<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
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
(612) 944-0400
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
[x]
The Company's revenues for the Fiscal Year Ended December 31, 1996 totaled
$2,129,503
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1997 was approximately $19,442,387 based upon the
closing bid price on the OTC Bulletin Board on that date. The number of shares
of the Company's no par value common stock outstanding as of March 5, 1997 was
13,577,068
Transitional Small Business Disclosure Format (Check One):
Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
for the year ended December 31, 1996 are incorporated by reference in part III
Copies of the Company's Forms 10-KSB, as filed with the Securities and Exchange
Commission, may be obtained free of charge from James Geiser at the Company,
6468 City West Parkway, Eden Prairie, Minnesota 55344, phone 612-944-0400
<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 "Cautionary Statement," to this Annual Report on
Form 10-KSB for the year ended December 31, 1996.
PART I
------
Item 1. Description of Business.
General
The Company was incorporated under the laws of the State of Minnesota in 1985.
As of March 1, 1997/December 31, 1996, the Company had no paid employees for a
period of over one year and its principal subsidiary, Global MAINTECH, Inc., a
Minnesota corporation ("MAINTECH"), had sixteen paid employees as of March 1,
1997.
At the Company's annual shareholders meeting in 1995, the shareholders
approved, among other things, the change of its name to Global MAINTECH
Corporation from Mirror Technologies, Incorporated.
Effective January 1, 1995, the Company merged with MAINTECH (the "Merger"),
pursuant to the terms of an Agreement and Plan of Merger, dated December 6,
1994, as amended (the "Agreement"), among the Company, Mirror Consolidation
Company, a Minnesota corporation and wholly owned subsidiary of Mirror ("Mirror
Subsidiary"), and MAINTECH. Under the terms of the Agreement, each share of
MAINTECH's common stock was converted into 71.75 shares of the Company's common
stock. As a result, the Company issued 5,740,000 shares of common stock in
exchange for all of the outstanding capital stock of MAINTECH. MAINTECH had four
operating units all related to the IBM mainframe computer business which
included engineering, brokerage, parts and services to users of IBM mainframe
computers ("Brokerage") and a start up unit engaged in the development of
software and the sale of a hardware product which when sold in combination is
designed to consolidate control and automate the operation of large corporate
data centers ("VCC").
Effective December 31, 1995, the Company sold its Brokerage business.
Global MAINTECH, Inc., a wholly owned subsidiary of the Company, is the
operating entity resulting from the Merger. 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 ("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.
The VCC competes with internal monitoring systems (which monitor certain
pieces of hardware internally) sold by other companies in the form of software,
only. Sales of internal monitoring systems within the U.S. were estimated at
$700 million for 1994. It is believed the market recently has been expanding at
a rapid rate, growing over 30% in recent years. The Company believes the VCC is
well suited for use in enterprise computing applications. Enterprise computing
is the term associated with the hardware and software that enables computers
that contain different processors to be linked together. The Company has adapted
the VCC and coupled it with proprietary software to form an enterprise computing
management system. The VCC can be used to monitor and control desktop, mid-range
servers and mainframes. The market size for computer networking systems, which
is one segment of the enterprise computing system market, is estimated to be $15
billion per year within the U.S.
The Company is now engaged solely in the business of manufacturing and selling
VCC systems that monitor and control large computer data centers. This business
generated all of the Company's revenue in 1996 and over 90% of the revenue in
1995. Certain of the revenues represent maintenance service revenue and
consulting revenue from its customer base. In 1995 the Company had one customer
and three customers in 1996. While this
2
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concentration on a few customers is significant, the Company believes the credit
risk is minimal due to the credit worthiness of each customer.
Item 2. Description of Property.
The Company conducts its business in a 3,100 square foot office at 6468 City
West Parkway, Eden Prairie, MN 55344. The lease for this facility provides for
monthly payments through July 31, 1998 without extension or renewal. In August
1996 the Company entered into an office lease with 1,545 square feet at 17310
Redhill Avenue, Suite 115, Irvine, CA 92714. This lease provides for monthly
payments through July 30, 1998 and is used as a sales and technical development
office. The Company is responsible for utilities, insurance, and other operating
expenses at both locations.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's shareholders during
the quarter ended December 31, 1996.
3
<PAGE>
PART II
-------
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock trades on the OTC Bulletin Board under the symbol
"GLBM". Prior to November 12, 1996, the Company's common stock traded under the
symbol "GBMT". The Company effected a 1-for-5 reverse split on November 12,
1996.
The following are the high and low bid quotations for the Company's common
stock as reported on the OTC Bulletin Board during each quarter of the fiscal
years ended December 31, 1996 and 1995. These quotations represent prices quoted
between dealers as if the 1-for-5 reverse stock split had occurred on
January 1, 1995, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock
Quarter Low High
-----------------------------
<S> <C> <C>
First $0.30 $0.75
Second 0.40 1.60
Third 0.65 1.30
Fourth 0.90 1.81
Year Ended December 31, 1995
Common Stock
Quarter Low High
-----------------------------
<S> <C> <C>
First $0.30 $0.65
Second 0.25 0.55
Third 0.15 0.40
Fourth 0.20 0.45
</TABLE>
As of March 5, 1997, the Company had approximately 494 shareholders of record.
The Company has not paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future.
Changes in Securities.
The Company issued a Private Placement Memorandum dated November 25, 1996, as
amended by Supplement No. 1 thereto dated February 10, 1997, (the "Memorandum")
offering for purchase up to 2,415,000 shares of the Company's common stock at
$0.75 per share as adjusted for the reverse stock split discussed below. As of
December 31, 1996, 653,500 shares were issued pursuant to this Memorandum.
During January and February 1997, the Company issued an additional 1,632,801
shares in connection with such offering. The Memorandum names Maven Securities,
Inc. as the exclusive placement agent. The Company agreed to pay the placement
agent a 10% commission, a 3% fee for expenses and to issue to such agent 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
shares of common stock issued pursuant to the Memorandum are exempt from
registration under Rule 506 of Regulation D of the Securities Act of 1933, as
amended.
The Company effected a 1-for-5 reverse stock split of the Company's common or
preferred stock, as appropriate, 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. The reverse stock split did not
adversely affect the rights or preferences of the holders of outstanding shares
of any class or series of the Company's capital stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Result
of Operations.
Results of Operations
The consolidated financial statements that accompany this discussion show the
operating results of the Company for the years ended December 31, 1996 and 1995.
These results include the operations of Global MAINTECH, Inc., a new subsidiary
which prior to 1996 had been engaged in certain aspects of the mainframe
computer business (Brokerage). In December 1995, the Brokerage business was
discontinued. The Company continues in the computer monitoring and control
systems business.
Net cash provided in operating and discontinued activities for the year ended
December 31, 1996 was approximately $56,000 compared to a use of cash of
approximately $651,000 for such activities in the year ended December 31, 1995.
During the year ended December 31, 1996 cash was provided by net income and
deferred revenue as well as by non-cash expenses of depreciation and
amortization. This increase of net cash was substantially offset by a reduction
of accounts payable of approximately $412,000, a $112,000 increase in accounts
receivable, and a $107,000 increase in leased equipment.
Sales from continuing operations for the year ended December 31, 1996 were
approximately $2,130,000 compared to sales of continuing operations of
$1,174,000 in the year ended December 31, 1995. Sales for the current year ended
December 31, 1996 reflect business activity generated by the new business unit,
known as the Virtual Command Center or VCC unit. VCC unit sales were
approximately $1.8 million in 1996 compared to approximately $1.0 million in
1995. Maintenance fees of approximately $206,000 on previously sold systems were
generated for the first time in 1996. Remaining revenue of approximately
$103,000 in 1996 is primarily the result of miscellaneous computer parts sales
to existing customers. In 1995, revenue of approximately $174,000 incremental to
VCC unit sales was derived from remote facility support which activity has been
replaced with VCC
4
<PAGE>
support and maintenance fees. The gross margin on sales was approximately 71% in
1996 compared to 70% in 1995. The components of gross margin in the two years
are similar and the Company considers the gross margin comparison to be
essentially unchanged.
Selling, general and administrative costs for the year ended December 31, 1996
were approximately $962,000 compared to approximately $764,000 for the same
period in the prior year. This $198,000 increase is primarily due to increases
in salary expense which reflects an increase in paid employees which grew during
the year from six to sixteen. This increase began in April 1996 and was
substantially completed by October 1996. Other "S,G&A" costs showed a reasonable
variance from the prior year but the variances substantially offset each other.
Advertising, travel and expense and equipment lease expenses all were higher in
the year ended 1996 versus 1995. This reflects the increased activities in the
business: advertising and travel are directly related to increased selling
activities; and the increased equipment lease expense is related to a lease of
two IBM development computers with a mainframe operating system. Professional
and technical expenses, depreciation expense, insurance expense and building
rent all declined in 1996 compared to 1995. Professional and technical expenses
decreased due to the settlement or elimination of any litigation from prior
business activities and the reduced professional activities associated with the
discontinuance of certain businesses. Depreciation expense declined due to the
use of a rapid depreciation rate and the age of the equipment. The Company uses
a double declining depreciation rate and most of the depreciable equipment
reached the end of an average three year life in 1996. Insurance expense
declined because the Company received an unexpected insurance refund and a
commensurate reduction in 1996 rates during 1996. The reduced building expense
is due to the smaller rentable space in 1996 (the Company moved in December
1995) compared to 1995. This was partially offset by an additional small office
which the Company opened in August 1996 in Irvine, CA. Research and development
expenses in 1996 and 1995 relate to the on-going maintenance of existing
software and comprise salaries and consulting fees for technical expertise. In
1996 this cost was approximately $37,000 higher than in the year ended 1995.
Non-operating expenses in the year ended December 31, 1996 consisted primarily
of interest expense. Interest expense includes accrued interest on the Company's
convertible subordinated debentures, notes payable to vendors, a bank, and an
individual. Total debt outstanding declined 58% or approximately $419,000 (which
amount includes $260,000 of debt converted to common stock) from December 1995
to December 1996.
Cash used for investing activities of approximately $579,000 reflects
investments of approximately $474,000 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
$68,000 of patent costs. The Company also purchased approximately $37,000 of
machinery and equipment. In 1995 the Company generated proceeds from the sale of
a building producing net cash after payment of the mortgage on the property of
approximately $125,000. Cash received from the merger with Global MAINTECH
Corporation was approximately $637,000.
Net cash of approximately $516,000 was provided by financing activities in the
year ended December 31, 1996. This is the result of net proceeds from the
issuance of common stock of $675,000 through three separate Private Placement
Memoranda at per share prices of $0.30, $0.50 and, at the end of the year 1996,
at $0.75, offset by a reduction of notes payable of approximately $159,000.
Also, common stock in the total amount of $260,000 was issued to converting
debentures during 1996. In the year ended 1995 cash was used by financing
activities partially due to the sale of the Company's building in January 1995,
a substantial portion of which was used to repay the mortgage note payable and
to reduce other notes payable of the Company. Cash was raised through the sale
of common stock in 1995 of approximately $427,000.
Liquidity and Capital Resources
As of December 31, 1996, the Company had negative working capital of
approximately $400,000 compared to negative working capital of approximately
$1,019,000 as of December 31, 1995. The negative working capital as of December
31, 1996 is primarily due to current notes payable of approximately $212,000 and
convertible subordinated debentures of approximately $152,000 for a total of
$364,000. As of December 31, 1996, the Company was delinquent in principal
payments on $283,000 of this debt. During January and February 1997, the Company
completed the issuance of common stock pursuant to the terms of the November 25,
1996 Private Placement Memorandum and raised an additional $1.1 million net of
stock issue costs at a price per share of $0.75. (This in addition to the
approximate $450,000, net of stock issue costs, issued in 1996.) A portion of
these proceeds was used to cure the delinquency status on all debt except the
convertible subordinated debentures. On February 28, 1997 the Company also paid
principal on one-third of these debentures.
Presently, the Company believes it has sufficient working capital to pay its
current liabilities. This depends on the Company's ability to collect its
accounts receivable and 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 approximately 70% on its
5
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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 additonal inventory in anticipation of additonal sales. However, in
spite of the Company's best efforts, there can be no assurance that sales will
be sufficient to cover expenses and to contribute additional capital. In the
event sales are slow or insufficient, the Company will seek additional capital
from outside sources and there can be no assurance such additional capital can
be raised on terms favorable to the Company.
During the year ended December 31, 1996, the Company's liquidity and capital
resources were substantially improved. The Company's operating plan for the year
ending December 31, 1997 anticipates a substantial increase in sales over the
year ended December 31, 1996 with a commensurate increase in net income. As a
result this operating plan expects 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.
6
<PAGE>
Item 7. Financial Statements.
Index to Financial Data
Page
----
Independent Auditors' Report 8
Consolidated balance sheets 9
Consolidated statements of operations 11
Consolidated statements of stockholders' equity (deficit) 12
Consolidated statements of cash flows 13
Notes to consolidated financial statements 14
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of Global MAINTECH Corporation
We have audited the accompanying consolidated balance sheets of Global MAINTECH
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global MAINTECH
Corporation and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Global MAINTECH Corporation will continue as a going concern. As discussed
in note 3, the Company's 1996 working capital deficit and accumulated deficit
raise substantial doubt about the entity's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
8
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- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 32,890 $ 39,364
Accounts receivable, less allowance for
doubtful accounts of $15,000 451,599 321,052
Other receivables 21,519 40,218
Inventory 217,943 186,812
Prepaid expenses and other 26,706 21,004
---------- ----------
Total current assets 750,657 608,450
Property and equipment, net 31,221 16,300
Leased equipment, net (note 9) 82,377 -
Patent costs, net (note 1) 61,779 -
Software development costs, net (note 1) 425,519 -
TOTAL ASSETS $1,351,553 $ 624,750
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
9
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GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 396,004 $ 808,430
Current portion of notes payable (note 6) 211,613 479,038
Convertible subordinated debentures (note 5) 151,750 261,750
Accrued liabilities:
Compensation and payroll taxes 79,655 33,810
Interest (notes 5 and 6) 13,960 38,070
Other 38,325 6,430
Deferred revenue 259,747 -
----------- -----------
Total current liabilities 1,151,054 1,627,528
----------- -----------
Notes payable, less current portion (note 6) 16,600 58,000
----------- -----------
Total liabilities 1,167,654 1,685,528
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A,
convertible into one common share for each
preferred share, no par value; 887,980 shares
authorized; 700,667 in 1996 and 865,207 shares
in 1995 issued and outstanding; total liquidation
preference of outstanding shares-$1,314,000 328,601 405,770
Common stock, no par value; 49,112,020 shares
authorized; 13,260,533 in 1996 and 10,487,695
shares in 1995 issued and outstanding - -
Additional paid-in-capital 2,243,438 906,658
Notes receivable - officers (324,500) -
Accumulated deficit (2,063,640) (2,373,206)
----------- -----------
Total stockholders' equity (deficit) 183,899 (1,060,778)
----------- -----------
Commitments and contingencies (notes 4 and 9)
$ 1,351,553 $ 624,750
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
10
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GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 2,129,503 $ 1,173,744
Cost of sales 625,467 350,585
----------- -----------
Gross profit 1,504,036 823,159
Operating expenses:
Selling, general and administrative 962,398 763,807
Research and development 150,273 113,234
----------- -----------
Income (loss) from operations 391,365 (53,882)
Other income (expense):
Interest expense (60,745) (134,453)
Interest income - 7,309
Other (2,554) (7,770)
----------- -----------
Total other expense, net (63,299) (134,914)
----------- -----------
Income (loss) from continuing operations before
income taxes 328,066 (188,796)
Provision for income taxes 18,500 5,850
----------- -----------
Income (loss) from continuing operations 309,566 (194,646)
----------- -----------
Discontinued operations (note 4):
Income from operations - (174,578)
Loss on disposal - (420,630)
----------- -----------
Loss from discontinued operations - (595,208)
----------- -----------
Net income (loss) $ 309,566 $ (789,854)
=========== ===========
Net earnings (loss) per common and common
equivalent share (notes 2, 4 and 7):
Continuing operations $ 0.022 $ (0.019)
Discontinued operations 0.000 (0.059)
----------- -----------
Net earnings (loss) $ 0.021 $ (0.078)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 14,268,610 10,128,098
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
11
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred stock Common stock Additional Notes
------------------------------------- paid-in Receivable- Accumulated
Shares Amount Shares Amount capital Officers deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - 80,000 $ 800 $ 79,200 - ($1,583,352) ($1,583,352)
Net loss - - - - - - (789,854) (789,854)
Stockholder debt forgiveness (note 10) - - - - 400,000 - - 400,000
Subsidiary common stock retired
in connection with merger (note 2) - - (80,000) (800) - - - (800)
Common stock issued in connection
with merger (note 2) - - 9,070,361 - 21,471 - - 21,471
Common stock issued (note 7) - - 1,558,000 - 456,200 - - 456,200
Stock subscriptions receivable (note 7) - - (163,333) - (47,000) - - (47,000)
Stock issue costs (note 7) - - - - (13,843) - - (13,843)
Preferred stock related to merger (note 2) 887,874 416,400 - - - - - 416,400
Converted preferred shares (note 7) (22,667) (10,630) 22,667 - 10,630 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 865,207 405,770 10,487,695 - 906,658 - (2,373,206) (1,060,778)
Net income - - - - - - 309,566 297,766
Common stock issued (note 7) - - 1,609,965 - 777,545 - - 777,545
Stock issue costs (note 7) - - - - (119,434) - - (119,434)
Voluntary stock reduction (note 7) - - (1,340,000) - - - - -
Conversion of notes payable (note 7) - - 200,000 - 150,000 - - 150,000
Conversion of subordinated debentures
(note 7) - - 168,334 - 110,000 - - 110,000
Common stock options and warrants
exercised (note 7) - - 1,970,000 - 341,500 - - 341,500
Exercise officer stock options (note 7) - - - - - (324,500) - (324,500)
Converted preferred shares (note 7) (164,540) (77,169) 164,540 - 77,169 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 700,667 $328,601 13,260,533 $ - $2,243,438 ($324,500) ($2,063,640) $ 183,899
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
12
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GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 309,566 $ (789,854)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 101,215 76,253
Loss on disposal of discontinued operations - 420,630
Changes in operating assets and liabilities:
(Increase) decrease in accounts
and other receivables (111,848) (109,741)
(Increase) decrease in inventory (31,131) (33,830)
Increase in leased equipment (107,140) -
(Increase) decrease in prepaid expenses (5,702) 1,453
Decrease in accounts payable [412,426] (48,970)
Increase (decrease) in accrued expenses 53,630 (39,739)
Increase (decrease) in deferred revenue 259,747 (148,000)
Increase in other - 20,467
---------- ----------
Cash provided (used) by operating and discontinued activities 55,911 (651,331)
---------- ----------
Cash flows from investing activities:
Proceeds (payment) from sale (purchase) of
property and equipment (37,173) 764,454
Investment in patent costs (67,779) -
Investment in software development costs (473,719) -
Net cash received in merger - 637,071
---------- ----------
Cash provided (used) by investing act (578,671) 1,401,525
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 675,111 426,658
Decrease in short-term notes payable (117,425) (109,266)
Principal payments on mortgage note payable - (620,000)
Decrease in long-term notes payable (41,400) (432,531)
---------- ----------
Cash provided (used) by financing activities 516,286 (735,139)
---------- ----------
Net increase (decrease) in cash (6,474) 15,055
Cash and cash equivalents at beginning of year 39,364 24,309
---------- ----------
Cash and cash equivalents at end of year $ 32,890 $ 39,364
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for: Interest $ 62,686 $ 125,517
Taxes - 8,126
Supplemental disclosure of noncash investing and financing activities:
During 1996, $260,000 of notes payable and convertible subordinated
debentures were converted to common stock.
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: 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 different 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.
Principles of consolidation: As a result of the merger described in note 2, the
consolidated financial statements represent the historical financial information
of MAINTECH and include the accounts of Mirror since the date of the merger. All
significant intercompany accounts and transaction have been eliminated in
consolidation.
Cash and cash equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventory: Inventory is stated on a first in, first out (FIFO) basis at the
lower of cost or market (net realizable value).
Property and equipment: Property and equipment is recorded at cost. Depreciation
is provided for principally using the double declining method, based on the
estimated useful lives of the respective assets which generally have lives of
three years.
Maintenance and repairs are charged to expense as incurred. Renewals and
betterments are capitalized and depreciated over their estimated useful service
lives.
Revenue recognition: Revenue is recognized upon the latter of shipment or final
acceptance. Deferred revenue is recorded when the Company receives customer
payments before shipment or acceptance. The Company sells maintenance agreements
which require minor updates of software to be delivered to the customers free of
charge. New versions of the Company's software representing a major upgrade are
not a part of the maintenance agreements. The Company expenses the costs of
minor updates to its software as incurred.
Patents: Patents are stated at cost and are amortized over three years using the
straight-line method.
Capitalized Software Development Costs: Under the criteria set forth in SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, capitalization of software development costs begins upon the
establishment of technological feasibility of the product. The establishment of
technological feasibility and the ongoing assessment of the recoverabilty 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.
14
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 1996, upon attaining technological feasibility of certain software products
and enhancements, the Company capitalized subsequent software development costs.
Software development costs capitalized will be amortized utilizing the straight-
line method over the estimated economic life of the software not to exceed three
years. Under SFAS No. 86, amortization of capitalized software costs commences
upon the general release of the software which occurred in fourth quarter 1996.
Amortization of $48,200 of software development costs was recorded in 1996.
Research and development: Research and development costs are expensed as
incurred.
Stock Based Compensation: The Company has adopted the disclosure requirements
under Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
Accounting and Disclosure of Stock-Based Compensation. As permitted under SFAS
No. 123, the Company applies Accounting Principles Board Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees and related interpretations in
accounting for is plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans.
Reverse Stock Split: The Company effected a reverse stock split of 1 share
of the Company's Common Stock or Series A Preferred Stock for each 5 shares of
the Company's Common or Preferred Stock, as appropriate, 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. The effect of the
stock split has been retroactively reflected in the accompanying consolidated
financial statements and notes thereto.
The reverse stock split does not adversely affect the rights or preferences of
the holders of outstanding shares of any class or series of the Company's
capital stock.
Net income (loss) per share: The net income (loss) per common share and common
share equivalents is computed by dividing net income (loss) by the weighted
average number of shares and dilutive common share equivalents outstanding
during each period. Common equivalents result from dilutive stock options and
warrants computed using the treasury stock method. Common equivalent shares are
excluded for 1995 because of their anti-dilutive effect.
Income taxes: Deferred taxes are provided on a liability method for temporary
differences and operating loss and tax credit carryforwards. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Fair value of instruments: All financial instruments are carried at amounts that
approximate estimated fair values.
Use of estimates: Management of the company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
Note 2. Merger Transaction
Effective January 1, 1995, Mirror merged with MAINTECH, a Minnesota corporation
(the "Merger"), pursuant to the terms of an Agreement and Plan of Merger, dated
December 6, 1994, as amended (the "Agreement"). Under the terms of the
Agreement, each share of MAINTECH's common stock was converted into 71.75 (post-
reverse stock split) shares of Mirror's common stock. As a result, Mirror issued
5,740,000 shares of common stock in exchange for all of the outstanding capital
stock of MAINTECH.
In connection with the Merger, outstanding options of MAINTECH to purchase
68,214 shares of MAINTECH's common stock converted into the right to purchase
approximately 4,894,401 shares of Mirror's common stock at an exercise price of
$0.15 per share. Stock for the purchase of options covering 4,840,000 shares of
Mirror's common stock will vest on June 1, 1999, or earlier, subject to the
merged business (the "Company") attaining certain earnings levels. Subsequent to
December 1995, options to purchase approximately 740,000 shares were canceled
due to the departure of an officer of the Company.
15
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As a result of this Merger and prior to the dilution of subsequent issues of
common stock, the former shareholders of MAINTECH held unregistered stock
comprising approximately 58 percent of the common stock and common stock
equivalents of the Company and if the options to purchase common stock are
exercised, these shareholders will hold approximately 70 percent of the
outstanding shares of the Company. The Merger resulted in the former
shareholders of MAINTECH having majority common stock ownership and majority
board of directors representation in the surviving entity. Accordingly, for
financial statement purposes, the transaction has been accounted for as if
MAINTECH acquired Mirror. This transaction was accounted for as a reverse
acquisition but Mirror remained as the surviving legal entity. The Merger was
accounted for as a purchase of the net assets of Mirror by MAINTECH. Mirror
assets consisted principally of cash with book value approximating fair value.
During 1996, certain shareholders of MAINTECH voluntarily forfeited 1,340,000
shares of common stock pursuant to an agreement related to the November 1, 1995
Private Placement Memorandum. As a result the percentage currently held by these
particular stockholders is approximately 43 percent. Two of the officers of
MAINTECH were elected to the Board of Directors of the Company subsequent to the
consummation of the Merger.
Note 3. Going Concern
As of December 31, 1996 the Company had negative working capital of
approximately $400,000 and was substantially current with its accounts payable.
However, it was delinquent in principal payments under all but one debt
facility. In January 1997, the Company brought all accounts payable to current
status and cured its delinquent principal payment status under all but the
subordinated convertible debt outstanding.
As of December 31, 1995, the Company had negative working capital of
approximately $1,019,000. Due to cash flow constraints the Company was
delinquent under each of the contractual liabilities in notes 5 and 6 at
December 31, 1995 and was slow to pay certain of its accounts payable. And the
Company's assets were insufficient to satisfy the existing debts as they became
due.
During 1996, the Company raised additional capital through the issuance of
common stock in the approximate amount, net of expenses, of $675,000. The new
capital was raised, in part, to offset net losses from operations and pay its
remaining debt obligations from prior years. The Company believes increased
sales of its VCC product will provide additional operating capital to satisfy
some of these 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.
During 1996 and 1995, the Company borrowed from time to time against its
accounts receivable from its principal bank and may continue to do so in the
future. As of December 31, 1996, the Company had no debt outstanding from its
principal bank.
The timing of any new sales of VCC units and, in the absence of sufficient
sales, the Company's ability to raise additional capital is uncertain. 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 lenders.
Note 4. Discontinued Operations, Sale and Basis of Accounting
During the fourth quarter of 1995, the Company's Board of Directors made the
decision to discontinue that portion of the operations which brokers and sells
parts for IBM mainframe computers ("Brokerage") due to poor financial
performance. In addition, the prospects for future profitability were poor.
Effective December 31, 1995 the Company sold the Brokerage inventory and certain
selected liabilities for a total of $123,000 to Norcom Resources, Inc., a
privately held corporation whose sole shareholder is a former officer and a
major shareholder of the Company. This sale resulted in a loss on disposal of
$420,630. Due to the uncertainty of collection, the Company will treat payments
under this sale as income when received. The sales proceeds are secured by
approximately 416,000 shares of the Company's common stock held by this former
officer. In conjunction with the sale, the Company negotiated to remove this
former officer as personal guarantor from a certain note payable in the amount
of $190,000 (as of December 31, 1995) in April 1996. In March 1997 the Company
collected $70,000 as payment on a note receivable related to the sale of
Brokerage inventory. Previously, the
16
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company had treated this note receivable as uncollectible. As a result, during
the first fiscal quarter 1997, the Company will record a recovery related to
this discontinued business.
Selected financial information for the discontinued operations for the year
ended December 31, 1995, is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1995
------------
<S> <C>
Revenue $6,138,316
Cost of sales 5,590,976
------------
Gross Profit 547,340
Operating expenses 721,918
------------
Operating loss from
discontinued operations ($174,578)
============
</TABLE>
Note 5. Convertible Subordinated Debentures
The Company's 11 percent convertible subordinated debentures were due July 1,
1996, with interest due semi-annually, and prior to maturity were redeemable by
the Company or convertible at the option of the holder into 41,880 common shares
at a price per share of $6.25. During the year, debentures valued at $110,000
converted to equity pursuant to conversion terms other than the original $6.25
per share. Since maturity on July 1, 1996, the Company has paid interest monthly
on the overdue and unconverted principal. In February 1997, the Company paid
one-third of the principal outstanding pro-rata to all debentureholders along
with the monthly interest payment calculated at 11% per year. Expenses
associated with the original issuance of the unconverted debentures were fully
amortized as of July 1, 1996.
Note 6. Notes Payable
Notes payable at December 31, 1996 and 1995 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
Interest Interest
Amount rate Amount rate
-------------------- ---------------------
<S> <C> <C> <C> <C>
Notes payable to First Bank, due in
quarterly installments of $25,000
through December 31, 1996 and
$16,600 through March 31, 1997 $83,000 10.25% $174,750 10.50%
Note payable to related party, due
in monthly installments beginning
January 1, 1995 16,667 13.00% 100,000 13.00%
Note payable to vendor, due in
monthly installments of $9,447
through April 25, 1997, at which
date the remaining balance is due 108,532 16.50% 190,246 13.50%
Note payable to officer 15,000 18.00% -
Note payable to vendor due in quarterly
installments of $19,000 plus interest
until paid 5,014 6.00% 72,042 6.00%
---------- ----------
228,213 537,038
Less current portion (211,613) (479,038)
---------- ----------
$16,600 $58,000
========== ==========
</TABLE>
17
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The interest rate on the note payable to First Bank is based on the prime rate
plus 2%.
The Company was technically in default pursuant to the terms of the notes
payable of $108,532, $16,667 and $5,014. The default conditions in notes
payable were cured by the Company in January 1997. Two notes payable ($108,532
and $16,667) are guaranteed by one of the officers of the Company.
The long term portion of the notes payable is due in 1998.
Note 7. Stockholders' Equity
Common stock warrants: The Company has or, subsequent to year end, will issue
warrants in conjunction with common stock issued pursuant to the Private
Placement Memorandum dated November 25, 1996. These warrants are exercisable at
$0.75 per share and expire on February 28, 2002. During the year the Company
also issued warrants pursuant to Private Placement Memoranda dated November 1995
and August 1996 exercisable at $0.36 and $0.50 per share, respectively and
expiring on or before November 30, 2001. As of December 31, 1996, the Company
had approximately 214,000 warrants to purchase common stock outstanding which
are exercisable at per share prices between $0.36 and $0.75 and expiring on or
before the year 2002. Subsequent to December 31, 1996, the Company issued
additional warrants to purchase an approximate 1,100,000 common shares
exercisable at per share prices of $0.75 to $3.00 and expiring on or before
February 28, 2002.
Common stock options: The Company's stock option plan ("Plan"), provides for
granting to the Company's employees, directors and consultants, qualified
incentive and nonqualified options to purchase common shares of stock. The Plan
was amended during 1995 to increase the number of aggregate options which can be
issued to 10,000,000 shares of common stock. Qualified incentive options must be
granted with exercise prices equal to the fair market value of the stock at the
date of grant. Nonqualified options must be granted with exercise prices equal
to at least 85% percent of the fair market value of the stock at the date of
grant.
The Company applies APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock options. As a result no
compensation expense has been recognized for stock-based compensation plans. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation, the Company's net income and earnings per share would
have been reduced by an immaterial amount in both 1996 and 1995. The Company
made this calculation using the Black-Scholes option pricing model with the
following assumptions: volatility of 224%, risk-free interest rate of 5.75%, and
an expected life of 5 years.
This pro-forma effect does not include the compensation cost of stock options
currently issued but which do not vest until future years nor does it include
the compensation cost of stock options issued prior to 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro-forma net income amounts presented above.
Information with respect to stock options under the plan are summarized as
follows:
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Options
------------------------------- ----------------------------
Shares Weighted average Shares Weighted average
exercise price exercise price
<S> <C> <C> <C> <C>
Total outstanding at December 31, 1995 4,232,000 $0.35 83,000 $5.87
Granted 941,000 $0.59
Canceled (620,000) $0.30
Exercised (1,938,000) $0.17
------------------------------- ---------------------------
Total outstanding at December 31, 1996 2,615,000 $0.49 83,000 $5.87
=============================== ===========================
</TABLE>
Options for 1,719,000 shares of common stock were exercisable at a weighted
average exercise price of $0.17 as of December 31, 1996.
18
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Common stock issued: In 1996 the Company issued a combined total amount of
common stock of approximately 3,948,000 shares. These shares were issued as a
result of the following activities: due to three separate Private Placement
Memoranda ("PPM"); due to the conversion of debt; and due to the exercise of
qualified stock options and warrants. The stock issued pursuant to the PPMs was
partially offset by a voluntary stock reduction by certain officers of the
Company in the amount of 1,340,000 shares. In addition, 164,540 shares (and
22,667 shares in 1995) of common stock were issued to holders of preferred stock
series A on a one-for-one exchange conversion in accordance with terms of the
preferred stock.
Specifically, the Company issued 590,000 shares of common stock at $0.30 per
share pursuant to the PPM dated November 1995 in addition to 1,395,000 shares in
1995; 700,000 shares of common stock at $0.50 per share under the PPM dated
August 1996 and 653,000 shares of common stock at $0.75 per share under a PPM
dated November 1996. Included in these private placement issues is the
conversion into common stock of notes payable and certain convertible
subordinated debentures. Another 35,000 shares of common stock were issued to
subordinated debentureholders who accepted a conversion offer from the Company
at $1.00 per share. In addition, 1,938,000 shares of common stock were issued
due to the exercise of qualified stock options pursuant to notes receivable
issued by certain officers and employees of the Company and 32,000 shares of
common stock were issued to a converting warrantholder. In January 1996 two
current and one former officer of the Company voluntarily reduced their common
stockholdings in the amount of 1,340,000 shares of common stock in consideration
for the shares issued pursuant to the PPM dated November 1, 1995. Stock issue
costs were $13,843 and $119,434 in 1995 and 1996, respectively.
Prior to the merger on January 1, 1995 described in note 2, Company issued two
subordinated notes of $200,000 each for cash received individually from the
president of Company, and an executive vice-president of Company. During 1996,
the executive vice-president left the employ of the Company in connection with
the purchase of the Brokerage inventory by Norcom Resources, Inc. During the
year ended December 31, 1995 the $400,000 balance due was forgiven by these two
individuals for no additional consideration. Accordingly, the Company reflected
the debt forgiveness as an addition to paid-in-capital in the Consolidated
Statements of Stockholders' Equity (Deficit) for the year ended December 31,
1995.
In 1997 the Company issued an additional 1,632,801 shares of common stock at
$0.75 per share and realized proceeds net of stock issue costs of approximately
$1.1 million. These shares were issued pursuant to a Private Placement
Memorandum dated November 25, 1996 and terminating February 28, 1997, as
amended.
Note 8. Income Taxes
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $9.2 million. As a result of the January 1, 1995 ownership change
as described in note 2 and prior ownership changes, approximately $8.7 million
of the net operating loss carryforward will be subject to an annual limitation
as defined by Section 382 of the Internal Revenue Code. The annual limitation
for losses incurred prior to January 1, 1995 is approximately $200,000. Due to
this limitation, approximately $5.2 million of the net operating loss will
expire prior to utilization. In addition, the utilization of these losses may be
further limited by application of the separate return limitation year rules.
Subsequent and future equity transactions could further limit the net operating
losses available in any one year.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities as of December 31, 1996 and 1995 are
shown as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $5,000 $5,000
Net operating loss carryforward 1,454,000 1,440,000
-------------- ------------
subtotal 1,459,000 1,445,000
</TABLE>
19
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Less valuation allowance for deferred
tax asset (1,306,000) (1,445,000)
----------- -----------
153,000 0
Deferred tax liabilities (153,000) 0
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
The provision for income taxes consists of the following for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current
Federal $ 9,500 $41,750
State 9,000 (35,900)
------------ ------------
Total 18,500 5,850
Deferred -- --
------------ ------------
Total $18,500 $ 5,850
============ ============
</TABLE>
The income tax expense (benefit) differed from the amounts computed by applying
the U. S. federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
Expense (benefit) at statutory rate $112,000 ($268,600)
State income tax benefit,
net of federal 6,000 (23,700)
Change in valuation allowance (139,000) (2,249,000)
Effect of change in ownership on
net operating loss carryforward - 2,541,300
Other 39,500 5,850
-------------- -------------
Actual tax expense (benefit) $ 18,500 $ 5,850
=============================
</TABLE>
Note 9. Operating Leases
Company as Lessor: The Company began leasing its Virtual Command Center (VCC) to
Customers in 1996. The Company is flexible in the terms of the lease to meet the
customers' preferences. In some cases the lease may be classified as an
operating lease on the Company's financial statements. Generally, the terms
requiring operating lease classification on the Lessor's/Company's financial
statements are that the lease extends for a term less than the full economic
life of the product and the Lessor retains a residual interest at the end of the
lease term. Conversely, in these circumstances the lease contract requires 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 Lessor/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 $107,140 less
accumulated depreciation of $24,763 for a net investment of $82,377.
The above lease stream was assigned to a third party, on a non-recourse basis,
for a lump sum payment to the Company. 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 recorded in
1996 was $91,000 and the future lease revenue in 1997 and 1998 is $114,000 and
$23,000, respectively.
20
<PAGE>
GLOBAL MAINTECH CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company as Lessee: The Company has operating leases for an automobile, telephone
equipment, certain development related IBM computers and its offices. The rental
payments under these leases are charged to expense as incurred. All the leases
provide that the Company pay taxes, maintenance, insurance, and other operating
expenses applicable to the leases. Lease expense in 1996 and 1995 was
approximately $103,000 and $91,000, respectively. The future minimum lease
payments are approximately $98,000, $53,000 and $16,000 for the years 1997, 1998
and 1999, respectively.
21
<PAGE>
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information with respect to Directors of the Company under the caption
"Election of Board of Directors" contained in the Company's Proxy Statement
relating to the Annual Meeting of Shareholders for the year ending December 31,
1996 is incorporated herein by reference.
The information with respect to the Executive Officers of the Company under
the caption "Executive Officers" contained in the Company's Proxy Statement
relating to the Annual Meeting of Shareholders for the year ending December 31,
1996 is incorporated herein by reference.
The information contained under the caption "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders for the year ending
December 31, 1996 is incorporated herein by reference.
Item 10. Executive Compensation.
The information contained under the caption "Executive Compensation" in the
Company's Proxy Statement relating to the Annual Meeting of Shareholders for the
year ending December 31, 1996 is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement relating to
the Annual Meeting of Shareholders for the year ending December 31, 1996 is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information contained under the caption "Related Transactions" in the
Company's Proxy Statement relating to the Annual Meeting of Shareholders for the
year ending December 31, 1996 is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Index of Exhibits
Exhibit
Description Number
--------------------------------------------------- -------
Agreement and Plan of Merger dated December 6, 1994, 2
as amended, among the Company, Mirror Consolidation
Company, and MAINTECH Resources, Inc. (the Articles
of Merger are attached thereto as Exhibit A)
(Incorporated herein by reference to the Registrant's
Form 8-K filed with the Commission on January 19, 1995,
(File No. 0-14692).
Bylaws of the Company, as amended (incorporated 3.2
herein by reference to the Registrant's Form S-1
(File No. 33-34894).
Restated Articles of Incorporation of the Company, 3.3
as amended in May 15, 1995 annual meeting of common
stockholders (corporate name change and increase in
authorized stock) (incorporated herein by reference
to the Registrant's Form 10-KSB for the year ended
December 31, 1995 (File No. 0-14692)).
Amendment to Amended and Restated Articles of 3.4
Incorporation of the Company, filed November 12,
1996 (File No. 0-14692).
22
<PAGE>
Form of 11% Convertible Subordinated Debenture due 4.2
July 1, 1996 (incorporated herein by reference to
the Registrant's Form 10-K for the year ended
March 31, 1991, (File No. 0-14692).
Form of Registration Agreement between the Company 4.3
and holders of the Company's 11% Convertible
Subordinated Debentures Due July 1, 1996
(incorporated herein by reference to the
Registrant's Form 10-K for the year ended March 31,
1991, (File No. 0-14692).
Form of Certificate of the Company's Series A 4.4
Convertible Preferred Stock (incorporated herein by
reference to the Registrant's Form 10-KSB for the
year ended December 31, 1994, (File No. 0-14692).
Form of Certificate of the Company's Common Stock 4.5
following change of corporate name change
(incorporated herein by reference to the
Registrant's Form 10-KSB for the year ended
December 31, 1995 (File No. 0-14692).
The Company's 1989 Stock Option Plan (incorporated 10.1
herein by reference to Exhibit 28 to the Registrant's
Registration Statement on Form S-8, File 33-33576).
Amendments No. 1 and 2, dated October 17, 1991 and 10.2
April 24, 1992, respectively, to the Company's 1989
Stock Option Plan (incorporated herein by reference
to the Registrant's Form 10-K for the year ended
March 31, 1992, (File No. 0-14692).
Mirror Technologies, Incorporated 401(K) Plan 10.3
effective April 1, 1992 (incorporated herein by
reference to the Registrant's Form 10-K for the year
ended March 31, 1992, (File No. 0-14692).
Lease Agreement dated April 22, 1993 between the 10.4
Company and Opus Corporation (incorporated by
reference to the Registrant's Form 10-KSB for the
year ended March 31, 1993, (File No. 0-14692).
Sales Agency Agreement dated January 6, 1994 10.5
between the Company and MacUSA, Inc. (incorporated
by reference to the Registrant's Form 8-K filed on
January 21, 1994, (File No. 0-14692).
Office Lease Agreement between the Company and 10.6
Jason Bassett Creek Plaza dated March 28, 1994
(incorporated herein by reference to the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1994).
Office Lease Agreement between the Company and 10.7
Physician's and Surgeon's Capital Corporation
dated October 1, 1994 (incorporated herein by
reference to the Registrant's Form 10-KSB for the
year ended December 31, 1994, (File No. 0-14692)
Office and Warehouse Lease Agreement between 10.8
MAINTECH Resources, Inc. and David D. Heinen dated
December 20, 1994 (incorporated herein by reference
to the Registrant's Form 10-KSB for the year ended
December 31, 1994, (File No. 0-14692).
Exclusive Distributor and Licensing Agreement 10.9
between Yutaka Takagi and Circle Corporation and
MAINTECH Resources, Inc. and Global MAINTECH, Inc.
dated December 20, 1994
23
<PAGE>
(incorporated herein by reference to the
Registrant's Form 10-KSB for the year ended December
31, 1994, (File No. 0-14692).
Office Lease Agreement between the Company and 10.10
Charles and Sharron Mills dated December 12, 1995
(incorporated herein by reference to the Registrant's
Form 10-KSB for the year ended December 31, 1995
(File No. 0-14692).
Brokerage Asset Purchase Agreement between Norcom 10.11
Resources, Inc. and Global MAINTECH, Inc. dated
December 31, 1995 (incorporated herein by reference
to the Registrant's Form 10-KSB for the year ended
December 31, 1995 (File No. 0-14692).
Amendment No. 3, dated May 15, 1995 to the Company's 10.12
1989 Stock Option Plan (incorporated herein by
reference to the Registrant's Form 10-KSB for the
year ended December 31, 1995 (File No. 0-14692).
Sale contract between Burlington Northern Railroad 10.13
Company and Global MAINTECH, Inc. dated March 21,
1996 (incorporated herein by reference to the
Registrant's Form 10-KSB for the year ended December
31, 1995 (File No. 0-14692).
Subsidiaries of the Registrant (incorporated herein 21
by reference to the Registrant's Form 10-KSB for
the year ended December 31, 1994 (File No. 0-14692).
Consent of KPMG Peat Marwick LLP 23
Financial Data Schedule 27
Cautionary Statement 99
(b) Reports on Form 8-K
No Form 8-K was filed in the last quarter of the twelve month period ended
December 31, 1996.
24
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Global MAINTECH Corporation
Dated: March 20, 1997 By /s/ James Geiser
--------------------------
James Geiser
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ David McCaffrey Chief Executive Officer
- ------------------------ (Principal Executive Officer) and
David McCaffrey Director March 20, 1997
/s/ James Geiser Chief Financial Officer and Secretary March 20, 1997
- ------------------------ (Principal Financial and Accounting
James Geiser Officer)
/s/ Robert E. Donaldson Director March 20, 1997
- ------------------------
Robert E. Donaldson
25
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Description Number
- -------------------------------------------------------------------- -------
<S> <C>
Amendment to Articles of Incorporation for one-for-five reverse stock
split on November 12, 1996 (File No. 0-14692). 3.4
Consent of KPMG Peat Marwick LLP 23
Financial Data Schedule 27
Cautionary Statement 99
</TABLE>
26
<PAGE>
EXHIBIT 3.4
AMENDMENT TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
Global MAINTECH Corporation
1. The name of this corporation is Global MAINTECH Corporation, a
Minnesota corporation.
2. The following amendment to the Amended and Restated Articles of
Incorporation of Global MAINTECH Corporation was adopted by the Board of
Directors of Global MAINTECH Corporation by written action dated November 8,
1996, pursuant to Section 302A.402, Subdivision 3 of the Minnesota Business
Corporation Act:
RESOLVED, that Section 3.1 of the currently existing Articles of
Incorporation is hereby amended in its entirety to read as follows:
"3.1 Designation and Number. The aggregate number of authorized shares
of the corporation is 50,000,000 shares, no par value, of which 887,980
shares shall be designated Series A Convertible Preferred Stock, and
49,112,020 shares shall be divisible into such classes and series, have
such designations, voting rights, and other rights and preferences and be
subject to the such restrictions, as the Board of Directors of the
corporation may from time to time establish, fix and determine consistent
with Articles 4 and 5 hereof. Unless otherwise designated in these Restated
Articles or by the Board of Directors, all issued shares shall be deemed
Common Stock with equal rights and preferences. The rights, preferences,
privileges and restrictions granted to and imposed upon the Common Stock
and the Series A Convertible Preferred Stock (the "Preferred Stock") are
set forth in this Article 3."
3. The amendment will not adversely affect the rights or preferences
of the holders of outstanding shares of any class or series and will not result
in the percentage of authorized shares that remain unissued after such amendment
exceeding the percentage of authorized shares that were unissued before such
amendment.
4. The document attached hereto as Exhibit A sets forth resolutions
duly approved by all members of the Board of Directors of Global MAINTECH
Corporation by written action dated November 8, 1996, which resolutions state
the manner in which the Company's share combination will be effected.
5. The amendment has been adopted pursuant to Chapter 302A of the
Minnesota Business Corporation Act.
<PAGE>
IN WITNESS WHEREOF, the undersigned, the Secretary of Global MAINTECH
Corporation, being duly authorized on behalf of Global MAINTECH Corporation, has
executed this document on this 11th day of November, 1996.
/s/ James Geiser
---------------------------------
James Geiser
Secretary
-2-
<PAGE>
Exhibit A
EXCERPT FROM WRITTEN ACTION
OF
THE BOARD OF DIRECTORS
OF
Global MAINTECH Corporation
DATED NOVEMBER 8, 1996
SHARE COMBINATION
RESOLVED, that a 1-for-5 reverse split of the Company's Common Stock
and Preferred Stock (the "Share Combination") be effected on November 12, or
such other appropriate date as the Chief Executive Officer may determine, by the
substitution of 1 share of Common Stock for every 5 shares of Common Stock
issued and outstanding of record on such date and by substituting 1 share of
Preferred Stock for every 5 shares of Preferred Stock issued and outstanding of
record on such date, with the issuance of such stock to be made from authorized
but unissued shares of the Company's capital stock.
RESOLVED, that, since both the Common Stock and the Preferred Stock
are subject to the Share Combination, the Conversion Price (as such term is
defined in Section 3.6 of the currently existing Amended and Restated Articles
of Incorporation of the Company) for the Preferred Stock shall not be affected
by the Share Combination, but the liquidation preference for the Preferred Stock
appearing in Section 3.3 of such Amended and Restated Articles of Incorporation
shall be increased by multiplying the per share liquidation preference for the
Preferred Stock by 5.
RESOLVED, that Section 3.1 of the currently existing Articles of
Incorporation is hereby amended in its entirety to read as follows:
"3.1. Designation and Number. The aggregate number of authorized
shares of the corporation is 50,000,000 shares, no par value, of which
887,980 shares shall be designated Series A Convertible Preferred Stock,
and 49,112,020 shares shall be divisible into such classes and series,
have such designations, voting rights, and other rights and preferences
and be subject to such restrictions, as the Board of Directors of the
corporation may from time to time establish, fix and determine consistent
with Articles 4 and 5 hereof. Unless otherwise designated in these
Restated Articles or by the Board of Directors, all issued shares shall be
deemed Common Stock with equal rights and preferences. The rights,
preferences, privileges and restrictions granted to and imposed upon the
Common Stock and the Series A Convertible Preferred Stock (the "Preferred
Stock") are set forth in this Article 3."
A-1
<PAGE>
FURTHER RESOLVED, that the officers of the Company are hereby
authorized and directed to execute and file with the Secretary of State of
Minnesota Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company reflecting the change as stated herein.
FURTHER RESOLVED, that appropriate adjustments and reservations of
shares be made to the Company's Stock Option Plan (the "Plan") (i) to
decrease the number of shares purchasable under each option granted under
the Plan and outstanding on the date on which the Share Combination is
effected, (ii) to decrease the number of shares reserved for issuance under
such Plan and (iii) to increase the exercise price per share of each such
option.
FURTHER RESOLVED, that, in light of the Share Combination, appropriate
adjustments and reservations be made to warrants and options to purchase
the Company's securities that are outstanding on the date on which the
Share Combination is effected (other than those issued under the Plan) (i)
to decrease the number of shares purchasable under each such warrant and
option, (ii) to decrease the number of shares reserved for issuance upon
the exercise of such warrants and options and (iii) to increase the
exercise price per share of each such warrant and option.
FURTHER RESOLVED, that the Chief Executive Officer and Chief Financial
Officer, or any one of them, are hereby authorized and directed to take
any action necessary or appropriate to establish procedures for the
issuance of replacement share certificates from the authorized and unissued
shares of the Company in order to effect the Share Combination, and each of
the shares represented by such certificates shall be validly issued, fully
paid and non-assessable; provided, however, that until such time as a
holder of a share certificate shall surrender his or her certificate
pursuant to such procedures, such outstanding certificates shall be deemed
to represent the number of shares of Common Stock or Preferred Stock, as
appropriate, to which such holder shall be entitled upon the surrender
thereof.
FURTHER RESOLVED, that no fractional shares shall be issued pursuant
to these resolutions, but rather the number of shares to be issued to each
shareholder, who would otherwise be entitled to a fractional share, shall
be rounded up to the nearest whole share.
FURTHER RESOLVED, that, for the purpose of the issuance of replacement
certificates as a result of the Share Combination, Norwest Bank, Minnesota
N.A., as transfer agent and registrar (the "Transfer Agent"), is hereby
authorized to record in its transfer records and to countersign as Transfer
Agent and Registrar replacement certificates for shares of Common Stock or
Preferred Stock, as appropriate, resulting from such Share Combination; and
that the officers of the Company are hereby authorized to execute and
deliver such instructions as may be necessary or appropriate in connection
with the issuance of replacement shares in connection with the Share
Combination.
A-2
<PAGE>
FURTHER RESOLVED, that the Chief Executive Officer and Chief Financial
Officer, or any one of them, are hereby authorized and directed to take any
action necessary or appropriate to effect the Share Combination, including the
giving of any notices and preparing and filing Articles of Amendment with the
Minnesota Secretary of State, and to execute any documents and take any other
actions necessary or advisable to carry out the intent of the foregoing
resolutions.
A-3
<PAGE>
Exhibit 23
Independent Auditors' Consent
The Board of Directors
Global Maintech Corporation:
We consent to incorporation by reference in the Registration Statement (No. 33-
33576) on Form S-8 of Global Maintech Corporation of our report dated February
14, 1997, relating to the balance sheets of Global Maintech Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
then ended, which report appears in the 1996 annual report on Form 10-KSB of
Global Maintech Corporation.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000783738
<NAME> Global Maintech Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 33
<SECURITIES> 0
<RECEIVABLES> 451
<ALLOWANCES> 0
<INVENTORY> 218
<CURRENT-ASSETS> 751
<PP&E> 31
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,352
<CURRENT-LIABILITIES> 1,151
<BONDS> 17
0
329
<COMMON> 1,919
<OTHER-SE> (2,064)
<TOTAL-LIABILITY-AND-EQUITY> 1,352
<SALES> 2,130
<TOTAL-REVENUES> 2,130
<CGS> 625
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 328
<INCOME-TAX> 18
<INCOME-CONTINUING> 310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
The Company, or persons acting on behalf of the Company, or outside
reviewers retained by the Company making statements on behalf of 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, and Section 21E of the Securities Exchange Act of 1934, 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
has negative working capital and its liabilities exceed its assets. 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 has declined from approximately $2 million as of
December 31, 1994, to approximately $1 million as of December 31, 1995, and to
$400,000 as of December 31, 1996. Although management believes increased sales
of the VCC product 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 not
been paid in full. An event of Default may be waived but only if all of the
debentureholders consent. The Company has not received a waiver of the
<PAGE>
Payment Event of Default. As a result the Company remains in default on the
Debentures which through negotiation and conversion have been reduced from
$261,750 to $151,750 in principal.
Liquidity and Capital Resources. As of December 31, 1996, the Company had
negative working capital of approximately $400,000. The Company intends to meet
its cash requirements by structuring the Debentures for delayed payment and by
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 will 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 four 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 computer hardware is relatively new, and the demand for the
product is not yet fully know. 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
<PAGE>
the VCC is large. However, to date, the Company has sold to only three
customers (General Electric Capital Corporation, Burlington Northern Santa Fe
and Storage Technology Corporation), 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 products 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 are being prepared, and the Company believes the VCC will be
protected by a patent that is currently under review by the U.S. Patent and
Trademark Office. This patent was filed by Circle Corporation, a Japanese
corporation, on December 28, 1993 and the Company licenses 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 two of the three existing
customers of the Company's products are not required to purchase additional
products. 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.
<PAGE>
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 insurance will be available on commercially reasonable terms, or at all, or
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 could have a material adverse
effect on the business and prospects of the Company.
