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 June 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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No______
______________________________________________
On August 7, 1997 there were 16,675,784 shares of the Registrant's no par value
common stock outstanding.
Transitional small business issuer format: No
Page 1 of 11
<PAGE>
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; 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; failure by the
Company to sustain demand in current 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 year ended June 30, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,987,232 $ 32,890
Accounts receivable, less
allowance for doubtful
accounts of $15,000 1,183,808 451,599
Other receivables 46,179 21,519
Inventory 281,938 217,943
Prepaid expenses and other 30,520 26,706
----------- -----------
Total current assets 4,529,677 750,657
Property and equipment, net 100,875 31,221
Leased equipment, net 70,869 82,377
Patent costs, net 72,085 61,779
Deferred subordinated debt costs 211,472 -
Software development costs, net 730,605 425,519
TOTAL ASSETS $ 5,715,583 $ 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>
<CAPTION>
June 30, December 31,
1997 1996
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 222,278 $ 396,004
Current portion of notes payable - 211,613
Convertible subordinated debentures - 151,750
Accrued liabilities
Compensation and payroll taxes 91,659 79,655
Interest 304 13,960
Other 19,680 38,325
Deferred revenue 100,325 259,747
----------- -----------
Total current liabilities 434,246 1,151,054
Subordinated notes payable,
less current portion 2,000,000 16,600
----------- -----------
Total liabilities 2,434,246 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; 340,112 shares
issued and outstanding; total
liquidation preference of
outstanding shares-$638,000 159,513 328,601
Common stock, no par value;
49,112,020 shares authorized;
16,613,884 shares issued and
outstanding - -
Additional paid-in-capital 5,051,767 2,243,438
Notes receivable-officers (294,500) (324,500)
Accumulated deficit (1,635,443) (2,063,640)
----------- -----------
Total stockholders' equity 3,281,337 183,899
----------- -----------
$ 5,715,583 $ 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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 868,836 $ 557,654 $ 1,575,387 $ 1,050,001
Cost of sales 216,513 181,597 397,093 381,030
----------- ----------- ----------- -----------
Gross profit 652,323 376,057 1,178,294 668,972
Operating expenses
Selling, general and
administrative 380,553 197,312 702,644 308,983
Research and development 42,681 92,472 81,007 146,109
----------- ----------- ----------- -----------
Income from operations 229,089 86,273 394,643 213,879
Other income (expense):
Interest expense (17,399) 5,274 (33,946) (18,915)
Interest income - - - -
Other - (2,089) - (2,554)
----------- ----------- ----------- -----------
Total other
expense, net (17,399) 3,185 (33,946) (21,469)
----------- ----------- ----------- ----------
Income from continuing
operations before income
taxes 211,690 89,458 360,697 192,410
Provision for income
taxes - - 2,500 -
----------- ----------- ----------- -----------
Income from
continuing operations 211,690 89,458 358,197 192,410
Recovery of discontinued
operations - - 70,000 -
----------- ----------- ----------- ----------
Gain from discon-
tinued operations - - - -
----------- ----------- ----------- ----------
Net income $ 211,690 $ 89,458 $ 428,197 $ 192,410
Net earnings (loss) per common and common
equivalent share:
Continuing operations $ 0.012 $ 0.006 $ 0.024 $ 0.014
Discontinued operations - - 0.005 -
----------- ----------- ----------- ----------
Net earnings $ 0.012 $ 0.006 $ 0.029 $ 0.014
Weighted average number
of common and common
equivalent shares
outstanding 17,057,874 14,236,033 14,639,009 13,712,591
</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>
Six Months Ended
June 30,
1997 1996
<C> <S> <S>
Cash flows from operating activities:
Net income $ 428,197 $ 192,410
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 171,580 21,621
Changes in operating assets and liabilities:
(Increase) decrease in accounts
and other receivables (756,869) 131,268
Increase in inventory (63,996) (120,408)
Increase in leased equipment (8,584) (61,048)
Increase in prepaid expenses (3,815) (18,740)
Decrease in accounts payable (166,939) (382,623)
Increase (decrease) in accrued expenses (32,097) 20,402
Increase (decrease) in deferred revenue (159,422) 380,658
Increase in other - -
----------- -----------
Cash provided(used) by operating activities (591,945) 163,540
Cash flows from investing activities:
Purchase of property and equipment (89,142) (4,325)
Increase in deferred debt costs (211,472) -
Investment in software development costs (425,086) -
Investment in patent costs (22,306) -
----------- -----------
Cash used by investing activities (748,006) (4,325)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,669,242 168,911
Decrease in short-term notes payable (358,349) (194,470)
Increase (decrease) in long-term notes payable 1,983,400 (58,000)
----------- -----------
Cash provided (used) by financing activities 4,294,293 (83,559)
----------- -----------
Net increase (decrease) in cash 2,954,342 75,656
Cash and cash equivalents at beginning of period 32,890 39,365
----------- -----------
Cash and cash equivalents at end of period $ 2,987,232 $ 115,021
</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
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.
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 June 30, 1997 include the
weighted average of 13,817,122 common shares outstanding, 340,112 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 2,560,528
shares and are computed by application of the treasury stock method.
Capitalized Computer Software Costs
In the quarter ended June 30, 1997, the Company recorded software development
costs, net of amortization, of approximately $730,605, 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.
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 onthe 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 it 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
nonrecourse 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 June 30, 1997 was $91,000 and $57,000, respectively.
The annual lease revenue in 1997 and 1998 will 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 six month
period ended June 30, 1997 was approximately $592,000. Cash generated from
net income for this six month period was approximately $428,000 and was
$172,000 from depreciation and amortization. However, cashwas used to fund
increases in current assets, primarily accounts receivable and inventory
totaling approximately $834,000 and to reduce accounts payable, accrued
expenses and deferred revenue totaling approximately $358,000. In the
same period in the prior year operating activities generated cash
of approximately $164,000 which was largely due to net income of $192,410.
Sales from continuing operations for the second quarter ended June 30, 1997
were approximately $869,000 compared to sales of continuing operations for the
second quarter of 1996 of approximately $558,000. And sales for the six months
ended June 30, 1997 were approximately $1.6 million compared to $1.1 million
in the same six month period of 1996. The increase in sales of $311,000 for
the second quarter of 1997 is primarily due to an increase in product
sales of approximately $211,000 and an increase in ongoing licensing fees
of approximately $80,000. The increase in sales of $500,000 for the six month
period ended June 30, 1997 is primarily due to an approximate $240,000
increase in product sales, an approximate $210,000 increase in ongoing
licensing fees and an increase in consulting fees. The gross profit
margin percentage in the second quarter of 1997 was approximately
75% compared to approximately 67% in the same quarter in the prior year
and approximately 75% for the six month period ended June 30, 1997 compared
to approximately 64% in the same perion in the prior year. The increase in
gross profit margin is due primarily to increases in ongoing licensing and
consulting fees.
Selling, general and administrative expenses in the second quarter of 1997
were approximately $381,000 compared to $197,000. For the six month period
ended June 30, 1997 these expenses were approximately $703,000 compared to
$309,000 in the same period in the prior year. These increases of
$184,000 and $394,000 are both primarily due to increases in salaries and to
an increase in professional and technical expenses. 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 increase
in professional and technical expenses in 1997 is partially due to the
settlement in the prior year of old claims from continuing operations at
less than the accrued amount and is also due to increases in audit and
financial public relations expenses which the Company attributes to higher
levels of corporate governance activities.
Research and development costs in the second quarter of 1997 were
approximately $43,000 compared to $92,000 in the second quarter of 1996, one
year ago. For the six month period ended June 30, 1997 research and
development costs were approximately $81,000 compared to $146,000 in the
period in the prior year. These decreases are largely 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.
Non-operating expenses in both periods under comparison primarily consisted
of interest expense. Interest expense increased in the three and six month
periods ending June 30, 1997 compared to the same periods in the prior year
in spite of decreases in the level of debt in 1997 compared to 1996.
This is due to the settlement in 1996 of accrued interest expense at less
than the accrued amount. Prior to the issuance on June 19, 1997 of
subordinated debt in the amount of $2,000,000, the debt of the Company
declined approximately $200,000 since June 1996.
Cash used by investing activities of approximately $748,000 reflects
investments of $425,000 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 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 $89,000 of additions to machinery and
equipment during the first six months of 1997. During the six months ended
June 30,1996, the Company invested only $4,000 in equipment.
Net cash provided by financing activities in the six month period ended
June 30, 1997 was approximately $4,294,000. This is due to the receipt of net
proceeds from the issuance of common stock of approximately $2,670,000 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 $1,104,000 and $1,566,000, 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 $358,000 use of cash to reduce notes payable. In the six month
period ending June 30, 1996, the Company raised $169,000 from the issuance
of common stock which was offset by reductions of notes payable of $252,000
resulting in a net use of cash by financing activities of $83,000.
Liquidity and Capital Resources
As of June 30, 1997, the Company had positive working capital of approximately
$4,095,000 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 $2,670,000 received from the
issuance of common stock in connection with two private placement offerings
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 approximately 70%
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 2. CHANGES IN SECURITIES
On June 19, 1997, the Company issued a promissory note in the amount of
$1,000,000 to each of two accredited investors in exchange for a secured
subordinated loan in the total amount of $2,000,000. On the same day, the
Company also issued a warrant to purchase 500,000 shares of the Company's
Common Stock at a purchase price of $1.80 per share, as adjusted for the
Company's one-for-five reverse stock split, to one of these accredited
investors as a condition to such investor's loan. Maven Securities, Inc.
("Maven") acted as placement agent for such loans and was paid $140,000 as
compensation for such services. The promissory notes and the warrant were
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. The proceeds from such loans were used by the Company to
repay approximately $250,000 of short-term debt and the remainder of such
proceeds will be used to fund research and development expenses and the
Company's future working capital needs.
In addition, in June 1997 the Company issued 1,085,000 shares of common
stock to accredited investors at a purchase price of $1.40 per share which
shares were also exempt from registration under Rule 506 of Regulation D of
the Securities Act of 1933, as amended. Maven acted as placement agent for
this sale on cash terms of 10% commission and a 3% fee for expenses. As
additional compensation, the Company issued Maven warrants to purchase 44,660
shares of common stock at an exercise price of $1.40 per share and 30,000
shares of common stock at an exercise price of $1.80 per share. The aggregate
offering price for such shares was $1,519,000 and the aggregate placement
agent commissions and expenses were $98,252.
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.
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
August 14, 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.
August 14, 1997 By: /s/ David McCaffrey
---------------------
David McCaffrey
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 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> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2987
<SECURITIES> 0
<RECEIVABLES> 1230
<ALLOWANCES> 0
<INVENTORY> 282
<CURRENT-ASSETS> 4530
<PP&E> 101
<DEPRECIATION> 0
<TOTAL-ASSETS> 5716
<CURRENT-LIABILITIES> 434
<BONDS> 2000
0
160
<COMMON> 4757
<OTHER-SE> (1635)
<TOTAL-LIABILITY-AND-EQUITY> 5716
<SALES> 869
<TOTAL-REVENUES> 869
<CGS> 217
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 212
<INCOME-TAX> 0
<INCOME-CONTINUING> 212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-PRIMARY> 0.012
<EPS-DILUTED> 0.012
</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 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 $4,095,000 as of June 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'sability 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 to 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 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 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
any debt financing, if available, may involvevolve 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. Altough the Company is not aware of any pending or threatened product
liability or other legal claim against it, a product liability or other
claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business and
prospects of the Company.
