<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 0-14692
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Global MAINTECH Corporation
Minnesota 41-1523657
State of Incorporation I.R.S. Employer Identification No.
7578 Market Place Drive, Eden Prairie, MN 55344
Telephone Number: (612) 944-0400
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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On November 3, 1998 there were 18,131,361 shares of the Registrant's no par
value common stock outstanding.
Transitional small business issuer format: No
Page 1 of 13
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward- looking statements. Factors that might cause such differences include,
but are not limited to, the uncertainty in the Company's ability to operate
profitably in the future; failure of the Company to meet its future additional
capital requirements; loss of key personnel; inability of the Company to compete
in the industry in which it operates; failure of the Company to respond to
evolving industry standards and technological changes; lack of market acceptance
of the Company's products; failure of the Company to secure adequate protection
for the Company's intellectual property rights; and the Company's exposure to
product liability claims. The forward-looking statements are qualified in their
entirety by the cautions and risk factors set forth in Exhibit 99, under the
caption "Cautionary Statement," to this Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1998.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 299,871 $1,726,889
Accounts receivable, less allowance for
doubtful accounts of $15,000 2,407,743 576,573
Other receivables 199,724 26,111
Inventories 1,397,272 797,435
Prepaid expenses and other 158,951 77,308
Notes receivable 170,000 75,000
Current portion of investment in
sales-type leases -- 286,997
---------- ----------
Total current assets 4,633,561 3,566,313
Property and equipment, net 308,118 308,347
Leased equipment 128,541 209,033
Software development costs, net 2,352,893 955,835
Net investment in sales-type leases,
net of current portion -- 492,918
Other assets, net 1,000,957 331,003
---------- ----------
TOTAL ASSETS $8,424,070 $5,863,449
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 494,545 $ 396,159
Current portion of notes payable 175,000 100,000
Accrued liabilities
Compensation and payroll taxes 256,729 123,605
Other 24,389 10,588
Deferred revenue 21,927 52,443
----------- -----------
Total current liabilities 972,590 682,795
----------- -----------
Subordinated notes payable, less current portion 1,750,000 1,900,000
----------- -----------
Total liabilities 2,722,590 2,582,795
STOCKHOLDERS' EQUITY
Voting, convertible preferred stock - Series A, convertible into
one common stock share for each preferred share, no par value;
887,980 shares authorized; 134,510 shares in 1998 and
244,113 shares in 1997 issued and outstanding; total liquidation
preference of outstanding shares-$50,441 61,859 114,489
Voting, convertible preferred stock - Series B, convertible on or
before September 23, 2001 based on price of common stock;
conversion price not to exceed $2.50 per share or be less than
$0.75; dividend of 8% payable in cash or common stock;
no par value; 615,385 shares authorized; 74,152 shares in 1998
and none in 1997 issued and outstanding; total liquidation
preference of outstanding shares-$481,988 481,988 --
Common stock, no par value; 48,496,635 shares authorized;
18,175,362 shares in 1998 and 17,084,857 shares in 1997
issued and outstanding
Additional paid-in-capital 6,975,466 5,295,829
Notes receivable-officers (294,500) (294,500)
Accumulated deficit (1,523,333) (1,835,164)
----------- -----------
Total stockholders' equity 5,701,480 3,280,654
----------- -----------
$ 8,424,070 $ 5,863,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales
Systems 1,378,093 $ 968,647 $ 4,325,499 $ 2,176,294
Maintenance, consulting and other 280,517 $ 212,396 $ 806,369 $ 580,136
------------ ------------ ------------ ------------
Total net sales $ 1,658,610 $ 1,181,043 $ 5,131,868 $ 2,756,430
Cost of sales
Systems 243,386 $ 231,318 $ 1,117,380 $ 509,930
Maintenance, consulting and other 275,624 $ 72,702 $ 652,564 $ 191,183
------------ ------------ ------------ ------------
Total cost of sales 519,010 304,020 1,769,944 701,113
------------ ------------ ------------ ------------
Gross profit 1,139,600 877,023 3,361,924 2,055,317
Operating expenses
Selling, general and administrative 838,494 491,272 2,440,027 1,181,568
Research and development 212,463 84,987 485,984 178,344
------------ ------------ ------------ ------------
Income from operations 88,643 300,764 435,913 695,405
Other income (expense):
Interest expense (68,591) (73,955) (215,257) (107,901)
Interest income 607 1,110 124,395 1,110
Other (11,073) (10,574) (33,220) (10,574)
------------ ------------ ------------ ------------
Total other income (expense), net (79,057) (83,419) (124,082) (117,365)
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 9,586 217,345 311,831 578,040
Provision for income taxes -- -- -- 2,500
------------ ------------ ------------ ------------
Income from continuing operations 9,586 217,345 311,831 575,540
Gain from discontinued operations -- -- -- 70,000
------------ ------------ ------------ ------------
Net earnings $ 9,586 $ 217,345 $ 311,831 $ 645,540
============ ============ ============ ============
Basic earnings per common share:
Continuing operations $ 0.001 $ 0.014 $ 0.018 $ 0.040
Discontinued operations -- -- -- 0.005
------------ ------------ ------------ ------------
Net earnings $ 0.001 $ 0.014 $ 0.018 $ 0.045
============ ============ ============ ============
Diluted earnings per common share:
Continuing operations $ 0.000 $ 0.012 $ 0.015 $ 0.033
Discontinued operations -- -- -- 0.004
------------ ------------ ------------ ------------
Net earnings $ 0.000 $ 0.012 $ 0.015 $ 0.038
============ ============ ============ ============
Shares used in calculations:
Basic 17,910,212 16,081,176 17,609,610 14,425,373
Diluted 19,993,323 18,845,064 20,302,729 17,189,261
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 311,831 $ 645,540
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 990,238 283,849
Changes in operating assets and liabilities:
Increase in accounts receivable (1,831,170) (1,115,139)
Increase in other receivables (173,613) (64,103)
Increase in inventories (599,837) (154,718)
Increase in prepaid expenses and other (81,643) (55,039)
Increase (decrease) in accounts payable 98,386 (125,541)
Increase in accrued liabilities 146,925 37,226
Decrease in deferred revenue (30,516) (214,895)
----------- -----------
Cash used by operating activities (1,169,399) (762,820)
----------- -----------
Cash flows from investing activities:
Sale of investment in sales-type leases 679,634 --
Purchase of property and equipment (204,770) (166,006)
Reduction (increase) in leased equipment 37,156 (6,437)
Investment in software development costs (1,904,808) (586,489)
Investment in other assets (803,826) (25,746)
Investments in notes receivable (170,000) --
Payments received on notes receivable 75,000 --
----------- -----------
Cash used by investing activities (2,291,614) (784,678)
----------- -----------
Cash flows from financing activities:
Disbursements for deferred debt costs -- (212,470)
Net proceeds from issuance of common stock 1,627,007 2,704,513
Net proceeds from issuance of preferred stock 481,988 --
Payments of short-term notes payable -- (363,363)
Payments of long-term notes payable (75,000) 1,983,400
----------- -----------
Cash provided by financing activities 2,033,995 4,112,080
----------- -----------
Net increase (decrease) in cash (1,427,018) 2,564,582
Cash and cash equivalents at beginning of period 1,726,889 32,890
----------- -----------
Cash and cash equivalents at end of period $ 299,871 $ 2,597,472
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for: Interest $ 215,257 $ 13,960
Income taxes $ -- $ 9,999
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
GENERAL
The Company, through its wholly owned subsidiary Global MAINTECH, Inc.,
designs, develops and markets a computer system, consisting of hardware and
software, which monitors and controls diverse computers in a data center from a
single, master console. The Virtual Command Center ("VCC" or "VCC Unit") can
simultaneously manage mainframes, mid-range computers (e.g., UNIX, Microsoft and
Windows NT platforms) and networks. The VCC is designed to perform three primary
functions: (a) consolidate consoles (computer terminal with access to the
internal operation of a computer) into one monitor, a "virtual console" or
single point of control: (b) monitor and control the computers connected to the
virtual console; and (c) automate most, if not all, of the routine processes
performed by computer 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 reduced instruction set computer ("RISC") 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.
In 1995, the Company installed its first three VCC Units in the data
centers of a large industrial and financial company. In 1996, the Company sold
or leased seven additional VCC Units and added two new customers. As of December
31, 1997, the Company had sold or leased a cumulative total of 26 VCC Units to a
total of eight customers and had shipped four VCC Units for evaluation purposes
to three prospective customers. As of September 30, 1998, the Company had sold
an additional 10 VCC Units for a total of 36. The Company's customers include:
General Electric Capital Corporation, Burlington Northern Santa Fe Railroad,
Storage Technology Corporation, Systems Management Specialists, Inc., Ferntree
Computer Corp. (Australia), SAP America, Inc., Deluxe Corporation, Bank One
Services Corp., BMC Software, Frontier Information Technologies, Inc., Merrill
Lynch & Co. Inc., Southern California Gas Company, Alltel Information Services,
Spiegel Inc. and Minnesota Mining and Manufacturing Company.
Basis of Presentation
The interim consolidated financial statements are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair presentation
of results for such periods. All such adjustments are of a normal recurring
nature.
The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
Basic and Diluted Earnings Per Share
Basic earnings per share represent earnings, reduced by any dividends on
preferred stock, divided by the weighted average number of common shares
outstanding for the reporting period. Diluted earnings per share represent
earnings divided by the sum of the weighted average number of common shares
outstanding plus shares derived from other potentially dilutive securities. For
the Company, potentially dilutive securities include "in the money" stock
options and warrants for the purchase of shares of common stock and the amount
of common shares which would be added by conversion of the outstanding
convertible preferred stock. The number of shares added for stock options and
warrants is determined by the treasury stock method, which assumes exercise of
these securities and the use of any proceeds from these actions to repurchase a
portion of these shares at the average market price for the period. When the
results of continuing operations are a loss, other potentially dilutive
securities will not be included in the calculation of loss per share.
6
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The weighted average shares and total dilutive shares used in the
calculation of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------- ----------
<S> <C> <C>
Basic Earnings Per Share
Weighted average shares 17,609,610 14,425,373
Diluted Earnings Per Share
Weighted average shares 17,609,610 14,425,343
Stock options and Warrants 2,558,609 2,505,108
Conversion of preferred stock 134,510 258,780
---------- ----------
Total dilutive shares 20,302,729 17,189,261
========== ==========
</TABLE>
Capitalized Software Development Costs
Capitalized software development costs represent costs incurred after
technological feasibility has been established in connection with the
development of enhancements to one or more particular software programs. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic life, and changes in software
and hardware technology. The software development costs are being amortized
using the straight-line method over the estimated economic life of the software
not to exceed three years.
Other Assets
Other assets is comprised of patents, capitalized software license fees,
and capitalized debt issuance costs. Patents and capitalized software license
fees are stated at cost and are amortized over their useful life of three to
five years using the straight-line method. Capitalized debt issuance costs are
stated at cost and are amortized over the term of the related debt agreement.
Recorded amounts for patents and license fees are regularly reviewed and
recoverability assessed. The review considers factors such as whether the
amortization of these capitalized amounts can be recovered through forecasted
undiscounted cash flows.
Asset Purchase and Software License
On February 27, 1998 the Company licensed certain software and purchased
certain assets relating to the system software business of Infinite Graphics
Incorporated ("IGI"), a Minnesota corporation based in Minneapolis. The
acquisition has been recorded as an asset purchase. The acquisition agreement
provides for initial payments of $700,000 and additional payments of up to
$3,300,000, the payment of which is contingent on the future revenue generated
by this business segment and is determinable as of May 31, 1999. In the twelve
months ended December 31, 1997 the unaudited revenue of IGI's software segment
was $1,683,000 and the gross margin was $621,000.
7
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The acquired software and assets will be used by the Company to design,
assemble and market computer-aided design and manufacturing software systems
that operate on a variety of mid-range and personal computer platforms. Assets
purchased in the acquisition include inventory, machinery, equipment, furniture
and fixtures, used in IGI's system software business. In connection with such
transaction, the Company also obtained a perpetual exclusive software license of
a majority of IGI's software products used in IGI's system software business and
a non-exclusive license of certain software used in IGI's remaining business
segment. The company has recorded the initial payments of $700,000 primarily as
software licenses to be amortized over a useful life not to exceed five years.
IGI will reimburse the Company for the liabilities of IGI explicitly assumed by
the Company in connection with the acquisition. The Company also agreed to
satisfy IGI's unrecorded service obligations to the software end users in return
for which the Company expects to receive support payments from such end users.
Stock Issuance
In February 1998, the Company began a 400,000 share private placement of
common stock at $1.90 per share. This offering was later amended to include an
additional 100,000 shares for a total of 500,000 shares. This offering
terminated on July 9, 1998 and a total of 426,500 shares were sold. Maven
Securities, Inc. ("Maven") acted as the placement agent. The Company paid Maven
a 10% commission, a 3% fee for expenses and issued a warrant to purchase 42,650
shares of common stock at an exercise price of $1.90 per share to Maven. The
shares of common stock issued pursuant to this issuance are exempt from
registration under Rule 506 of Regulation D of the Securities Act of 1933, as
amended.
On August 11, 1998, the Company completed a 1,667,000 share private
placement of units, each consisting of one share of Common Stock and one Warrant
to purchase a fraction of a share of Common Stock, at a price of $2.20 per unit.
The offering began on July 21, 1998. A total of 450,000 units were sold in such
offering. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Recent Developments" and "ITEM 2. CHANGES IN SECURITIES."
At the end of August 1998, the Company began a private placement of up
to 615,384 units, each consisting of one share of Series B Cumulative
Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase
shares of common Stock. The purchase price per unit is $6.50. As of September,
30, 1998, the Company had sold 74,152 of such units for total gross proceeds of
$481,988. The offering is expected to terminate on or before December 31, 1998.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Recent Developments" and "ITEM 2. CHANGES IN
SECURITIES."
Reclassifications
Certain amounts previously reported in 1997 have been reclassified to
conform to the 1998 presentation.
New Accounting Pronouncements
The Company is currently reviewing the potential impact of the recently
released FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for Global MAINTECH Corporation in January 2000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales from operations for the third quarter ended September 30,
1998 were approximately $1,659,000 compared to sales from operations
for the third quarter of 1997 of approximately $1,181,000. Sales for the nine
months ended September 30, 1998 were approximately $5.1 million compared to $2.8
million in the same nine month period of 1997. The $478,000 increase for the
third quarter is primarily related to an approximate increase of $409,000 in
system sales which includes both the Virtual Command Center (VCC) and computer-
aided design software products, and an increase of $68,000 in maintenance,
consulting and other fees. The $2.4 million increase for the nine months ended
September 30, 1998 is substantially due to a $2.1 million increase in system
sales and increases in maintenance, consulting and other fees is the primary
reason for the remaining $0.3 million increase.
Cost of sales increased in the third quarter ended September 30, 1998 to
31% from 26% in the third quarter of 1997 and for the nine months ended
September 30, 1998 increased to 34% from 25% in the nine months ended September
30, 1997. Nearly all of the increase in the third quarter ended September 30,
1998 is due to increased amounts of software amortization. The increase in cost
of sales for the nine months ended September 30, 1998 is evenly split between
increases in software amortization and product costs. Product costs include
increased distribution costs which are the result of certain of the sales in the
nine months ended 1998 being made through a third party distributor. The Company
had no third party distribution costs in the same nine month period of 1997.
Software amortization increased in 1998 as a result of increases in capitalized
software development costs. As a result, the gross margin in the third quarter
ended September 30, 1998 was approximately 69% compared to 74% in the third
quarter of 1997 and for the nine months ended September 30, 1998 the gross
margin was approximately 66% compared to 75% in the same nine month period in
1997.
Selling, general and administrative expenses in the third quarter of 1998
were approximately $838,000 compared to $491,000. For the nine month period
ended September 30, 1998 these expenses were approximately $2,440,000 compared
to $1,182,000 in the same period in 1997. These increases of $347,000 and
$1,258,000 are both primarily due to increases in salaries and secondarily to
increases in travel, depreciation and marketing expenses. The salary increase is
almost entirely due to an increase in employees the majority of which is due to
an increase in the areas of sales and sales support. The increase in travel
expenses is related to sales activity, depreciation expenses increased due to
the additional equipment purchases for new employees and the rapid depreciation
method used by the Company, and marketing expenses increased as part of a plan
to communicate with the marketplace.
Research and development costs in the third quarter of 1998 were
approximately $212,000 compared to $85,000 in the third quarter of 1997, one
year ago. For the nine month period ended September 30, 1998 research and
development costs were approximately $486,000 compared to $178,000 in the same
period in the prior year. The increases of $127,000 in the third quarter and
$308,000 for the nine months ended September 30, 1998 are substantially due to
increased salary expenses relating to additional employees in this expense
category and secondarily to fees paid to employee search firms.
Non-operating expenses include interest expense, amortization of
capitalized debt issuance costs and interest income. Interest expense increased
due to the issuance in June 1997 of subordinated notes payable and amortization
is related to cost of this debt. The increase in interest income is related to
the sale of sales-type leases in March 1998.
Net cash used in operating activities for the nine month
period ended September 30, 1998 was approximately $1,169,000. Cash generated
from net income for this nine month period was approximately $311,000 and was
$990,000 from depreciation and amortization. However, cash was used to fund
increases in current assets, primarily receivables and inventory totaling
approximately $2,605,000. Cash was also provided by accounts payable and accrued
expenses totaling approximately $245,000. In the same period in the prior year
operating activities used cash of approximately $763,000, which was largely due
to net income and depreciation and amortization of approximately $929,000 which
was more than offset by cash used to increase current assets and to reduce
current liabilities.
9
<PAGE>
Cash used by investing activities of approximately $2,291,000 reflects
investments of $2,709,000 in software licenses purchased in March 1998, included
in other assets, and in capitalized computer software costs which represent
costs incurred after technological feasibility has been established in
connection with the development of enhancements to one or more particular
software programs. The Company also purchased approximately $205,000 of
additions to machinery and equipment during the first nine months of 1998,
invested $170,000 in notes receivable and received payments on notes receivable
of $75,000. During the nine months ended September 30, 1997, the Company
invested $785,000 primarily in capitalized computer software development costs
of $586,000, and $166,000 in machinery and equipment.
Net cash provided by financing activities in the nine month period ended
September 30, 1998 was approximately $2,034,000. This is due to the receipt of
net proceeds from the issuance of common stock of approximately $2,109,000 in
three private placements of the Company's securities. See "ITEM 2. CHANGES IN
SECURITIES." Offsetting this increase was a $75,000 use of cash to reduce
subordinated notes payable. In the nine month period ending September 30, 1997,
the Company raised $2,705,000 in two private issues of common stock at per share
prices of $0.75 and $1.40. In addition, in the nine month period ending
September 30, 1997, the Company issued five year subordinated notes payable of
$2,000,000, disbursed $212,000 for debt issuance costs, and reduced short term
debt of $363,000 resulting in net cash provided by financing activities of
$4,112,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had positive working capital of
approximately $3,661,000 compared to positive working capital as of December 31,
1997 of approximately $2,884,000. The increase in positive working capital is
related to the net earnings plus depreciation and amortization recorded in the
nine months ended September 30, 1998 which was partially offset by an increase
in current liabilities.
During the nine months ended September 30, 1998, the Company's liquidity
and capital resources were reduced by cash investments in accounts receivable
and inventory and cash was invested in long-term assets as described above. As a
result the Company's liquidity was reduced from year-end 1997. The Company is
now more dependent on the collection of its accounts receivable and the
liquidation of its inventory through sales. The growing demand for the Company's
technology from new customers suggests the Company will continue to invest in
inventory and accounts receivable during the remainder of the year. Accordingly,
management expects cash will continue to be invested in short-term assets. The
Company's operating plan for the year ending December 31, 1998 anticipates a
continuing increase in sales over the year ended December 31, 1997 with a
commensurate increase in net income. As a result, this operating plan projects
the working capital of the Company will increase.
Furthermore, the Company is committed to making long-term investments in
the form of additional software development, additional purchases of software
licenses, such as the IGI software business, and additional purchases of
property and equipment.
As a result of the growth in short-term and long-term investments,
management expects the Company will continue to raise cash in the capital
markets. While management 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, nor can management provide any assurance of the
Company's continued access to the capital markets. At this point management
believes the Company's growth will be funded by a combination of operating
income and access to outside capital. Management believes these sources will be
sufficient to meet the Company's liquidity needs for the foreseeable future.
RECENT DEVELOPMENTS
On July 21, 1998, the Company began a 1,667,000 share private placement
of units, each consisting of one share of Common Stock (subject to certain
adjustments) and one Warrant to purchase a fraction of a share of Common Stock,
at a price of $2.20 per unit. This offering terminated on August 11, 1998 and a
total of 450,000 units were sold for a total offering price of $990,000. For a
more detailed description of this offering, see "ITEM 2. CHANGES IN SECURITIES."
At the end of August 1998, the Company began a private placement of up
to 615,384 units, each consisting of one share of Series B Cumulative
Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase
shares of common Stock. The purchase price per unit is $6.50. As of November 2,
1998, the Company had sold 74,152 of such units for total gross proceeds of
481,988 and had commitments to purchase an additional 76,925 units. This
offering is expected to terminate on or before December 31, 1998. For a more
detailed description of this offering, see "ITEM 2.
CHANGES IN SECURITIES."
10
<PAGE>
YEAR 2000 ISSUE
Background. Many currently installed computer systems and software are
coded to accept only two-digit entries in the date code fields. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with year 2000 requirements. The potential global impact of the year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
Company and the U.S. and world economy generally.
State of Readiness. The Company has analyzed the potential effect of
the year 2000 issue on both the system software included in the Company's
products and its internal systems (e.g., word processing and billing software),
including its information technology ("IT") and non-IT systems (which systems
contain embedded technology in manufacturing or process control equipment
containing microprocessors or other similar circuitry). The Company's year 2000
compliance program includes the following phases: identifying systems that need
to be modified or replaced; carrying out remediation work to modify existing
systems or convert to new systems; and conducting validation testing of systems
and applications to ensure compliance. The Company is currently in the
remediation phase of this program with respect to software purchased or licensed
from software vendors by the Company and used internally and has completed the
validation phase of this program with respect to its own products.
The amount of remediation work required to address year 2000 problems
is not expected to be extensive. The Company has tested all of the system
software included in its products and determined that it is year 2000 compliant.
In addition, the Company has requested and received documentation from vendors
supplying software for its primary business applications addressing year 2000
compliance. In all cases, vendors' responses indicated that their applications
were either currently year 2000 compliant or that they would be compliant by the
end of 1998. Therefore, the Company will be required to modify some of its
existing software applications in order for its internal computer systems to
function properly in the year 2000 and thereafter. The Company estimates that it
will complete its year 2000 compliance program for all of its significant
internal systems no later than July 1, 1999. The Company also has had informal
discussions with its major suppliers and customers regarding their efforts to
address the year 2000 problem. These actions are intended to help mitigate the
possible external impact of the year 2000 problem. However, it is impossible to
fully assess the potential consequences in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
Costs. Because essentially all of the Company's products and internal
systems were created in the last few years, such products and internal systems
were designed to avoid the year 2000 problem. As a result, the total cost for
resolving the Company's year 2000 issues is expected to be less than $10,000, a
negligible amount of which has been spent through September 30, 1998. The total
cost estimate includes the cost of replacing or upgrading non-compliant systems
that were otherwise planned (but perhaps accelerated due to the year 2000 issue)
or which have significant improvements and benefits unrelated to year 2000
issues. Estimates of year 2000 costs are based on numerous assumptions, and
there can be no assurance that the estimates are correct or that actual costs
will not be materially greater than anticipated.
Contingency. The Company has not yet developed a contingency plan to
provide for continuity of processing in such event of various problem scenarios,
but it will assess the need to develop such a plan based on the outcome of the
validation phase of all of its systems and any additional results from surveys
of its major suppliers and customers with respect to their year 2000 compliance.
Risk. Based on its assessments to date, the Company believes it will
not experience any material disruption as a result of year 2000 problems with
respect to its products and the third-party systems it uses for its internal
functions, and, in any event, the Company does not anticipate the year 2000
issues it will encounter will be significantly different than those encountered
by other computer hardware and software manufacturers, including its
competitors. For example, if certain critical third-party providers, such as
those providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's operations at individual facilities could occur for the duration
of the disruption. Assuming no major disruption in service from utility
companies or other critical third-party providers, the Company believes that it
will be able to manage its total year 2000 transition without any material
effect on the Company's results of operations or financial condition.
11
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PART II. OTHER INFORMATION
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ITEM 2. CHANGES IN SECURITIES
(a) Change to Articles of Incorporation: During September 1998, the Company
amended its Ariticles of Incorporation twice in connection with the August 1998
private placement of up to 615,384 units, each consisting of one share of Series
B Stock and one Warrant to purchase shares of common Stock. On October 2, 1998,
the Company then restated its Articles of Incorporation by filing Second Amended
and Restated Articles of Incorporation with the Secretary of State of the State
of Minnesota. Such Second Amended and Restated Articles of Incorporation are
filed as an exhibit to this Form 10-QSB.
(b) Effect of Series B Issuance on Outstanding Securities: At the end of August
1998, the Company began a private placement of up to 615,384 units, each
consisting of one share of Series B Stock and one Warrant to purchase shares of
common Stock. Prior to such offering, the Company's Board of Directors created a
new class of preferred stock, the Series B Stock. Each share of Series B Stock
entitles the holder thereof to receive an annual dividend equal to $.52. Such
dividend shall be cumulative and shall be payable upon conversion into Common
Stock. Such dividends shall be payable by the Company, in its sole discretion,
all in cash or all by the issuance of a number of shares of Common Stock.
Further, holders of Series B Stock are entitled to a liquidation preference. In
the event of any liquidation, dissolution or winding up of the Company, subject
to the prior liquidation preference of the holders of the previously issued
Series A Convertible Preferred Stock, the Series B Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Company to the holders of Common Stock, an amount per share equal to the sum of
(1) $6.50, subject to certain adjustments as set forth in the Company's Second
Amended and Restated Articles of Incorporation, and (2) and amount equal to
the cumulative unpaid dividends on such shares. On all matters submitted to the
Company's shareholders, the holder of each share of Series B Stock is entitled
to vote that number of shares of Common Stock into which such Series B Stock is
then convertible.
(c) Sales of Unregistered Securities:
Between February 1998 and July 9, 1998, the Company issued 426,500 shares of
common stock to certain accredited investors at a purchase price of $1.90 per
share in a private offering pursuant to the terms of a private placement
agreement dated February 19, 1998. Maven Securities, Inc. ("Maven") acted as
placement agent for such sale and was paid a 10% commission and a 3% fee for
expenses. As additional compensation, the Company issued Maven a warrant to
purchase 42,650 shares of common stock (equal to 10% of the number of shares of
common stock issued in connection with such offering which occurred during the
first and second quarters of 1998) at an exercise price of $1.90 per share. The
aggregate offering price for the shares offered was $810,350 and the aggregate
placement agent commissions and expenses were approximately $105,350. The shares
issued were exempt from registration under Rule 506 of Regulation D of the
Securities Act of 1933, as amended.
On July 21, 1998, the Company began a 1,667,000 share private placement
of units, each consisting of one share of Common Stock (subject to possible
adjustment as described below) and one Warrant to purchase a fraction of a share
of Common Stock (determined as described below), at a price of $2.20 per unit.
Each Warrant entitles the holder thereof to purchase .2667 shares of Common
Stock at $2.60 per share for each $1 such investor invested in the offering. In
addition, the number of shares purchased in the offering may be increased based
on the future market price of the Common Stock. In the event that the average
closing price per share for the Company's Common Stock for all trading days in
December 1998 (the "Average Price") is less than $2.93, then the number of
shares issued to an investor in the offering will be adjusted in accordance with
the following formula: the number of adjusted shares will equal the result
obtained by dividing the aggregate investment by 75% of the Average Price;
provided, however, that the Average Price is subject to a minimum value of
$2.00. This offering terminated on August 11, 1998 and a total of 450,000 units
were sold for a total offering price of $990,000. The Company offered this
private placement without the assistance of a placement agent. The shares of
Common Stock issued pursuant to this issuance are exempt from registration under
Rule 506 of Regulation D of the Securities Act of 1933, as amended.
At the end of August 1998, the Company began a private placement of up
to 615,384 units, each consisting of one share of Series B Cumulative
Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase
shares of common Stock. The purchase price per unit is $6.50.
Each share of Series B Stock entitles the holder thereof to receive an
annual dividend equal to $.52. Until February 15, 1999, each share of Series B
Stock is convertible into that number of shares of Common Stock equal to the per
unit purchase price divided by $3.25, subject to certain adjustments.
Thereafter, each share of Series B Stock is convertible into that number of
shares of Common Stock equal to the per unit purchase price divided by 80% of
the average closing bid price of the Common Stock for the 20 consecutive trading
days prior to the conversion date, subject to certain adjustments; provided,
however, that such average price may not be greater than $2.50 nor less than
$.75. All outstanding shares of Series B Stock will be automatically converted
into Common Stock on September 23, 2001 if the Company has registered such
common shares under the Securities Act of 1933, as amended, and the Common Stock
is traded on Nasdaq.
Each Warrant is a five-year callable warrant to purchase Common Stock
at $3.25 per share. The number of shares of Common Stock for which the Warrant
in each Unit will be exercisable will equal the number of shares of Common Stock
into which the associated share of Series B Stock contained in the unit will
have been converted. The Warrants are callable by the Company provided the
Common Stock has not traded below $4 3/8 for 20 consecutive trading days prior
to the call exercise date and the underlying shares are registered under the
Securities Act of 1933, as amended, and the Common Stock is traded on Nasdaq.
The Company has agreed to register the shares of Common Stock
underlying the Series B Stock and the Warrants and to pay a penalty if such
registration is not effective by February 28, 1999. This penalty is equal to 1%
of the purchase price of the units for each of the first two 30-day periods
following February 28, 1999 and 3% for every 30-day period thereafter until the
registration statement has been declared effective. The units will be sold only
to accredited investors and this offering is exempt from registration under Rule
506 of Regulation D of the Securities Act of 1933, as amended.
Miller, Johnson & Kuehn Incorporated ("MJK") is acting as the placement
agent and Miller & Schroeder Financial, Inc. ("MSF") and RJ Steichen & Company
("RJS") are acting as sub-agents. In consideration for MJK's services, it will
receive a cash fee equal to 8% of the proceeds from the units it sells and a
cash fee equal to 2% of the proceeds from the units either MSF or RJS sells. In
addition, at each closing held in connection with the offering, MJK will receive
a warrant to purchase that number of shares of Common Stock equal to 20% the
number of units it sells and 4% of the number of units MSF and RJS sell, with a
per share exercise price equal to 110% of the average closing bid price of the
Common Stock for the 20 trading day period immediately prior to such closing.
Further, the Company agreed to reimburse MJK for all reasonable legal fees
incurred by MJK in connection with the offering. In consideration for MSF's and
RJS' services, each of them will receive a cash fee equal to 2% of the proceeds
from the units it sells and, at each closing held in connection with the
offering, each of them will receive a warrant to purchase that number of shares
of Common Stock equal to 16% the number of units it sells, with a per share
exercise price equal to 110% of the average closing bid price of the Common
Stock for the 20 trading day period immediately prior to such closing.
As of September, 30, 1998, the Company had sold 74,152 of such units
for total gross proceeds of $481,988. Commissions paid on this amount totaled
$38,559 to MJK for placement agent commisions and $18,726 for the payment of
MJK's legal expenses incurred by MJK in connection with the offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 28, 1998, the Company held a special meeting at which the
Company asked the holders of its Series A Convertible Preferred Stock ("Series A
Stock") to approve a proposal to create and issue a new class of preferred
stock, the Series B Stock, in connection with the offering of units that began
in late August 1998. "See ITEM 2. CHANGES IN SECURITIES." At this meeting,
774,006 of the shares voted to approve such proposal, no shares voted against it
and 280,000 shares abstained. On September 18, 1998, the Company held a special
meeting at which the Company asked the holders of its Series A Stock to ratify
the approval of the creation and issuance of the Series B Stock and to approve
certain corrections thereto with respect to the conversion price, the number of
shares designated as Series B Stock and the annual dividend rate. At this
meeting, 774,006 of the shares voted to approve such proposal, no shares voted
against it and 280,000 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3--Articles of Incorporation
27--Financial Data Schedule
99--Cautionary Statement
(b) Reports on Form 8-K
None.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBAL MAINTECH CORPORATION
November 13, 1998 By: /s/ James Geiser
--------------------------------
James Geiser
Chief Financial and Chief
Accounting Officer
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 13, 1998 By: /s/ David McCaffrey
--------------------------------
David McCaffrey
Chief Executive Officer
13
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EXHIBIT 3
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GLOBAL MAINTECH CORPORATION
Article 1. Name
The name of the corporation is Global MAINTECH Corporation.
Article 2. Registered Office
The address of the registered office of the corporation is 7578 Market
Place Drive, Eden Prairie, MN 55344.
Article 3. Authorized Shares
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 (the "Series A
Preferred Stock") and 615,385 shall be designated Series B Convertible
Cumulative Preferred Stock (the "Series B Preferred Stock") and 48,496,635
shares shall be divisible into such classes and series, have such designations,
voting rights, and other rights and preferences and be subject to such
restriction 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 Amended and Restated Articles 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, the Series A Preferred Stock and the Series B
Preferred Stock (the Series A Preferred Stock and the Series B Preferred Stock
sometimes referred to together as the "Preferred Stock") are set forth in this
Article 3.
3.2 Dividend Provisions.
(a) Dividends shall be payable on the Series A Preferred Stock
out of funds legally available for the declaration of dividends, only if and
when declared by the Board of Directors. In no event shall any dividend be paid
or declared, nor shall any distribution be made, on the Common Stock, unless
holders of the Series A Preferred Stock shall participate in such dividend on a
pro rata basis with the holders of Common Stock, counting shares of Series A
Preferred Stock on an as-if-converted basis.
(b) Upon issuance, dividends shall accrue on each share of
outstanding Series B Preferred Stock at an annual rate equal to $.52 per share
per annum (8% of the Series B Original Issue Price, as defined below). Such
dividends shall be cumulative and shall be payable upon any
<PAGE>
conversion of the Series B Preferred Stock pursuant to Section 3.4 below. Such
dividends shall be payable by the corporation, in its sole discretion, all in
cash out of legally available funds of the corporation or all by the issuance of
a number of shares of the corporation's unrestricted, freely tradable Common
Stock equal to the dividends owing on the Series B Preferred Stock; provided,
however, that prior to the payment of any such dividend by the issuance of
shares of the corporation's Common Stock, the corporation shall deliver to the
investors of the Series B Preferred Stock an opinion of counsel stating that all
such shares have been validly registered under the Securities Act of 1933, as
amended (the "Securities Act"), so as to be freely tradable, and that such
shares are duly authorized, validly issued and nonassessable . For the purposes
hereof, the number of shares of the corporation's Common Stock issuable in lieu
of any cash dividend payment shall equal the total dividend payment then due
divided by the average closing bid price for one share of Common Stock as quoted
on the Nasdaq Stock Market (or, if not so quoted on the Nasdaq Stock Market, as
quoted in the over-the-counter market) for the ten consecutive trading days
prior to the payment of such dividends. Dividends on shares of the Series B
Preferred Stock shall accrue beginning on the date of issuance of the shares of
Series B Preferred Stock, shall compound on an annual basis and shall be payable
upon conversion of the Series B Preferred Stock. All accrued and unpaid
dividends on the Series B Preferred Stock must be paid before any dividends may
be declared or paid on any other junior series of Preferred or Common Stock
issued by the corporation.
3.3. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock then outstanding shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
corporation to the holders of the Common Stock by reasons of their ownership
thereof, an amount equal to $.375 per share, subject to adjustment in the event
of any stock dividend, split, distribution or combination with respect to such
shares. If upon the occurrence of such event, the assets and funds of the
corporation available for the distribution to its stockholders shall be
insufficient to pay the holders of the Series A Preferred Stock the full amounts
to which they shall be entitled, the holders of the Series A Preferred Stock
shall share ratably in any distribution of assets and funds of the corporation
legally available for distribution in proportion to the respective amounts which
would be payable in respect of the shares held by them upon such distribution if
all amounts payable on or with respect to such shares were paid in full.
(b) In the event of any liquidation, dissolution or winding up
of the corporation, either voluntary or involuntary, subject to the prior
liquidation preference of the holders of the Series A Preferred Stock, the
Series B Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the corporation to the holders of
Common Stock by reason of their ownership thereof, an amount per share equal to
the sum of (i) $6.50, as adjusted pursuant to Section 3.5(c) hereof (the "Series
B Original Issue Price"), and (ii) an amount equal to cumulative unpaid
dividends on such shares (such sum referred to as a "Liquidation Amount"). If
upon the occurrence of such an event, the assets and funds thus distributed
among the holders of the Series B Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid
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<PAGE>
preferential amounts, then, the entire assets and funds of the corporation
legally available for distribution shall be distributed ratably among the
holders of the Series B Preferred Stock.
(c) Upon the completion of the distribution required by
subparagraphs (a) and (b) of this Section 3.3, if assets remain in the
corporation, the remaining assets of the corporation shall be distributed
ratably among the holders of the corporation's Common Stock, Series A Preferred
Stock and the Series B Preferred Stock in proportion to the number of shares of
Common Stock held by each (assuming full conversion of all shares of Series A
Preferred Stock and Series B Preferred Stock).
(d) (i) For purposes of this Section 3.3, a liquidation,
dissolution or winding up of the corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of the corporation by another entity by
means of any transaction or series of related transactions (including any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the corporation); or (B)
a sale of all or substantially all of the assets of the corporation, unless the
corporation's shareholders as constituted immediately prior to such acquisition
or sale will, immediately after such acquisition or sale (by virtue of
securities issued as consideration for the corporation's acquisition or sale or
otherwise) hold at least 50% of the voting power of the surviving or acquiring
entity.
(ii) In any of such events, if the consideration received by
the corporation is other than cash, its value will be deemed its fair
market value.
(iii) In the event the requirements of this Section 3.3 are
not complied with, the corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 3.3 have been
complied with, or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the
Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior
to the date of the first notice referred to in subsection
3.3(d)(iv) hereof.
(iv) The corporation shall give each holder of record of
Preferred Stock written notice of such impending transaction not later
than 30 days prior to the shareholders' meeting called to approve such
transaction, or 30 days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of
the final approval of such transaction; provided, however, that the
holder of any shares of then outstanding Preferred Stock shall have the
right during such applicable period to convert such shares pursuant to
Section 3.3 hereof. The first of such notices shall describe the
material terms and conditions of the impending transaction and the
provisions of this Section 3.3, and the corporation shall thereafter
give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than 30 days, 20 days
in the case of the holders of Series B Preferred Stock, after the
corporation has given the first notice
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provided for herein or sooner than ten days after the corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of the
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of Preferred Stock, each voting as a series.
3.4. Conversion.
(a) Conversion of Series A Preferred Stock. Each share of
Series A Preferred Stock shall be convertible at the option of the holder
thereof at any time into the number of shares of Common Stock of the corporation
equal to the number obtained by dividing the Series A Issuance Price (as defined
below) per share of such Series A Preferred Stock by the conversion price
computed as hereinafter set forth (the "Series A Conversion Price") in effect
for such Series A Preferred Stock at the time of conversion. The Series A
Issuance Price is $.375 per share, and the initial Series A Conversion Price for
Series A Preferred Stock is $.375 per share. The Series A Conversion Price is
subject to adjustment from time to time as hereinafter provided.
In order to exercise the conversion privilege, a holder of
Series A Preferred Stock shall surrender the certificate to the corporation at
its principal office, accompanied by written notice to the corporation that the
holder elects to convert a specified portion or all of such shares. Series A
Preferred Stock shall be deemed to have been converted on the day of surrender
of the certificate representing such shares for conversion in accordance with
the foregoing provisions, and at such time the rights of such holder of such
shares of Series A Preferred Stock, as such holder, shall cease and such holder
shall be treated for all purposes as the record holder of the Common Stock
issuable upon conversion. As promptly as practicable on or after the conversion
date, certificates representing the number of shares of Common Stock issuable
upon conversion, rounded to the nearest full share, and a certificate or
certificates for the balance of the Preferred Stock surrendered, if any, not so
converted into Common Stock.
(1) Adjustment to Series A Conversion Price. The Series A
Conversion Price is subject to adjustment from time to time as follows:
(i) Dividends. In case the corporation shall declare a
dividend upon its shares of Common Stock payable otherwise than in
cash out of earnings or surplus (including a dividend payable in
shares of Common Stock), then thereafter each holder of shares of
Series A Preferred Stock upon conversion thereof will be entitled
to receive the number of shares of Common Stock into which such
Series A Preferred Stock shall be converted and, in addition and
without payment thereof, the cash, stock or other securities and
other property (including Common Stock) which such holder would
have received by way of dividends or distributions (otherwise than
out of earnings or surplus) if continuously since the record date
for any such dividend or distribution such holder (i) had been the
record holder of the number of shares of Common Stock into which
such shares of Series A Preferred Stock shall be convertible, and
(ii) had retained all dividends or distributions in stock or
securities payable in respect of such Common Stock or in respect
of any
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stock or securities paid as dividends or distributions and
originating directly or indirectly from such Common Stock.
(ii) Subdivisions and Combinations. In case the
corporation shall at any time subdivide or split its outstanding
shares of Common Stock into a greater number of shares, the Series
A Conversion Price in effect immediately prior to such subdivision
or split shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the corporation shall be
combined into a smaller number of shares, the Series A Conversion
Price in effect immediately prior to such combination shall be
proportionately increased.
(iii) Reorganizations. In any capital reorganization or
reclassification of the capital stock of the corporation, or
consolidation or merger of the corporation with another
corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for shares of
Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Series
A Preferred Stock shall thereafter have the right to receive, upon
the basis and upon the terms and conditions specified in such
reorganization, reclassification, consolidation, sale or merger in
lieu of the shares of Common Stock of the corporation immediately
theretofore receivable upon the conversion of the Series A
Preferred Stock, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number
of outstanding shares of Common Stock equal to number of shares of
Common Stock immediately theretofore receivable upon the
conversion of the Series A Preferred Stock had such
reorganization, reclassification, consolidation, merger or sale
not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the holders of
the Series A Preferred Stock to the end that the provisions hereof
(including without limitation provisions for adjustments of the
Series A Conversion Price for the Series A Preferred Stock and of
the number of shares receivable upon the conversion of the Series
A Preferred Stock) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets
thereafter receivable upon the conversion of the Series A
Preferred Stock. The corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof the surviving corporation (if other than this
corporation), the corporation resulting from such consolidation or
the corporation purchasing such assets shall assume by written
instrument executed and mailed to the registered holders of the
Series A Preferred Stock at the last address of such holders
appearing on the books of the corporation the obligation to
deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holders may
be entitled to receive.
(2) Notice Regarding Series A Conversion Price Adjustments. Upon any
adjustments of the Series A Conversion Price for the Series A Preferred Stock,
then and in each such case the corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the registered holders of the
Series A Preferred Stock at the addresses of such holders as shown on the books
of the corporation, which notice shall state the Series A Conversion Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such
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price upon the conversion of the Series A Preferred Stock, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(3) Other Notices. In case at any time:
(i) the corporation shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other than
regular cash dividends) to the holders of its Common Stock;
(ii) the corporation shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of
stock of any class or other rights;
(iii) there shall be any capital reorganization,
reclassification of the capital stock of the corporation, or
consolidation or merger of the corporation with, or sale of all or
substantially all of its assets to, another corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the corporation;
then, in any one or more said cases, the corporation shall give written notice,
by first-class mail, postage prepaid, addressed to the holders of the Series A
Preferred Stock at the addresses of such holders as shown on (aa) the books of
the corporation, on the date on which the books of the corporation shall close
or a record shall be take for such dividend, distribution or subscription
rights, or (bb) such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up shall take place, as the case may
be. Such notice shall also specify the date as of which the holders of Common
Stock of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be. Such written notice shall be given at least 20
days prior to the action in question and not less than 20 days prior to the
record date or the date on which the corporation's transfer books are closed in
respect thereto.
(b) Conversion of Series B Preferred Stock. At the option of
the holder thereof, each share of Series B Preferred Stock shall be convertible
at any time during the period commencing on the day on which the resale of the
Common Stock underlying the Series B Preferred Stock (the "Series B Conversion
Stock") is registered under the Securities Act and expiring on September 23,
2001; provided, however, that if upon such expiration date the Series B
Conversion Stock is not subject to an effective Registration Statement under the
Securities Act, such expiration date shall be extended until 30 days after the
Series B Conversion Stock is subject to an effective registration statement
under the Securities Act (the "Extension Period"). Each share of Series B
Preferred Stock shall be convertible at the office of the corporation or any
transfer agent for such stock into such number of fully paid and nonassessable
shares of the corporation's Common Stock as is determined by dividing the Series
B Original Issue Price, subject to adjustment as provided in
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<PAGE>
Section 3.5, by the Series B Conversion Price applicable to such shares
determined as hereafter provided, in effect on the date the certificate
representing such share is surrendered for conversion (the "Series B Conversion
Date"). The Series B Conversion Price initially will be $3.25. After February
15, 1999, the Series B Conversion Price shall be equal to the average closing
bid price of one share of the corporation's Common Stock as quoted by the Nasdaq
SmallCap Market, the Nasdaq National Market or the principal exchange upon which
shares of the corporation's Common Stock may be listed, or, if the corporation's
Common Stock shall not then be quoted on the Nasdaq SmallCap Market or the
Nasdaq National Market or listed on a national securities exchange, but shall
otherwise be traded in the over-the-counter market, on such over-the-counter
market, for the 20 consecutive trading days prior to the Series B Conversion
Date (the "Trading Period") multiplied by .8 (the "Series B Conversion Price");
provided, however, that in no event shall the Series B Conversion Price exceed
$2.50 per share or be less than $0.75 (the "Maximum Price" and "Minimum Price,"
respectively) per share; and provided, further, that appropriate adjustments
shall be made in determining the average closing bid price if a recapitalization
or other event affecting the corporation's Common Stock shall occur during the
Trading Period.
(1) Dividend Payment. Should the corporation, pursuant to
Section 3.2 hereof, not elect to pay all outstanding, cumulative, accrued and
unpaid dividends on the Series B Preferred Stock in shares of its Common Stock,
the corporation shall pay, in immediately available funds, to the holder of any
shares of Series B Preferred Stock being converted, all such dividends within
five business days of the date that it receives notice of such holder's intent
to convert such shares pursuant to (3) below. Separately, should the corporation
elect to pay all outstanding, cumulative, accrued and unpaid dividends on the
Series B Preferred Stock in shares of its Common Stock, it shall, within five
business days of receiving a holder's notice of intent to convert, deliver
certificates representing such shares to the holder of the Series B Preferred
Stock.
(2) Automatic Conversion. Any shares of Series B Preferred
Stock remaining outstanding on the later of September 23, 2001 or the expiration
of any Extension Period shall be automatically converted as of such date
pursuant to the conversion terms of Section 3.4(b) above. In any event, the
corporation shall, within five business days after automatic conversion of the
Series B Preferred Stock, issue and deliver a certificate or certificates for
the number of shares of the corporation's Common Stock to which each former
holder of Series B Preferred Stock is entitled. Notwithstanding the foregoing,
no automatic conversion of the Series B Preferred Stock shall occur pursuant to
this Section unless (i) all shares of the corporation's Common Stock underlying
the shares of Series B Preferred Stock may be sold pursuant to an effective
registration statement under the Securities Act, (ii) the corporation's Common
Stock is listed and trading on The Nasdaq Stock Market, and (iii) the
corporation has reserved and available for issuance a number of shares of its
Common Stock sufficient to cover conversion of all outstanding shares of Series
B Preferred Stock.
(3) Mechanics of Conversion. Before any holder of Series B
Preferred Stock shall be entitled to convert the same into shares of the
corporation's Common Stock, he, she or it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the
- 7 -
<PAGE>
corporation or of any transfer agent for the Series B Preferred Stock, and shall
give written notice, via facsimile, to the corporation, at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of the
corporation's Common Stock are to be issued. The corporation shall, immediately
thereafter (and in any event no more than five business days thereafter), issue
and deliver to such holder of Series B Preferred Stock at the address shown on
the corporation's records or at such other address as such party may designate
by written notice to the corporation, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of the
corporation's Common Stock to which such holder shall be entitled pursuant to
Section 3.4(b) and a certificate representing unconverted shares of Series B
Preferred Stock, if any. Such conversion shall be deemed to have been made
immediately prior to the close of business on the Series B Conversion Date, and
the person or persons entitled to receive the shares of the corporation's Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of the corporation's Common Stock as of
such date.
(4) Mechanics of Automatic Conversion. On the Series B
Conversion Date with respect to the automatic conversion pursuant to subsection
3.4(b)(2) above, the certificates representing shares of Series B Preferred
Stock shall immediately represent that number of shares of the corporation's
Common Stock into which such shares are convertible. Holders of Series B
Preferred Stock shall deliver their certificates, duly endorsed in blank, to the
principal office of the corporation, together with a notice setting out the name
or names (with addresses) and denominations in which the certificates
representing such shares of Common Stock issuable upon conversion are to be
issued and including instructions for delivery thereof. The person entitled to
receive the shares of the corporation's Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock at and on the Series B Conversion Date, and the rights of such
person as a holder of shares of Series B Preferred Stock shall cease and
terminate at and on the Series B Conversion Date, in any case without regard to
any failure by such holder to deliver the certificates or the notice required by
this subsection 3.4(b)(4). On the Series B Conversion Date with respect to
automatic conversion, the corporation shall pay all outstanding, cumulative,
accrued and unpaid dividends, either by the issuance of shares of its Common
Stock or in cash, pursuant to the provisions set forth in 3.2(b)(1) above;
provided, however, that should the corporation elect to pay such dividends by
the issuance of additional shares of its Common Stock, the person entitled to
receive such shares of the corporation's Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such
additional shares on the Series B Conversion Date
(5) Notice of Adjustment. The corporation shall provide all
holders of shares of Series B Preferred Stock five business days prior written
notice of any adjustments in the Series B Original Issue Price, the Maximum
Price, the Minimum Price or any other adjustments made pursuant to the
provisions hereof.
- 8 -
<PAGE>
(c) General Provisions.
(1) Common Stock Defined. As used in this Section 3.4, the
term "Common Stock" shall mean and include the corporation's presently
authorized Common Stock and shall also include any capital stock of any class of
the corporation hereafter authorized which shall have the right to vote on all
matters submitted to the shareholders of the corporation and shall not be
limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution, or winding up of this
corporation; provided that the shares receivable pursuant to conversion of the
Preferred Stock shall include shares designated as Common Stock of this
corporation as of the date of issuance of such Preferred Stock, or, in case of
any reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in section 3.4(a)(1)(iii) above.
(2) No Impairment. The corporation will not, by amendment of
these Amended and Restated Articles of Incorporation or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3.4 and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of the Preferred Stock against impairment.
(3) No Fractional Shares. No fractional shares shall be
issued upon the conversion of any share or shares of the Preferred Stock, and
the number of shares of the corporation's Common Stock to be issued in
connection with each conversion shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Preferred Stock the
holder is at the time converting into shares of the corporation's Common Stock
and the number of shares of such Common Stock issuable upon such aggregate
conversion.
(4) Notices of Record Date. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the corporation shall mail to each
holder of Series A Preferred Stock, at least 30 days, 20 days in the case of the
holders of Series B Preferred Stock, prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(5) Reservation of Stock Issuable Upon Conversion. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares of
its Common Stock as shall from time to time be sufficient to effect the
conversion
- 9 -
<PAGE>
of all outstanding shares of the Preferred Stock; and if at any time the number
of authorized but unissued shares of the corporation's Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Preferred Stock, the corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to the corporation's
Amended and Restated Articles of Incorporation.
(6) Notices. Any notice required by the provisions of this
Section 3.4 to be given to the holders of shares of Series B Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his, her or its address appearing on
the books of the corporation.
3.5. Anti-Dilution Provisions.
(a) In case at any time the corporation shall subdivide its
outstanding shares of Common Stock into a greater number of shares, the
Series B Original Issue Price, the Maximum Price and the Minimum Price
in effect immediately prior to such subdivision shall be
proportionately reduced, and the corporation shall subdivide the Series
B Preferred Stock in the same proportion. In case at any time the
outstanding shares of the corporation's Common Stock shall be combined
into a smaller number of shares, the Series B Original Issue Price, the
Maximum Price and the Minimum Price in effect immediately prior to such
combination shall be proportionately increased, and the corporation
shall combine the Series B Preferred Stock in the same proportion. Any
adjustment under this paragraph 3.5(a) shall become effective at the
close of business on the date the subdivision or combination shall
become effective. The corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Series B Preferred Stock to such
number of shares as shall be sufficient for any such purposes,
including engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendment to the corporation's Amended and
Restated Articles of Incorporation.
(b) The corporation shall provide the holders of Series B
Preferred Stock with at least ten days prior written notice of any
capital reorganization or reclassification of the capital stock of the
corporation, or consolidation or merger of the corporation with another
corporation, or the sale of all or substantially all of the
corporation's assets to another corporation. Further, if any of the
foregoing events shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation, merger or sale,
lawful and adequate provision shall be made whereby the holders of
Series B Preferred Stock shall thereafter have the right to receive,
upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the corporation immediately
theretofore receivable upon the conversion of shares of Series B
Preferred Stock, such stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to
- 10 -
<PAGE>
the number of shares of such stock immediately theretofore receivable
upon the conversion of shares of Series B Preferred Stock had such
reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the holders of Series B
Preferred Stock to the end that the provisions hereof (including
provisions for adjustments of the Series B Conversion Price and of the
number of shares of Common Stock issuable upon the conversion) shall
thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
conversion of such Series B Preferred Stock. The corporation shall not
effect any such reorganization, reclassification, consolidation, merger
or sale unless prior to the consummation thereof the successor
corporation (if other than the corporation) resulting from such
consolidation or merger, or the corporation purchasing such assets,
shall assume by operation of law or written instrument, the obligation
to deliver to such holders of Series B Preferred Stock such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holders of Series B Preferred Stock may be entitled to
receive. Notice of such assumption shall be promptly mailed to the
registered holders of Series B Preferred Stock hereof at the last
address of such holder appearing on the books of the corporation.
(c) Upon any adjustment of the Series B Original Issue Price,
the Maximum Price or the Minimum Price, then, and in each such case,
the corporation shall give written notice thereof, by first class mail,
postage prepaid, addressed to each registered holder of Series B
Preferred Stock at the address of such holder as shown on the books of
the corporation, which notice shall state the Series B Original Issue
Price, the Maximum Price or the Minimum Price resulting from such
adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(d) If any event occurs as to which in the good faith
determination of the Board of Directors of the corporation the other
provisions of this Section 3.5 are not strictly applicable or if
strictly applicable would not fairly protect the purchase rights of the
holders of Series B Preferred Stock in accordance with the essential
intent and principles of such provisions, then the Board of Directors
shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect
such purchase rights as aforesaid.
3.6. Voting Rights of Preferred Stock. The holder of each share of
Preferred Stock shall have the right to vote on all matters submitted to the
corporation's shareholders the number of votes that shall be equal to the number
of shares of the corporation's Common Stock into which such holder's shares of
Preferred Stock shall then be convertible (assuming a conversion as of the
record date set for the vote).
3.7 Special Voting Rights for Series A Preferred Stock. Without the
affirmative vote or consent of holders of at least a majority of the Series A
Preferred Stock at the time outstanding, voting separately as a class, the
corporation shall not:
- 11 -
<PAGE>
(a) Authorize or issue any (i) additional Series A Preferred
Stock or (ii) shares of stock having priority over the Series A
Preferred Stock or ranking on a parity therewith as to the payment of
dividends or as to the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the
corporation; or
(b) Declare or pay any dividend or make any other distribution
on any shares of capital stock of the corporation at any time created
and issued ranking junior to Series A Preferred Stock with respect to
the right to receive dividends and the right to the distribution of
assets upon liquidation, dissolution or winding up of the corporation
(the "Junior Stock"), other than dividends or distributions payable
solely in shares of Junior Stock, or purchase, redeem or otherwise
acquire for any consideration (other than in exchange for or out of the
net cash proceeds of the contemporaneous issue or sale of other shares
of Junior Stock) or set aside as a sinking fund for the redemption or
repurchase of any shares of Junior Stock; or
(c) Amend the articles of incorporation of the corporation so
as to adversely affect any of the rights, preferences or privileges of
the holders of Series A Preferred Stock.
3.8. Status of Converted Stock. In the event any shares of Preferred
Stock shall be converted pursuant to Section 3.4 hereof, the shares of Preferred
Stock so converted shall be canceled.
Article 4. No Cumulative Voting
There shall be no cumulative voting by the shareholders of the
corporation.
Article 5. No Preemptive Rights
The shareholders of the corporation shall not have any preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any class, kind or series of the corporation.
Article 6. Written Action by Directors
An action required or permitted to be taken at a meeting of the board
of directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action signed,
or counterparts of a written action signed in the aggregate, by the number of
directors that would be required to take the same action at a meeting of the
board of directors of the corporation at which all of the directors were
present.
- 12 -
<PAGE>
Article 7. Director Liability
A director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Sections 302A.559 or 80 A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the date
when this Article 7 became effective.
If the Minnesota Business Corporation Act is hereafter amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of a director of the corporation shall be eliminated or
limited to the fullest extent permitted by the Minnesota Business Corporation
Act, as so amended.
Any repeal or modification of the foregoing provisions of this Article
7 by the shareholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
- 13 -
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 299 299
<SECURITIES> 0 0
<RECEIVABLES> 2,607 2,607
<ALLOWANCES> 0 0
<INVENTORY> 1,397 1,397
<CURRENT-ASSETS> 4,633 4,633
<PP&E> 308 308
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 8,424 8,424
<CURRENT-LIABILITIES> 972 972
<BONDS> 1,750 1,750
0 0
544 544
<COMMON> 6,681 6,681
<OTHER-SE> (1,523) (1,523)
<TOTAL-LIABILITY-AND-EQUITY> 8,424 8,424
<SALES> 1,659 5,132
<TOTAL-REVENUES> 1,659 5,132
<CGS> 519 1,770
<TOTAL-COSTS> 1,051 2,926
<OTHER-EXPENSES> (11) 91
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (69) (215)
<INCOME-PRETAX> 9 312
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 9 312
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9 312
<EPS-PRIMARY> .001 .018
<EPS-DILUTED> .000 .015
</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:
Liquidity and Capital Resources. As of September 30, 1998, the Company had
working capital of approximately $3,661,000. The Company believes it has
sufficient working capital to pay its current liabilities. The Company believes
its working capital will be sufficient to fund its liabilities and believes its
working capital may improve as the Company's profitability improves and access
to capital markets remains available to the Company. Nevertheless, the Company
can provide no assurance as to its continued profitability and access to the
capital markets.
Reliance Upon Key Personnel. The Company will be relying heavily upon the
abilities of key personnel, in particular, two technicians. Jeff Jensen and
Norm Freedman, and division head Bob Donaldson, to further develop the VCC. If
any of these employees should cease to be employed by the Company or for any
reason be unable to continue in their respective capacities as employees of the
Company, the Company would be required to hire a comparable employee. There can
be no assurance that it would be able to do so quickly and at an affordable
compensation rate. While these three employees have incentive options and are
bound by a confidentiality requirement, the Company does not have "key man"
insurance for them and cannot guarantee their continued employment.
Competitive Conditions. The Company's industry is characterized by rapidly
evolving technology and intense competition. The Company is aware of several
other competitors. These competitors have substantially greater resources and
experience in research and development and marketing than the Company and may
therefore represent significant competition for the Company. However, unlike
the Company, no competitor produces a complete enterprise computing system, but
rather components that could be combined to form such a system. The Company's
management believes that the Company's ability to produce an integrated whole
gives the Company a competitive advantage. Nevertheless, there can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive.
New Product with Uncertain Demand. The concept of an external monitor and
control system for 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 fourteen
customers, 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.
If the current capital of the Company is insufficient to meet its operating and
working capital 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 none of the existing customers of
the Company's products are 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.
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.
