<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 March 31, 1998
Commission File Number 0-14692
----------------------------------------------
GLOBAL MAINTECH CORPORATION
MINNESOTA 41-1523657
State of Incorporation I.R.S. Employer Identification No.
6468 City West Parkway, Eden Prairie, MN 55344
Telephone Number: (612) 944-0400
----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
----------------------------------------------
On April 13, 1998 there were 17,403,258 shares of the Registrant's no par value
common stock outstanding.
Transitional small business issuer format: No
Page 1 of 12
<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
year ended March 31, 1998.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 596,219 $1,726,889
Accounts receivable, less allowance for
doubtful accounts of $15,000 1,473,379 576,573
Other receivables 740,085 26,111
Inventories 1,040,838 797,435
Prepaid expenses and other 107,679 77,308
Notes receivable -- 75,000
Current portion of investment in
sales-type leases -- 286,997
---------- ----------
Total current assets 3,958,200 3,566,313
Property and equipment, net 312,961 308,347
Leased equipment 194,552 209,033
Software development costs, net 1,229,198 955,835
Net investment in sales-type leases,
net of current portion -- 492,918
Other assets, net 1,050,535 331,003
---------- ----------
TOTAL ASSETS $6,745,446 $5,863,449
========== ==========
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 474,238 $ 396,159
Current portion of notes payable 100,000 100,000
Accrued liabilities:
Compensation and payroll taxes 99,068 123,605
Interest 68,085 --
Other 33,546 10,588
Deferred revenue 65,127 52,443
----------- -----------
Total current liabilities 840,064 682,795
----------- -----------
Subordinated notes payable, less current portion 1,900,000 1,900,000
----------- -----------
Total liabilities 2,740,064 2,582,795
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A,
convertible into one common stock share for each pre-
ferred share, no par value; 887,980 shares authorized;
233,446 shares in 1998 and 244,113 shares in 1997
issued and outstanding; total liquidation preference of
outstanding shares-$438,000 109,486 114,489
Common stock, no par value; 49,112,020 shares
authorized; 17,403,258 shares in 1998 and 15,248,816 -- --
shares in 1997 issued and outstanding
Additional paid-in-capital 5,788,423 5,295,829
Notes receivable-officers (294,500) (294,500)
Accumulated deficit (1,598,027) (1,835,164)
----------- -----------
Total stockholders' equity 4,005,382 3,280,654
----------- -----------
$ 6,745,446 $ 5,863,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Net sales
Systems $ 1,322,292 $ 491,385
Maintenance, consulting and other 474,108 215,166
------------ ------------
Total net sales 1,796,400 706,551
Cost of sales
Systems 483,299 105,947
Maintenance, consulting and other 201,171 74,633
------------ ------------
Total cost of sales 684,470 180,580
------------ ------------
Gross profit 1,111,930 525,971
Operating expenses
Selling, general and administrative 756,170 316,091
Research and development 147,322 44,326
------------ ------------
Income from operations 208,438 165,554
Other income (expense):
Interest expense (74,098) (16,547)
Interest income 113,870 --
Other (11,074) --
------------ ------------
Total other income (expense), net 28,698 (16,547)
------------ ------------
Income from continuing operations before income taxes 237,136 149,007
Provision for income taxes -- 2,500
------------ ------------
Income from continuing operations 237,136 146,507
Gain from discontinued operations -- 70,000
------------ ------------
Net income $ 237,136 $ 216,507
============ ============
Basic earnings per common share:
Continuing operations $ 0.014 $ 0.013
Discontinued operations -- 0.005
------------ ------------
Net earnings $ 0.014 $ 0.018
============ ============
Diluted earnings per common share:
Continuing operations $ 0.012 $ 0.011
Discontinued operations -- 0.004
------------ ------------
Net earnings $ 0.012 $ 0.015
============ ============
Shares used in calculations:
Basic 16,625,070 13,736,391
Diluted 19,784,645 16,732,492
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net income $ 237,136 $ 216,507
Adjustments to reconcile net income to
net cash provided (used) in operating activities:
Depreciation and amortization 283,888 82,598
Changes in operating assets and liabilities:
Increase in accounts receivable (896,806) (486,859)
Increase in other receivables (713,974) --
Increase in inventories (243,403) (38,713)
Increase in prepaid expenses and other (30,371) (24,038)
Increase (decrease) in accounts payable 78,079 (82,548)
Increase (decrease) in accrued liabilities 66,506 (4,276)
Increase (decrease) in deferred revenue 12,684 (87,711)
----------- ----------
Cash used by operating and discontinued activities (1,206,261) (425,040)
----------- ----------
Cash flows from investing activities:
Sale of investment in sales-type leases 712,332 --
Purchase of property and equipment (59,613) (42,454)
Investment in leased equipment -- (10,729)
Investment in software development costs (439,428) (263,131)
Investment in other assets (700,291) (17,500)
Receipt of payment on note receivable 75,000 --
----------- ----------
Cash used by investing activities (412,000) (333,814)
----------- ----------
Cash flows from financing activities:
Disbursements for deferred debt costs
Proceeds from issuance of common stock 487,591 1,104,037
Payments of short-term notes payable -- (107,817)
Payments of long-term notes payable -- (16,600)
----------- ----------
Cash provided by financing activities 487,591 979,620
----------- ----------
Net increase (decrease) in cash (1,130,670) 220,766
Cash and cash equivalents at beginning of
period 1,726,889 32,890
----------- ----------
Cash and cash equivalents at end of period $ 596,219 $ 253,656
=========== ==========
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 March 31, 1998, the Company had sold an
additional 5 VCC Units for a total of 31. 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. and Southern California Gas 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:
Three Months Ended March 31,
1998 1997
---------------------------------
BASIC EARNINGS PER SHARE
Weighted average shares 16,625,070 13,736,391
DILUTED EARNINGS PER SHARE
Weighted average shares 16,625,070 13,736,391
Stock options and Warrants 2,926,134 2,630,916
Conversion of preferred stock 233,441 365,185
---------------------------------
Total dilutive shares 19,784,645 16,732,492
=================================
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 an initial payment of $500,000 and additional payments of up to
$3,500,000, 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)
These 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 payment of $500,000 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.
COMMON STOCK ISSUANCE
In February 1998 the Company began a 400,000 share private placement
of common stock at $1.90 per share and had issued 280,000 of such shares as of
March 31, 1998. Maven Securities, Inc. is acting as the placement agent wherein
the Company agreed to pay the placement agent a 10% commission, a 3% fee for
expenses and to issue to such agent a warrant to purchase up to 10% of the
number of shares of common stock issued in connection with such offering at an
exercise price of $1.90 per share. 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.
RECLASSIFICATIONS
Certain amounts previously reported in 1997 have been reclassified to
conform to the 1998 presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales from continuing operations for the first quarter ended March 31,
1998 were approximately $1,796,000 compared to sales from continuing operations
for the first quarter of 1997 of approximately $707,000. The $1,089,000 increase
is primarily related to an increase of $831,000 in unit sales of the Virtual
Command Center (VCC) and an increase of $137,000 in software license and
hardware maintenance fees. The Company also recorded sales of $116,000 for the
first time from its new computer-aided design software line of business (the
"CAD" Business). See "Footnotes to Interim Consolidated Financial
Statements--Asset Purchase and Software License."
Cost of sales increased in the first quarter ended March 31, 1998 to
38% from 26% in the first quarter of 1997. This increase is related to increased
distribution costs, increased amounts of software amortization and an increase
in the cost of parts. Distribution costs increased because certain of the sales
in the first quarter of 1998 were made through a third party distributor. The
Company had no third party distribution arrangements in the first quarter of
1997. Software amortization increased in 1998 as a result of increases in
capitalized software development costs. The increase in equipment cost is
related to an upgrade of computer parts made to the VCC after March 31, 1997. As
a result, the gross margin in the first quarter of 1998 was 62% compared to 74%
in the first quarter of 1997.
Selling, general and administrative costs in the first quarter of 1998
were approximately $756,000 compared to $316,000. The increase of $440,000 is
primarily due to an increase in salaries of $274,000. The salary increase is
substantially due to an increase in the number of employees, the majority of
which are in sales and sales support. The remaining portion of the increase,
$166,000, is primarily due to increases in travel and related costs of
approximately $43,000, marketing and advertising costs of approximately $12,000,
depreciation and equipment costs of approximately $66,000, and building and
utility costs of approximately $38,000. The increased sales activity is
reflected in the increases in travel and entertainment costs, and marketing and
advertising costs increases reflects the effort by the Company to facilitate
sales. However, the increase in the number of employees to 18 in March 1998 from
10 in March 1997 is the primary activity to which the cost increases relate. The
depreciation and equipment cost increases are the result of increased purchases
of furniture and equipment for the new employees and the increases in rented
square footage for these new employees is reflected in the increased rent and
utility costs.
Research and development costs in the first quarter of 1998 were
approximately $147,000 compared to $44,000 in the first quarter of 1997. The
increase of $103,000 is due to increases in search firm fees of $45,000 paid to
acquire some of the additional employees with software expertise. The remaining
increase is due to salaries paid for product research and development.
Non-operating expenses consist of interest expense, amortization of
debt issue costs and interest income. The increase in interest expense and
amortization of debt issue costs is due to the $2,000,000 of subordinated debt
issued in June 1997. Interest income is from short-term investments and from the
sale in March 1998 of certain sales-type leases held by the Company.
Net cash used in operating and discontinued activities for the quarter
ended March 31, 1998 was approximately $1,206,000 compared to a use of cash of
approximately $425,000 for such activities in the quarter ended March 31, 1997.
Cash was provided from net income, depreciation and amortization totaling
approximately $521,000 in the quarter ended March 31,1998 compared to
approximately $299,000 from the same sources in the quarter ended March 31,
1997. Cash was used to fund the approximate increases in accounts receivable of
$897,000, inventory of $243,000, prepaid expenses of $30,000. In addition, the
Company entered into a contract to sell its sales-type leases on a non-recourse
basis which sale was recorded in current other receivables and resulted in the
increase of $714,000. Cash was also provided by increases in accounts payable of
approximately $78,000, accrued expenses of approximately $67,000 and deferred
revenue of approximately $13,000. In the quarter ended March 31, 1997, the
Company used cash to fund an increases in accounts receivable, inventory and
prepaid expenses and to reduce accounts payable, accrued expenses and deferred
revenue which were partially offset by cash sources from income and
depreciation.
Cash used by investing activities of approximately $412,000 reflects
investments of $439,000 in capitalized computer software development costs,
which represent costs incurred after technological feasibility
9
<PAGE>
has been established in connection with the development of enhancements to one
or more particular software programs, and approximately $500,000 in software
license costs which reflect the allocation of the purchase price related to the
acquisition of the CAD Business. The Company also purchased approximately
$60,000 of additions to machinery and equipment during the first quarter of
1998. Finally, cash was provided by the receipt of payment of $75,000 on a note
receivable and by the non-recourse sale of the Company's investment in sales-
type leases. During the first quarter of 1997, cash used in investing activities
totaled $334,000, the majority of which was in investments in software
development costs of $263,000 and purchases of property and equipment of
approximately $42,000.
Net cash provided by financing activities in the first quarter of 1998
was approximately $488,000. This is primarily due to the receipt of net proceeds
from the issuance of common stock of approximately 280,000 shares at a per share
price of $1.90 in connection with a private offering of such securities. In the
first quarter of 1997, the Company raised $1,104,000 from the issuance of common
stock at a per share price of $0.75 which was partially offset by a reduction of
notes payable of $125,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had positive working capital of
approximately $3,118,000 compared to positive working capital as of December 31,
1997 of $2,884,000. Working capital was improved by net income and non-cash
depreciation totaling approximately $521,000, the non-recourse sale of the
investment in sales-type leases and the net proceeds from the common stock
issuance. Working capital was negatively affected by approximately $500,000 of
software license costs incurred in connection with the purchase of the CAD
Business and the additional investment in software development costs, both of
which are classified as long-term assets.
During the quarter ended March 31, 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 moderately 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 an 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.
10
<PAGE>
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES
During the first quarter of 1998, the Company issued 280,000 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 agency 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 up to 10%
of the number of shares of common stock issued in connection with such
offering at an exercise price of $1.90 per share. The aggregate
offering price for such shares was $532,000 and the aggregate
placement agent commissions and expenses were $69,160. The shares
issued were exempt from registration under Rule 506 of Regulation D of
the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27--Financial Data Schedule
99--Cautionary Statement
(b) Reports on Form 8-K
None.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL MAINTECH CORPORATION
May 14, 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.
May 14, 1998 By: /s/ David McCaffrey
----------------------------------
David McCaffrey
Chief Executive Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 596
<SECURITIES> 0
<RECEIVABLES> 1,473
<ALLOWANCES> 0
<INVENTORY> 1,041
<CURRENT-ASSETS> 3,958
<PP&E> 313
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,745
<CURRENT-LIABILITIES> 840
<BONDS> 1,900
0
109
<COMMON> 5,494
<OTHER-SE> (1,598)
<TOTAL-LIABILITY-AND-EQUITY> 6,745
<SALES> 1,796
<TOTAL-REVENUES> 1,796
<CGS> 684
<TOTAL-COSTS> 903
<OTHER-EXPENSES> (102)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 237
<INCOME-TAX> 0
<INCOME-CONTINUING> 237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237
<EPS-PRIMARY> 0.014
<EPS-DILUTED> 0.012
</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 March 31, 1998, the Company had
working capital of approximately $3,118,000. 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
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the VCC is large. However, to date, the Company has sold to only eight
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.
