<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 14, 1999
GLOBAL MAINTECH CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Minnesota 0-14692 41-1523657
- ---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission file number) (IRS employer
of incorporation) identification No.)
</TABLE>
7578 Market Place Drive, Eden Prairie, MN 55344
-----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 944-0400
--------------
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE>
The undersigned registrant, Global MAINTECH Corporation (the "Company"),
hereby amends Items 7 of its Current Report on Form 8-K dated April 14, 1999
(initially filed with the Commission on April 29, 1999) to include the financial
statement information indicated in Item 7 below. The original April 29, 1999
filing of the Form 8-K described the Company's April 14, 1999 acquisition of
Breece Hill Technologies, Inc. ("Breece Hill") pursuant to an Agreement dated as
of March 5, 1999.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired
-----------------------------------------
The following financial statements of Breece Hill and report of
PriceWaterhouseCoopers, LLP, Breece Hill's independent public
accountants, are included in this Report:
1. Report of PriceWaterhouseCoopers, LLP.
2. Financial statements and accompanying footnotes of Breece
Hill Technologies, Inc. at December 31, 1998 and 1997.
(b) Pro Forma Financial Information
-------------------------------
The following pro forma financial information is included in this
Report:
1. Unaudited Pro Forma Condensed Consolidated Statements of
Earnings for the fiscal year ended December 31, 1998.
2. Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1999 and accompanying Notes.
(c) Exhibit No. Description
----------- -----------
23.1 Consent of PriceWaterhouseCoopers, LLP, independent
public accountants.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to Current Report to be signed
on its behalf by the undersigned hereunto duly authorized.
Date: June 28, 1999
GLOBAL MAINTECH CORPORATION
By /s/ David McCaffrey
--------------------------------
David McCaffrey
Chief Executive Officer
<PAGE>
Report of Independent Accountants
May 15, 1999
To the Board of Directors and Stockholders
of Breece Hill Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Breece Hill
Technologies, Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to this matter are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
<PAGE>
Breece Hill Technologies, Inc.
Balance Sheet
- -------------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Assets
Current Assets $ 1,483,524 $ 119,777
Cash and cash equivalents
Accounts receivable, net of an allowance for
doubtful accounts receivable of $720,000
and $525,000, respectively 6,258,170 4,596,291
Inventory, net 4,506,458 3,580,668
Prepaids and other assets 118,182 209,627
------------- -------------
Total current assets 12,366,334 8,506,363
Property and equipment, net 1,357,342 1,023,999
Noncurrent prepaids and other assets 515,331
------------- -------------
Total assets $ 14,239,007 $ 9,530,362
============= =============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 5,960,776 $ 10,026,773
Short-term debt 8,896,252 6,962,951
Accrued liabilities 733,768 558,841
------------- -------------
Total liabilities 15,590,796 17,548,565
------------- -------------
Commitments and contingencies (Note 10)
Stockholders' deficit:
Preferred stock, Series A, $.01 par value per
share; 10,000,000 shares authorized;
912,229 and 241,500 shares issued and
outstanding, respectively; $1,505,338
liquidation preference at December 31, 1998 2,415 9,122
Common stock, $.01 par value per share;
30,000,000 shares authorized; 15,507,462
and 15,367,847 shares issued, 15,338,614
and 15,198,999 shares outstanding,
respectively 153,678 155,075
Additional paid-in capital 9,159,447 10,621,457
Treasury stock, at cost (142,225) (142,225)
Subscription receivables (175,369)
Accumulated deficit (10,349,735) (18,661,632)
------------- -------------
Total stockholders' deficit (1,351,789) (8,018,203)
------------- -------------
Total liabilities and stockholders' deficit $ 14,239,007 $ 9,530,362
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Breece Hill Technologies, Inc.
Statement of Operations
- ------------------------------------
<TABLE>
<CAPTION>
For the Year Ended Three Months Ended
December 31, March 31,
--------------------------------- ------------------
1997 1998 1999
------------- ------------- ------------------
(unaudited)
<S> <C> <C>
Sales, net $ 29,042,411 $ 35,140,291 $ 9,217,230
Cost of goods sold (excluding depreciation) (21,766,994) (27,273,205) (6,934,847)
Depreciation (1,158,112) (1,735,805) (215,568)
Selling, general and administrative (8,592,308) (13,116,313) (1,632,312)
Research and development (2,435,848) (49,872) (95,495)
------------- ------------- ------------------
Loss from operations (4,910,851) (7,034,904) 339,008
Interest expense, net (904,239) (1,276,993) (206,443)
------------- ------------- ------------------
Loss before income taxes (5,815,090) (8,311,897) 132,565
Benefit from income taxes -- -- --
------------- ------------- ------------------
Net earnings (loss) $ (5,815,090) $ (8,311,897) $ 132,565
============= ============= ==================
Basic and diluted net loss per share $ (.38) $ (.54) $ 0.008
Weighted-average common shares outstanding 15,110,347 15,393,155 15,552,831
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Breece Hill Technologies, Inc.
Statement of Changes in Stockholders' Deficit
- ------------------------------------------------
<TABLE>
<CAPTION>
Preferred Common Additional
Paid-in Capital
------------------------ --------------------------
Shares Amount Shares Amount
----------- ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 15,036,547 $150,365 $ 8,019,430
Stock issued for cash and subscription 241,500 $2,415 254,553 2,546 829,274
receivables
Stock issued for prepayment of interest 66,433 664 90,644
on promissory notes
Treasury stock purchased
Stock issued for services 10,314 103 16,915
Detachable stock warrants issued in 203,184
conjunction with debt
Net loss
----------- --------- ----------- ---------- ------------
Balance at December 31, 1997 241,500 2,415 15,367,847 153,678 9,159,447
Stock issued for cash 670,729 6,707 195,901 1,960 1,157,061
Stock issued for prepayment of interest 57,121 571 73,686
on promissory notes
Cancellation of stock issued for (113,407) (1,134) (174,235)
subscription receivable
Detachable stock warrants issued in 405,498
conjunction with debt
Net Loss
----------- --------- ----------- ---------- ------------
Balance at December 31, 1998 912,229 $9,122 15,507,462 $155,075 $10,621,457
=========== ========= =========== ========== ============
Stock issued for cash
Stock issued for prepayment of interest
on promissory notes
Cancellation of stock issued for
subscription receivable
Detachable stock warrants issued in
conjunction with debt
Net Loss
Balance at March 31, 1999
<CAPTION>
Treasury Subscrip-tion Accumulated Total
Receiv-ables Deficit
------------------------------
Shares Amount
-------------- -------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (59,000)) $ (15,900) $(169,718) $ (4,534,645) $ 3,449,532
Stock issued for cash and subscription (81,684) 752,551
receivables
Stock issued for prepayment of interest 91,308
on promissory notes
Treasury stock purchased (109,848) (126,325) 76,033 (50,292)
Stock issued for services 17,018
Detachable stock warrants issued in 203,184
conjunction with debt
Net loss (5,815,090) (5,815,090)
---------- ---------- ---------- ------------- ------------
Balance at December 31, 1997 (168,848) (142,225) (175,369) (10,349,735) (1,351,789)
Stock issued for cash 1,165,728
Stock issued for prepayment of interest 74,257
on promissory notes
Cancellation of stock issued for 175,369
subscription receivable
Detachable stock warrants issued in 405,498
conjunction with debt
Net Loss (8,311,897) (8,311,897)
---------- ---------- ---------- ------------- ------------
Balance at December 31, 1998 (168,848) $(142,225) $ -- $(18,661,632) (8,018,203)
========== ========== ========== ============= ============
Stock issued for cash
Stock issued for prepayment of interest
on promissory notes
Cancellation of stock issued for
subscription receivable
Detachable stock warrants issued in
conjunction with debt
Net Loss
Balance at March 31, 1999
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Breece Hill Technologies, Inc.
Statement of Cash Flows
- --------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(5,815,090) $ (8,311,897)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for prepayment of interest on 17,018 74,257
promissory notes
Noncash interest expense 488,479 708,856
Provision for losses on accounts receivable 450,000 195,000
Provision for excess and obsolete inventory 379,799 120,201
Depreciation 1,158,112 1,735,805
Loss on disposal of property and equipment 657,184
Changes in:
Accounts receivable (2,744,365) 1,466,879
Inventory 988,408 383,300
Prepaids and other assets (82,833) 123,672
Accounts payable 1,241,650 4,065,996
Accrued liabilities 320,333 (174,927)
----------- ------------
Net cash provided by (used in) (2,941,305) 387,142
operating activities
----------- ------------
Cash Flows From Investing Activities
Purchases of property and equipment (973,870) (983,316)
----------- ------------
Net cash used in investing activities (973,870) (983,316)
----------- ------------
Cash Flows From Financing Activities
Proceeds from line of credit 2,874,647 32,391,091
Payments on line of credit (46,023) (34,987,163)
Proceeds from issuances of promissory notes 1,125,000 1,280,000
Payments on promissory notes (625,000) (617,229)
Proceeds from issuances of preferred stock 398,635 1,106,763
Proceeds from issuance of common stock 237,500 58,965
Proceeds from payments on subscription receivables 116,416
Treasury stock purchases (50,292)
----------- ------------
Net cash provided by (used in) 4,030,883 (767,573)
financing activities
----------- ------------
Net increase (decrease) in cash and cash 115,708 (1,363,747)
equivalents
Cash and cash equivalents at beginning of year 1,367,816 1,483,524
----------- ------------
Cash and cash equivalents at end of year $ 1,483,524 $ 119,777
=========== ============
Supplemental Disclosure of Cash Flow
Information
Interest paid with cash $ 414,349 $ 526,151
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
1. Organization, Financial Condition and Summary of Significant Accounting
Policies
Organization
Breece Hill Technologies, Inc. (the "Company"), a Delaware corporation,
engages in the design, development, manufacture and marketing of computer
magnetic tape subsystems for general commercial application. The Company's
customers are value-added resellers ("VARs") and distributors. On April
14, 1999, the Company was acquired by Global MAINTECH Corporation.
Financial Condition
The Company has a working capital deficit and a total stockholders' deficit
at December 31, 1998, and has subsequently incurred additional losses.
These factors, as well as other factors, raise substantial doubt about
whether the Company can continue as a going concern. Management is
currently attempting to obtain additional financing to fund future
operations. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets and liabilities that might be necessary should the Company be unable
to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly-liquid instruments purchased with original
maturities of three or fewer months to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
by the first-in, first-out cost flow assumption.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets. Leasehold improvements are generally amortized over the shorter of
their useful lives or the terms of the related leases, which amounts are
included in depreciation expense. Maintenance and repairs are expensed as
incurred.
Revenue Recognition and Product Warranty
Revenue from sales of products is generally recognized when shipment is
made, with provision made for estimated returns and price protection
pursuant to contractual provisions. The Company also provides for the
estimated costs to repair or replace products under warranty at the time of
sale.
Concentration of Credit Risk and Sales to Major Customers
The Company has concentrations of credit risk, primarily in accounts
receivable which are concentrated in the computer and peripherals industry.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
During the years ended December 31, 1997 and 1998, the respective
percentages of sales to each major customer were as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Customer A (stockholder) 25% 12%
Customer B 16% 32%
Customer C (stockholder) 13% 11%
</TABLE>
Accounts receivable from these customers accounted for approximately 27%
and 18% of the Company's total accounts receivable as of December 31, 1998
and 1997, respectively. A loss of any of these customers could adversely
impact the Company's results; however, the Company expects these business
relationships to continue in the foreseeable future.
Advertising and Research and Development Costs
Advertising and research and development costs are expensed as incurred.
The total amount charged to advertising expense during 1998 and 1997 was
$159,090 and $585,817, respectively.
<PAGE>
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, a revolving
line of credit and promissory notes payable. Except for the promissory
notes payable, the carrying amounts of financial instruments approximate
fair value due to their short maturities and/or variable rates of interest.
The fair values of the promissory notes payable at December 31, 1998, based
on rates available for similar types of arrangements, were not materially
different than the carrying amounts.
Stock Option Compensation
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its stock option plans and, accordingly, does not recognize
compensation cost for options granted to employees and directors whose
exercise price is equal to or exceeds the fair value of common stock as of
the grant date. Compensation expense is recognized on options to non-
employees over the related service period based on the fair value of such
options as of the grant date.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
more likely than not to be realized.
Basic and Diluted Net Loss per Share
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of
the incremental common shares issuable upon conversion of convertible
preferred stock (using the if-converted method) and shares issuable upon
the exercise of stock options and warrants (using the treasury stock
method). Common equivalent shares in 1998 and 1997 were excluded from the
computation as their effect was anti-dilutive.
Unaudited Financial Statements
The Company has prepared its unaudited financial statements in a manner
consistent with the preparation of its audited financial statements.
Use of Estimates
The Company has prepared these financial statements in conformity with
generally accepted accounting principles, which require the use of
management's estimates. Actual results could differ from the estimates
used.
2. Inventory
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Raw materials $3,608,188 $2,319,295
Work-in-process 308,858 175,529
Finished goods 969,211 1,585,844
Obsolescence reserve (379,799) (500,000)
---------- ----------
$4,506,458 $3,580,668
========== ==========
</TABLE>
3. Property and Equipment
Property and equipment consists of the following at December 31:
<PAGE>
<TABLE>
<CAPTION>
Useful Lives 1997 1998
------------------- ------------------- -----------------
<S> <C> <C> <C>
Demonstration units 2 $ 666,051
Computer equipment 3 788,268 $ 1,279,423
Manufacturing equipment 5-7 1,152,522 1,551,483
Furniture and fixtures 7 121,421 192,596
Leasehold improvements 2 130,369 151,107
----------- -----------
2,858,631 3,174,609
Less accumulated depreciation (1,501,289) (2,150,610)
----------- -----------
$ 1,357,342 $ 1,023,999
=========== ===========
</TABLE>
4. Short-Term Debt and Warrants Issued with Debt
Short-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Promissory notes issued September 30, 1996 $3,000,000 $2,318,605
Revolving line of credit 5,545,592 2,996,125
Promissory note issued January 10, 1997 500,000 414,826
Promissory note issued January 22, 1998 800,000
Promissory note issued March 4, 1998 200,000
Promissory note issued June 15, 1998 100,000
Promissory note issued July 13, 1998 150,000
Promissory note issued July 13, 1998 30,000
Unamortized debt discount (149,340) (46,605)
---------- ----------
$8,896,252 $6,962,951
========== ==========
</TABLE>
On January 22, 1998 and March 4, 1998, the Company executed two
subordinated promissory notes with an affiliate of a significant
stockholder. Total principal of $800,000 and $200,000 was originally due
on the maturity dates of July 22, 1998 and September 4, 1998, respectively.
In conjunction with the issuance of these promissory notes, the Company
issued a warrant to purchase 200,000 shares of the Company's common stock
with an exercise price of $1.65 per share and a term of five years. On
July 22, 1998, the Company amended the two subordinated promissory notes by
extending their maturity dates to January 4, 1999. Interest for both notes
was prepaid through the issuance of 57,121 shares of the Company's common
stock. In conjunction with the amendment of these promissory notes, the
Company issued an additional warrant to purchase 200,000 shares of the
Company's common stock with an exercise price of $1.65 per share and a term
of five years. In August 1998, the payment terms of the notes were further
amended and an additional warrant to purchase 60,231 shares of the
Company's common stock with an exercise price of $1.65 per share and a term
of three years was issued. The fair value of the warrants was recorded as
a debt discount. Note that the Company is currently in default on the
payments due under these promissory notes.
On June 15, 1998 and July 13, 1998, the Company executed three promissory
notes with affiliated stockholders in the amounts of $100,000, $150,000 and
$30,000. The notes accrue interest at the rate of 9.00% per annum and were
originally due in full on November 15, 1998 and October 15, 1998. See note
11 regarding their conversion of the promissory notes into common stock
subsequent to December 31, 1998.
On January 10, 1997, the Company executed a $500,000 subordinated
promissory note with an affiliate of a significant stockholder. Principal
payments of $27,778 are due monthly, beginning May 1, 1998, through the
maturity date of October 1, 1999. Interest has been prepaid through the
issuance of 59,144 shares of the Company's common stock. In conjunction
with the issuance of the promissory note, the Company issued a warrant to
purchase 100,000 shares of the Company's common stock with an exercise
price of $1.65 per share and a term of five years. The fair value of the
warrant was recorded as a debt discount.
<PAGE>
On April 1, 1997, the Company amended the payment terms of a $625,000
subordinated promissory note issued in 1996, extending the maturity date to
September 30, 1997. Interest for the extension period was prepaid through
the issuance of 7,289 shares of the Company's common stock. In conjunction
with the amendment of the promissory note, the Company issued a warrant to
purchase 125,000 shares of the Company's common stock with an exercise
price of $1.65 per share and a term of six years. The fair value of the
warrant was recorded as a debt discount.
On September 30, 1996, the Company executed a $3,000,000 subordinated
promissory note with an affiliate of a significant stockholder. Principal
payments of $166,667 are due monthly, beginning May 1, 1998, through the
maturity date of October 1, 1999. Interest has been prepaid through the
issuance of 387,109 shares of the Company's common stock. In conjunction
with the issuance of the promissory note, the Company issued a warrant to
purchase 600,000 shares of the Company's common stock with an exercise
price of $1.65 per share and a term of five years. The fair value of the
warrant was recorded as a debt discount.
During 1998, the Company amended its secured revolving line-of-credit
agreement by extending the expiration date to October 31, 1999. In
conjunction with the extension, the Company issued a warrant to purchase
17,210 shares of the Company's common stock with an exercise price of $1.65
per share and a term of five years. The fair value of the warrant was
recorded as a debt discount. The maximum borrowing limit is the lesser of
$8,000,000 or an amount determined as a percentage of the Company's
eligible accounts receivable and inventory. The line of credit bears
interest at the highest LIBOR rate in effect each month, plus 4.88% (10.50%
at December 31, 1998) provided that the interest rate in effect each month
is not less than 8.00%. The interest charged each month shall be a minimum
of $10,000, regardless of the amount of obligations outstanding. As of
December 31, 1998, the Company had no availability under the line of
credit.
The Company's debt arrangements contain certain covenants, including, among
others, limitations on the incurrence of additional debt and restrictions
on the payment of dividends to stockholders. The Company has violated its
covenants regarding providing its lenders with audited financial statements
within 90 days of the end of its fiscal year. No covenant waivers have
been obtained and accordingly, all of the Company's debt arrangements are
callable by the lenders. The debt arrangements are secured by the assets
of the Company, with the line of credit ranking senior to the subordinated
promissory notes in liquidation.
5. Capital Stock and Warrants Issued with Equity
Preferred Stock
All preferred stock is convertible, at the option of the holder, into
common stock at a conversion rate of one-for-one, subject to adjustment in
certain circumstances. At the option of the Company, all of the preferred
stock will automatically convert into shares of common stock immediately
prior to the first to occur of the following events: (i) closing of the
initial public offering of the Company's common stock or (ii) closing of a
sale of not less than 80% of the stock or substantially all of the assets
of the Company if the purchase price is in excess of $1.65 per share of
common stock.
In the event of liquidation of the Company, the holders of preferred stock
will be entitled to be paid out of the assets, prior and in preference to
any payment to common stock, the initial sales price per share plus all
accrued or declared but unpaid dividends thereon. If assets available for
distribution are insufficient to make payment in full on the liquidation
preferences, the assets will be distributed ratably based on each share's
percentage of the aggregate liquidation preference. Any remaining assets
legally available for distribution shall be distributed ratably to the
holders of the common stock.
Voting Rights and Board Seats
Each share of common and preferred stock are entitled to one vote, on an as
converted basis, and vote together as a single class upon any matter
submitted to stockholders for a vote.
Dividend Rights
The holders of common and preferred stock are entitled to receive, out of
funds legally available, cash dividends, when, as and if declared by the
Company's board of directors. The holders of the preferred stock
<PAGE>
are entitled to receive cash dividends in an amount equal to the common
equivalent per share dividend declared on the common stock prior to the
payment of any cash dividends on the common stock. There are no declared
but unpaid dividends to date.
Common Stock Subscription Receivables
In 1997, the Company had financed, for certain stockholders, the purchase
of shares of the Company's common stock. In 1998, the outstanding
subscription receivables and related stock issued were cancelled.
Warrants Issued with Equity
During 1995, the Company sold common stock in a private placement. The
stockholders also received warrants to purchase additional 852,803 shares
of common stock at $1.50 per share. These warrants originally expired in
1997; however, the maturity dates were extended to the earlier of 45 days
following the date the warrant holders are notified by mail that they will
expire or May 31, 2000. Also during 1995, warrants were issued to
purchase 143,470 and 54,804 shares of common stock at $.85 and $1.38 per
share, respectively, as a commission for the private placement of the
Company's preferred stock. These warrants expire in December 1999.
During 1997, warrants for the purchase of 60,380 shares of common stock at
$1.65 were issued in conjunction with the preferred stock private
placement. These warrants expire on April 17, 1999. Also, during 1997,
additional warrants for the purchase of 176,471 shares of common stock at
$1.50 per share were issued with the sale of common stock. These warrants
expire in May 2000. A consultant was issued a warrant for services
performed to purchase an additional 50,000 shares at $1.65 which expire in
March 2002.
During 1998, in conjunction with the preferred stock private placement,
preferred stockholders also received warrants to purchase an additional
167,683 shares of common stock at $1.65 per share. An additional issuance
of warrants to purchase 150,020 shares of common stock at $1.65 per share
were issued to agents of the Company for payment of services rendered in
connection with the private placement of the Company's preferred stock.
These warrants expire on April 17, 1999.
6. Stock Options and Stock Warrants
The Board of Directors has authorized the issuance of stock options to
employees, including officers and directors, to purchase shares of common
stock under a 1993 non-qualified stock option plan and a 1995 qualified
stock option plan and reserved 2,550,000 shares of common stock for
issuance thereto. In November 1997, the board of directors adopted a 1997
Stock Option/Stock Issuance Plan for the issuance of stock and stock
options to employees, directors and consultants and has since reserved
3,700,000 shares of common stock for issuance thereto.
<PAGE>
The following table summarizes stock option and stock warrant activity for
1997 and 1998:
<TABLE>
<CAPTION>
Number of Weighted- Number of Weighted-
Stock Average Stock Average
Options Exercise Warrants Exercise
Price Price
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996 2,734,759 $ .66 1,748,254 $1.50
Granted 2,627,850 1.65 561,851 1.60
Exercised (241,000) .28
Forfeited (1,472,009) .71
------------ ----------
Outstanding at December 31, 1997 3,649,600 1.30 2,310,105 1.53
Granted 1,918,000 1.65 795,644 1.65
Exercised (153,750) .11
Forfeited (2,106,350) 1.60
------------ ----------
Outstanding at December 31, 1998 3,307,500 1.36 3,105,749 1.31
============ ==========
</TABLE>
The weighted-average grant-date fair values of stock options granted during
1998 and 1997 were $.40 and $.42, respectively. The weighted-average
grant-date fair values of stock warrants granted during 1998 and 1997 were
$.38 and $.44, respectively. As of December 31, 1998, there were stock
options for 1,769,297 shares of the Company's common stock available for
grant under the plans, and the weighted-average remaining contractual life
of stock options outstanding and the weighted-average exercise price of
stock options exercisable were 9.0 years and $.42 per share, respectively.
Stock options vest over periods determined by the Company's Board of
Directors, generally two to four years. All stock warrants outstanding are
exercisable and the weighted-average contractual life of stock warrants
outstanding was 2.0 years.
The fair value of each stock option grant was estimated on the date of
grant using the Black-Scholes minimum-value option-pricing model with the
following weighted-average assumptions used for grants in the years ended
December 31, 1998 and 1997: dividend yield of zero; expected volatility of
zero; risk-free interest rates ranging from 5.50% to 6.38%; and an expected
term of five years. The risk-free interest rate used in the calculation is
the yield on the grant date of the U.S. Treasury Strip with a maturity
equal to the expected term of the option.
The fair value of each stock warrant grant was estimated on the date of
grant using the Black-Scholes pricing model with the following weighted-
average assumptions used for grants in the years ended December 31, 1998
and 1997: dividend yield of zero; expected volatility of 55%; risk-free
interest rates ranging from 5.50% to 6.38%; and an expected life of three
to five years.
Had the Company recognized compensation cost for stock options granted to
employees and directors based on the fair value of the stock options
granted as of the grant date as prescribed by SFAS No. 123, net loss would
have been increased to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Net loss -- as reported $(5,815,090) $(8,311,897)
Net loss -- pro forma (5,939,897) (8,507,695)
Basic and diluted net loss per share -- as reported (.38) (.54)
Basic and diluted net loss per share -- pro forma (.39) (.55)
</TABLE>
7. Income Taxes
The Company's net deferred tax assets consist of the following at December
31:
<PAGE>
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 3,193,398 $ 6,133,815
Temporary differences 602,240 522,171
Research and development credits 51,775 51,775
----------- -----------
Gross deferred tax assets 3,847,413 6,707,761
Less valuation allowance (3,847,413) (6,707,761)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The Company has net operating loss carryforwards aggregating approximately
$16,444,466, which expire from 2008 through 2018. The Company's research
and development credits expire from 2008 through 2018. The Internal Revenue
Code places certain limitations on the annual amount of net operating loss
carryforwards and research and development credits which can be utilized if
certain changes in the Company's ownership occur. The Company believes
that with the acquisition by Global MAINTECH Corporation, pursuant to
Section 382 of the Internal Revenue Code, there has been a change in the
ownership and the net operating loss carryforwards and research and
development credits may be significantly limited. Future changes in the
Company's ownership may further limit the use of such benefits. The
Company has recorded a valuation allowance against its deferred tax assets
as it believes it is currently more likely than not that such benefits will
not be realized.
The income tax benefit differs from the amount computed by applying the
U.S. federal income tax rate of 34% to loss before income taxes for the
following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1998
----------- ------------
<S> <C> <C>
U.S. federal income tax benefit at statutory rate $ 1,977,130 $ 2,826,045
Change in valuation allowance (2,141,774) (2,860,348)
State income tax benefit, net of federal expense 196,550 259,354
Other nondeductible items (31,906) (225,051)
----------- ------------
Income tax benefit $ -- $ --
=========== ============
</TABLE>
8. Retirement Plan
During 1996, the Company adopted a 401(k) plan effective January 1, 1997,
covering all eligible employees meeting certain age and service
requirements. The plan provides for discretionary matching contributions by
the Company equal to 50% of the participant's contributions, up to a
maximum of 3% of the employee's compensation. Total company contributions
to this plan totaled $70,246 and $69,578 during 1998 and 1997,
respectively.
9. Other Related Party Transactions
Two of the Company's customers owned 3.8% of the Company's outstanding
common stock as of December 31, 1998. Sales to these distributors during
1998 and 1997 were $7,888,986 and $10,757,726, respectively. As of
December 31, 1998 and 1997, these distributors owed the Company $1,225,883
and $1,392,197, respectively.
10. Commitments and Contingencies
The Company leases its office, production and sales facility and certain
office equipment under non-cancelable operating leases. Rent expense
aggregated $612,171 and $540,105 in 1998 and 1997, respectively. Future
minimum lease payments under non-cancelable operating lease arrangements
are as follows:
<PAGE>
<TABLE>
<S> <C>
1999 $ 651,718
2000 630,456
2001 354,368
2002 30,408
2003 6,195
----------
$1,673,145
==========
</TABLE>
The Company has been named as the defendant in a wrongful termination
action filed by a former Chief Executive Officer. Management believes the
action is without merit but is currently unable to determine the ultimate
outcome of resolution of the action or estimate reasonably the amount of
loss, if any, which may result from resolution of this matter.
11. Subsequent Events
In January 1999, the Company issued 60,606 shares of common stock to a
stockholder as compensation for services rendered in conjunction with the
Company's issuance of preferred stock in 1998.
On March 9, 1999, the Company issued 297,151 shares of common stock as
payment for principal and interest related to the $280,000 promissory notes
from affiliated stockholders.
During April 1999, the Company was acquired by Global MAINTECH Corporation,
a Minneapolis based Company in the business of enterprise management
software for data centers and received $1.9 million of cash from Global
MAINTECH Corporation to fund operations.
The March 31, 1998 comparative financial statements are currently
unavailable and will be provided in a further amendment to this Form 8-K.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction
The unaudited pro forma financial statements give effect to the Company's
acquisition (the "Acquisition") of Breece Hill Technologies, Inc. ("BHT"), have
been prepared on the basis of assumptions described in the notes to the
unaudited pro forma financial statements and include assumptions relating to the
allocation of the consideration paid for BHT to the consolidated assets and
liabilities of BHT based on preliminary estimates of their respective fair
values. The actual allocation of such consideration may differ from that
reflected in the pro forma consolidated financial statements after an
appropriate review of the fair values of the consolidated assets and liabilities
of BHT has been completed. Amounts allocated will be based upon the estimated
fair values at the time of the Acquisition which could vary significantly from
the amounts reflected in the unaudited pro forma financial statements. The
Acquisition has been accounted for using the purchase method of accounting. The
unaudited pro forma financial statements should be read in conjunction with the
financial statement of BHT set forth above and of the Company contained in the
Company's periodic filings with the Securities and Exchange Commission.
Pro Forma Condensed Combined Statements of Earnings (Unaudited)
The pro forma condensed combined statement of earnings for the fiscal year
ended December 31, 1998 has been prepared by combining the consolidated
statement of earnings of the Company for the fiscal year ended December 31, 1998
with the consolidated statement of earnings of BHT for the fiscal year ended
December 31, 1998, adjusted to give effect to the Acquisition as if it had
occurred on January 1, 1998. The pro forma condensed combined statement of
earnings for the first quarter of fiscal 1999 ended March 31, 1999 has been
prepared by combining the consolidated statement of earnings of BHT for the
quarter ended March 31, 1999, adjusted to give effect to the Acquisition as if
it had occurred on January 1, 1999. The pro forma financial statements may
not necessarily reflect the actual results of operations of the Company which
would have resulted had the purchase of BHT occurred as of the dates presented.
The pro forma information is not necessarily indicative of future results of
operations for the combined companies.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------
December 31, December 31, December 31, 1998
1998 1998
the Company BHT
-----------------------------------
Pro Forma Pro Forma
Adjustments Combined
-------------- -------------- --------------- ---------------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net Sales $ 6,209 $35,140 $ $ 41,349
Costs and expenses:
Cost of sales 2,323 27,273 494(3) 30,090
Selling, general and administrative expenses 5,705 14,902 1,986(4) 22,593
Research and Development xxx xxx
Interest, net (184) (1,277) 67(4)
Total costs and expenses 8,212 43,452 2,647 54,311
Earnings (loss) before taxes and accounting change (2,003) (8,312) (2,647) (12,962)
Provisions for income taxes - - -
Net earnings (loss) (2,034) (8,312) (2,647) (12,993)
Net earnings (loss) per common share -- diluted (0.11) (0.453) (0.135) (0.660)
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined
Statements of Earnings below.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
March 31, March 31, March 31, 1999
1999 1999
the Company BHT
-----------------------------------
Pro Forma Pro Forma
Adjustments Combined
-------------- -------------- --------------- ---------------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net Sales $ 2,580 $9,217 $ $11,797
Costs and expenses:
Cost of sales 751 6,935 494(3) 8,180
Selling, general and administrative expenses 1,886 1,943 496(4) 4,325
Interest, net (218) (206) 42(4) (466)
Total costs and expenses 2,855 9,084 1,032 12,971
Earnings (loss) before change in accounting principle (275) 133 (1,032) (1,174)
Net earnings (loss) (218) 133 (1,032) (1,117)
Net earnings (loss) per common share -- basic (0.011) 0.007 (0.054) (0.055)
</TABLE>
Notes to the Unaudited Pro Forma Condensed
Combined Statements of Earnings
Pro Forma Condensed Combined Balance Sheet (Unaudited)
The pro forma condensed combined balance sheet as of March 31, 1999 has
been prepared by combining the consolidated balance sheet of the Company as of
March 31, 1999 with the consolidated balance sheet of BHT as of March 31, 1999
adjusted to give effect to the Acquisition as if it had occurred on March 31,
1999. The pro forma financial statements may not necessarily reflect the actual
financial position of the Company which would have resulted had the purchase of
BHT occurred as of the date presented. The pro forma information is not
necessarily indicative of the future financial position for the combined
companies.
<PAGE>
<TABLE>
<CAPTION>
March 31, March 31,
1999 1999 Pro Forma Pro Forma
the Company BHT Adjustments Combined
---------------- ----------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Cash 2,260 578 2,838
Receivables, net 3,000 4,853 7,853
Inventories 1,013 2,500 494(3) 4,007
Other current assets 974 182 1,156
Total current assets 7,247 8,112 494 15,853
Software development costs, net 2,782 2,782
Purchased technology and other intangibles, net 1,352 13,404(1) 14,756
Net property, plant and equipment 1,086 775 1,861
Other assets 310 310
Total assets 12,777 8,888 13,898 35,563
Notes payable 1,002 7,414 (4,013)(5) 4,403
Accounts payable 1,186 8,912 (3,334)(6) 6,764
Current maturities of long-term debt 225 225
Other current liabilities 797 207 1,004
Total current liabilities 3,210 16,533 (7,347) 12,396
Subordinated notes payable, less current portion 1,625 4,733(2) 6,358
Preferred stock 3,748 1,000(5) 4,748
Common stock - -
Additional paid-in capital 8,281 11,969 1,614(5)(6) 21,864
Retained earnings (4,087) (19,614) 13,898 (9,803)
Total stockholders' equity 7,942 (7,645) 16,512 16,809
Total liabilities and stockholders' equity 12,777 8,888 13,898 33,563
</TABLE>
Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
General
- -------
The Acquisition was effective April 1, 1999 and the Company recorded it as
a purchase of assets. The Company issued warrants to purchase common stock of
the Company exercisable at $1.50 as initial compensation to the shareholders of
BHT. Additional compensation may be due to the shareholders of BHT on or about
the anniversary date of the Acquisition depending on BHT's revenues over the
twelve months following the acquisition as well as certain other factors. The
amount of additional compensation is indeterminate but may include cash and a
maximum of 5,500,000 shares of common stock of the Company.
The pro forma adjustments represent capitalization of the purchase price in
excess of assets which is recorded as purchased technology in the amount of
$14,395,000 less amortization over a period of seven years on average.
Additional pro forma adjustments are recorded to reflect: the new terms on the
subordinated debt of BHT which extended the date of maturity; the conversion of
certain portions of the subordinated debt into preferred stock of BHT which is
convertible into common stock of the Company at the discretion of the holder;
and the conversion into common stock of a portion of senior debt of BHT.
1. To reflect the excess of purchase price over the fair value of net assets
acquired (e.g., purchased technology, agreements, workforce and trade name).
2. To reflect the $2,000,000 note payable to a third party at 9.75% interest as
a condition of the purchase of Breece Hill to provide working capital for
Breece Hill and the renegotiation of debt amortization of $2,733,000 of
existing debt.
3. To reflect assets and liabilities acquired at the date of purchase, including
the increase of inventory to fair value less normal selling costs in the
amount of $494,000.
4. To reflect the amortization of intangible assets over seven years beginning
January 1, 1998 in the amount of $2,056,000 for the 1998 year, $514,000
for the quarter ended March 31, 1999 and interest accrual on the $2,000,000
note at an annual interest rate of 9.75% beginning January 1, 1998.
5. To reflect the conversion of short-term notes payable to a combination of
long-term notes and equity upon the closing of the acquisition. A total of
$1,000,000 of debt was converted to preferred stock series B newly issued by
Breece Hill and $280,000 was converted to common stock.
6. To reflect the issuance of 1,326,000 shares of common stock and net proceeds
of $1,334,000 pursuant to a private placement, the proceeds of which were
used to provide working capital for Breece Hill.
