<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 June 30, 1999
Commission File Number 0-14692
______________________________________________
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
______________________________________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No______
-------
______________________________________________
On August 4, 1999 there were 20,191,843 shares of the Registrant's no par value
common stock outstanding.
Transitional small business issuer format: No
Page 1 of 15
<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 continue to operate profitably in the future;
failure of the Company to meet its future additional capital requirements;
loss of key personnel; failure of the Company to respond to evolving
industry standards and technological changes; inability of the Company to
compete in the industry in which it operates; failure of the Company to
successfully integrate the operations of newly acquired businesses; lack of
market acceptance of the Company's products, including products under
development; 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 qualified in their entirety
by the cautions and risk factors set forth in Exhibit 99, under the
statements are caption "Cautionary Statement," to this Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1999.
---------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
---------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,577,779 $ 664,066
Accounts receivable, less allowance for
doubtful accounts of $950,000 and $300,000, respectively 8,429,956 2,283,578
Other receivables 223,430 147,466
Inventories 3,305,846 861,418
Prepaid expenses and other 407,255 80,094
Deferred debt issue costs 67,044 -
Current portion of investment in
sales-type leases - 20,776
----------------- -----------------
Total current assets 14,011,310 4,057,398
Property and equipment, net 1,678,550 1,042,432
Leased equipment 143,965 124,658
Software development costs, net 3,308,462 2,273,834
Purchased technology and other intangibles, net 18,661,680 1,419,008
Net investment in sales-type leases,
net of current portion - 22,410
Other assets, net 426,448 193,191
----------------- -----------------
TOTAL ASSETS $ 38,230,415 $ 9,132,931
================= =================
</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 (DEFICIT)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 5,699,882 $ 867,120
Current portion of notes payable 6,951,502 395,680
Convertible subordinated debentures 0 200,000
Accrued liabilities compensation and payroll taxes 2,238,118 267,581
Other 144,724 31,049
Deferred revenue 386,999 228,231
----------------- ----------------
Total current liabilities 15,421,225 1,989,661
----------------- ----------------
Subordinated notes payable, less current portion 6,283,430 1,700,000
Minority interest 1,000,000 -
----------------- ----------------
Total liabilities 22,704,655 3,689,661
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; 129,176 shares in 1999 and in 1998 issued and outstanding;
total liquidation
preference of outstanding shares-$242,200 $ 60,584 $ 60,584
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 of Company; no par value; 615,385
shares authorized; 335,961 shares issued and outstanding; total
liquidation preference
of outstanding shares-$2,183,769 2,183,769 2,183,769
Voting, convertible preferred stock - Series C, convertible on or
before March 31, 2002 based on price of common stock; conversion price
not to exceed $2.50 per share; dividend of 8% payable in cash or common
stock of Company; no par value; 1,675 shares authorized; 1,675 shares in
1999 and none in 1998 issued and outstanding; total
liquidation preference of outstanding shares-$1,675,000 1,504,000 -
Common stock, no par value; 48,496,635 shares authorized;
20,191,843 shares in 1999 and 18,409,397 shares in 1998
issued and outstanding - -
Additional paid-in-capital 18,183,710 7,362,796
Notes receivable-officers (294,500) (294,500)
Accumulated deficit (6,111,803) (3,869,379)
----------------- ----------------
Total stockholders' equity 15,525,760 5,443,270
----------------- ----------------
$ 38,230,415 $ 9,132,931
================= ================
</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 Six Months Ended
June 30, June 30,
----------------- ----------------- ----------------- --------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net sales
Systems $ 11,566,633 $ 1,439,433 $ 13,083,224 $ 2,878,177
Maintenance, consulting and other 1,182,790 237,424 2,246,416 595,081
--------------- --------------- --------------- ------------
Total net sales 12,749,423 1,676,857 15,329,639 3,473,259
Cost of sales
Systems 7,851,863 334,727 8,053,148 818,025
Maintenance, consulting and other 693,788 231,735 1,243,084 432,909
--------------- --------------- -------------- ------------
Total cost of sales 8,545,651 566,462 9,296,232 1,250,935
--------------- --------------- --------------- ------------
Gross profit 4,203,772 1,110,395 6,033,407 2,222,324
Operating expenses
Selling, general and administrative 4,812,236 843,515 6,348,699 1,599,684
Research and development 572,491 126,199 921,870 273,521
--------------- --------------- --------------- ------------
Income (loss) from operations (1,180,955) 140,681 (1,237,162) 349,119
Other income (expense):
Interest expense (353,546) (72,567) (432,053) (146,666)
Interest income 2,022 9,918 3,549 123,788
Amortization of deferred debt costs (421,687) (11,073) (562,690) (22,147)
--------------- --------------- --------------- ------------
Total other income (expense), net (773,211) (73,722) (991,194) (45,025)
--------------- --------------- --------------- ------------
Income (loss) before cumulative effect of change
in accounting principle (1,954,166) 66,959 (2,228,356) 304,094
Cumulative effect of change to straight-line depreciation - - 99,607 -
--------------- --------------- --------------- ------------
Net income (loss) $ (1,890,463) $ 66,959 $ (2,128,749) $ 304,094
=============== =============== =============== ============
Accrual of cumulative dividends on
Convertible preferred stock (70,000) - (113,675) -
--------------- --------------- --------------- ------------
Net income (loss) attributable
to common stockholders $ (2,024,166) $ 66,959 $ (2,242,424) $ 304,094
=============== =============== =============== ============
Basic earnings per common share:
Net income (loss) before cumulative effect of
change in accounting principle $ (0.097) $ 0.004 $ (0.122) $ 0.018
Cumulative effect of change in accounting principle - - 0.005 -
--------------- --------------- --------------- ------------
Net income (loss) $ (0.097) $ 0.004 $ (0.117) $ 0.018
=============== =============== =============== ============
Diluted income(loss) per common share:
Net income (loss) before cumulative effect of
change in accounting principle $ (0.097) $ 0.003 $ (0.125) $ 0.015
Cumulative effect of change in accounting principle - - 0.005 -
--------------- --------------- --------------- ------------
Net income (loss) $ (0.097) $ 0.003 $ (0.120) $ 0.015
=============== =============== =============== ============
Shares used in calculations:
Basic 20,187,639 17,328,065 18,635,284 17,137,029
Diluted 20,187,639 20,396,641 18,635,284 20,271,924
</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>
Six Months Ended
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,128,749) $ 304,094
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 3,370,254 590,006
Changes in operating assets and liabilities:
Accounts receivable (2,635,974) (1,130,865)
Other receivables (59,315) (124,335)
Inventories 55,592 (585,632)
Prepaid expenses and other (132,408) (31,208)
Accounts payable (3,306,233) 286,115
Accrued liabilities (384,705) 100,757
Deferred revenue 158,768 (9,708)
----------- -----------
Cash used by operating activities (5,062,771) (600,777)
----------- -----------
Cash flows from investing activities:
Cash received from sales-type leases 43,186 712,332
Purchase of property and equipment (349,736) (126,112)
Reduction(increase) in leased equipment -- 35,858
Investment in software development costs (1,783,626) (1,146,856)
Cash acquired in acquistions 580,150 --
Investment in other assets (11,711) (773,046)
Investment in note receivable -- (50,000)
----------- -----------
Cash used by investing activities (1,521,737) (1,347,824)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,504,000 --
Proceeds from issuance of common stock 1,579,492 697,518
Proceeds of short-term notes payable 1,764,729 --
Payments of long-term notes payable 2,650,000 (50,000)
----------- -----------
Cash provided by financing activities 7,498,221 647,519
----------- -----------
Net increase (decrease) in cash 913,713 (1,301,082)
Cash and cash equivalents at beginning of period 664,066 1,726,889
----------- -----------
Cash and cash equivalents at end of period $ 1,577,779 $ 425,807
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
5
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
The Company, through its wholly owned subsidiaries, Global MAINTECH, Inc.
("GMI"), Breece Hill Technologies, Inc. ("BHT"), and SinglePoint Systems, Inc.
("SSI"), is engaged in the business of providing systems and network management
products and tape library storage devices to computer data centers, primarily in
the United States.
The Company has expanded through internal development and acquisitions. SSI
was acquired in November 1998 and BHT was acquired effective on April 1, 1999.
The network monitoring products were developed during 1998 and were made
available for sale in January 1999. In addition, in February 1998 the Company
licensed certain software and purchased certain assets relating to the system
software business of Infinite Graphics Incorporated, a Minnesota corporation
("IGI"). The Company uses such software and assets to design, assemble and
market computer-aided design and manufacturing software systems that operate on
a variety of mid-range and personal computer platforms.
6
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company was incorporated under the laws of the State of Minnesota in
1985 under the name Computer Aided Time Share, Inc. In 1995, the Company changed
its name to Global MAINTECH Corporation.
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, 1998.
Earnings (Loss) Per Share
Basic and diluted net earnings (loss) per share is computed by dividing the
net earnings (loss) by the weighted average number of shares of common stock
outstanding during the period. During 1999, dilutive shares were excluded from
the net loss per share computation as their effect is antidilutive.
The weighted average shares and total dilutive shares used in the
calculation of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30,1999 June 30, 1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share
Weighted average shares 20,187,639 17,328,065 18,635,284 17,137,029
Diluted Earnings (Loss) Per Share
Weighted average shares 20,187,639 17,328,065 18,635,284 17,137,029
Stock options and Warrants -- 2,835,135 -- 2,901,454
Conversion of preferred stock -- 233,441 -- 233,441
--------------------------------------------------------
Total dilutive shares 20,187,639 20,396,641 18,635,284 20,271,924
========================================================
</TABLE>
7
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized Software Development Costs
Under the criteria set forth in SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of
software development costs begins upon the establishment of technological
feasibility of the software. 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. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years.
The carrying value of a software development asset is regularly reviewed by
the Company and a loss is recognized when the unamortized costs are not
recoverable based on the estimated cash flows to be generated from the
applicable software.
Purchased Technology and Other Intangibles
The Company has recorded the excess of purchase price over net tangible
assets as purchased technology and other intangibles based on the fair value of
such items at the date of purchase. These assets are amortized over their
estimated economic lives using the straight-line method. Recorded amounts 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.
The Company has allocated the excess of purchase price over net tangible
assets to purchased technology, assembled workforce, distribution agreements,
OEM agreements and trade names. The amortization periods for these categories
vary from 2 to 7 years and average approximately 5 years. For a substantial
portion of these assets the Company employed an independent valuation firm to
determine the allocation of excess purchase price and the appropriate
amortization periods.
Purchased technology and other intangibles at June 30, 1999 includes
$15,023,030 of assets as a result of the acquisition of BHT and $3,300,000 of
assets as a result of payment of contingent consideration related to the
acquisition of IGI (both discussed under "Acquisitions").
Deferred Debt Issue Costs
The deferred debt issue costs include a valuation for the issuance of
warrants to purchase 400,000 shares of common stock attached to a subordinated
short-term promissory note issued in February 1999.
Common Stock Issuance
In March 1999, the Company began a private placement of 1,325,000 shares of
common stock at a purchase price of $1.125 per share and had issued 444,000 of
such shares as of March 31, 1999. The Company completed this private placement
on May 12, 1999. A total of 1, 325,000 shares were sold for total gross proceeds
of $1,490,625. Aethlon Capital acted as the placement agent. The Company paid
the placement agent a cash commission equal to 10% of the gross proceeds and
reimbursed the agent for out-of-pocket expenses incurred in connection with the
offering. The Company also issued to the agent a warrant to purchase up to 10%
of the number of shares of the common stock sold in the offering, which warrant
will have an exercise price of $1.125 per share. The securities issued pursuant
to this offering were exempt from registration under Rule 506 of Regulation D of
the Securities Act of 1933, as amended.
Change in depreciation method
Effective January 1, 1999, the Company adopted the straight-line method of
depreciation for its property and equipment. Previously the Company used the
double declining balance method. The Company changed its method based on an
evaluation by management which indicated that the property and equipment does
not depreciate on an accelerated basis during its early years, is not subject to
significant additional maintenance in the later years of the assigned useful
life and that the new method results in a better matching of revenues and
expenses.
The cumulative effect of this accounting change was to decrease the net
loss by $99,607 ($0.005 per share) in the six months ended June 30, 1999.
8
<PAGE>
Reclassifications
Certain amounts previously reported in 1998 have been reclassified to
conform to the 1999 presentation.
Acquisitions
On April 14, 1999, the Company acquired all of the issued and outstanding
common stock and Series A Convertible Preferred Stock (the "Outstanding Shares")
of Breece Hill Technologies, Inc. ("BHT") in connection with the merger of BHT
Acquisition, Inc., a wholly owned subsidiary of GMI, with and into BHT. BHT was
the surviving corporation and is now a wholly owned subsidiary of GMI. The
Company recorded this acquisition using the purchase method of accounting.
In exchange for the cancellation of their Outstanding Shares, holders of
such shares received rights to proportionate interests in the merger
consideration, which consisted of warrants to purchase a total of 4,500,000
shares of the Company's common stock and the right to receive an earn out
payment based in part on the sales of BHT over the twelve months following the
acquisition. This earn out payment will be made, if at all, in the form of the
Company's common stock in the maximum amount of 5,500,000 shares, a portion of
the fair market of which may be satisfied with cash. Subsequent to the date of
acquisition, the BHT subsidiary issued 400,000 shares of Preferred Stock Series
B to Hambrecht & Quist Guaranty Fund LLP in exchange for a reduction of debt
secured by certain assets of BHT in the amount of $1,000,000. The Preferred
Stock has a monthly dividend of $10,000 payable in cash or common stock of
Global MAINTECH Corporation and is convertible at the option of the holder into
common stock of Global MAINTECH Corporation. The Company has recorded this
Preferred Stock as a minority interest in BHT.
BHT is a supplier of automated tape libraries used to backup, restore and
archive information stored in networks on servers, PCs and workstations, and
stored via on-line data storage subsystems.
The Company engaged an independent valuation firm to determine the fair
value of the assets purchased. The total valuation in excess of the book value
acquired was $15,517,030 and is comprised of the fair value of warrants issued
using a Black-Scholes valuation model in the amount of $7,630,544, and
liabilities assumed in excess of assets in the amount of $7,886,486. The Company
assigned $494,000 of the $15,517,030 valuation to inventory which was expensed
as a cost of sale in the fiscal quarter ended June 30, 1999. The remaining
portion of this valuation of $15,023,030 was assigned to purchased technology in
the following components:
Amount Amortization
(000's) period (yrs.)
------- -------------
Technology $ 4,958 7
Assembled workforce 1,653 3
Distribution Agreements 5,709 7
IBM OEM Agreement 1,803 2
Trade Name 900 7
-------
Total $15,023
The Company recorded amortization expenses of approximately $850,000 in the
fiscal quarter ended June 30, 1999.
The unaudited pro forma combined historical results, as if BHT had been
acquired as of January 1, 1998, are estimated to be:
Six months Six months
ended ended
(000's, except per share data) June 30, 1998 June 30, 1999
------------------------------------------------------------------
Revenue $ 23,084 $ 24,547
Net loss $ (2,825) $ (2,879)
Net loss per common share $ (0.171) $ (0.154)
The pro forma results include amortization of the intangibles presented above
and interest expense on debt assumed issued to finance the purchase. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
In June 1999 the Company settled the amount of contingent consideration
related to certain software assets purchased from Infinite Graphics, Inc.
pursuant to an acquisition agreement dated February 1998. In addition to the
initial cash paid in 1998 of $700,000, the contract provided for additional
contingent consideration based on certain operating results in the amount of
$3,300,000. As operating results met the criteria related to the contingent
consideration, the full contingent amount was fulfilled. The Company paid this
amount by an assignment of accounts receivable in the amount of $1,435,481, the
issuance $864,519 of common stock, and by the granting of $1,000,000 of minority
interest in the net proceeds of this asset group. The additional consideration
was recorded as additional purchased technology and other intangibles.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Operating results by segment are as follows:
Segment Second Quarter Comparison
<TABLE>
<CAPTION>
Amount Inc (Dec) % of Revenue
(000's) 1999 1998 $ % 1999 1998
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Monitoring Products 2,699 1,677 1,022 60.9% 21.2% 100.0%
Tape Library Storage Products 10,050 -- 10,050 N/A 78.8% --
----------------------------------------------------------
Total 12,749 1,677 11,072 660.2% 100.0% 100.0%
Income (loss) from operations
Monitoring Products (581) 141 (722) (512.1%) (4.6%) 8.4%
Tape Library Storage Products (600) -- (600) N/A 4.7% --
----------------------------------------------------------
Total (1,181) 141 (1,322) N/A (9.3%) 8.4%
Segment Year-to-date June 30 Comparison
Amount Inc (Dec) % of Revenue
(000's) 1999 1998 $ % 1999 1998
----------------------------------------------------------
Revenue
Monitoring Products 5,280 3,473 1,807 52.0% 34.4% 100.0%
Tape Library Storage Products 10,050 -- 10,050 100.0% 65.6% --
----------------------------------------------------------
Total 15,330 3,473 11,857 341.4% 100.0% 100.0%
Income (loss) from operations
Monitoring Products (637) 349 (986) (282.5%) (4.2%) 10.0%
Tape Library Storage Products (600) -- (600) N/A (3.9%) --
----------------------------------------------------------
Total (1,237) 349 (1,586) N/A (8.1%) 10.0%
</TABLE>
The consolidated financial statements that accompany this discussion show
the operating results of the Company for the quarters ended June 30, 1999 and
1998. These results include the operations of GMI, BHT and SSI.
Net Sales for the second quarter ended June 30, 1999 were approximately
$12,749,000 compared to sales for the second quarter of 1998 of approximately
$1,677,000. Sales for the six months ended June 30, 1999 were approximately
$15,330,000 compared to $3,473,000 in the same six month period of 1998. The
approximate $11,100,000 increase for the second quarter and the approximate
$11,900,000 increase for the six months ended June 30, 1999 is primarily related
to an increase of approximately $10,000,000 in product sales of BHT, which was
acquired at the beginning of the second quarter. The remaining increases of
$1,100,000 for the second quarter and $1,900,000 for the six months ended June
30, 1999 are primarily due to sales from new products and products acquired in
the latter part of 1998 fiscal year.
Cost of sales increased in the second quarter ended June 30, 1999 to 67%
from 34% in the second quarter of 1998 and increased for the six months ended
June 30, 1999 to 61% from 36% in the six months ended June 30, 1998. Excluding
the newly acquired tape library business, BHT, cost of sales decreased to 30% in
both the second quarter ended June 30, 1999 and for the six months ended June
30, 1999. Excluding one-time non-cash charges related to the BHT acquisition,
the BHT cost of sales was 27% which reflects the typical equipment and labor
assembly costs of the tape library business. The decrease in cost of sales from
the non-BHT business segment reflects the increase in software sales over the
prior three and six month periods. The decrease in cost of sales percentage in
1999 is in spite of an increase in software amortization in 1999 of
approximately $380,000 and $680,000 for the three and six month periods ended
June 30, 1999.
Selling, general and administrative expenses in the second quarter of 1999
were approximately $4,812,000 compared to $844,000. For the six month period
ended June 30, 1999 these expenses were approximately $6,634,000 compared to
$1,600,000 in the same period in 1998. Excluding BHT's selling, general and
administrative expenses of approximately $2,800,000 in the second quarter of
1999, which includes approximately $850,000 of purchase cost amortization, these
increases would have been approximately $1,168,000 and $1,949,000, for the three
and six month periods ended June 30, 1999, respectively. The increases in both
the three and six month periods are primarily due to increases in salaries and
advertising and secondarily to increases in travel and meals, depreciation and
rent expenses. The increases are substantially due to increases in the product
areas generating increases in sales. The Company has increased the number of
employees in these product areas including sales, support and development and
increased advertising and marketing to promote these products. The increase in
travel expenses is related to increased sales activity. Depreciation and rent
expenses increased due to the additional employees and additional equipment for
these employees.
Research and development costs in the second quarter of 1999 were
approximately $572,000 compared to $126,000 in the second quarter of 1998, one
year ago. For the six month period ended June 30, 1999 research and development
costs were approximately $922,000 compared to $274,000 in the same period in the
prior year. The increases of $446,000 in the second quarter and $648,000 for the
six months ended June 30, 1999 are primarily due to the monitoring products
business segment and are due to increased salary expenses relating to additional
employees in this expense category.
Non-operating expenses include interest expense, amortization of
capitalized debt issuance costs and interest income. The increase in
amortization is due to the addition of deferred debt costs from the issuance of
warrants attached to $500,000 of subordinated short-term debt issued in February
1999. Interest expense increased $281,000 and $285,000 in the three and six
months ended June 30, 1999, respectively. The majority of the increase in both
periods is due to interest expense in the BHT subsidiary in the amount of
$227,000. BHT has a line of credit to finance accounts receivable and inventory
and subordinated debt in the amount of $2.7 million. The remainder of the
increase is related to an increase in debt issued by the Company, a portion of
which was issued in connection with the acquisition of BHT.
Liquidity and Capital Resources
As of June 30, 1999, the Company had negative working capital of
approximately $1,410,000 compared to positive working capital of approximately
$2,068,000 as of December 31, 1998. The decrease in positive working capital as
of June 30, 1999 is due to the acquisition of BHT which has post-acquisition
negative working capital of approximately $1,600,000 and the completion in May
1999 of the acquisition of the software licenses purchased from Infinite
Graphics, Inc. under a
10
<PAGE>
contract issued on February 27, 1998 which was satisfied with the assignment of
accounts receivable of approximately $1,435,000 which was partially offset by
common stock and long-term debt issued by the Company.
Net cash used in operating activities for the six months ended June 30,
1999 was approximately $5,063,000. During this six month period of 1999
operating funds of approximately $1,242,000 were provided by the net earnings
prior to depreciation/amortization. Operating funds were also provided by an
increase in deferred revenue in the approximate amount of $159,000. Operating
funds were used by increases in current assets of approximately $2,771,000,
which includes an increase in accounts receivable of approximately $2,636,000,
and a decrease in accounts payable and accrued liabilities of approximately
$3,690,000.
Cash used by investing activities for the six months ended June 30, 1999
was approximately $1,552,000 and included investments of $1,784,000 in
capitalized computer software development costs, which represent costs incurred
after technological feasibility has been established in connection with the
development of enhancements to one or more particular software programs. The
majority of the increase in capitalized software costs reflects purchased
technology from acquisitions. The Company also purchased approximately $350,000
of additions to machinery and equipment during the first six months of 1999 and
acquired $580,000 of cash as a result of its acquisitions. In the first six
months of 1998, cash used in investing activities totaled $1,348,000, which
included investments in software development costs of $1,147,000 and purchases
of property and equipment of approximately $126,000, which was partially offset
by the sale of sales-type leases in the amount of $712,000 and an investment in
a note receivable.
Net cash of approximately $7,500,000 was provided by financing activities
in the first six months of 1999. This is primarily the result of net proceeds
from the issuance of $1,504,000 of Series C convertible preferred stock at a per
share price of $1,000 and approximately $1,500,000 from the issuance of
approximately 1,326,000 shares of common stock at a per share price of $1.125.
In addition, proceeds were received from the issuance of short-term debt
collaterialized by accounts receivable and inventory in the amount of
approximately $1,765,000 and the issuance of long-term debt in the amount of
$2,650,000 secured by long-term assets. In the first six months of 1998, the
Company raised $488,000 from the issuance of approximately 280,000 shares of
common stock at a per share price of $1.90 in connection with a private offering
of such securities.
Presently, the Company believes its negative working capital can be
corrected with continued earnings measured before depreciation and amortization
and from the lines of credit collaterialized by accounts receivable and
inventory. This depends on the Company's ability to collect its accounts
receivable and to make sales sufficient to realize the full value of its current
inventory. The recent gross margins of the Company have matched the Company's
expectations and the Company believes these gross margin levels will continue.
To that end, the Company has continued to purchase additional inventory in
anticipation of additional sales. In addition, the Company believes it will be
able to raise proceeds from the issuance of additional equity. Nevertheless, the
Company can provide no assurance as to its future profitability and access to
the capital markets.
During the six months ended June 30, 1999, the Company has used its
enhanced liquidity from its acquisition of BHT and has obtained a working
capital line of credits, exclusive of its BHT subsidiary which also has a
working capital line of credit. The Company's operating plan for the year ending
December 31, 1999 anticipates a continued increase in sales over the year ended
December 31, 1998, exclusive of the increase resulting from its BHT acquisition,
with a commensurate increase in earnings. The projected increase in sales is
based on an increase in sales of the Company's traditional products and an
increase in sales resulting from the Company's acquisitions during 1998. As a
result this operating plan projects the increase in liquidity from sales and
earnings and from access to capital markets to exceed the Company's anticipated
investment in long-term assets. While the Company believes in the viability of
its operating plan and currently anticipates that it will continue to have
access to capital markets, there can be no assurances to that effect.
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
11
<PAGE>
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 validation 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 additional remediation work required to address year 2000
problems is not expected to be extensive. The Company 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 1999. 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 believes that it
has completed its year 2000 compliance program for all of its significant
internal systems as of the date of this report. Nevertheless, the Company will
continue to test its internal systems to determine such systems are year 2000
compliant. The Company also has had informal discussions with its major
suppliers and customers regarding their efforts to address the year 2000
problem. These actions were 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
incurred for resolving the Company's year 2000 issues is believed to be less
than $20,000, all of which has been incurred prior to July 31, 1999. No
additional costs are expected. 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 final 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 the 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.
Recent Developments
On August 6, 1999, the Company rescheduled the principal payment of $250,000 of
a $500,000 note payable to Andersen, Weinroth which was due on July 31, 1999.
This payment is now due on September 30, 1999.
12
<PAGE>
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES
In March 1999, the Company began a private placement of 1,325,000
shares of common stock at a purchase price of $1.125 per share. The Company
completed this private placement on May 12, 1999. A total of 1, 325,000 shares
were sold for total gross proceeds of $1,490,625. The shares were offered and
sold only to accredited investors. Aethlon Capital acted as the placement agent.
The Company will pay the placement agent a cash commission equal to 10% of the
gross proceeds and will reimburse the agent for out-of-pocket expenses incurred
in connection with the offering. The Company also will issue to the agent a
warrant to purchase up to 10% of the number of shares of the common stock sold
in the offering, which warrant will have an exercise price of $1.125 per share.
The securities issued pursuant to this offering were exempt from registration
under Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On May 7, 1999, the Company issued convertible notes payable to two
accredited investors in the aggregate principal amount of $167,372. The notes
are convertible into common stock at $1.25 per share and bear interest at the
rate of 6% per annum. The notes are subordinate to current and future debt
issued by the Company. The notes are due on November 7, 1999. The notes were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The annual meeting of shareholders was held on May 27, 1999. The
Company solicited proxies and filed its definitive proxy statement with
the Securities and Exchange Commission pursuant to Regulation 14A. The
only matters voted upon at the meeting were the election of directors,
the ratification of the Company's accountants and approval of the
Company's 1999 Stock Option Plan. All items presented to shareholders
were passed.
B. The shareholders re-elected Messrs. McCaffery, Donaldson, Haugo, Clarey
and Pihl to serve on the board of directors for a term expiring on the
next regular meeting and until their successors are elected and
qualified.
C. The shareholders ratified the selection of KPMG Peat Marwick LLP as
independent auditors of the Company for the year ending December 31,
1999 and approved the Company's 1999 Stock Option Plan. There were
17,045,618 shares represented at the annual meeting of a total of
20,307,890 entitled to vote. Of the shares represented, each of the
Directors received 16,901,076 votes for re-election. Of the shares
represented, the votes for the ratification of KPMG Peat Marwick LLP as
independent auditors was 16,939,627 for, 35,248 against and 70,743
abstained. Of the shares represented, the votes for the ratification of
the 1999 Stock Option Plan were 9,383,325 for, 2,908,093 against and
292,499 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27--Financial Data Schedule
99--Cautionary Statement
(b) Reports on Form 8-K
The Company filed Current Report on April 29, 1999 on Form 8-K reporting
the acquisition of Breece Hill Technologies, Inc. by a subsidiary of the
Company. The report was amended on June 28, 1999 and again on August 9,
1999 to include additional financial information regarding BHT and the
Company.
13
<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
August 16, 1999 By: /s/ James Geiser
-----------------------------------------
James Geiser
Chief Financial and Chief Accounting Officer
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 16, 1999 By: /s/ David McCaffrey
-----------------------------------------
David McCaffrey
Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 1,578 1,578
<SECURITIES> 0 0
<RECEIVABLES> 8,653 8,653
<ALLOWANCES> 0 0
<INVENTORY> 2,812 2,812
<CURRENT-ASSETS> 13,517 13,517
<PP&E> 1,679 1,679
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 38,005 38,005
<CURRENT-LIABILITIES> 14,421 14,421
<BONDS> 8,220 8,220
0 0
3,739 3,739
<COMMON> 17,664 17,664
<OTHER-SE> (6,048) (6,048)
<TOTAL-LIABILITY-AND-EQUITY> 38,005 38,005
<SALES> 12,749 15,330
<TOTAL-REVENUES> 12,749 15,330
<CGS> 8,546 9,296
<TOTAL-COSTS> 2,898 4,000
<OTHER-EXPENSES> (318) (460)
<LOSS-PROVISION> (2,623) 3,307
<INTEREST-EXPENSE> (354) (432)
<INCOME-PRETAX> (1,990) (2,165)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,990) (2,165)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 100 100
<NET-INCOME> (1,890) (2,065)
<EPS-BASIC> (0.097) (0.117)
<EPS-DILUTED> (0.097) (0.117)
</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:
Competition
Our industry is characterized by rapidly evolving technology and intense
competition. We know of several other competitors that have much greater
resources and experience in research and development and marketing than we do.
These companies may represent significant competition for us. However, none of
these companies produces as complete an enterprise computing system as we do,
but rather they only produce components that could be combined to form such a
system. We believe that we have a competitive advantage because we can produce
an integrated system. Nevertheless, we cannot predict whether our competitors
will develop or market technologies and products that are more effective than
ours or that would make our technology and products obsolete or noncompetitive.
New Product with Uncertain Demand
Recently the Company revised aspects of the external control and monitoring
systems to enhance its remote capabilities. Our VCC product provides customers
with an economically feasible method of controlling and monitoring
geographically dispersed computers and systems, particularly for systems that
consist of many different locations with as few as one server per location, such
as a retail organization. In such organizations, the local servers often upload
data regarding product sales and inventory levels to a centralized data center.
Our product allows the centralized data center to control these local servers
(shutting down, starting-up, etc.) and operating systems for a price per server
ranging from $3,000 to $8,000. The concept of an external monitor and control
system for computer hardware is relatively new, and we do not yet know what the
continued demand for the product will be. It is difficult to project the overall
size of the future market for this product. We estimate that the current market
size for internal systems is several billion dollars per year. We believe the
market for external control systems could expand because external control
systems could soon be used to solve networking problems with enterprise
computing. Based on recent feedback we have received from current and potential
customers, we believe the demand for the VCC is significant. However, to date,
we have sold the VCC to only 16 customers and we cannot assure you that
additional customers will buy our products.
<PAGE>
Dependence on Limited Product Offerings and Customer Base
We currently offer a limited number of products, primarily consisting of a
base VCC unit and related software and accessories. Our existing customers are
not required to buy additional hardware products or to renew their software
license and maintenance agreements with us when such license and agreements
expire. Therefore, a significant portion of our revenue is derived from
non-recurring revenue sources. To succeed, we will need to develop a sustained
demand for our current products and to develop and sell additional products. We
cannot assure you that we will be successful in developing and maintaining
demand or in developing and selling additional products.
Product Under Development
We are currently developing a set of software products that monitors
networking and communication devices primarily for networks, Microsoft NT,
midrange and mainframes. These products will perform capacity tests to measure
systems activity and hardware utilization and will correlate measured trends
with specific events or expected benchmarks. Although preliminary tests indicate
that these products will perform as intended and can be integrated with the VCC,
we cannot assure you that they will do so or, even if they do, that the market
will demand such products.
Newly Acquired Businesses; Integration of Operations
We purchased three new product lines during 1998 and one new product line
in 1999. Effective November 1, 1998, we purchased substantially all of the
assets of Enterprise Solutions, Inc., an Ohio corporation ("ESI"). As a result
of this acquisition, we obtained substantially all of the assets and assumed
certain liabilities of ESI, including a suite of software products that notify
the proper person(s) by telephone, pager or the Internet of critical data center
events. In addition, we obtained ESI's short-term consulting business, which
assists companies to optimize their existing systems management and network
management tools. Effective October 1, 1998, we purchased substantialy all of
the assets of Asset Sentinel, Inc., a Minnesota Corporation ("ASI"). The primary
assets acquired were a suite of software products that provide updated mapping
of network, cable and telephone lines in buildings and computer centers. On
February 27, 1998, we licensed certain software and purchased certain assets
relating to the system software business of Infinite Graphics Incorporated, a
Minnesota corporation ("IGI"). We will use such software and assets to design,
assemble and market computer-aided design and manufacturing software systems
that operate on a variety of mid-range and personal computer platforms.
Effective April 1, 1999, we purchased all the oustanding stock of Breece Hill
Technologies, Inc., a Delaware corporation ("BHT"). As a result of this
acquisition, we obtained all the assets and all the liabilities of BHT. BHT is a
supplier of automated tape libraries used to backup, restore and archive
information stored in networks on servers, PC's and workstations, and stored via
on-line data storage subsystems. Although we believe we will be able to
successfully integrate the employees we hired from BHT, IGI, ASI and ESI into
our own workforce and that we will be able to market and sell the product lines
purchased from ESI, ASI and IGI on a profitable basis for the next several
years, we cannot assure you that this will happen.
Fluctuations in Operating Results
Our future operating results may vary substantially from quarter to
quarter. At our current stage of operations, the timing of the development and
market acceptance of our products may materially affect our quarterly revenues
and results of operations. Generally, our operating expenses are higher when we
are developing and marketing a product. For these reasons, the market price of
our stock may be highly volatile. The price of our stock may also be affected
by:
the general state of the country's economy
the conditions in the stock market
the development of new products by us and our competitors
public announcements by us or our competitors
<PAGE>
Future Capital Requirements; No Assurance Future Capital Will Be Available
We expect that the proceeds of our recent equity and debt offerings will be
enough to fund our operations through at least September 1999. Thereafter, we
may need additional funds to continue the marketing of our products and to meet
our long-term growth needs. To meet our needs, we may have to obtain additional
funding through public or private financings, including equity and debt
financings. Any additional equity financings may be dilutive to our
shareholders, and debt financing, if available, may have restrictive covenants.
We are uncertain as to whether we will be able to obtain financing and, if we
do, whether the financing will be available at reasonable rates and terms. Our
business could be adversely affected if we do not secure such additional
financing.
Reliance on Key Personnel
We rely heavily on three technicians, Jeff Jensen, Steve Vranyes and Norm
Freedman, to further develop the VCC. In addition, we rely heavily on Trent Wong
and Desmond DosSantos for technical or business development for products of
Singlepoint Systems, Inc. and Jim Watson and Robert Schaefer of Breece Hill
Technologies, Inc. Even though these seven employees have incentive stock
options and are subject to standard rules of confidentiality, we cannot
guarantee that they will stay with the Company. If any of these individuals
leave the Company, we would need to hire a comparable employee. We cannot assure
you that we would be able to hire someone quickly and at an affordable salary.
Intellectual Property
We protect our intellectual property rights through a combination of
statutory and common law patent, copyright, trademark and trade secret laws,
customer licensing agreements, employee and third-party non-disclosure
agreements and other methods.
Although we do not own any patents, we believe the VCC will be protected by
two patents that are being reviewed by the U.S. Patent and Trademark Office and
by a patent for hardware that Circle Corporation, a Japanese corporation,
applied for on December 28, 1993. We license the hardware from Circle
Corporation and use it in the VCC. Under our license, we can distribute the
hardware worldwide, except in Japan. The initial term of this license expires on
December 20, 2004.
Although we have taken these precautions to protect our intellectual
property rights, a third party may copy or otherwise obtain or use our products
or technology without our authorization, or develop similar products or
technology independently. Our business would be adversely affected if someone
used or copied our products to any substantial degree. We cannot assure you that
the protection for our intellectual property rights is adequate or that our
competitors will not independently develop similar products.
We require our consultants and developers to assign to us their rights in
any materials they provide to or make for us. We also ask their assurance that
if we use any of their materials in our products we will not violate the rights
of third parties. Based on these assurances and our relationships with our
consultants and developers, we have no reason to believe that our products
infringe on the proprietary rights of third parties. However, we have not
commissioned an independent investigation to reaffirm the basis for our belief,
and we cannot guarantee that our current or future products will infringe on
their rights. We believe that developers of control systems increasingly may be
subject to such claims as the number of products and competitors in the industry
grows and the functionality of such products in the industry overlaps. Any such
claim, with or without merit, could result in expensive litigation and could
have a material adverse effect on our business.
<PAGE>
Lack of Product Liability Insurance
We may be liable for product liability claims if someone claims that our
products injured a person or business. We do not have product liability
insurance. We cannot assure you we could obtain insurance on commercially
reasonable terms, or at all, or that even if we obtained insurance it would
adequately cover a product liability claim. We are not aware of any pending or
threatened product liability or other legal claim against us. Our business could
be adversely affected if someone brings a product liability or other legal claim
against us.
Year 2000 Issue
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 economies generally.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of year 2000 problems with respect to our
products and the third-party systems we use for our internal functions, and, in
any event, we do not anticipate the year 2000 issues we will encounter will be
significantly different than those encountered by other computer hardware and
software manufacturers, including our 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 our 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, we
believe that we will be able to manage our total year 2000 transition without
any material effect on our results of operations or financial condition. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000 Issue."
