<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 15, 1999 there were 4,823,187 shares of the Registrant's no par
value common stock outstanding.
Transitional small business issuer format: No
Page 1 of 17
<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 statements 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 September 30, 1999.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 754,128 $ 664,066
Accounts receivable, less allowance for doubtful
accounts of $760,000 and $300,000, respectively 8,247,561 2,283,578
Other receivables 241,119 147,466
Inventories 4,794,313 861,418
Prepaid expenses and other 570,495 80,094
Current portion deferred debt issue costs 75,790 --
Current portion of investment in
sales-type leases -- 20,776
----------- -----------
Total current assets 14,683,406 4,057,398
Property and equipment, net 1,647,452 1,042,432
Leased equipment 132,026 124,658
Software development costs, net 3,397,610 2,273,834
Purchased technology and other intangibles, net 21,989,322 1,419,008
Net investment in sales-type leases,
net of current portion -- 22,410
Other assets, net 449,874 193,191
----------- -----------
TOTAL ASSETS $42,299,690 $ 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>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 6,068,545 $ 867,120
Current portion of notes payable 7,152,730 395,680
Convertible subordinated debentures - 200,000
Accrued liabilities compensation and payroll taxes 4,828,444 267,581
Other 291,878 31,049
Deferred revenue 660,880 228,231
------------ ------------
Total current liabilities 19,002,477 1,989,661
------------ ------------
Subordinated notes payable, less current portion 5,595,118 1,700,000
Minority interest 1,000,000 --
------------ ------------
Total liabilities 25,597,595 3,689,661
STOCKHOLDERS' EQUITY
Voting, convertible preferred stock - Series A, convertible into one common
stock share for each five preferred shares, 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 $12.50 per share or be less than $3.75; dividend of
8% payable in cash or common stock of Company; no par value; 123,077
shares authorized; 51,792 shares issued and outstanding; total
liquidation preference of outstanding shares-$1,683,269 1,683,269 2,183,769
Non-voting, convertible preferred stock - Series C, convertible on
or before March 31, 2002 based on price of common stock; conversion
price not to exceed $12.50 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; 9,698,992 shares authorized;
4,821,187 shares in 1999 and 3,681,879 shares in 1998
issued and outstanding -- --
Additional paid-in-capital 25,305,133 7,362,796
Notes receivable-officers (294,500) (294,500)
Accumulated deficit (11,556,391) (3,869,379)
------------ ------------
Total stockholders' equity 16,702,095 5,443,270
------------ ------------
$ 42,299,690 $ 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 Nine Months Ended
September 30, September 30,
------------ ------------ ------------ ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales
Systems $ 9,590,368 $ 1,378,093 $ 22,673,592 $ 4,325,499
Maintenance, consulting and other 975,355 280,517 3,221,771 806,369
------------ ------------ ------------ ------------
Total net sales 10,565,723 1,658,610 25,895,363 5,131,868
Cost of sales
Systems 6,364,442 243,386 14,417,590 1,117,380
Maintenance, consulting and other 649,351 275,624 1,892,435 652,564
------------ ------------ ------------ ------------
Total cost of sales 7,013,793 519,010 16,310,025 1,769,944
------------ ------------ ------------ ------------
Gross profit 3,551,930 1,139,600 9,585,338 3,361,924
Operating expenses
Selling, general and administrative 7,356,497 838,494 13,717,752 2,440,027
Research and development 331,278 212,463 1,240,593 485,984
------------ ------------ ------------ ------------
Income (loss) from operations (4,135,845) 88,643 (5,373,007) 435,913
Other income (expense):
Interest expense (392,108) (68,591) (824,160) (215,257)
Interest income 5,263 607 8,811 124,395
Amortization of deferred debt costs (341,524) (11,073) (904,214) (33,220)
Other expenses (451,200) -- (451,200) --
------------ ------------ ------------ ------------
Total other income (expense), net (1,179,569) (79,057) (2,170,763) (124,082)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change
in accounting principle (5,315,414) 9,586 (7,543,770) 311,831
Cumulative effect of change to straight-line depreciation -- -- 99,607 --
------------ ------------ ------------ ------------
Net income (loss) $ (5,315,414) $ 9,586 $ (7,444,163) $ 311,831
------------ ------------ ------------ ------------
Accrual of cumulative dividends on
convertible preferred stock (129,175) -- (242,849) --
------------ ------------ ------------ ------------
Net income (loss) attributable
to common stockholders $ (5,444,589) $ 9,586 $ (7,687,012) $ 311,831
============ ============ ============ ============
Basic earnings (loss) per common share:
Net income (loss) before cumulative effect of
change in accounting principle $ (1.308) $ 0.003 $ (2.013) $ 0.089
Cumulative effect of change in accounting principle -- -- 0.026 --
------------ ------------ ------------ ------------
Net income (loss) $ (1.308) $ 0.003 $ (1.987) $ 0.089
============ ============ ============ ============
Diluted income (loss) per common share:
Net income (loss) before cumulative effect of
change in accounting principle $ (1.308) $ 0.002 $ (2.013) $ 0.077
Cumulative effect of change in accounting principle -- -- 0.026 --
------------ ------------ ------------ ------------
Net income (loss) $ (1.308) $ 0.002 $ (1.987) $ 0.077
============ ============ ============ ============
Shares used in calculations:
Basic 4,162,425 3,582,042 3,868,421 3,521,922
Diluted 4,162,425 3,998,665 3,868,421 4,060,546
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,444,163) $ 311,831
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Stock issued for services 1,290,000 --
Depreciation and amortization 4,925,203 990,238
Changes in operating assets and liabilities:
Accounts receivable (2,082,106) (1,831,170)
Other receivables (77,004) (173,613)
Inventories (466,301) (599,837)
Prepaid expenses and other (211,508) (81,643)
Accounts payable (2,448,954) 98,386
Accrued liabilities 1,184,698 146,925
Deferred revenue 230,268 (30,516)
----------- -----------
Cash used by operating activities (5,099,868) (1,169,399)
----------- -----------
Cash flows from investing activities:
Cash received from sales-type leases 22,410 679,634
Purchase of property and equipment (408,747) (204,770)
Reduction (increase) in leased equipment (40,686) 37,156
Investment in software development costs (2,331,189) (1,904,808)
Cash acquired in acquistions 606,998 --
Investment in other assets (190,523) (803,826)
Investment in note receivable -- (170,000)
Payments received on notes receivable -- 75,000
----------- -----------
Cash used by investing activities (2,341,737) (2,291,614)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 1,504,000 481,988
Net proceeds from issuance of common stock 2,720,488 1,627,007
Net Proceeds of short-term notes payable 2,807,179 --
Net Proceeds/Payments of long-term notes payable 500,000 (75,000)
----------- -----------
Cash provided by financing activities 7,531,667 2,033,995
----------- -----------
Net increase (decrease) in cash 90,062 (1,427,018)
Cash and cash equivalents at beginning of period 664,066 1,726,889
----------- -----------
Cash and cash equivalents at end of period $ 754,128 $ 299,871
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
The consolidated financial statements include the accounts of all
subsidiaries in which a controlling interest is held. These subsidiaries include
Global MAINTECH, Inc. ("GMI"), Breece Hill Technologies, Inc. ("BHT"), and
Singlepoint Systems, Inc. ("SSI"). The Company is primarily 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 created as a subsidiary in connection with the Company's acquisition of
substantially all of the assets of Enterprise Solutions, Inc. in November 1998.
The Company acquired BHT in April 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"), and in September 1999 the Company
purchased the substantially all of the assets and liabilities of Lavenir
Technology, Inc ("Lavenir"). The Company uses the IGI and Lavenir 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. However, due to payment default which is in dispute, the IGI license
agreement may terminate on December 12, 1999 and the assets purchased from IGI
will revert to IGI as of the same date.
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 was antidilutive.
The weighted average shares and total dilutive shares used in the
calculation of basic and diluted earnings (loss) per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share
Weighted average shares 4,162,425 3,582,042 3,868,421 3,521,922
Diluted Earnings (Loss) Per Share
Weighted average shares 4,162,425 3,582,042 3,868,421 3,521,922
Stock options and warrants -- 389,721 -- 511,722
Conversion of preferred stock -- 26,902 -- 26,902
--------------------------------------------------------
Total dilutive shares 4,162,425 3,998,665 3,868,421 4,060,546
========================================================
</TABLE>
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
6
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 1999 includes
$14,752,117 of gross intangible assets as a result of the acquisition of BHT,
$3,300,000 of gross assets as a result of payment of contingent consideration
related to the acquisition of IGI and $4,985,000 of gross intangible assets as a
result of the Lavenir acquisition (both discussed under "Acquisitions").
Reverse Stock Split
The Company effected a reverse stock split of 1 share of the Company's
Common Stock for each 5 shares of the Company's Common Stock, on September 2,
1999. The conversion of Preferred Stock into Common Stock was also adjusted, and
in some cases, the Preferred Stock itself according to its terms. As a result,
the aggregate number of authorized shares of the Company was reduced from
50,000,000 to 10,711,724 shares. Excluding the Preferred Stock, the aggregate
number of authorized shares is now 9,698,992. The effect of the stock split on
share and per share amounts has been retroactively reflected in the accompanying
consolidated financial statements and notes thereto.
The reverse stock split does not adversely affect the rights or preferences of
the holders of outstanding shares of any class or series of the Company's
capital stock.
Common Stock Issuance
In March 1999, the Company began a private placement of common stock at a
purchase price of $5.625 per share. The Company completed this private placement
on May 12, 1999. A total of 265,222 shares were sold for total gross proceeds of
$1,491,875. 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
26,522 shares of the common stock with an exercise price of $5.625 per share.
On June 28, 1999, the Company began a second private placement of common
stock at a purchase price of $5.00 per share. As of September 30, 1999 a total
of 129,430 shares were sold for total gross proceeds of $647,150. 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 $5.00 per share.
7
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The securities issued pursuant to these offerings were exempt from
registration under Rule 506 of Regulation D of the Securities Act of 1933, as
amended.
In August 1999, the Company entered into two arrangements to receive
investor relations consulting services in return for the issuance of an
aggregate of 258,000 shares of common stock. The Company recorded an expense of
$1,290,000 for the value of shares issued for the consulting services received.
On May 7, 1999, the Company issued convertible notes payable to two
accredited investors in the aggregate principal amount of $167,372. The notes
were convertible into common stock at $1.25 per share. The notes were to become
due on November 7, 1999; however, on September 9, 1999, the notes were
converted, in accordance with their terms, into 26,554 shares of common stock.
The shares of common stock issued upon conversion of the notes were exempt from
registration under Section 3(a)(9) of the Securities Act.
On August 6 and again on September 30, 1999, the Company rescheduled the
principal payment of $250,000 of a $500,000 note payable to Andersen, Weinroth,
which originally was due on July 31, 1999. This payment is now due on November
30, 1999. In connection with these reschedulings, the Company issued warrants to
purchase a total of 30,000 shares of common stock at an exercise price of $5.40
per share to Andersen, Weinroth. These warrants have a term of five years and
were issued pursuant to Section 4(2) of the Securities Act.
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 ($0.026 per share) in the nine months ended September 30, 1999.
Reclassifications
Certain amounts previously reported in 1998 have been reclassified to
conform to the 1999 presentation.
Acquisitions
On September 28, 1999, the Company, through its wholly owned subsidiary
Global MAINTECH, Inc. ("GMI"), purchased substantially all the assets of Lavenir
Technology, Inc., a California corporation ("Lavenir"), pursuant to an Agreement
and Plan of Reorganization (the "Purchase Agreement") by and among the Company,
GMI and Lavenir. Immediately prior to the acquisition, Lavenir was engaged in
the business of developing and selling software and Raster Photoplotters for the
printed circuit board industry.
In addition to purchasing substantially all of the assets of Lavenir
(including rights under and to Lavenir's computer software products and the
trademarks and copyrights related thereto), the Company assumed certain
liabilities of Lavenir, including, Lavenir's ongoing leases, debt and contract
obligations. The primary assets acquired by the Company were a suite of CAD/CAM
software products, including the ability to design, test, verify and repair
precision graphics designs. This software is sold independently or with Raster
Photoplotters, sophisticated hardware products used to build master printed
circuit boards.
The transaction was treated as an asset purchase for accounting purposes.
The total purchase price of $5,300,000 is payable as follows: 266,000 shares of
the Company's common stock was paid to Lavenir at closing and $400,000 in the
form of a payable due on January 31, 2000. A maximum of 700,000 additional
shares of common stock are issuable as of April 30, 2000 sufficient to cause the
value of the shares debt previously issued and the $400,000 liability to total
$5,300,000 as of April 30, 2000. The holders of common stock issued by the
Company in connection with the acquisition were granted customary registration
rights.
The Company received net assets, excluding capitalized software fair valued
at approximately $315,000 as a result of the Lavenir acquisition and allocated
the purchase price of $4,985,000 to purchased technology with useful lives of
three to five years.
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 subsidiary of GMI, with and into BHT. BHT was the surviving
corporation and is now a 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 900,000 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 1,100,000 shares, a portion of the fair
value of which
8
<PAGE>
GLOBAL MAINTECH CORPORATION
FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $14,752,117 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 $7,121,573. The
$7,630,544 valuation includes the warrants to purchase 900,000 shares of common
stock and warrants issued to Maven Securities, Inc. as fees for acting as
placement agent. The Company assigned $494,000 of the $14,752,117 valuation to
inventory which was expensed as a cost of sale in the fiscal quarter ended June
30, 1999 and assigned $83,381 to in process research and development which was
expensed in the fiscal quarter ended June 30, 1999. The remaining portion of
this valuation of $14,174,736 was assigned to purchased technology in the
following components:
Amount Amortization
(000's) period (yrs.)
------- -------------
Technology $4,632 7
Assembled workforce 1,575 3
Distribution Agreements 5,374 7
IBM OEM Agreement 1,668 2
Trade Name 926 7
---------
Total $14,175
The Company recorded amortization expenses of approximately $1,650,000 through
September 30, 1999 related to the above intangible assets.
The unaudited pro forma combined historical results, as if BHT and Lavenir
had been acquired as of January 1, 1998, are estimated to be:
Nine months Nine months
ended ended
(000's, except per share data) September 30, September 30,
1998 1999
---------------------------------------------------------------
Revenue 31,700 $ 31,170
Net loss $ (6,078) $ (2,674)
Net loss per common share $ (1.726) $ (0.691)
The pro forma results include amortization of the intangibles related to both
acquisitions. 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, and
by the recognition of an accrued liability in the amount of $1,864,519 which is
now recorded in current liabilities. The additional consideration was recorded
as additional purchased technology and other intangibles.
Contingencies
On October 29, 1999, the Company rescheduled the borrowing base line of
credit to bring it into compliance with the terms of its credit facility with
H&Q and made arrangements to make the final payment of $250,000 of a $500,000
note payable to Andersen, Weinroth which was due on September 30, 1999. This
payment is now scheduled to be made on or before November 30, 1999.
Pursuant to the terms of the purchase agreement relating to the Company's
acquisition of Enterprise Solutions, Inc. ("ESI"), the Company may be required
to return the purchased assets and assumed liabilities of ESI to the former
shareholders of ESI on a prospective basis if the Company does not meet certain
working capital conditions set forth in the purchase agreement. On September 29,
1999, ESI notified the Company that it's subsidiariy, Global MAINTECH, Inc. was
in default of one of those conditions. This default notice has since been waived
by ESI.
The Company received notice from Infinite Graphics Incorporated, dated
November 12, 1999, regarding (1) the termination of the license agreement for
the IGI CAD/CAM software it licensed from IGI pursuant to the License and Asset
Purchase Agreement between the Company and IGI dated February 27, 1998 (the "IGI
Agreement") and (2) the transfer back to IGI of the related assets the Company
purchased from IGI pursuant to the IGI Agreement (the "Transferred Assets").
IGI's right to terminate the license agreement and to reclaim the Transferred
Assets arose due to the Company's inability to pay the earn-out payment due to
IGI pursuant to the Purchase Agreement. The amount of this payment was
approximately $1,864,000 and was due in June 1999. The termination of the
license and the reversion of the assets, according to the claim is to be
effective as of December 12, 1999. IGI claims that the Company still must pay
IGI all or a portion of the earn out payment. The Company intends to dispute
this claim vigorously.
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:
<TABLE>
<CAPTION>
Segment Third Quarter Comparison
Amount Inc (Dec) % of Revenue
(000's) 1999 1998 $ % 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Monitoring Products 1,855 1,659 196 11.8% 17.6% 100.0%
Tape Library Storage Products 8,711 -- 8,711 N/A 82.4% --
-----------------------------------------------------------------
Total 10,566 1,659 8,907 536.9% 100.0% 100.0%
Income (loss) from operations
Monitoring Products (3,186) 89 (3,275) (3,679.8%) (30.2%) 5.4%
Tape Library Storage Products (950) -- (950) N/A (9.0%) --
-----------------------------------------------------------------
Total (4,136) 89 (4,225) (4,747.2%) (39.1%) 5.4%
<CAPTION>
Segment Year-to-date (throughSept. 30) Comparison
Amount Inc (Dec) % of Revenue
(000's) 1999 1998 $ % 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Monitoring Products 7,134 5,132 2,002 39.0% 27.5% 100.0%
Tape Library Storage Products 18,761 -- 18,761 N/A 72.5% --
------------------------------------------------------------------
Total 25,895 5,132 20,763 404.6% 100.0% 100.0%
Income (loss) from operations
Monitoring Products (3,759) 435 (4,194) (964.1%) (14.5%) 8.5%
Tape Library Storage Products (1,614) -- (1,614) N/A (6.2%) --
------------------------------------------------------------------
Total (5,373) 435 (5,808) (1,335.2%) (20.7%) 8.5%
</TABLE>
The consolidated financial statements that accompany this discussion show
the operating results of the Company for the quarters ended September 30, 1999
and 1998. These results include the operations of GMI, BHT and SSI.
Net Sales for the third quarter ended September 30, 1999 were approximately
$10,566,000 compared to sales for the third quarter of 1998 of approximately
$1,659,000. Sales for the nine months ended September 30, 1999 were
approximately $25,895,000 compared to $5,132,000 in the same nine month period
of 1998. The approximate $8,907,000 increase for the third quarter and the
approximate $20,763,000 increase for the nine months ended September 30, 1999 is
substantially related to the Company's acquisition of BHT in April 1999. BHT
contributed approximately $8,711,000 and $18,761,000 in product sales for the
third quarter and nine month periods, respectively. The remaining increases of
$196,000 for the third quarter and $2,002,000 for the nine months ended
September 30, 1999 are due to sales from new products and products acquired in
the latter part of 1998 fiscal year.
Cost of sales as a percentage of revenue increased in the third quarter of
1999 to 66% from 31% in the third quarter of 1998 and increased for the nine
months ended September 30, 1999 to 63% from 34% in the nine months ended
September 30, 1998. Excluding the newly acquired tape library business, BHT,
cost of sales increased to 38% in the third quarter and decreased to 30% in the
nine months ended September 30, 1999, respectively. Excluding one-time non-cash
charges due to a $494,000 inventory valuation related to the BHT acquisition,
the BHT cost of sales was 28% and 27% for the third quarter and nine months to
date, respectively, which reflects the equipment and labor assembly costs of the
tape library industry. The hardware component in the non-BHT business segment
cost of sales decreased compared to the prior three and nine month periods.
However, the cost of sales in 1999 includes an increase in amortization of
software development costs in 1999 of approximately $460,000 and $1,360,000 for
the three and nine month
10
<PAGE>
periods ended September 30, 1999. This increase in amortization of development
costs caused the non-BHT business segment cost of sales as a percentage of
revenue to increase to 38% in the third quarter of 1999 compared to 31% in the
third quarter of 1998. Sales in the third quarter ended September 30, 1999 did
not increase sufficiently to offset the increase in amortization of software
development costs. The Company was expecting an increase in VCC sales which did
not materialize. The Company attributes this to the shift in sales focus from
direct sales to sales through the reseller arrangement with Hitachi Data
Systems. The Company did not anticipate the delay in sales revenues as a result
of focusing its sales force to this reseller arrangement but has recently
experienced an increase in activity as a result of this change of sales focus
and assumes this additional activity will continue.
Selling, general and administrative expenses in the third quarter of 1999
were approximately $7,356,000 compared to $838,000 in the third quarter of 1998.
For the nine month period ended September 30, 1999 these expenses were
approximately $13,718,000 compared to $2,440,000 in the same period in 1998.
Excluding BHT's selling, general and administrative expenses of approximately
$3,357,000 and $6,234,000 in the third quarter and the first nine months of
1999, respectively, which includes approximately $800,000 and $1,647,000,
respectively, of purchase cost amortization, these increases were
approximately $3,999,000 and $7,484,000 for the three and nine month periods
ended September 30, 1999, respectively. Included in this increase is a non-cash
charge of $1,290,000 which reflects the issuance of 258,000 shares of common
stock for a financial investment advisory program begun on August 30, 1999 and
extending into the year 2000. The terms of this contract require the Company to
reflect this cost at the start of the program. The Company does not expect to
incur any significant cash expenditures for this program. The remaining increase
in selling, general and administrative expenses of $2,709,000 and $6,194,000 for
the three and nine month periods ended September 30, 1999, respectively, 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 staffing increases in the product areas generating increases in
sales which include 10 new products from a combination of Singlepoint Systems
and Magnum Technlogies. 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 depreciation from the purchase of additional equipment and
space required for additional employees.
Research and development costs in the third quarter of 1999 were
approximately $331,000 compared to $212,000 in the third quarter of 1998. For
the nine month period ended September 30, 1999 research and development costs
were approximately $1,241,000 compared to $486,000 in the same period in the
prior year. The increases of $119,000 in the third quarter and $755,000 for the
nine months ended September 30, 1999 are primarily due to the monitoring
products business segment and are due to increased salary and consulting
expenses relating to additional employees and contractors in this expense
category. The majority of these increases are related to new products developed
or acquired by the Company throughout 1998 and the first nine months of 1999.
Non-operating expenses include interest expense, amortization of
capitalized debt issuance costs, interest income and other expense. The increase
in amortization is due to the addition of deferred debt costs from the issuance
of warrants related to $500,000 of subordinated short-term debt issued in
February 1999. Interest expense increased $324,000 and $609,000 in the three and
nine months ended September 30, 1999, respectively. The increase in both periods
is primarily due to interest expense attributable to BHT in the amount of
$217,000 and $443,000 in the three and nine months ended September 30, 1999,
respectively. BHT has a line of credit to finance accounts receivable and
inventory and subordinated debt totaling $6.7 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. Other expense
increased as a result of an accrual of penalties on Preferred Stock Series B in
the amount of $387,000. This accrual represents a penalty for a delay in the
registration of the underlying common stock into which the Series B and C is
convertible. No demand of the penalty interest has been made and the Company has
a general understanding that such penalty interest may be waived. The Company
plans to formalize this waiver during the next fiscal quarter.
Liquidity and Capital Resources
As of September 30, 1999, the Company had negative working capital of
approximately $4,255,000 compared to positive working capital of approximately
$2,068,000 as of December 31, 1998. The decrease in positive working capital as
of September 30, 1999 is due to the acquisition of long-term assets using
short-term liabilities. During the nine months ended September 30, 1999, the
Company has incurred short-term liabilities, primarily in the form of notes
payable of approximately $3.0 million related to the acquisitions of BHT and
Lavenir and for the investment in capitalized software costs and incurred
short-term liabilities of approximately $1.8 million to complete the acquisition
of the software licenses purchased from Infinite Graphics, Inc. ("IGI"). In
addition, BHT has post-acquisition negative working capital of approximately
$644,000.
Net cash used in operating activities for the nine months ended September
30, 1999 was approximately $5,100,000. During this nine month period of 1999
operating funds loss of approximately $1,229,000 were used by the net loss prior
to depreciation/amortization and valuation charges for common stock issued for
investor relations services. The net loss was also affected by an allocation to
inventory of a portion of the purchase price of BHT in the amount of $494,000
and the write-off of $83,000 of in process technology at BHT at the time of
acquisition. The Company charged the $494,000 to cost of sales as the related
inventory was sold and the $83,000 was charged to research and development.
Operating funds were also provided by an increase in accrued expenses and
deferred revenue in the
11
<PAGE>
combined approximate amount of $1,415,000. Operating funds were used by
increases in current assets of approximately $2,837,000, which includes an
increase in accounts receivable and inventory of approximately $2,082,000 and
$466,000, respectively, and a decrease in accounts payable of approximately
$2,449,000.
Cash used by investing activities for the nine months ended September 30,
1999 was approximately $2,342,000 and included investments of $2,331,189 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
Company also invested in other assets in the amount of $191,000. The
Company also purchased approximately $427,000 of additions to machinery and
equipment during the first nine months of 1999 and acquired $607,000 of cash as
a result of its acquisitions. In the first nine months of 1998, cash used in
investing activities totaled $2,292,000, which included investments in software
development costs of $1,905,000, purchased technology of $804,000, purchases of
property and equipment of approximately $205,000 and an investment, net of
receipt of payments, in a note receivable in the amount of $95,000. These
investments were partially offset by the sale of sales-type leases in the amount
of $680,000 and a reduction in leased equipment in the amount of $95,000.
Net cash of approximately $7,532,000 was provided by financing activities
in the first nine 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 $2,720,000 from the issuance of shares
of common stock in two private placements. In addition, proceeds in the amount
of $3,307,000 were received from the issuance of both short-term and long-term
debt primarily secured by long-term assets. In the first nine months of 1998,
net cash of approximately $2,034,000 was provided by financing activities. Net
proceeds of approximately $1,627,000 were received from the issuance of shares
of common stock and approximately $482,000 from the issuance of Series B
convertible preferred stock. These proceeds were partially offset by a $75,000
reduction in notes payable.
Presently, the Company believes its negative working capital can be
improved from the sale of a business unit and from earnings measured before non-
cash items such as expenses for depreciation and amortization and stock issued
for services. The Company's loss before non-cash items for the nine months ended
September 30, 1999 was approximately $1,229,000 in the first nine months of 1999
which represents a decline from a similar measure in the first six months of
1999. This loss in the third quarter before non-cash items has caused the
Company to implement a restructuring plan to reduce its expenses subsequent to
September 30, 1999 which resulted in the layoff of approximately 20 employees
and some temporary salary reductions for the remainder of 1999.
While the loss before non-cash items in the third of 1999 is largely due to
actual sales being less than forecasted, the loss was made worse because the
Company was incurring operating expenses based upon a planned higher forecast
than actually occurred. As a result operating expenses have been reduced
accordingly. In addition to these changes in operations, the Company has also
addressed the effects of this loss before non-cash items as it relates to the
ability of the Company to keep current with its debt obligations. The Company
has a note payable in the amount of $250,000 with Andersen, Weinroth & Co., L.P.
which was due on September 30, 1999 and a borrowing base line of credit with H&Q
both of which have payments which are past due as of September 30, 1999. On
October 29, 1999, the Company has renegotiated its accounts receivable based
line of credit with H&Q and H&Q has verbally agreed to purchase the $250,000
note payable from Andersen, Weinroth & Co., L.P. The terms of the renegotiation
with H&Q call for the Company to significantly reduce the notes payable
outstanding with H&Q with revenue from sales and from proceeds from additional
equity, debt or asset sales. If the Company is not in default in its debt
agreements with H&Q, the prepayments can be re-borrowed according to the
standard terms of the borrowing base agreement.
The Company has re-evaluated its assumptions predicting future growth in
sales and improved earnings before non-cash items and believes the factors that
created the loss in the three months ended September 30, 1999 will not
significantly affect future sales. However future sales may be affected by the
sale if a business unit or other changes. Although variable costs of sales have
been reduced, certain costs of sales such as amortization of capitalized
software costs are not directly related to short-term reductions in sales or
reductions in the rate of sales growth. As a result total gross margins have
declined. These results have reduced the Company's liquidity and can be expected
to reduce the Company's ability to raise capital in the debt or equity markets.
In addition, the Company has various contingencies that may require it to issue
additional common stock. Depending on the outcome of these contingencies, it may
be necessary for the Company to seek shareholder approval to authorize
additional shares of common stock.
Liquidity is also affected by the Company's ability to collect its accounts
receivable and the Company's ability to realize full value for its inventory and
other assets. As previously mentioned, the gross margins on the Company's
inventory have not declined and the Company's inventory has increased over the
nine months ended
12
<PAGE>
September 30, 1999. Furthermore, based on its renegotiations withH&Q and the
current forecast the Company believes it has adequate lines of credit and cash
flow to purchase additional inventory as necessary. Although the Company's aged
accounts receivable have improved as of September 30, 1999, there is no
assurance this improvement will continue.
The Company's debt level has increased substantially in the nine months
ended September 30, 1999 and the majority of this debt matures over the next 18
months. The assets that support this debt have a longer expected life than the
debt. This increase in debt has occurred in the non-BHT segment of the business
that has a 67% to 69% gross margin. The Company believes the recent reduction in
operating expenses in this segment of the business will enhance the Company's
operating margin to service this debt with a higher level of profitability.
Nevertheless, the Company can provide no assurance as to its future
profitability and continued access to the capital markets or its ability to
repay its debts as they become due.
Year 2000 Issue
Background. Many currently installed computer systems and software are
coded to accept only two-digit entries in the date code fields. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with year 2000 requirements. The potential global impact of the year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
Company and the U.S. and world economy generally.
State of Readiness. The Company has analyzed the potential effect of the
year 2000 issue on both the system software included in the Company's products
and its internal systems (e.g., word processing and billing software), including
its information technology ("IT") and non-IT systems (which systems contain
embedded technology in manufacturing or process control equipment containing
microprocessors or other similar circuitry). The Company's year 2000 compliance
program has included 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 has completed the validation
phase of this program with respect to its own products and software purchased or
licensed from software vendors.
The amount of additional remediation work required to address year 2000
problems, if any, is expected to be insignificant. 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 currently year 2000 compliant. 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 may
continue to test its internal systems to verify that 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 tohave been
less than $25,000, all of which was 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 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 any future
testing 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,
13
<PAGE>
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
Debt Restructuring
- ------------------
On October 29, 1999, the Company rescheduled the borrowing base line of credit
to bring it into compliance with the terms of its credit facility with H&Q and
made arrangements to make the final payment of $250,000 of a $500,000 note
payable to Andersen, Weinroth which was due on September 30, 1999. This payment
is now scheduled to be made on or before November 30, 1999.
ESI Default and Waiver
- ----------------------
Pursuant to the terms of the purchase agreement relating to the Company's
acquisition of Enterprise Solutions, Inc. ("ESI"), the Company may be required
to return the purchased assets and assumed liabilities of ESI to the former
shareholders of ESI on a prospective basis if the Company does not meet certain
working capital conditions set forth in the purchase agreement.On September 29,
1999, ESI notified the Company that it's subsidiary, Global MAINTECH, Inc.
was in default of one of those conditions. This default notice has since been
waived by ESI.
Appointment of Interim CEO; Director Changes.
- ---------------------------------------------
On November 10, 1999, the Company announced the appointment of Trent
Wong as interim Chief Executive Officer and President of Global MAINTECH
Corporation and Global MAINTECH, Inc. Mr. Wong is also President of the
Company's wholly owned subsidiary Singlepoint Systems, Inc. and co-founder of
ESI, Mr. Wong replaced David McCaffrey as CEO; however, Mr. McCaffrey will
remain on the Board of Directors as Chairman.
Mr. Wong's background encompasses 20 years of experience in the
software industry having worked for both Computer Associates and Votek Systems
prior to starting Singlepoint Systems. Votek Systems marketed an Enterprise
Management tool similar to the Company's Virtual Command Center. For the past
five years, Mr. Wong has worked to build Singlepoint Systems, which provides
professional services and automated notification and response software to this
same market segment.
On November 10, 1999, the Company also reported that, due to
commitments to other businesses, Doug Pihl and John Clarey have resigned from
the Board of Directors. Mr. Wong will assume Doug Pihl's position on the Board
of Directors. Mr. Clarey's seat will remain vacant until a suitable candidate is
identified.
IGI Default; Transaction to be Reversed.
- ----------------------------------------
The Company received notice from Infinite Graphics Incorporated, dated
November 12, 1999, regarding (1) the termination of the license agreement for
the IGI CAD/CAM software it licensed from IGI pursuant to the License and Asset
Purchase Agreement between the Company and IGI dated February 27, 1998 (the "IGI
Agreement") and (2) the transfer back to IGI of the related assets the Company
purchased from IGI pursuant to the IGI Agreement (the "Transferred Assets").
IGI's right to terminate the license agreement and to reclaim the Transferred
Assets, which assumes facts that the Company disputes, arose due to the
Company's inability to pay the earn out payment due to IGI pursuant to the
Purchase Agreement. The amount of this payment was approximately $1,864,000 and
was due in June 1999. The termination of the license and the reversion of the
assets, according to the claim is to be effective as of December 12, 1999. IGI
claims that the Company still must pay IGI all or a portion of the earn out
payment. The Company intends to dispute this claim vigorously.
Lavenir Acquisition
- -------------------
On September 28, 1999, the Company, through its wholly owned subsidiary
Global MAINTECH, Inc. ("GMI"), purchased substantially all the assets of Lavenir
Technology, Inc., a California corporation ("Lavenir"), pursuant to an Agreement
and Plan of Reorganization (the "Purchase Agreement") by and among the Company,
GMI and Lavenir. Immediately prior to the acquisition, Lavenir was engaged in
the business of developing and selling software and Raster Photoplotters for the
printed circuit board industry.
In addition to purchasing substantially all of the assets of Lavenir
(including rights under and to Lavenir's computer software products and the
trademarks and copyrights related thereto), the Company assumed certain
liabilities of Lavenir, including, Lavenir's ongoing leases, debt and contract
obligations. The primary assets acquired by the Company were a suite of CAD/CAM
software products, including the ability to design, test, verify and repair
precision graphics designs. This software is sold independently or with Raster
Photoplotters, sophisticated hardware products used to build master printed
circuit boards.
The transaction was treated as an asset purchase for accounting purposes.
The total purchase price of $5,300,000 is payable as follows: 266,000 shares of
the Company's common stock was paid to Lavenir at closing and $400,000 in the
form of a payable due on January 31, 2000. A maximum of 700,000 additional
shares of common stock are issuable as of April 30, 2000 sufficient to cause the
value of the shares debt previously issued and the $400,000 liability to total
$5,300,000 as of April 30, 2000. The holders of common stock issued by the
Company in connection with the acquisition were granted customary registration
rights.
The Company received net assets, excluding capitalized software fair valued
at approximately $315,000 as a result of the Lavenir acquisition and allocated
the purchase price of $4,985,000 to purchased technology with useful lives of
three to five years.
BHT Assertion
- -------------
The Company received notice from BHT asserting that the Company has
defaulted on a $1,600,000 payment obligation set forth in the Agreement and Plan
of Merger by and among the Company, Global MAINTECH, Inc., BHT Acquisition, Inc.
and BHT, dated March 5, 1999. The Company believes BHT's assertion is in error.
Restructuring Plan
- ------------------
The Company undertook a restructuring plan in October 1999 to reduce costs,
primarily with respect to its VCC operations. The restructuring plan resulted in
the layoff of approximately 20 employees, the reduction of salaries through
December 31, 1999. The Company believes that the restructuring plan will
significantly reduce its operating costs and allow it to meet its scheduled debt
obligations for the foreseeable future.
14
<PAGE>
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES
On September 2, 1999, the Company effected a 1-for-5 reverse stock
split. All share amounts shown below reflect this stock split.
Issuance of Warrants in Connection with Debt Rescheduling.
- ----------------------------------------------------------
On August 6 and again on September 30, 1999, the Company rescheduled
the principal payment of $250,000 of a $500,000 note payable to Andersen,
Weinroth, which originally was due on July 31, 1999. This payment is now due on
November 30, 1999. In connection with these reschedulings, in September 1999,
the Company issued warrants to purchase a total of 30,000 shares of common stock
at an exercise price of $5.40 per share to Andersen, Weinroth. These warrants
have a term of five years and were issued pursuant to Section 4(2) of the
Securities Act. The fair value of those warrants is being amortized over this
new debt payment term.
Issuance of Common Stock for Consulting Services.
- -------------------------------------------------
On August 26, 1999, the Company issued 258,000 shares of common stock
to an investor relations consulting firm as payment for future consulting
services. The shares were issued pursuant to Section 4(2) of the Securities Act.
Issuance of Common Stock.
- -------------------------
On June 28, 1999, the Company began a private placement of common stock
at a purchase price of $5.00 per share. As of September 30, 1999, the Company
had sold a total of 129,430 shares for total gross proceeds of $647,150. The
shares were offered and sold only to accredited investors. 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 will also issue
to the agent a warrant to purchase up to 10% of the number of shares of common
stock sold in the offering, which warrant will have an exercise price of $5.00
per share and a term of five years. The securities issued pursuant to this
offering were exempt from registration under Rule 506 of Regulation D of the
Securities Act.
Issuance of Common Stock upon Note Conversion.
- ----------------------------------------------
On May 7, 1999, the Company issued convertible notes payable to two
accredited investors in the aggregate principal amount of $167,372. The notes
were convertible into common stock at $6.25 per share. The notes were to become
due on November 7, 1999; however, onSeptember 9, 1999, the notes were converted,
in accordance with their terms, into 26,554 shares of common stock. The shares
of common stock issued upon conversion of the notes were exempt from
registration under Section 3(a)(9) of the Securities Act.
Issuance of Common Stock in Connection with Asset Purchase from Lavenir.
- ------------------------------------------------------------------------
On September 28, 1999, the Company, through its wholly owned subsidiary
Global MAINTECH, Inc. ("GMI"), purchased substantially all of the assets of
Lavenir Technology, Inc., a California corporation ("Lavenir"), pursuant to an
Agreement and Plan of Reorganization (the "Purchase Agreement") by and among the
Company, GMI and Lavenir. Immediately prior to the acquisition, Lavenir was
engaged in the business of developing and selling software and Raster
Photoplotters for the printed circuit board industry.
In addition to purchasing substantially all of the assets of Lavenir
(including rights under and to Lavenir's computer software products and the
trademarks and copyrights related thereto), the Company assumed certain
liabilities of Lavenir, including Lavenir's lease, debt and ongoing contract
obligations. The primary assets acquired by the Company were a suite of CAD/CAM
software products, including the ability to design, test, verify and repair
precision graphics designs. This software is sold independently or with Raster
Photoplotters, sophisticated hardware products used to build master printed
circuit boards.
The transaction was treated as an asset purchase for accounting
purposes. The total purchase price of $5,300,000 is payable as follows: 266,000
shares of the Company's common stock was paid to Lavenir at closing and $400,000
payable on January 31, 2000. A maximum of 700,000 additional shares of common
stock are issuable as of April 30, 2000 sufficient to cause the value of the
shares previously issued and the $400,000 liability to total $5,300,000 as of
April 30, 2000. The holders of common stock issued by the Company in connection
with the acquisition were granted customary registration rights.
15
<PAGE>
All securities issued in connection with the acquisition were exempt
from registration under [Rule 506 of Regulation D/ Section 4(2)??? of the
Securities Act.] [How many shareholders were there?]
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 October 12, 1999 on Form 8-K reporting
the acquisition of Lavenir Technology, Inc. by a subsidiary of the Company.
16
<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
November 22, 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.
November 22, 1999 By:/s/Trent Wong
----------------------------------------
Trent Wong
Chief Executive Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 754 754
<SECURITIES> 0 0
<RECEIVABLES> 8,248 8,248
<ALLOWANCES> 0 0
<INVENTORY> 4,794 4,794
<CURRENT-ASSETS> 14,683 14,683
<PP&E> 1,647 1,647
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 42,300 42,300
<CURRENT-LIABILITIES> 18,938 18,938
<BONDS> 5,595 5,595
0 0
3,248 3,248
<COMMON> 25,011 25,011
<OTHER-SE> (11,492) (11,492)
<TOTAL-LIABILITY-AND-EQUITY> 42,300 42,300
<SALES> 10,566 25,895
<TOTAL-REVENUES> 10,566 25,895
<CGS> 7,014 16,310
<TOTAL-COSTS> 7,688 14,958
<OTHER-EXPENSES> 788 1,346
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 392 824
<INCOME-PRETAX> (5,251) (7,380)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,251) (7,380)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,251) (7,380)
<EPS-BASIC> (1.308) (1.92)
<EPS-DILUTED> (1.308) (1.92)
</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"). Due to a payment default this license will
terminate on December 12, 1999 and we will be required to return the purchased
assets to 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, 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 BHT 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 November 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. Debt
financing may be more difficult for us to obtain than it has in the past due to
recent defaults, our relatively high debt level and a smaller amount of assets
that can be used as collateral due to the reversion of the assets we purchased
from Infinite Graphics, Inc., a Minnesota coporation ("IGI"). Our business could
be adversely affected if we do not secure such additional financing.
Reliance on Key Personnel
We rely heavily on one technician, 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."
