in accounts payable (125,541) (298,979)
Increase (decrease) in accrued
expenses 37,226 48,462
Increase (decrease) in deferred
revenue (214,895) 167,398
Increase in other - -
----------- -----------
Cash provided(used)
by operating activities (769,256) 198,750
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (166,006) (20,130)
Increase in deferred debt costs (211,472) -
Investment in software development
costs (586,489) (314,929)
Investment in patent costs (26,746) -
----------- -----------
Cash used by investing
activities (990,713) (335,059)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock 2,704,513 284,511
Decrease in short-term notes payable (363,363) (85,095)
Increase (decrease) in long-term notes
payable 1,983,400 (58,000)
----------- -----------
Cash provided (used) by financing
activities 4,324,551 141,416
----------- -----------
Net increase (decrease) in cash 2,564,582 5,107
Cash and cash equivalents at
beginning of period 32,890 39,364
----------- -----------
Cash and cash equivalents at end of
period $ 2,597,472 $ 44,471
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
page 5 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
The Company, through its wholly owned subsidiary Global MAINTECH, Inc.,
designs, develops and markets a computer system, consisting of hardware and
software, which monitors mainframe and mid-range computer operations and
consolidates control of large corporate data centers. This system is called
the Virtual Command Center ("VCC") and is designed to perform three primary
functions: (a) consolidate consoles (computer terminals with access to the
internal operation of a computer) into one monitor, a "virtual console" or
single point of control; (b) monitor and control the computers connected to
the virtual console; and (c) 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.
The VCC competes with internal monitoring software, which monitors certain
pieces of hardware and software in the computer in which it is installed,
sold by other companies. Sales of such software were estimated to be $3
billion in November 1996. It is believed this market will grow to almost $9
billion by 2000, which would represent a compound annual growth rate of
approximately, 30%.
The Company believes the VCC also is well suited for use in enterprise
computing applications. Enterprise computing is the term associated with the
hardware and software which enables computers that contain different
processors to be linked together. The Company has adapted the VCC and coupled it
with its own proprietary software to form an enterprise computing
management system. The VCC can be used to monitor and control
desktops, mid-range servers and mainframes. Sales of all such
UNIX-based systems in 1995 were $19 billion.
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.
Reclassifications
Certain reclassifications have been made to the fiscal 1996 data to conform
with the fiscal 1997 presentation.
Reverse Stock Split
The Company effected a one-for-five 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.
page 6 of 11
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 any appreciation of the value of
the common stock. Accordingly, the weighted average common and common
equivalent shares outstanding for the quarter ended September 30, 1997
include the weighted average of 15,927,008 common shares outstanding, 258,780
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 2,659,275 shares and are computed by application of the treasury stock
method.
Capitalized Computer Software Costs
In the quarter ended September 30, 1997, the Company recorded software
development costs, net of amortization, of approximately $832,009, which
represent costs incurred aftertechnological feasibility has been
established in connection with the development of enhancements to one or more
particular software programs. The establishment of technological feasibility
and the ongoing assessment of the recoverability 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 straight-line method.
Operating Leases
The Company began leasing its Virtual Command Center product (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 VCC if the lessee chooses to purchase the
product 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 $47,000 for a
total of $70,869.
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 September 30, 1997 was $91,000 and $85,500,
respectively. The annual lease revenue in 1997 and 1998 is expected to be
$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 nine month
period ended September 30, 1997 was approximately $769,000. Cash provided
from net income,before depreciation and amortization, for this nine month
period was approximately $930,000. However, cash was used to fund increases
in current assets, primarily accounts receivable and inventory totaling
approximately $1,334,000 and to reduce accounts payable and deferred revenue
totaling approximately $340,000. In the same period in the prior year
operating activities generated cash of approximately $199,000, which was
largely due to net income of $293,572.
Sales for the third quarter ended September 30, 1997 were approximately
$1,181,000 compared to sales of continuing operations for the third quarter
of 1996 of approximately $421,000. Sales for the nine months ended
September 30, 1997 were approximately $2.8 million compared to $1.5 million
in the same nine month period of 1996. The increase in sales of $760,000
for the third quarter of 1997 is primarily due to an increase in product
sales of approximately $920,000 offset by a decrease in licensing fees of
approximately $160,000. In the quarter ended September 30, 1996, the
Company recorded a one-time licensing fee sale of $225,000. Otherwise,
ongoing licensing fees sales, exclusive of the one-time sale,
increased $60,000. The increase in sales of $1.3 million for the
nine month period ended September 30, 1997 is primarily due to an
approximate $1.0 million increase in product sales, an approximate $50,000
increase in ongoing licensing fees and an increase in consulting fees of
approximately $100,000. The gross profit margin percentage in the third
quarter of 1997 was approximately 74% compared to approximately 90% in the
same quarter in the prior year and was approximately 75% for the nine month
period ended September 30, 1997 compared to approximately 71% in the same
period in the prior year. The decrease in gross profit margin in
the quarter ended September 30, 1997 compared to the same quarter in
the prior year is due to the one-time license fee sale in the quarter
ended September 30, 1996. The increase in gross profit margin for
the nine months ended September 30, 1997 compared to the same period in the
prior year is primarily due to a decrease in the cost of sales. The
Company attributes this decrease in costs of sales to temporary decreases
in equipment costs which fluctuate from time to time.
Selling, general and administrative expenses in the third quarter of 1997
were approximately $500,000 compared to $200,000 for the third quarter
of 1996. For the nine month period ended September 30, 1997 these
expenses were approximately $1,200,000 compared to $500,000 in the same
period in the prior year. The increase of $300,000 for the third quarter
ended September 30, 1997 is due primarily to increases in
salaries, professional and technical, travel and expenses, marketing,
insurance and depreciation expenses. Salaries increased due to
increases in the number of employees the majority of which is due to new
hires in sales and sales support. Professional and technical expenses
increased in the areas of legal and investor relations. These increases
in corporate governance expenses are largely related to expenses incurred
from the registration of certain common stock securities previously issued
in a series of private issues of such securities. The increases in travel
expenses are due to increases in sales activities; marketing expense
increases are due to increased product marketing efforts; insurance
expense increases are related to increased sales and inventory levels; and,
depreciation expense increases are due to purchases of machinery and
equipment for software development. The $700,000 increase for the nine
month period ended September 30, 1997 compared to the nine month
period ended September 30, 1996 is primarily due to increases in salaries,
professional and technical, travel and expenses, marketing, insurance and
depreciation expenses. These increases are primarily attributable to the
same factors that caused the increases in these same expense categories
in the third quarter comparison above, with one exception: Legal expenses
increased in the nine month period primarily due to the settlement in the
prior year's nine month period ended September 30, 1996 of old claims from
continuing operations at less than the accrued amount.
Research and development costs in the third quarter of 1997 were
approximately $79,000 compared to $40,000 in the third quarter of 1996, one
year ago. For the nine month period ended September 30, 1997
research and development costs were approximately $160,000 compared to
$186,000 in the same period in the prior year. The increase in the
comparative three month periods is due to increases in consulting
expenses related to the development of certain improvements to the hardware
used in the VCC. The decrease in the comparative nine month period is
primarily due to changes in salary expenses. The Company reduced its
administrative engineering activities and increased its focus on
enhancements to existing products, the costs of which are recorded
in costs of goods sold.
page 8 of 11
<PAGE>
Non-operating expenses in both periods under comparison primarily consisted
of interest expense. Interest expense increased in the three and nine month
periods ending September 30, 1997 compared to the same periods in
the prior year. This is due to the issuance in June 1997 of $2,000,000 of
subordinated debt. The increase in other non-operating expenses is entirely
due to the amortization of deferred subordinated debt costs, which costs are
being amortized over the term of the related subordinated debt.
Cash used by investing activities of approximately $991,000 reflects
investments of $586,000 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. The Company also incurred costs of
approximately $211,000 in connection with the issuance of five year
subordinated notes payable in the amount of $2,000,000 in June 1997 which costs
will be amortized on a straight-line basis over the term of the related debt.
The Company also purchased approximately $166,000 of additions to machinery
and equipment during the first nine months of 1997. During the nine
months ended September 30,1996, the Company invested approximately
$315,000 in software development and $20,000 in machinery and
equipment.
Net cash provided by financing activities in the nine month period ended
September 30, 1997 was approximately $4,325,000. This is due to the receipt
of net proceeds from the issuance of common stock of approximately
$2,705,000 in two private issues, one ending in February 1997
with common stock issued at a per share price of $0.75 and one ending in
June 1997 at a per share price of $1.40 raising approximately $1,104,00
and $1,601,000, respectively. In addition, on June 19, 1997 the Company
received $2,000,000 in return for the issuance of five year subordinated
notes payable. Offsetting this increase was a $363,000 use of cash
to reduce notes payable. In the nine month period ending September 30, 1996,
the Company raised approximately $284,000 from the issuance of common
stock which was offset by reductions of short and long-term notes payable of
$143,000 resulting in a net use of cash by financing activities of $141,000.
Liquidity and Capital Resources
As of September 30, 1997, the Company had positive working capital of
approximately $4,220,000 compared to negative working capital as of
December 31, 1996 of approximately $400,000. The positive working
capital was substantially enhanced by the net proceeds of
approximately $2,705,000 received from the issuance of common
stock in connection with two private placements of such securities
and the issuance of five year subordinated notes payable in the amount of
$2,000,000. The Company used these proceeds to pay all other outstanding
debt, a portion of which had been delinquent as to principal payments.
Due to continued profitability and the equity and long-term debt financings,
the Company's liquidity and capital resources currently appear adequate to
meet the expected needs of the Company's operations. Although the Company
is not currently dependent on its earnings to provide liquidity, it has
recently demonstrated an ability to realize gross margins of better than 70%
in all periods under review and to produce a profit. Accordingly,
management believes the liquidity and capital resources of the Company
are sufficient to meet its operational needs and to allow
the Company to realize the value of its assets.
page 9 of 11
<PAGE>
PART II. OTHER INFORMATION
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
November 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.
November 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 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
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-1-1997 JAN-1-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<EXCHANGE-RATE> 999,999.99999 999,999.99999
<CASH> 2,597 2,597
<SECURITIES> 0 0
<RECEIVABLES> 1,652 1,652
<ALLOWANCES> 0 0
<INVENTORY> 373 373
<CURRENT-ASSETS> 4,704 4,704
<PP&E> 152 152
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 6,018 6,018
<CURRENT-LIABILITIES> 484 484
<BONDS> 0 0
0 0
121 121
<COMMON> 4,831 4,831
<OTHER-SE> (1,418) (1,418)
<TOTAL-LIABILITY-AND-EQUITY> 6,018 6,018
<SALES> 1,181 2,756
<TOTAL-REVENUES> 1,181 2,756
<CGS> 304 701
<TOTAL-COSTS> 576 1,360
<OTHER-EXPENSES> 11 11
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73 106
<INCOME-PRETAX> 217 578
<INCOME-TAX> 0 3
<INCOME-CONTINUING> 217 575
<DISCONTINUED> 0 70
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 217 645
<EPS-PRIMARY> 0.012 0.038
<EPS-DILUTED> 0.012 0.038
</TABLE>
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 a 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 context 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.
The prior existence of such conditions has raised 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 has 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.
The Company had positive working capital of approximately $4,220,000 as of
September 30, 1997. As a result management believes the issues affecting the
Company as a Going Concern are no longer prevalent in the short-term.
However, as a start-up company, there can be no assurance of the long term
viability in the marketplace of the Company's products.
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 cannot
guarantee their continued employment and only has "key man" insurance for
Bob Donaldson.
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 no
competitor of the Company produces as complete enterprise computing system
as does the Company, but rather the Company's competitors produce components
that could be combined to form such a system. Management believes that the
Company's ability to produce an integrated whole gives the Company a
competitive advantage in this respect. 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 computer 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 significant. However, to date,
the Company has sold VCC units to only nine customers, including General
Electric Capital Corporation, Burlington Northern Santa Fe, Storage
Technology Corporation, Ferntree Computer Corporation, System Management
Specialists, Inc., Deluxe Corporation, and SAP America; and there can be no
assurance 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
and mid-range computers. 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 and debt offerings are expected
to fund the Company's operations through at least December 31, 1998.
Thereafter, 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.
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 regards its products as proprietary
and relies primarily on a combination of statutory and common law patent,
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to
protect its proprietary rights.
Although the Company currently holds no patents, the Company believes the
VCC will be protected by two patents that are currently under review by the
U.S. Patent and Trademark Office and by a patent that was filed by
Circle Corporation, a Japanese corporation, on December 28, 1993 (the "Circle
Corp. Patent"). The Circle Corp Patent relates to certain hardware developed
by Circle Corporation that has been licensed to the Company and incorporated
by the Company into the VCC. This license provides the Company with exclusive
distribution rights to such hardware worldwide, except Japan. The initial term
of this license expires in November 2004.
Despite the foregoing precautions, it may be possible for a third party to
copy or otherwise obtain or use the Company's products or technology without
authorization, or to develop similar products or technology independently. If
unauthorized use or copying of the Company's products were to occur to any
substantial degree, the Company's business and operating results could be
materially adversely affected. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar products.
The Company requires its consultants and developers to assign their rights
in materials provided to, or made for, the Company and to represent that the
inclusion or use of such representations, the Company's relationships with
such consultants and developers and initial marketing of the VCC, the
company has no reason to believe that its products infringe on the
proprietary rights of third parties. The Company has not commissioned an
independent investigation to reaffirm the basis for such belief, however,
and there can be no assurance that third parties will not claim that the
Company's current or future products infringe on the proprietary rights of
others. The Company believes that developers of control systems may
increasingly be subject to such claims as the number of products and
competitors in the industry grows and the functionality of such products in
the industry overlaps. Any such claim, with or without merit, could result in
costly litigation and could have a material adverse effect on the Company.
Dependence on Limited Product Offerings and Customer Base. The Company
currently has a limited number of product offerings, and existing customers of
the Company's products are not required to purchase additional
hardware products or to renew software license and maintenance agreements
when such agreements expire. 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 product developments and public 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 be liable for 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 insurance
will be available on commercially reasonable terms, or at all, or that
such insurance, even if obtained, would adequately cover any product
liability claim. Although the Company is not aware of any pending or
threatened product liabilty or other legal claim against it, a product
liability or other claim with respect to uninsured liabilities or in excess
of insured liabilities could havea material adverse effect on the
business and prospects of the Company.
