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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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
(952) 944-0400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value
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 period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No _______
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Check if disclosure of delinquent filers in response to Item 405 of Regulations
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[X]
The Company's revenues for the Fiscal Year Ended December 31, 1999 totaled
$9,831,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 16, 2000 was approximately $41,396,000 based upon the
closing bid price on the OTC Bulletin Board on that date. The number of shares
of the Company's no par value common stock outstanding as of March 16, 2000 was
6,034,958.
Transitional Small Business Disclosure Format (Check One):
Yes ____ No X
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Copies of the Company's Forms 10-KSB, as filed with the Securities and Exchange
Commission, may be obtained free of charge from James Geiser at the Company,
7578 Market Place Drive, Eden Prairie, Minnesota 55344, phone 952-944-0400.
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB 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, 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; failure to successfully adjust the Company's product
mix and product sales following divestiture of some businesses; failure of the
Company to meet its future additional capital requirements; lack of market
acceptance of the Company's products, including products under development; the
uncertainty in the Company's ability to continue to operate profitably in the
future; loss of key personnel; failure of the Company to secure adequate
protection for the Company's intellectual property rights; failure of the
Company to respond to evolving industry standards and technological changes; and
the Company's exposure to product liability claims. The forward-looking
statements are qualified in their entirety by the cautions and risk factors set
forth in Exhibit 99, under the caption "Cautionary Statement," to this Annual
Report on Form 10-KSB for the year ended December 31, 1999.
PART I
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Item 1. Description of Business.
General
The Company, through its subsidiaries Global MAINTECH, Inc. ("GMI") and
Singlepoint Systems, Inc. ("SSI"), and divisions, supplies world class systems
(device and system consolidation, systems and network management, professional
services and storage products) to data centers. These products and services
provide solutions that enable companies to better use their IT management tools.
The Company's products include the Global MAINTECH Virtual Command Center
("VCC"), a master console that provides simultaneous control, operation,
monitoring and console consolidation for mainframe, midrange, UNIX, Microsoft NT
and networks. SSI manufactures and sells event notification software and
provides professional services to help implement enterprise management
solutions. The Company's Lavenir printed circuit board division manufactures and
sells printed circuit board design software and plotters. The Company's
customers include General Electric Capital Corporation, Burlington Northern
Santa Fe Railroad, Systems Management Specialists, Inc., Ferntree Computer Corp.
(Australia), SAP America, Inc., Deluxe Corporation, Bank One Services Corp.,
Worldspan, State Farm Insurance, Southern California Gas, MCI, Alltel
Information Services, and Minnesota Mining and Manufacturing. The Company has
established partnerships with HP, IBM, BMC, Compaq, Internet Security Solutions,
Remedy and Cabletron Spectrum. Together, the Company's products and services
provide solutions that enhance the IT Framework solutions provided by these and
other partner companies.
The Company has expanded through internal development and acquisitions. SSI
was acquired in November 1998 and on September 29, 1999 the Company purchased
the assets, including software, of Lavenir Technology, Inc.
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.
Monitoring Products and Services
VCC. This product is a computer system, consisting of hardware and
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software, which monitors and controls diverse computers in a data center from a
single, master console. A console is a computer terminal with access to the
internal operation of other computers. The VCC can simultaneously manage
servers, networks, mainframes and mid-range computers such as those with MVS,
VM, OS390, UNIX, Microsoft and Windows NT platforms. The VCC is designed to
perform three primary functions:
- consolidate consoles into one monitor, a "virtual console" or
single point of control;
- monitor and control the computers connected to the virtual
console; and
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- automate most, if not all, of the routine processes performed by
computer operators in data centers.
It is an external system that monitors and controls the subject mainframe and
other data center computers from a workstation-quality reduced instruction set,
RISC-based UNIX system, computer which is housed separately from the computers
it controls. VCC users are able to:
- reduce staffing levels;
- consolidate all data center operations and technical support
functions to a single location regardless of the physical
location of the data center(s); and
- achieve improved levels of operational control and system
availability.
The hallmark of this product is that it allows centralized management and
automated operations of multiple hardware platforms and networks on a local and
remote basis. Users of the VCC are able to consolidate the management of entire
data centers, whether the computing devices comprising the data center are
located in one location or distributed across the world, into a single
workstation that provides complete inter-connectivity and control over a
network. The VCC is a hardware and software solution that is easy to install and
use. Benefits include: access to enterprise-wide reports at various levels of
the network, management of any task or computer console on local or remote
basis, and automated warnings of potential or actual system problems. The VCC's
ability to consolidate operational computer consoles reduces the need for
operational staff, technical support and software licenses. The VCC is scalable
to accommodate data center growth and change and can be installed and become
operational in just a few days.
The majority of systems and network management products are represented by
software-only products employing invasive software agents, known as active
agents, which are installed on each of the mission critical computing devices.
Software agents can be either passive collectors of information or active
searchers for information. Software that employs active agents is time consuming
to install and by its nature activates the need for "change control," one of the
eight functions of systems and network management. Any new software must go
through the change control process to determine compatibility with all other
software deployed on the subject computing device. This process may be extensive
depending on which systems and network management software is used.
The VCC is not designed to compete with the active agent software now
prevalent in the industry. It is an external system that accepts the signals and
information output of each of the devices to which it is connected.
Consequently, it can use the infrastructure provided by native and non-native
operational software to control the enterprise computing operations. The greater
the information issuing from these devices, the more useful the VCC becomes. As
a result, some of the other products offered by us employ passive agents to
collect information from host devices or networks before passing that
information on to the VCC.
The VCC is a platform that allows customers to establish enterprise-wide
operational control. In addition, we offer other products that complement the
VCC, which are described below.
Global Watch MVS/SNA. This product can operate on a stand-alone or fully
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integrated basis with the VCC to manage a customer's networked environment for
IBM's mainframe-based Net View application and customers have confirmed it uses
only approximately 5% of the processing capacity required by Net View. In
addition, it reduces exposure to network outages, improves average repair times
on network problems and provides many analytic problem-solving tools. When
Global Watch MVS/SNA is combined with the VCC, the customer can take advantage
of the MVS Logical Console, which captures highlighted messages and WTOR's
(Write to Operate with Reply) at the instant the messages are produced, in real
time, from all LPAR's (Logical Partitions which divide a mainframe device into
multiple internal devices), and displays the messages in a single, logical
console alert window in the VCC. There is no need for any customization on the
host computer's devices and messages can be collected from a nearly infinite
number of CPUs/LPARs.
Alarm Point(TM). This product can operate on a stand-alone or fully
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integrated basis with the VCC. It is an intelligent event notification system
designed to receive status messages from event and system management tools,
including the VCC, Hewlett-Packard's Open View, IBM's Tivoli TME, Computer
Associates' Unicenter, and Cabletron's SPECTRUM, to alert the proper people of
critical alarms. Alarm Point makes note of an appropriate "event" by making
calls to all types of phones, digital and alphanumeric pagers, faxes and email.
Alarm Point
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"knows" the notification protocol by implementing pre-determined notification
policies set-up using an easy to use graphical user interface. Alarm Point's
telephony skills allow it to automatically recognize when a voicemail system or
answering machine picks up the call and will leave a message and/or try an
alternate contact. Through the use of integration modules and platform specific
receptor agents, this telephony-based product has the ability to notify on
alarms almost regardless of the hardware platform or operating system on which
the alarms originated. Alarm Point is easily installed and can begin telephone
notification on the first day of installation.
Professional Services. Our forte is providing implementation skills for
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enterprise management tools. We also provide strategic and tactical planning and
implementation of enterprise management projects. These include projects
involving mainframe, mid-tier and open systems computing environments. They
involve projects ranging from the implementation of systems management tools to
managing and monitoring mission critical applications within a corporation.
We also install the industry's leading systems management products, including
our own.
Tape Library Storage Products
Through our acquisition of Breece Hill Technologies, Inc., effective on
April 1, 1999, we supply automated tape libraries used to backup, restore and
archive information stored in networks on servers, PC's and workstations, and
on-line data storage subsystems. The Company is currently investigating the
possibility of a sale of Breece Hill. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Developments
- - Proposed Sale of Breece Hill."
Sales and Marketing
We currently employ several different sales channels to properly fit the
product. The VCC has been sold primarily through direct sales and through our
business partnerships using our sales force. This requires appropriate training
for each sales person and direct, consultative sales techniques. The direct
sales team is supported by a dedicated telemarketing process and sales support
in the form of written materials, CD-ROM presentations, VCR tape presentations
and remote PC-based presentation routines available on the salespersons laptop
computer. In June 1999, we announced a corporate sponsorship and alliance with
Hitachi Data Systems in which it would use its 200-plus sales force and 800-plus
systems engineers to sell the VCC. We believe this alliance represents a
significant endorsement of the VCC product. In March 2000, Hitachi Data Systems
announced that it was scaling back its mainframe operations. As a result, this
alliance will diminish in importance.
Our other products, excluding storage management products, are sold through
resellers and strategic arrangements with other companies that have products
complementary to ours. The direct sales team and the telemarketing staff sell
these other products to allow an entry point to a customer at any level in which
the customer may become engaged. In addition, the software-only products may be
downloaded from our web-site for free trial for a limited time.
Our professional services are sold directly to the customer or through
strategic partnerships with such companies as BMC Software.
Competition
The VCC competes with internal monitoring software, which monitors certain
pieces of hardware and software applications in the computer in which such
internal software is installed. Annual sales of systems and network management
software were estimated to be $17 billion as of December 1998. It is believed
this market will grow to almost $26 billion by 2001.
Major products and companies in the system and network management industry
are as follows:
<TABLE>
<CAPTION>
Product Maker Base Platform
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<S> <C> <C>
Net View IBM Mainframe
TME IBM/Tivoli Mid-range server
Unicenter Computer Associates Mainframe
Command/Post Boole & Babbage Mainframe
Open View Hewlett-Packard Mid-range server
</TABLE>
The majority of the makers listed above are expanding their base focus to
include other platforms through partnerships, acquisition or further internal
development. In all cases these products use active agents and often take months
or years to deploy throughout a company's computer network. The mainframe
products of other makers can
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consolidate from 7 to 16 computer consoles but their architecture does not allow
significant console consolidation into one monitor. We believe each of these
products requires a significant number of people to install, maintain and to
complete the installation due primarily to the invasive nature of the active
software agents. Also the ability of these other products to be expanded with
the addition of new devices and data center sites repeats the complexity of the
initial installation. The VCC and related products are all designed to be
initially installed in hours or at most days and to automatically recognize the
addition or removal of devices after installation. One VCC can consolidate from
two to several hundred devices and our other software products such as Global
Watch MVS/SNA can monitor from two to thousands of devices. Each of our products
performs at least one of eight functions of the systems and network management
market described above. The VCC performs all eight of such functions.
Competition for the AlarmPoint product consists of several other
products. Those are supplied by companies such as Telamon and Attention.
AlarmPoint has positioned itself as the most feature rich tool on the market. We
have stratified the product to compete from a powerful entry level product to
the sophisticated high end solution. The size of this specific market is
somewhat unknown since it is currently measured as part of the overall systems
and network management software market.
We have positioned ourselves initially in the professional services
marketplace as somewhat niche oriented. This has allowed us to carve out a
reputation without competing with the large consulting services organizations
such as IBM and EDS. As our customer base grows, we believe we will find
ourselves competing more head-on with these companies in the future but for now
feel we can substantially grow this business in our specific niche.
Research and Development
Our recent research and development activities have been substantial.
Other than the VCC and the Global Watch MVS/SNA products, all of our products
were developed in 1998. In addition, we introduced our new E-bus technology for
the VCC in 1998. In 1999, we introduced single E-bus units that can be used to
connect up to five devices per unit and allow remote access from a primary VCC
unit via a customer's LAN or WAN. The single E-bus allows economic access of the
VCC technology to any company with widely dispersed devices that tie into a
central VCC in another location. Retail organizations with numerous devices
dispersed across a wide geographic and computer outsourcers can economically
achieve full operational control over the dispersed devices and keep operating
expertise centrally located.
The GlobalWatch MVS/SNA will be re-introduced using the TCP/IP
communications protocol and the ability to link management information from
mainframes and UNIX workstations. This will bring the functionality of
GlobalWatch to additional platforms.
See also "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations -Recent Developments."
Item 2. Description of Property.
The Company's headquarters is located at 7578 Market Place Drive, Eden
Prairie, MN 55344. The lease for this location, 17,369 square feet, terminates
on September 30, 2001. In conjunction with acquisitions, the Company acquired
the following three office leases: (1) 6287 Arapahoe Avenue, Boulder, CO 80303
with 53,590 square feet, (2) 4020 Moorepark Ave., Suite 115, San Jose, CA 95117
with 2,062 square feet and (3) 2440 Estand Way, Pleasant Hill, CA 94523 with
12,000 square feet. These are net leases that provide for monthly payments
through October 31, 2002. The Company or one of its subsidiaries is responsible
for utilities, insurance, and other operating expenses at all locations.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1999.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters.
General
The Company's common stock trades on the OTC Bulletin Board under the
symbol "GLBM." The following are the high and low bid quotations for the
Company's common stock as reported on the OTC Bulletin Board during each quarter
of the fiscal years ended December 31, 1999 and 1998. These quotations represent
prices
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quoted between dealers, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Year Ended December 31, 1999
Quarter High Low
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First $12.19 $7.19
Second 9.84 5.94
Third 12.25 6.09
Fourth 8.16 5.13
Year Ended December 31, 1998
Quarter High Low
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First $13.75 $9.40
Second 13.75 9.70
Third 11.70 5.65
Fourth 8.45 5.30
As of March 16, 2000, the Company had approximately 3,165 shareholders
of record. The Company has not paid cash dividends on its common stock and does
not anticipate paying cash dividends in the foreseeable future.
Sales of Unregistered Securities.
The following text describes unregistered offers and sales by the
Company of its securities in 1999. All share amounts have been adjusted to
reflect the one for five split of the Company's common stock effected on
September 2, 1999.
February Note and Warrant Offering. On February 23, 1999, the Company
----------------------------------
received a loan in the amount of $500,000 from five partners in the investment
firm of Andersen, Weinroth & Co. In exchange for the loan, the Company issued a
promissory note in the amount of $500,000 bearing interest at an annual rate of
10% and warrants to purchase up to 80,000 shares of common stock. The issuance
of the note and warrants was made in reliance on the exemption from registration
provided in Rule 506 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). Interest on the promissory note was payable on April
30, 1999, and on the note's maturity date of July 31, 1999. To secure payment
under the note, the Company granted the investors in the offering a security
interest in both its current and noncurrent assets. Holders of the warrants may
exercise them by paying the exercise price in cash or by converting the warrants
under a cashless exercise option. The warrants are exercisable at $5.40 per
share. Warrants with respect to 26,760 of the 80,000 shares are callable by the
Company upon the occurrence of certain conditions set forth in the warrants.
Warrants with respect to the remaining 53,240 shares are noncallable. The
Company paid in full the balance due under the note as of November 30, 1999.
March Common Stock Offering. In March 1999, the Company began a
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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 265,000
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 sold in
the offering at an exercise price of $5.625 per share. The common stock sold in
this offering was issued in reliance on the exemption from registration provided
in Rule 506 promulgated under the Securities Act.
March Note Offering. On March 9, 1999, the Company issued to an
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accredited investor a $100,000 note bearing interest at the rate of 6% per
annum, convertible into common stock at $5.00 per share, and subordinate to
current and future debt issued by the Company. The note matured on September 9,
1999. The note was converted into 25,000 shares of common stock in December
1999. The issuance of the note was exempt from registration under Section 4(2)
of the Securities Act, and the common stock issued upon conversion of the note
was issued in reliance on the exemption from registration provided under Section
3(a)(9) of the Securities Act.
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March Series C Convertible Preferred Stock Offering. On March 25,
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1999, the Company issued 1,600 shares of Series C Convertible Preferred Stock
(the "Series C Stock") to certain accredited investors in a private offering for
total gross proceeds of $1,600,000. In connection with the offering, the Company
also issued warrants to the investors to purchase up to 20,000 shares of common
stock. Settondown Capital International Ltd., the placement agent used in
connection with the offering, received 75 shares of Series C Stock and a warrant
to purchase an aggregate of 20,000 shares of common stock, in addition to
$96,000 in fees for costs incurred in connection with the offering, including
legal fees. On January 19, 2000, the holders of the Series C stock and the
foregoing warrants exchanged their Series C Stock and warrants for shares of the
Company's Series D Convertible Preferred Stock and new warrants as described
below under "Recent Developments-January 19, 2000 Offering of Series D
Convertible Preferred Stock."
April Acquisition of Breece Hill Technologies, Inc. On April 14,
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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. ("Breece Hill") in connection with the merger of BHT
Acquisition, Inc., a subsidiary of GMI, with and into Breece Hill. Breece Hill
was the surviving corporation and is now a subsidiary of GMI.
In exchange for the cancellation of their Outstanding Shares, holders
of such shares received rights to proportionate interests ("Escrow Units") 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 Breece Hill over the twelve months
following the acquisition. This earn out payment will be made, if required under
the merger agreement based on Breece Hill's sales, in no more than 2,000,000
shares of the Company's common stock, in the aggregate, and an indeterminate
amount of cash. In connection with the acquisition, Breece Hill issued 400,000
shares of Series B Convertible Preferred Stock to Hambrecht & Quist Guaranty
Finance LLC in exchange for the cancellation of 1,000,000 of debt secured by
certain assets of Breece Hill. The preferred stock has a monthly dividend of
$10,000 payable in cash and Escrow Units and is convertible at the option of the
holder into common stock of the Company. The Company has recorded this preferred
stock as a minority interest in Breece Hill. All securities issued in connection
with this transaction were issued in reliance on the exemption from registration
provided in Rule 506 promulgated under the Securities Act.
On December 27, 1999, the Company approved a formal plan with regard
to the disposal of Breece Hill. Accordingly, the estimated loss from the
disposal of the Breece Hill segment and the financial position, results of
operations and cash flows of Breece Hill have been separately presented as
discontinued operations, and eliminated from the continuing operations amounts
in the accompanying financial statements and notes thereto.
May Note Offering. On May 7, 1999, the Company issued convertible
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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, bore
interest at the rate of 6% per annum, and were subordinate to current and future
debt issued by the Company. The notes were 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 notes were issued in reliance on the
exemption from registration provided under Section 4(2) of the Securities Act,
and the common stock issued upon conversion of the notes was issued in reliance
on Section 3(a)(9) of the Securities Act.
June Common Stock Offering. On June 28, 1999, the Company began a
--------------------------
private placement of common stock at a purchase price of $5.00 per share. A
total of 144,430 shares were sold for total gross proceeds of $722,150. 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 placement
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 at an exercise price of $5.00
per share. The shares and warrant were issued in reliance on the exemption from
registration provided in Rule 506 promulgated under the Securities Act.
August Warrant Offering. 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 certain partners in the investment firm of Andersen, Weinroth & Co.,
which originally was due on July 31, 1999. The due date of this payment was
extended to November 30, 1999, and was paid in full by the Company by such date.
In connection with these reschedulings, the Company issued warrants to purchase
a total of 20,000 shares of common stock at an exercise price of $5.40 per
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share to Andersen, Weinroth. These warrants have a term of five years and were
issued in reliance on the exemption from registration provided under Section
4(2) of the Securities Act.
August Common Stock Offering. On August 26, 1999, the Company issued
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238,000 shares of common stock to Liviakis Financial Communications, Inc.
("Liviakis") in exchange for an agreement by Liviakis to perform public
relations work for the Company. An additional 20,000 shares of common stock were
issued to The Geneva Group, Inc. to perform public relations work for the
Company in Europe. The Liviakis agreement was amended as of November 17, 1999
to extend its term through April 1, 2001. The Company issued an additional
390,000 shares of common stock to Liviakis in consideration for extension of the
term. Pursuant to the agreement, Liviakis agreed to a lock-up of the shares
until the expiration of the term of the consultancy. The foregoing shares were
issued in reliance on the exemption from registration provided under Section
4(2) of the Securities Act.
September Asset Purchase from Lavenir Technology, Inc. On September 28,
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1999, the Company, through 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.
The total purchase price of $5,300,000 was paid in 266,000 shares of the
Company's common stock delivered to Lavenir at closing, and $400,000 in the form
of a note payable due on January 31, 2000. In November 1999, the $400,000 note
was re-negotiated to a $100,000 note payable due January 31, 2000 in return for
100,000 shares of the Company's common stock. A number of additional shares of
common stock not to exceed 700,000 are issuable as of April 30, 2000 sufficient
to cause the value of the shares and debt previously issued and the original
$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. All securities issued in connection with
this transaction were issued in reliance on the exemption from registration
provided under Section 4(2) of the Securities Act.
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 which provide 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.
November Common Stock Offering. On November 30, 1999, in a transaction
-------------------------------
separate from the consulting agreement referenced above under "August Common
Stock Offering," the Company issued to John and Renee Liviakis 125,000 shares of
common stock for $500,000. The parties agreed to a lock-up of the shares for
the same period as the lock-up referenced under "August Common Stock Offering"
above. The shares issued in this transaction were issued in reliance on the
exemption from registration provided under Section 4(2) of the Securities Act.
November Note Offering. On November 12, 1999, the Company issued a
----------------------
convertible note in the amount of $300,000 in connection with the Company's
anticipated offering of Series D Convertible Preferred Stock. The note was
convertible into the Company's Series D Convertible Preferred Stock at $1,000
per share. See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Recent Developments-January 19, 2000
Offering of Series D Convertible Preferred Stock." The note was issued in
reliance on the exemption from registration provided under Section 4(2) of the
Securities Act.
December Series E Convertible Preferred Stock Offering. On December 30,
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1999, the Company issued 2,650 shares of Series E Convertible Preferred Stock
("Series E Stock") and warrants to purchase 51,000 shares of common stock in a
private placement for consideration totaling $2,650,000. Each share of Series E
Stock is convertible into the number of shares of common stock calculated by
dividing the per share purchase price of $1,000 by the conversion price. The
conversion price equals the lesser of $5.125 or 75% of the average of the three
lowest closing bid prices of the common stock during the 15 trading days
immediately before the conversion date. The holders of Series E Stock are also
entitled to receive dividends at an annual rate of 8% of the per share purchase
price. The dividends are payable upon conversion of the Series E Stock, in
either cash or shares of common stock, at the option of the Company. The number
of shares of common stock issuable as a dividend payment will equal the
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total dividend payment then due divided by the conversion price calculated as of
the date that the dividend payment is due. Each warrant entitles its holder to
purchase common stock at $5.125 per share at any time before the fifth
anniversary of the date of issuance of the warrant. All securities issued in
connection with this transaction were issued in reliance on the exemption from
registration provided under Section 4(2) of the Securities Act.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The consolidated financial statements that accompany this discussion
show the operating results from continuing operations of the Company for the
years ended December 31, 1999 and 1998. These results include the operations of
GMI and its subsidiaries.
Net sales from continuing operations for the year ended December 31,
1999 were $9,831,000 compared to net sales of $6,209,000 in the year ended
December 31, 1998. Systems sales were $2,876,000 in 1999 compared to $4,246,000
in 1998. The decrease in systems sales in 1999 is primarily due to reduced sales
of VCC systems. Maintenance fees on previously sold systems were $1,299,000 and
consulting fees were $3,458,000 in 1999. Maintenance and consulting fees in 1998
were $948,000 and $704,000, respectively. The increase in maintenance fees in
1999 is related to fees on new products in 1999. The increase in consulting fees
in 1999 is due to the increased consulting fees earned by the Company's SSI
subsidiary acquired in November 1998. Other revenues in 1999 of $2,199,000
include primarily software product sales which increased significantly over 1998
due to inclusion of SSI and the printed circuit board division sales for the
full year 1999.
Cost of sales as a percentage of sales decreased to 36.9% in the year
ended December 31, 1999 from 37.4% in the prior year. This decrease is primarily
related to higher consulting fees in 1999. The amortization of software
development costs was $1,916,000 in 1999 compared to $957,000 in 1998. The
materials component of sales, which is related to sales volume, also decreased
in 1999 as a percentage of sales compared to 1998. Cost of sales for 1999
includes $210,000 for writedown of inventory, primarily VCC component parts.
Gross margin from continuing operations in 1999 was 63.1% compared to 62.6% in
1998.
Selling, general and administrative costs from continuing operations
for the year ended December 31, 1999 were $12,855,000 compared to $4,414,000 for
1998. The year-over-year increase of $8,441,000 is related to non-cash equity
transactions and to acquisitions. In 1999 the Company recorded $2,850,000 as
non-cash equity expenses for issuance of 648,000 shares of common stock for a
financial investment advisory program begun on August 30, 1999 and extending
into April 2001. The terms of the contract under which these shares were issued
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, which was not in force in 1998.
Selling, general and administrative expenses attributable to Lavenir,
which was acquired on September 29, 1999, were $628,000 and selling, general and
administrative expenses attributable to acquisitions made during 1998 increased
$4,022,000 over the prior year as a result of including such operations for the
full year in 1999. Expense categories with significant increases are legal,
accounting, rent and advertising. The increases in legal and accounting are
related to the amount of financing and acquisition activities of the Company in
1999. Rent increased as a result of the additional space requirements of the
Company for which multiple year commitments were made during 1998. The increase
in advertising expenses is consistent with the additional products the Company
sells and the development of materials for distribution to potential customers.
In the fourth quarter of 1999 the Company took action to reduce expenses in its
VCC business, primarily in the software development function, and reduced
headcount by approximately 20 from a total of 40 in the VCC and corporate
administration areas.
Research and development costs for the year ended December 31, 1999
were approximately $2,830,000 compared to $1,291,000 for the same period in the
prior year. The increase of $1,539,000 in 1999 is primarily due to the
amortization of purchased technology and partially due to the increased number
of employees devoted to the development function in the first nine months of the
year.
Other operating expenses of $5,442,000 in 1999 consist of restructuring
charges for writedowns of capitalized software development costs, purchased
technology and equipment. In the fourth quarter of 1999 the Company determined
that capitalized development costs with a net book value of $1,938,000 would not
be
9
<PAGE>
recoverable due to the Company's decision to use different tools and techniques
in future development. The Company also entered into settlement discussions with
Infinite Graphics Incorporated ("IGI") to transfer back to IGI certain assets
previously acquired and resolve mutual claims; this resulted in the Company
recording a charge of $2,470,000, primarily for the writeoff of purchased
technology. Equipment writedowns were due to staffing reductions in the fourth
quarter that reduced the need for research and development equipment.
Other income and expenses in the year ended December 31, 1999 consisted of
interest expense, interest income and expenses related to issuance of debt and
equity. The increased interest expense is due to the higher debt level during
1999; notes payable were $5,458,000 as of December 31, 1999 compared to
$2,295,000 as of December 31, 1998. Other expense for 1999 includes non-cash
interest expense of approximately $768,000 for penalty interest related to the
delay in registration of the underlying common stock into which Series B Stock
and Series C Stock is convertible and approximately $1,658,000 for the intrinsic
value of warrants issued to lenders. In 1999 other expense also includes
approximately $412,000 for amortization and writeoff of debt issuance costs.
The majority of interest income in 1998 is primarily due to lease income where
the Company has acted as lessor of its VCC systems. No such lease activities
occurred in 1999.
Loss from discontinued operations was $4,410,000 and loss on disposal of
discontinued operations was $16,357,000 in 1999. These amounts relate to the
Company's decision to sell its Breece Hill subsidiary, which was acquired in
April 1999. The Company determined that Breece Hill would require additional
capital funding and decided to sell Breece Hill to focus capital resources on
its core systems and software products and services businesses. The loss from
discontinued operations includes $2,920,000 of amortization of purchased
technology.
Liquidity and Capital Resources
As of December 31, 1999, the Company had negative working capital of
$17,438,000 compared to positive working capital of $2,068,000 as of December
31, 1998. The decrease is related primarily to higher accounts payable and
accrued liabilities, including $7,265,000 for acquisition-related obligations
which are expected to convert to equity or be released according to agreements
executed or expected to be executed in the year 2000. In addition, liabilities
include $5,300,000 for the discontinued operations of Breece Hill and notes
payable of $5,390,000 classified as current due to the Company operating under a
workout arrangement with its primary secured lender.
Net cash used in operating activities for the year ended December 31, 1999
was $1,189,000 compared to $1,283,000 used by such activities in the year ended
December 31, 1998. The major adjustments to reconcile the 1999 net loss of
$38,897,000 to the net cash used in operating activities were the loss from
discontinued operations of $4,410,000 and the loss on disposal of discontinued
operations of $16,357,000, both of which relate to the Company's decision to
sell its Breece Hill subsidiary. In 1999 the Company had a writedown of assets
totaling $5,441,000 and issued equity instruments for services and payments of
interest totaling $3,001,000. Depreciation and amortization was $6,419,000 in
1999 compared to $1,611,000 in 1998. With respect to operating assets, cash of
$634,000 was used to increase accounts receivable and prepaid expenses in 1999
and cash of approximately $2,850,000 was provided by increases in current
liability accounts, primarily accounts payable and accrued liabilities.
Cash used by investing activities in the year ended December 31, 1999 was
$6,801,000 and reflects purchases of property and equipment of $443,000,
investment in software development of $2,691,000 and purchases of companies of
$3,587,000. The investment in software development for 1999 represents costs
incurred after technological feasibility has been established in connection with
the development of enhancements to one or more particular software programs
occurring in the first nine months of the Company's fiscal year. In the last
quarter of fiscal year 1999 the Company decided to change the direction in its
software development program. Such costs were significantly curtailed and
$1,938,000 of such costs were written off as noted above. The investment in
property and equipment in 1999 also occurred substantially in the first nine
months of the year. In 1998 the Company invested approximately $2,052,000 in
capitalized computer software development, $1,076,000 in property and equipment
and $1,277,000 in purchases of companies which was partially offset by cash
received from the sale of sales-type leases and the collection of a note
receivable.
Net cash of approximately $9,498,000 was provided by financing activities
in the year ended December 31, 1999. This reflects gross proceeds before
expenses from the issuance of preferred stock of approximately $3,862,000
through the issuance of Series C Stock and Series E Stock. Cash was also
provided by the issuance of common stock, primarily from private placements of
$2,637,000. Proceeds were received from the issuance of long-term debt
10
<PAGE>
in the amount of $4,311,000, with such proceeds partially offset by the
disbursement for deferred debt costs of $139,000. In 1999 payments on long-term
debt were $1,232,000. In the year ended December 31, 1998 cash was provided by
the issuance of $3,673,000 of Preferred and Common Stock and the issuance of
debt in the net amount of $150,000.
Presently, with the issuance after December 31, 1999 of additional
convertible preferred stock of approximately $2,700,000 and the sale of the
Lavenir software assets anticipated in May or June 2000, with expected proceeds
of $2,900,000, the Company believes that it has sufficient working capital to
pay its current liabilities. The Company expects that its Breece Hill
subsidiary will not be a substantial drain on the cash resources of the Company
and believes Breece Hill will be sold sometime during the year 2000. In
addition to the proceeds received from the issuance of equity and the sale of
Lavenir assets discussed above, the Company believes its working capital will
improve as the Company's profitability improves. The Company expects its
profitability to improve as a result of further increases in sales and the
expense reduction programs implemented during fourth quarter 1999.
Nevertheless, the Company can provide no assurance as to its future
profitability, access to the capital markets nor the completion of its projected
asset and business sales.
Recent Developments
Proposed Sale of Breece Hill
On February 3, 2000, the Company entered into a stock purchase agreement
with Tandberg Data ASA of Oslo, Norway ("Tandberg"), GMI, Hambrecht & Quist
Guaranty Finance LLC, Greyrock Capital and Cruttenden Roth, Incorporated,
pursuant to which Tandberg would purchase the Company's Breece Hill subsidiary.
The closing of the transaction is subject to, among other things, approval by
both the Company's and Tandberg's shareholders. The Company's shareholders
approved the transaction at a special meeting held on April 5, 2000. Tandberg
has informed the Company that it does not believe the transaction will be
approved by Tandberg's shareholders, and has suggested that the parties
terminate the agreement. The Company has advised Tandberg that it continues to
desire to close the transaction. The parties are currently discussing the
appropriate course of action to pursue.
Under the terms of the stock purchase agreement, if the transaction were
consummated:
. the Company would sell all of the common stock of Breece Hill to
Tandberg in exchange for $3.4 million in cash, less transaction costs
and holdbacks;
. Tandberg would assume or repay approximately $6.1 million in
additional liabilities of Breece Hill;
. the Company and GMI would be released from their obligations with
respect to approximately $5.7 million of debt to be prepaid by
Tandberg at the closing;
. holders of Breece Hill Series B preferred stock would receive up to $1
million in cash in the aggregate;
. former holders of Breece Hill Series A preferred stock at the time of
the acquisition of Breece Hill by GMI (the "Former BH Series A
Holders") would receive up to approximately $1.5 million in cash in
the aggregate;
. former holders of Breece Hill common stock at the time of the
acquisition of Breece Hill by GMI (the "Former BH Common Holders")
would receive warrants to purchase up to 5,091,160 ordinary shares of
Tandberg at a price of 30 Norwegian Kroner, up to 518,225 shares of
the Company's common stock in the aggregate and warrants to purchase
up to 200,000 shares of the Company's common stock in the aggregate;
and
. the Former BH Series A Holders and the Former BH Common Holders would
release any claims they may have against the Company, GMI, Breece Hill
or Tandberg, except for certain claims against the Company and GMI
related to the Company's obligation to issue options under the merger
agreement between Breece Hill and GMI.
11
<PAGE>
Listing on Nasdaq SmallCap Market
By letter dated April 19, 2000 Nasdaq notified the Company that Nasdaq had
closed the Company's application for listing on the Nasdaq SmallCap Market. In
its letter, Nasdaq explained that it had closed the Company's application
because the Company's share price had fallen below $4.00 (the minimum closing
bid price required for initial inclusion in the SmallCap Market). In addition,
Nasdaq noted that the Company did not file this Annual Report in a timely
manner. The Company has filed a Notification of Late Filing on Form 12b-25 which
would have resulted in this Annual Report being considered timely if filed on or
before April 14, 2000, but because of the complexities of the Company's
operations,acquisitions and discontinued operations, the Company's financial
statements were not finalized until after that date. The Company expects to
reapply for listing on the SmallCap Market as soon as it meets the SmallCap
Market's requirements for initial inclusion.
Settlement of VCC Litigation
On February 15, 2000, the Company and GMI were served with a patent
infringement suit filed in the federal district court for the Northern District
of Oklahoma. The suit alleged, among other things, that the Company's VCC
product, when monitoring a mainframe computer, infringed on a patent held by the
plaintiffs, IDG, Inc., an Oklahoma corporation, and R. Brent Johnson. The
Company believed that the plaintiffs' claims were without merit, but settled the
claims on March 16, 2000, in order to avoid potentially protracted and costly
litigation.
Increase in Authorized Number of Shares of Capital Stock
On February 3, 2000, the Company's Board of Directors (the "Board")
approved an amendment to the Company's Articles of Incorporation (the
"Amendment") to increase the authorized capital stock of the Company to
18,500,000 shares from the 10,711,724 shares currently authorized, subject to
approval by the shareholders. The shareholders approved the Amendment at a
Special Meeting held on April 5, 2000. The Amendment will permit the Company to
meet its obligations to issue shares under existing agreements and give the
Board the flexibility to declare stock dividends at such times as it may deem
appropriate, make acquisitions using stock, raise equity capital or use the
additional shares for other general corporate purposes.
Sale of Lavenir Software Operations
On March 24, 2000, the Company signed a letter of intent to sell the
software operations of its wholly owned Lavenir subsidiary. The sale is to a
publicly traded international company that is a leading independent producer of
desktop electronic design automation (EDA) software for the Microsoft Windows
environment. The letter of intent provides for a gross purchase price of
approximately $4,000,000 with $2,900,000 net in cash. The difference of
$1,100,000 is based on the licensing back of the software to enable Lavenir to
continue to use this software in its remaining products and markets.
Asset Sale to MT Acquiring Corp.
The Company, GMI, and Magnum Technologies, Inc., a wholly owned subsidiary
of GMI ("Magnum"), sold all of the business and properties used by GMI in
connection with its business conducted under the Magnum name pursuant to an
Agreement of Purchase and Sale of Assets made as of January 26, 2000 by and
among MT Acquiring Corp., Tim Hadden, Greg Crow, GMI, Magnum and the Company.
In the sale, MT Acquiring Corp. received properties and three software products
used to provide network monitoring and analysis services: CAP-TREND,
Coordinator and Advantage. MT Acquiring Corp. and it principals, Tim Hadden and
Greg Crow, also received a release from GMI, Magnum and the Company for all
claims arising out of the association of MT Acquiring Corp.'s principals with
GMI, Magnum and the Company. In exchange for the foregoing, MT Acquiring Corp.
and its principals released all claims against the Company, GMI and Magnum
relating to the parties' activities before January 26, 2000, assumed various
obligations and contracts related to the business, and delivered a subordinated
promissory note payable to the Company in the amount of $214,000. The note
bears interest at six percent annually and provides for four semi-annual
payments of principal and interest from the date of the note until its maturity
date of December 30, 2001.
12
<PAGE>
Proposed Settlement Agreement with IGI
The Company has signed a letter of intent and is currently negotiating the
transfer of certain assets and the termination of various software licenses
under a proposed settlement agreement between the Company and IGI. The Company
acquired the assets and licenses under a February 27, 1998 License and Asset
Purchase Agreement with IGI. The assets to be transferred would include those
used by GMI in designing, assembling and marketing computer-aided design and
manufacturing software systems that operate on a variety of mid-range and
personal computer platforms. The terminated licenses would include an exclusive
software license of software products used in the business and a non-exclusive
license of software used in both the Company's business and IGI's business. The
transfer and termination would be made in exchange for IGI's assumption of
specific contracts and liabilities related to the assets and for mutual release
of all claims arising from the License and Asset Purchase Agreement, including
IGI's release of payment obligations of the Company.
Sale of Assets Acquired from Asset Sentinel, Inc.
Effective March 31, 2000 the Company amended the Asset Purchase Agreement
dated as of October 1, 1998 by and among the Company, GMI, and Asset Sentinel,
Inc. ("ASI"), in which the assets of ASI were purchased by GMI. Pursuant to the
amendment, the assets were returned to ASI. ASI also received a release from
GMI and the Company for all claims arising out of the association of ASI with
GMI and the Company. In exchange for the foregoing, ASI released all claims it
might have against the Company and GMI relating to the parties' activities
before March 31, 2000 and assumed various obligations and contracts related to
the assets transferred.
January 19, 2000 Offering of Series D Convertible Preferred Stock.
On January 19, 2000, the Company issued 2,725 shares of Series D
Convertible Preferred Stock ("Series D Stock") in a private placement. The
shares were issued as follows: (1) 700 shares to new investors for $700,000 in
the aggregate; (2) 300 shares to certain investors upon conversion of $300,000
of convertible promissory notes issued by the Company on November 12, 1999, (3)
1,600 shares to the holders of the Company's then outstanding Series C
Convertible Preferred Stock (the "Series C Stock") in exchange for all of their
Series C Stock; and (4) 125 shares to the placement agent as compensation for
placement agent services. In addition, in connection with the Series D Stock
offering (1) the holders of warrants issued in the Series C Stock offering were
issued warrants to purchase 20,000 shares of common stock in exchange for the
warrants issued to them in the Series C Stock offering. The Company also issued
30,000 shares of common stock to the new investors and 120,000 shares of common
stock to the holders of the Series C Stock. Each share of Series D Stock is
convertible into the number of shares of common stock calculated by dividing the
stated value of such share ($1,000) by the conversion price. The conversion
price equals the lesser of 75% of the average of the three lowest closing bid
prices of the common stock during the 15 trading days immediately before the
conversion date or $5.4375. Holders of Series D Stock are entitled to receive
dividends at an annual rate of 8% of the per share purchase price. The
dividends are payable, upon conversion of the Series D Stock, in either cash or
shares of common stock, at the option of the Company. The number of shares of
common stock issuable as a dividend payment will equal the total dividend
payment then due divided by the conversion price calculated as of the date that
the dividend payment is due. Each warrant entitles its holder to purchase
common stock at $8.30 per share at any time before the fifth anniversary of the
date of issuance of the warrant.
The Company agreed to use its best efforts to register the shares of common
stock underlying the Series D Stock and the warrants and to pay a penalty if
such registration is not effective by the 120th day after issuance of the Series
D Stock. This penalty is equal to 2% of the purchase price of the Series D Stock
for the first 30-day period following such 120-day period and 3% of such
purchase price for every 30-day period thereafter until the registration
statement has been declared effective. The shares were issued in reliance on
the exemption from registration provided under Section 4(2) of the Securities
Act.
February 23, 2000 Offering of Series F Convertible Preferred Stock.
On February 23, 2000, the Company issued 2,000 shares of Series F
Convertible Preferred Stock ("Series F Stock") to certain accredited investors
in a private offering. In connection with the offering, the Company also issued
warrants to the investors to purchase 50,000 shares of common stock. The
holders of Series F Stock are not entitled to vote except in the event the
Company desires to issue shares of a class or series of preferred stock which
13
<PAGE>
could adversely affect the rights of such holders, or as may otherwise be
required by law. The holders of Series F Stock are entitled to receive
dividends at an annual rate of 8% of the stated value ($1,000) of the Series F
Stock, subject to the prior declaration or payment of any dividend to which the
holders of the Company's Series A Stock, Series B Stock, Series D Stock or
Series E Stock are entitled. Dividends on shares of the Series F Stock are
cumulative and are payable only upon conversion of the Series F Stock. Each
share of Series F Stock is convertible at any time into that number of shares of
common stock equal to the stated value of each such share ($1,000) divided by
the lesser of $6.75 or 75% of the average of the three lowest closing bid prices
of the common stock during the 15 trading days immediately preceding the
conversion date. All outstanding shares of Series F Stock will be automatically
converted into common stock on February 23, 2002. Each warrant is callable, and
has a five-year term and an exercise price of $11.00 per share. The Company
agreed to file a registration statement with regard to sales of the common stock
underlying the Series F Stock and the warrants and to pay a penalty if such
registration statement is not effective by the 120th day after issuance of the
Series F Stock. This penalty is equal to 2% of the purchase price of the Series
E Stock for the first 30-day period following such 120-day period and 3% of such
purchase price for every 30-day period thereafter until the registration
statement has been declared effective. The foregoing shares and warrants were
issued in reliance on the exemption from registration provided in Rule 506
promulgated under the Securities Act.
14
<PAGE>
Item 7. Financial Statements.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report 16
Consolidated balance sheets 17
Consolidated statements of operations 19
Consolidated statements of stockholders' equity (deficit) 20
Consolidated statements of cash flows 21
Notes to consolidated financial statements 22
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Global MAINTECH Corporation:
We have audited the accompanying consolidated balance sheets of Global MAINTECH
Corporation and subsidiaries (the Company) as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global MAINTECH
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered losses from
operations and has a working capital deficiency and an accumulated deficit that
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company changed its method of accounting for depreciation.
/s/ KPMG LLP
Minneapolis, Minnesota
April 14, 2000
16
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,171,648 $ 664,066
Accounts receivable, less allowance for doubtful
accounts of $115,000 and $300,000, respectively 2,013,371 2,283,578
Other receivables 94,211 147,466
Inventories 1,322,336 861,418
Prepaid expenses and other 161,252 80,094
Current portion of investment in
sales-type leases 20,753 20,776
------------ -----------
Total current assets 5,783,571 4,057,398
Property and equipment, net 823,286 1,042,432
Leased equipment, net 123,285 124,658
Software development costs, net 1,092,283 2,273,834
Purchased technology and other intangibles, net 12,371,739 1,419,008
Net investment in sales-type leases,
net of current portion - 22,410
Other assets, net 131,835 193,191
------------ -----------
$ 20,325,999 $ 9,132,931
============ ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
17
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,103,764 $ 867,120
Current portion of notes payable 5,390,270 595,680
Accrued liabilities, compensation and payroll taxes 1,103,004 267,581
Accrued consideration related to acquisitions 7,264,519 -
Accrued interest and penalties 802,801 -
Accrued dividends 259,919 31,049
Deferred revenue 997,141 228,231
Net liabilities of discontinued operation 5,300,000 -
------------------ -------------------
Total current liabilities 23,221,418 1,989,661
------------------ -------------------
Notes payable, less current portion 68,012 1,700,000
------------------ -------------------
Total liabilities 23,289,430 3,689,661
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A, no par value;
887,980 shares authorized; 86,896 shares in 1999 and
129,176 shares in 1998 issued and outstanding; total
liquidation preference of outstanding shares-$32,586 $ 40,765 $ 60,584
Voting, convertible preferred stock - Series B, no par value;
123,077 shares authorized; 51,632 shares in 1999 and
67,192 shares in 1998 issued and outstanding; total
liquidation preference of outstanding shares-$1,678,040
Convertible preferred stock - Series C, no par value;
1,675 shares authorized; 1,675 shares in 1999 and none in 1,678,069 2,183,769
1998 issued and outstanding; total liquidation preference of
outstanding shares-$1,675,000 1,368,712 -
Convertible preferred stock - Series E, no par value;
2,675 shares authorized; 2,675 shares in 1999 and none in
1998 issued and outstanding; total liquidation preference of
outstanding shares-$2,675,000 2,097,605 -
Common stock, no par value; 17,484,593 shares authorized;
5,404,099 shares in 1999 and 3,681,879 shares in 1998
issued and outstanding - -
Additional paid-in-capital 35,117,564 7,362,796
Notes receivable-officers (235,500) (294,500)
Accumulated deficit (43,030,646) (3,869,379)
------------------ --------------------
Total stockholders' equity (deficit) (2,963,431) 5,443,270
------------------ --------------------
$ 20,325,999 $ 9,132,931
================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE>
GLOBAL MAINTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Net sales:
Systems $ 2,875,714 $ 4,245,684
Maintenance, consulting and other 6,955,651 1,963,625
---------------- ---------------
Total net sales 9,831,365 6,209,309
Cost of sales:
Systems 631,144 1,127,361
Maintenance, consulting and other 2,993,467 1,195,941
---------------- ---------------
Total cost of sales 3,624,611 2,323,302
---------------- ---------------
Gross profit 6,206,754 3,886,007
Operating expenses:
Selling, general and administrative 12,855,454 4,414,140
Research and development 2,829,782 1,291,253
Other operating expenses 5,441,539 -
---------------- ---------------
Loss from operations (14,920,021) (1,819,386)
Other income (expense):
Loss on sales of property and equipment (51,000) -
Interest expense (558,063) (286,272)
Interest income 4,007 146,786
Other Expense (2,837,633) (44,294)
---------------- ---------------
Total other income (expense), net (3,442,689) (183,780)
---------------- ---------------
Loss from continuing operations (18,362,710) (2,003,166)
Discontinued operations:
Loss from discontinued operations; net of tax (4,409,727) -
Loss on disposal of discontinued operations; net of tax (16,356,792) -
---------------- ---------------
Loss before cumulative effect of change in accounting (39,129,229) (2,003,166)
principle
Cumulative effect of change in method of depreciation 231,936 -
---------------- ---------------
Net loss $ (38,897,293) $ (2,003,166)
Accrual of cumulative dividends on preferred stock (263,974) (31,049)
Attribution of beneficial conversion feature on preferred stock (2,442,432) (326,385)
---------------- ---------------
Net loss attributable to common stockholders $ (41,603,699) $ (2,360,600)
================ ===============
Basic loss per common share:
Loss from continuing operations $ (4.944) $ (0.643)
Loss from discontinued operations (4.873) -
Loss before cumulative effect of change in accounting principle (9.817) (0.643)
Cumulative effect of change in accounting principle 0.054 -
---------------- ---------------
Net loss $ (9.763) $ (0.643)
================ ===============
Diluted loss per common share:
Loss from continuing operations $ (4.944) $ (0.643)
Loss from discontinued operations (4.873) -
---------------- ---------------
Loss before cumulative effect of change in accounting principle (9.817) (0.643)
Cumulative effect of change in accounting principle 0.054 -
---------------- ---------------
Net loss $ (9.763) $ (0.643)
================ ===============
Shares used in calculations:
Basic 4,261,508 3,670,342
Diluted 4,261,508 3,670,342
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred stock A Preferred stock B Preferred stock C
-----------------------------------------------------------------
Shares amount Shares amount Shares amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 244,113 $114,489 - - - -
Net Loss - - - - - -
Accrual of dividends on preferred stock - - - - - -
Sales of common stock - - - - - -
Value of stock options issued in acquisition - - - - - -
Stock issue costs - - - - - -
Exercise of common stock options and warrants - - - - - -
Sales of series B preferred stock - - 335,961 2,183,769 - -
Converted preferred shares Series A (114,937) (53,905) - - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 129,176 $ 60,584 67,192 $2,183,769 - -
Net loss - - - - - -
Sales of common stock - - - - - -
Sales of series C preferred stock - - - - 1,600 1,464,712
Sales of series E preferred stock - - - - - -
Stock issue costs - - - - 75 (96,000)
Stock, options, and warrants issued for services - - - - - -
Warrants issued in connection with debt - - - - - -
Issuances of common stock, warrants, and
options in connection with acquisitions (see
Notes 3 and 7):
Lavenir - - - - - -
Breece Hill - - - - - -
SSI - - - - - -
Amortization of beneficial conversion
feature on convertible debt - - - - - -
Exercise of common stock options and warrants - - - - - -
Accrual of dividends on preferred stock
- - - - - -
Payment of preferred dividends with
common stock - - - - - -
Conversion of preferred shares (42,280) (19,819) (15,560) (505,700) - -
Conversion of debt and accrued interest - - - - - -
Receipt of payment on notes receivable - - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 86,896 $ 40,765 51,632 $1,678,069 1,675 $1,368,712
==================================================================
<CAPTION>
Addtional Notes
Preferred stock E Common stock paid-in receivables
------------------- ----------------
Shares amount Shares amount capital officers
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 - - 17,084,858 - $ 5,295,829 $(294,500)
Net Loss - - - - - -
Accrual of dividends on preferred stock - - - - - -
Sales of common stock - - 1,092,001 - 1,800,350 -
Value of stock options issued in acquisition - - - - 524,000 -
Stock issue costs - - - - (346,922) -
Exercise of common stock options and warrants - - 117,601 - 35,634 -
Sales of series B preferred stock - - - - - -
Converted preferred shares Series A - - 114,937 - 53,905 -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 3,681,879 - $ 7,362,796 $(294,500)
Net loss - - - - - -
Sales of common stock - - 534,578 - 2,713,399 -
Sales of series C preferred stock - - - - 135,288 -
Sales of series E preferred stock 2,650 2,389,630 - - 260,370 -
Stock issue costs 25 (292,025) - - (235,439) -
Stock, options, and warrants issued for services - - 648,000 - 2,994,785 -
Warrants issued in connection with debt - - - - 1,196,970 -
Issuances of common stock, warrants, and
options in connection with acquisitions (see
Notes 3 and 7):
Lavenir - - 266,000 - 4,900,000 -
Breece Hill - - 45,000 - 11,960,782 -
SSI - - - - 2,381,080 -
Amortization of beneficial conversion
feature on convertible debt - - - - 460,624 -
Exercise of common stock options and warrants - - 73,575 - 158,740 -
Accrual of dividends on preferred stock
- - - - - -
Payment of preferred dividends with
common stock - - 6,149 - 35,104 -
Conversion of preferred shares - - 96,880 - 525,519 -
Conversion of debt and accrued interest - - 52,038 - 267,546 -
Receipt of payment on notes receivable - - - - - 59,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,675 $2,097,605 5,404,099 - $35,117,564 $(235,500)
======================================================================
<CAPTION>
Accumulated
deficit Total
- ---------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1997 $ (1,835,164) $ 3,280,654
Net Loss (2,003,166) (2,003,166)
Accrual of dividends on preferred stock (31,049) (31,049)
Sales of common stock - 1,800,350
Value of stock options issued in acquisition - 524,000
Stock issue costs - (346,922)
Exercise of common stock options and warrants - 35,634
Sales of series B preferred stock - 2,183,769
Converted preferred shares Series A - -
- ---------------------------------------------------------------------------------
Balance at December 31, 1998 $ (3,869,379) $ 5,443,270
Net loss (38,897,293) (38,897,293)
Sales of common stock - 2,713,399
Sales of series C preferred stock - 1,600,000
Sales of series E preferred stock - 2,650,000
Stock issue costs - (623,464)
Stock, options, and warrants issued for services - 2,994,785
Warrants issued in connection with debt - 1,196,970
Issuances of common stock, warrants, and
options in connection with acquisitions (see
Notes 3 and 7):
Lavenir - 4,900,000
Breece Hill - 11,960,782
SSI - 2,381,080
Amortization of beneficial conversion
feature on convertible debt - 460,624
Exercise of common stock options and warrants - 158,740
Accrual of dividends on preferred stock
(263,974) (263,974)
Payment of preferred dividends with
common stock - 35,104
Conversion of preferred shares - -
Conversion of debt and accrued interest - 267,546
Receipt of payment on notes receivable - 59,000
- ---------------------------------------------------------------------------------
Balance at December 31, 1999 $(43,030,646) $ (2,963,431)
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (38,897,293) $ (2,003,166)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock, options, and warrants issued for services
and payment of interest 3,000,959 -
Depreciation and amortization 6,418,681 1,610,981
Loss on sales of property and equipment 51,000 -
Allowance for doubtful accounts (71,000) 300,000
Loss from discontinued operations 4,409,727 -
Loss on disposal of discontinued operations 16,356,792 -
Cumulative effect of change in accounting principle (231,936) -
Loss from asset write-offs 5,441,539 -
Changes in operating assets and liabilities:
Accounts receivable (629,207) (1,532,221)
Other receivables 28,593 (121,355)
Inventories 88,090 (63,983)
Prepaid expenses and other (4,994) (2,786)
Accounts payable 912,192 337,397
Accrued liabilities 566,918 112,500
Accrued interest and penalties 804,320 -
Deferred revenue 566,529 79,859
-------------- -------------
Cash used by operating activities (1,189,090) (1,282,774)
-------------- -------------
Cash flows from investing activities:
Sale of investment in sales-type leases 22,410 736,729
Purchase of property and equipment (443,145) (1,076,176)
Reduction in leased equipment (82,803) -
Investment in software development costs (2,690,593) (2,052,188)
Investment in other assets (19,623) (9,460)
Purchase of companies, net of cash acquired (3,587,339) (1,276,786)
Payments received on notes receivable - 75,000
-------------- -------------
Cash used by investing activities (6,801,093) (3,602,881)
-------------- -------------
Cash flows from financing activities:
Disbursements for deferred debt costs (139,411) -
Proceeds from note receivable 59,000 -
Proceeds from issuance of common stock 2,636,700 1,489,063
Proceeds from issuance of preferred stock 3,861,975 2,183,769
Proceeds from long-term debt 4,311,372 250,000
Payments of long-term debt (1,231,871) (100,000)
-------------- -------------
Cash provided by financing activities 9,497,765 3,822,832
-------------- -------------
Net increase (decrease) in cash 1,507,582 (1,062,823)
Cash and cash equivalents at beginning of period 664,066 1,726,889
-------------- -------------
Cash and cash equivalents at end of period $ 2,171,648 $ 664,066
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for: Interest $ 476,500 $ 200,554
Income taxes $ 3,500 $ 9,999
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: The Company, through its subsidiaries, Global MAINTECH, Inc.
("GMI") and Singlepoint Systems, Inc. ("SSI"), supplies world class systems and
services to data centers; manufactures and sells event notification software and
provides professional services to help customers implement enterprise management
solutions; and manufactures and sells printed circuit board design software and
plotters.
As further discussed in Note 3, the Company's Breece Hill Technologies, Inc.
("BHT") subsidiary, which was acquired in April 1999 and formerly represented
the Company's tape library storage products segment, is presented as a
discontinued operation.
Principles of consolidation: The consolidated financial statements include the
accounts of Global MAINTECH Corporation and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
New accounting pronouncements: Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (as amended by SFAS No. 137 with respect to the effective date)
will be effective for the Company in January 2001. SFAS 133 requires all
derivatives to be recognized as assets or liabilities on the balance sheet and
to be measured at fair value on a mark-to-market basis. This applies whether
the derivatives are stand-alone instruments, such as forward currency exchange
contracts, or embedded derivatives, such as call options contained in
convertible debt instruments. Along with the derivatives, the underlying hedged
items are also to be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in net earnings or loss in the statement
of operations or in other comprehensive income (and accumulated in stockholders'
equity), depending on the nature of the transaction. The Company is currently
reviewing the potential impact of this accounting standard.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended
by SAB 101A, summarizes certain views of the SEC staff in applying generally
accepted accounting principles to revenue recognition in financial statements.
Certain aspects of SAB 101 relate to the timing of recognition of revenue and
certain expenses with respect to arrangements that involve the receipt of
nonrefundable up-front fees. SAB 101 requires that in particular situations the
nonrefundable fees and certain associated expenses be recognized over the
contractual terms or average life of the underlying arrangement. SAB 101 will
be effective for the Company in the second quarter of 2000. The Company does
not expect SAB 101 to have a material impact on its financial condition or
results of operation.
Cash and cash equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventory: Inventory is stated on a first in, first out (FIFO) basis at the
lower of cost or market.
Property and equipment and change in depreciation method: Property and equipment
is recorded at cost and is comprised primarily of computer and office equipment.
Effective January 1, 1999, the Company adopted the straight-line method of
depreciation. 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 effect of the
change in depreciation method in 1999 was applied retroactively to property and
equipment acquisitions of prior years. The cumulative effect of the change with
respect to the retroactive application of the straight-line method was $231,936
(or $0.0544 per diluted common share) and is included in the Company's 1999 net
loss.
22
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Pro forma amounts assuming the new depreciation method had been applied
retroactively (rather than cumulatively in 1999) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Loss from continuing operations $ (18,362,710) $ (1,792,108)
Net loss (38,979,851) (1,748,442)
Basic loss per common share:
Loss from continuing operations $ (4.944) $ (0.586)
Net loss (9.782) (0.574)
Diluted loss per common share:
Loss from continuing operations $ (4.944) $ (0.586)
Net loss (9.782) (0.574)
</TABLE>
Depreciation is provided based upon useful lives of the respective assets, which
generally have lives of three years. Maintenance and repairs are charged to
expense as incurred.
Revenue recognition: Revenue from product sales is recognized upon the latter of
shipment or final acceptance. Deferred revenue is recorded when the Company
receives customer payments before shipment and/or acceptance or before
maintenance and/or service revenues are earned.
Under Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition" (as
amended by SOP 98-4 and 98-9), the Company recognizes revenue from software
sales when the software has been delivered (delivery is deemed to have occurred
upon the latter of shipment or final acceptance), if a signed contract exists,
the fee is fixed and determinable, collection of resulting receivables is
probable, and product returns are reasonably estimable. Maintenance and support
fees related to software sales including product upgrade rights (when and if
available) committed as part of new product licenses and maintenance resulting
from renewed maintenance contracts are deferred and recognized ratably over the
contract period. Professional service revenue is recognized when services are
performed. Revenues related to multiple element arrangements are allocated to
each element of the arrangement based on the fair values of such elements. The
determination of fair value is based on vendor specific objective evidence. If
such evidence of fair value for each element (or the aggregate of the
undelivered elements as allowed by SOP 98-9) does not exist, all revenue from
the arrangement is deferred until such time that, for applicable elements of the
arrangement, evidence of fair value does exist or until such elements are
delivered.
The Company recognizes revenue from leasing activities in accordance with SFAS
No. 13, Accounting for Leases. Accordingly, leases that transfer substantially
all the benefits and risks of ownership are accounted for as sales-type leases.
All other leases are accounted for as operating leases.
Under the sales-type method, profit is recognized at lease inception by
recording revenue and cost. Revenue consists of the present value of the future
minimum lease payments discounted at the rate implicit in the lease. Cost
consists of the equipment's book value. The present value of the estimated
value of the equipment at lease termination (the residual value), which is
generally not material, and the present value of the future minimum lease
payments are recorded as assets. In each period, interest income is recognized
as a percentage return on asset carrying values.
The Company is the lessor of equipment under operating leases expiring in
various years. The cost of equipment subject to such leases is recorded as
leased equipment and is depreciated on a straight-line basis over the estimated
service life of the equipment. Operating lease revenue is recognized as earned
over the term of the underlying lease.
23
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 software development assets is regularly reviewed by the
Company and a loss is recognized when the unamortized costs are deemed
unrecoverable 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 customer
lists based on the fair value of these intangibles at the date of purchase.
These assets are amortized over their estimated economic lives of three to five
years using the straight-line method. Recorded amounts for purchased technology
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.
Other assets: Other assets is comprised of patents and capitalized debt
issuance costs. Patents are stated at cost and are amortized over three years
or over the useful life using the straight-line method. Capitalized debt
issuance costs are stated at cost and are amortized over the term of the related
debt agreement. Recorded amounts for patents 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.
Research and development: Research and development costs are expensed as
incurred.
Stock based compensation: The Company has adopted the disclosure requirements
under SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted
under SFAS No. 123, the Company applies Accounting Principles Board Opinion No.
25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans.
Reverse stock split: On September 2, 1999, the Company effected a reverse stock
split of one share of the Company's Common Stock for each five shares of such
Common Stock and effected a reverse stock split of one share of the Company's
Series B Convertible Preferred Stock for each five shares of such Series B
Stock. As a result of these stock splits, certain conversion prices in regards
to preferred stock were also adjusted. The effect of these stock splits and
related conversion price changes on share and per share amounts has been
retroactively reflected in the accompanying consolidated financial statements
and notes thereto.
Loss per common share: Basic loss per common share is computed by dividing the
net loss attributable to common stockholders by the weighted average number of
shares of common stock outstanding during the period. The net loss attributable
to common stockholders is determined by increasing net loss by the accrual of
dividends on preferred stock for the respective period and by the value of any
embedded beneficial conversion feature present in issuances of preferred stock
attributable to the respective period.
Diluted loss per common share is computed by dividing the net loss attributable
to common stockholders by the sum of the weighted average number of common
shares outstanding plus shares derived from other potentially dilutive
securities. For the Company, potentially dilutive securities include (a) "in-
the-money" stock options and warrants,
24
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(b) the amount of weighted average common shares which would be added by the
conversion of outstanding convertible preferred stock and convertible debt, (c)
the number of weighted average common shares which would be added upon the
satisfaction of certain conditions with respect to arrangements involving
contingently issuable shares, and (d) the number of weighted average common
shares that may be issued subject to contractual arrangements entered into by
the Company that may be settled in common stock or in cash at the election of
either the Company or the holder.
During 1999 and 1998, potentially dilutive shares were excluded from the diluted
loss per common share computation as their effect was antidilutive. The
weighted average numbers of antidilutive option and warrant shares excluded from
the calculation of diluted loss per common share were the following for 1999 and
1998:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
--------- -------
<S> <C> <C>
Weighted average antidilutive option shares 1,402,200 888,785
Weighted average antidilutive warrant shares 1,498,820 423,044
</TABLE>
At December 31, 1999 and 1998, the numbers of common shares issuable (and
excluded from the calculation of diluted loss per common share) upon conversion
of the then outstanding preferred shares and convertible debt were the
following:
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
<S> <C> <C>
Number of common shares issuable upon conversion of:
Series A Convertible Preferred Stock 17,379 25,835
Series B Convertible Preferred Stock 352,529 400,835
Series C Convertible Preferred Stock 460,348 -
Series E Convertible Preferred Stock 686,170 -
Number of common shares with respect to convertible debt 521,504 -
</TABLE>
In addition to the above convertible securities, at December 31, 1999 400,000
shares of the Company's BHT subsidiary's Series B Preferred Stock was
outstanding (see Note 3). Such shares were convertible to 80,000 shares of the
of Company's common stock. Similar to the items discussed above, such shares
were excluded from the calculation of diluted loss per common share because
their inclusion would have been antidilutive.
At December 31, 1999, there were contingently issuable shares with respect to
the acquisition of certain assets and liabilities of Lavenir Technology, Inc.
(see Note 7). The parties to the agreement agreed to determine the settlement of
these shares as of March 31, 2000. As a result, 404,085 shares will be issued
to the Lavenir Technology, Inc. in April 2000. At December 31, 1998, there were
no arrangements in effect that involved contingently issuable shares.
Contingently issuable shares were excluded from the calculation of diluted loss
per common share in 1999 and 1998 because their inclusion would have been
antidilutive.
The Company is a party to a number of arrangements that may be settled in common
stock or in cash at the election of either the Company or the other party to the
arrangement as stipulated in such contracts. These contractual arrangements
include accrued dividends with respect to the Company's preferred stock, a
minimum earnout payment related to certain assets acquired from Enterprise
Solutions, Inc. (see Note 7), and various other contractual arrangements. The
settlement of such contractual obligations, if sought by either party through
the issuance of common shares, would have required 1,202,289 and 6,523 shares as
of December 31, 1999 and 1998, respectively.
25
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
These shares were excluded from the calculation of diluted loss per common share
in 1999 and 1998 because their inclusion would have been antidilutive.
Income taxes: Deferred taxes are provided on an asset and liability method for
temporary differences and operating loss and tax credit carryforwards. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Fair value of financial instruments: All financial instruments are carried at
amounts that approximate estimated fair values.
Reclassifications: Certain amounts previously reported in 1998 have been
reclassified to conform to the 1999 presentation.
Use of estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management of the Company to
make a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Note 2. Continuation as a Going Concern
The accompanying consolidated financial statements are prepared assuming the
Company will continue as a going concern. During the year ended December 31,
1999, the Company incurred a loss from operations of $14,920,021. At December
31, 1999, the Company had a working capital deficit of $17,437,847 and an
stockholders' deficit of $2,963,431. In addition, in December 1999, the Company
approved a plan to dispose its Breece Hill Technologies, Inc. subsidiary, for
which the Company recorded an estimated loss on disposal of $16,356,792 and a
loss from discontinued operations of $4,409,727 during 1999 (see Note 3). The
Company is also not in compliance with respect to certain borrowing arrangements
as discussed in Note 8.
The Company is currently in negotiation to resolve approximately $7,300,000 of
current liabilities included in the Company's December 31, 1999 consolidated
financial statements by issuance of equity securities for certain acquisition
earnout obligations. The completion of the disposal of BHT and resolution of
earnout liabilities will aid in alleviating the Company's December 31, 1999
working capital deficit. In January and February 2000, the Company issued Series
D and F Convertible Preferred Stock with combined gross proceeds of $2,700,000
(see Note 14). Furthermore, during the last fiscal quarter of 1999 the Company
appointed a new Chief Executive Officer and other executive management who took
action to reduce future operating expenses in an effort to improve operating
margins in 2000. In the first fiscal quarter of 2000 the Company implemented
additional budgetary controls and established performance criteria to monitor
expenses and improve financial performance. In addition, the Company expects
that the cash proceeds from the sale of the Lavenir software rights will provide
additional working capital. The Company also expects to reach a satisfactory
extension of its borrowing arrangements with its primary secured lender.
These actions are significant and their impact on further results is uncertain
as of the date of the consolidated financial statements. In addition, the
ability of the Company to attract additional capital if events do not occur as
expected by the Company is uncertain. While the Company believes in the
viability of its strategy to improve operating margins and believes in its
financial plan to improve the Company's working capital position, there can be
no assurances to that effect.
26
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Discontinued Operations--Breece Hill Technologies, Inc.
On December 27, 1999, the Company approved a formal plan with regards to the
disposal of its Breece Hill Technologies, Inc. subsidiary, which was acquired on
April 14, 1999 and which formerly represented the Company's tape storage
products business segment. Accordingly, the estimated loss from the disposal of
this segment and the financial position, results of operations and cash flows of
BHT have been separately presented as discontinued operations, and eliminated
from the continuing operations amounts in the accompanying consolidated
financial statements and notes thereto.
Acquisition of BHT during 1999: The Company acquired all of the issued and
outstanding common stock and Series A Convertible Preferred Stock of BHT (the
"Outstanding Shares") in connection with a merger with BHT which was effective
in April 1999. Under the terms of the merger, 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 at $7.50 per
share and the right to receive an earnout payment based in part on BHT's sales
over the twelve months following the acquisition. In addition, in conjunction
with the acquisition of BHT, the Company issued options to purchase 300,000 of
the Company's common stock at $17.73 per share to employees of BHT in exchange
for options such employees had to purchase shares of BHT and warrants to
purchase 290,488 shares of the Company's common stock at $20.63 per share to
certain creditors of BHT in exchange for warrants such creditors had to purchase
shares of BHT. This merger was recorded using the purchase method of
accounting.
The Company issued 45,000 shares of its common stock and issued warrants to
purchase 100,000 shares and 30,000 shares of the Company's common stock at $9.00
per and $10.00 per share, respectively, in return for services provided with
respect to the BHT acquisition. In addition, the Company incurred $291,175 in
other legal, accounting, and other costs associated with the acquisition.
Based upon the findings of an independent valuation firm, the total valuation in
excess of the book value acquired with respect to BHT was $18,663,448 and was
comprised of the fair value of the warrants, options, and common stock issued in
connection with the merger, as described above, of $11,960,782; liabilities
assumed in excess of the book value of assets received in the amount of
$6,411,491; and $291,175 in various legal, accounting and other costs associated
with the acquisition. The fair value of options and warrants issued in
connection with the merger was determined by use of a Black-Scholes valuation
model, considering the following assumptions: expected dividend yield 0%, risk-
free interest rate of 5.5%, volatility of 112%, and expected option and warrant
lives of four to five years. After the Company's allocation of amounts to the
fair value of asset and liabilities received, $18,063,194 was assigned to
intangible assets as a result of the merger with BHT.
In connection with the BHT merger, the BHT subsidiary issued 400,000 shares of
Series B Preferred Stock to Hambrecht & Quist Guaranty Fund LLP in exchange for
a reduction of $1,000,000 of debt secured by certain assets of BHT. The Company
recorded the BHT preferred stock issued as a BHT minority interest.
Discontinued operations treatment of BHT: As a result of the Company approving
a formal plan with regards to the disposal of BHT on December 27, 1999, the
Company reported BHT's financial position, results of operations and estimated
loss on disposal as discontinued operations.
The BHT business segment consisted of net liabilities of $5,300,000 as of
December 31, 1999. This balance included assets comprised of cash, accounts
receivable, inventory, property and equipment, intangible assets and other
assets amounting to $13,362,061 after deducting an allowance for the write-off
of certain intangible assets. These assets were offset by liabilities totaling
$18,662,061 which included estimated operating losses to the disposal date and
accrual of the earnout consideration totaling $6,800,000, debt and other
liabilities.
27
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Loss from operations of BHT from the period of acquisition by the Company (April
1999) through the discontinued operations measurement date (December 27, 1999)
of $4,409,727 reflects net sales of $24,953,139. The estimated loss on disposal
of BHT of $16,356,792 assumes the write-off of intangible assets of $9,556,792
and estimated operating losses from the measurement date to the anticipated
disposal date of $6,800,000 The estimated operating losses include an estimated
charge related to the immediate write-off of any intangible asset resulting from
the payment in 2000 of contingent consideration that would be required under the
original acquisition agreement.
Note 4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------- --------------
<S> <C> <C>
Raw materials $ 915,205 $ 568,167
Completed systems and finished goods 407,131 293,251
--------------- --------------
Total $ 1,322,336 $ 861,418
=============== ==============
</TABLE>
Note 5. Net Investment In Sales-Type Leases
The components of net investment in sales-type leases as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Minimum lease payments receivable $ 21,683 $ 45,336
Less: Unearned revenue (930) (2,150)
---------------- ----------------
20,753 43,186
Less: Current portion (20,753) (20,776)
---------------- ----------------
Investment in sales-type leases, net of
curent portion $ - $ 22,410
================ ================
</TABLE>
28
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Capital Assets
Certain of the Company's capital assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Property and equipment
Computer and office equipment $ 2,083,608 $ 1,642,691
Accumulated depreciation (1,260,322) (600,259)
--------------- ----------------
Property and equipment, net $ 823,286 $ 1,042,432
=============== ================
Leased equipment
Leased equipment $ 251,586 $ 235,922
Accumulated depreciation (128,301) (111,264)
--------------- ----------------
Leased equipment, net $ 123,285 $ 124,658
=============== ================
Software development costs
Software development costs $ 2,000,037 $ 3,307,422
Accumulated amortization (907,754) (1,033,588)
--------------- ----------------
Software development costs, net $ 1,092,283 $ 2,273,834
=============== ================
Purchased technology and other intangibles
Software, licenses and customer lists $ 14,455,586 $ 1,630,739
Accumulated amortization (2,083,847) (211,731)
--------------- ----------------
Purchased technology and other
intangibles, net $ 12,371,739 $ 1,419,008
=============== ================
Other assets
Patents $ 127,009 $ 107,386
Deferred debt issue costs - 225,224
Accumulated amortization (104,168) (139,419)
--------------- ----------------
Other assets, net $ 22,841 $ 193,191
=============== ================
</TABLE>
Note 7. Acquisitions
Lavenir assets and liabilities: On September 29, 1999, the Company, through its
GMI subsidiary, purchased substantially all the assets and rights to certain
hardware and software products, trademarks and copyrights of Lavenir Technology,
Inc., a California corporation ("Lavenir"), pursuant to an Agreement and Plan of
Reorganization (the "Lavenir Agreement") by and among the Company, GMI and
Lavenir. Subject to the Lavenir Agreement, the Company also assumed certain
liabilities of Lavenir, including Lavenir's outstanding debt, ongoing leases,
and contract obligations. The assets and rights acquired relate primarily to a
suite of CAD/CAM software and certain hardware products sold for use in the
printed circuit board industry.
29
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GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the terms of the Lavenir Agreement, the total purchase price of $5,300,000
is comprised of the following: (a) 266,000 shares of the Company's common stock
initially paid to Lavenir on the closing date, (b) $400,000 originally in the
form of a payable due on January 31, 2000, and (c) additional shares of the
Company's common stock issuable as of March 31, 2000 sufficient to cause the
aggregate value of the shares previously issued and the original $400,000
liability to total $5,300,000 as of the March 31, 2000. In November 1999 the
Company negotiated the $400,000 liability due on January 31, 2000 to a $100,000
amount due on January 31, 2000 in return for 100,000 shares of the Company's
common stock to be issued in January 2000. This negotiation of the satisfaction
of the original $400,000 liability and related issuance of additional shares of
common stock does not impact the number of common shares to be issued in March
2000 as described above.
The Company received net assets with a fair value of approximately $315,000 as a
result of the Lavenir asset acquisition and allocated the remaining purchase
price of $4,985,000 to purchased technology intangible assets with useful lives
of three to five years. Subsequent to December 31, 1999, the Company signed a
letter of intent to sell substantially all the rights and trademarks with
respect to the software used in the printed circuit board industry acquired as
described above (See Note 14). The rights, trademarks and copyrights acquired
from Lavenir related to hardware used in the printed circuit board industry are
not subject to this letter of intent.
Singlepoint Limited: On May 27, 1999, the Company, through its SSI subsidiary,
acquired all of the outstanding stock of Singlepoint Limited ("SSI Ltd"), a
distributor of SSI products and services. In return for the SSI Ltd shares, the
Company paid $80,000. In addition, under the terms of the related acquisition
agreement, the Company is required to pay an earnout payment based upon net
income of SSI Ltd for a period subsequent to the acquisition date through April
30, 2000. Through December 31, 1999, no additional earnout amounts have been
required with respect to SSI Ltd.
The Company recorded the acquisition of SSI Ltd using the purchase method of
accounting. The net liabilities in excess of identifiable assets of SSI Ltd as
of the acquisition date totaled $115,437. Based upon the $80,000 of
consideration paid, the Company recorded an increase in other intangible assets
of $195,437 in 1999 as a result of the SSI Ltd acquisition.
Enterprise Solutions, Inc. assets and liabilities: On November 1, 1998, the
Company, through its SSI subsidiary, purchased certain assets and rights and
assumed various liabilities from Enterprise Solutions, Inc. ("ESI"). The net
assets and rights acquired relate primarily to items used in manufacturing and
selling event notification software and in providing services with respect to
the implementation of enterprise management solutions.
Total consideration under the terms of the ESI asset purchase agreement (the
"ESI Agreement") includes: (a) $200,000 at the close of the transaction, (b)
options to purchase 80,000 shares of the Company's common stock at $6.25 per
share, (c) additional options to purchase up to 260,000 shares at $6.25 per
share based upon the earnings associated with the operations related to the ESI
assets acquired (the "SSI Operations") for a period of 18 months following the
closing of the acquisition. The options described above would be exercisable
for a term of 5 years from the ESI asset acquisition date. In addition, under
the ESI Agreement, in the event ESI does not meet certain earnout calculations
reaching a minimum of $5,000,000, the Company, at its option, would either pay
ESI the difference in cash or common stock of the Company or return the
purchased assets and assumed liabilities, as of the date the earnout calculation
is made, to ESI.
In 1998, based upon the terms described above, the Company recorded SSI
Operations acquisition cost equal to $724,000 which was comprised of the
$200,000 initial amount plus the fair value of the 80,000 non-contingent options
to purchase common stock of the Company of $524,000. The fair value of these
option shares was calculated using the Black-Scholes option pricing methodology
based upon the following assumptions: volatility of 112%, dividend rate of 0%,
risk free interest rate of 4.5 % and a five-year option life. The fair value of
the identifiable assets of the SSI Operations acquired totaled $326,969 and
consisted of cash of $57,796, accounts
30
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
receivable of $474,784, property and equipment of $116,324 and current
liabilities of $321,935. The Company recorded an intangible asset consisting of
purchased technology and customer lists of $397,031 with a useful life of five
years as a result of the SSI Operations acquisition.
During 1999, the Company pledged the assets of the SSI Operations to secure
borrowings of the Company. In addition, based upon the operating results of the
SSI Operations, the Company assessed that the criteria surrounding the
contingent options to purchase 260,000 shares and the minimum $5,000,000 earnout
would be met. Furthermore, the Company began renegotiating the final earnout
amount that would be required in excess of the $5,000,000 minimum amount.
Negotiations in regards to a final earnout settlement continue. However, during
1999, the Company issued additional options to purchase 240,000 shares of the
Company's common stock at an exercise price of $6.25 per share to ESI as an
initial partial settlement. The Company recorded an accrued liability related
to the $5,000,000 minimum earnout and recorded additional paid-in capital of
$2,381,840 related to the fair value of the 500,000 option shares determined by
use of a Black-Scholes valuation model, considering the following assumptions:
expected dividend yield 0%, risk-free interest rate of 5.5% to 5.6%, volatility
of 112%, and expected option and warrant lives of four to five years. These
items, correspondingly resulted in a 1999 increase in gross purchased technology
with respect to the SSI Operations of $7,381,840.
In November 1999, one of the principal shareholders of ESI was appointed as the
president and chief executive officer of the Company.
Asset Sentinel, Inc. software rights: On October 1, 1998, the Company acquired
the rights to a suite of network mapping software products from Asset Sentinel,
Inc. ("ASI"). Initial consideration for the software rights was $425,000 and
was comprised of a $146,680 note payable to ASI due six months from closing date
and forgiveness of an ASI note payable to the Company of $279,320. In addition,
the Company agreed to pay contingent consideration of up to $2,200,000, based on
certain sales milestones of the ASI products for 18 months after acquisition,
payable in cash or Company common stock, at the Company's option. The Company
did not acquire any tangible assets or assume any liabilities, and therefore,
the entire purchase price was recorded as purchased technology and was being
amortized over its estimated economic life of 5 years. As further discussed in
Note 11, subject to the Company's ongoing review of the recoverability of
intangible assets, the Company recorded a charge in 1999 related to impairment
of the net balance of ASI related purchased technology.
Infinite Graphics Incorporated assets and liabilities: On February 27, 1998,
the Company acquired certain assets, and perpetual software licenses and assumed
certain liabilities of a division of Infinite Graphics Incorporated ("IGI")
engaged in the development and sale of computer-aided design and manufacturing
software for the printed circuit board industry. The consideration related to
the purchase of the IGI assets included $700,000 in cash and contingent
consideration of up to $3,300,000 based on certain operating results with
respect to the IGI assets acquired (the "IGI Operations") over a period of 15
months from the date of acquisition. Net identifiable liabilities of $78,446
were assumed consisting of $50,000 of property and equipment and $128,446 of
current liabilities. As a result of the IGI asset acquisition, the Company
recorded $778,446 of purchased technology and customer lists in February 1998
with estimated useful lives of three to five years.
In the second quarter of 1999, the results of the IGI Operations met the
thresholds surrounding the $3,300,000 contingent consideration element of the
February 1998 agreement with IGI. As a result, the Company increased purchased
technology with respect to the IGI Operations, assigned $1,435,481 of accounts
receivable to IGI and recorded an accrued liability of $1,864,519 for the
remaining balance, which as of December 31, 1999 had not been paid by the
Company.
In November 1999, the Company received notice from IGI of IGI's intent to
terminate the licenses granted to the Company and to seek recovery of the assets
purchased by the Company under the February 1998 agreement due to
31
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the Company's inability to pay IGI the outstanding $1,864,519 balance of
contingent consideration. As further discussed in Note 11, as a result of the
notice given by IGI and in conjunction with the Company's ongoing review of the
recoverability of intangible assets, the Company recorded a charge in the fourth
quarter of 1999 related to the impairment of the net balance of purchased
technology and customer lists associated the IGI Operations.
Unaudited pro forma financial information: The following tables summarizes
unaudited pro forma consolidated financial information with respect to results
of operations of the Company as if the acquisitions of the assets, licenses, and
various rights and assumption of the described liabilities with respect to the
transactions with Lavenir, SSI Ltd, ESI, ASI, and IGI described above had
occurred as of the beginning of the periods presented:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Net sales $ 13,023,094 $ 12,639,259
Loss from continuing operations (18,895,609) (2,882,218)
Diluted loss per common share from
continuing operations $ (5.070) $ (0.790)
</TABLE>
32
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Notes Payable
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------- -----------------
<S> <C> <C>
Senior revolving loan maturing in May 2000,
interest payable monthly at prime plus 3%
(aggregating 11.5% at December 31, 1999) $ 1,300,000 $ -
Convertible term loan payable in monthly
installments of $133,333 plus interest at 12.75%
through December 2000 at which time the
remaining balance is due;
convertible to common stock of the
Company at $7.50 per share 1,939,872 -
Term loan payable in quarterly installments
of $50,000 during 2000 and $75,000 (commencing
March 31, 2001 through March 31, 2002); remaining
balance due June 30, 2002; interest payable
quarterly at 17% 1,750,000 -
Short-term promissory notes bearing interest
at 10% 300,000 -
Equipment loan due March 31, 2000, bearing
interest at 11.5% 45,000 -
Notes payable-various; $39,409 due in 2000 or
on demand, $50,000 due in 2002; bearing
interest at 8% to 11.32% 89,409 -
Other equipment loans; $15,989, $8,681,
$7,824 and $1,507 due in 2000, 2001, 2002 and 2003,
respectively; bearing interest at 9% to 21% 34,001 -
Notes payable to bank due June 1, 1999, bearing interest
at 9% - 250,000
Subordinated notes payable to investment firm,
bearing interest at 9.0%; $200,000, $300,000,
$300,000, and $1,100,000 due in 1999, 2000, 2001, and
2002, respectively - 1,900,000
Short-term note payable related to acquisition - 145,680
-------------------- -----------------
5,458,282 2,295,680
Less current portion (5,390,270) (595,680)
-------------------- -----------------
$ 68,012 $ 1,700,000
==================== =================
</TABLE>
In May 1999, the Company entered into a loan and security agreement and has
since executed certain amendments (collectively, the "1999 Debt Agreement") that
provided for (a) a senior revolving loan maturing in May 2000, (b) a convertible
term loan, and (c) a term loan. Various amendments were made to the 1999 Debt
Agreement throughout 1999. The Company utilized $1,900,000 of proceeds under
this agreement to pay its then outstanding subordinated notes payable. The
general payment terms and interest rates (including any
33
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
modifications based upon certain forbearance agreements discussed below) as of
December 31, 1999 with respect to the 1999 Debt Agreement are included in the
above table. Borrowings under the 1999 Debt Agreement are secured by all of the
assets of the Company, exclusive of those of its BHT subsidiary. Borrowings
with respect to the senior revolving loan are subject to a limit of the lesser
of (a) $3,300,000 less 10% of equity (as defined in the 1999 Debt Agreement) and
less any unpaid balance of the convertible term loan, (b) 80% of eligible
receivables, or (c) 20% of net worth (as defined in the 1999 Debt Agreement).
The Company is currently not in compliance with the 1999 Debt Agreement and has
entered into certain forbearance agreements with the lender. These agreements
established a forbearance period through March 31, 2000 during which, among
other things, collection of accounts receivable is made through a bank lockbox
and these proceeds are immediately applied to outstanding borrowings, interest
rates on borrowings subject to the 1999 Debt Agreement are increased 3% per
annum, certain modifications to the borrowing base formula are in effect, and
50% of proceeds from equity issuances and 75% of proceeds from other debt
issuances are to be paid to the lender. The Company has been unable to comply
with all of the terms of the forbearance agreements.
In connection with the 1999 Debt Agreement and related forbearance agreements,
the Company issued warrants to the lender to purchase 46,462 shares of the
Company's common stock at $7.15 per share. These warrants had a fair value of
$364,767 as determined by use of a Black-Scholes valuation model. In addition,
the conversion price of the convertible term loan under the 1999 Debt Agreement
was less than the market value of the Company's common stock on the date the
convertible term loan was issued, resulting in the existence of a beneficial
conversion feature with a value of $248,000. Based upon the default status of
the underlying borrowings, the Company recorded a charge of $612,767 with
respect to the value of this beneficial conversion feature and fair value of
warrants related to the 1999 Debt Agreement. In addition, all outstanding debt
in default has been classified as a current liability in the consolidated
balance sheet.
In December 1999, the Company issued $300,000 in short-term promissory notes.
As discussed in Note 14, these promissory notes were converted to shares of
Series D Convertible Preferred stock of the Company in January 2000.
As a result of the 1999 transaction with Lavenir (see Note 7), the Company
assumed certain equipment loans and notes payable. The general terms and
outstanding balances related to these debt obligations are summarized in the
table above.
In March and May 1999, the Company issued convertible notes payable aggregating
$261,372. The notes issued in March 1999 were convertible to the Company's
common stock at $4.00 per share while the notes issued in May 1999 were
convertible at $6.25 per share. These conversion prices were less than the per
share market value of the Company's common stock on the date the notes were
issued resulting in the existence of beneficial conversion features with a an
aggregate value of $212,624. In connection with these convertible notes
payable, the Company issued warrants to purchase 2,000 shares of the Company's
common stock at $7.50 per share. These warrants had a fair value of $15,000 as
determined by use of a Black-Scholes valuation model. The value of these
warrants and the beneficial conversion feature associated with these convertible
notes payable was amortized into expense over the period the notes were
outstanding. These notes and a portion of related accrued interest were
converted to common stock in September and December 1999.
In February 1999, the Company issued a $500,000 short-term note payable which
was paid by the Company in November 1999. In connection with this note, the
Company issued the lender warrants to purchase 110,000 shares of the Company's
common stock at $5.40 per share. The $810,703 fair value of these warrants was
amortized into expense over the period the notes were outstanding.
The valuation of warrants issued in conjunction with debt as described above was
determined by use of a Black-Scholes valuation model, considering the following
assumptions: expected dividend yield 0%, risk-free interest rate of 5.5%,
volatility of 112%, and expected warrant lives of 4.5 to five years.
34
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Stockholders' Equity
Common stock issued: During 1999, the Company sold 534,578 shares of its common
stock for gross proceeds of $2,713,399 pursuant to a series of private
placements of securities. The company paid capital raising costs of
approximately $235,000 and issued warrants to purchase 40,313 shares of the
Company's common stock to various placement agents at $4.00 to $6.25 per share
in conjunction with these private placements. Company also issued 648,000 shares
of common stock in return for investor relations services, 311,000 shares with
respect to acquisitions (see Note 7), 52,038 shares in connection with the
conversion of certain notes payable (see Note 8), and 176,604 shares with
respect to the conversion of preferred stock, payment of dividends and exercises
of stock options and warrants during 1999. The value of shares issued in
exchange for investor relations services was charged to administrative expense.
During 1998, the Company issued an aggregate of 264,907 shares of common stock,
218,400 shares of which were issued pursuant to various private placements and
46,507 of which related to conversions of preferred stock and exercises of
options and warrants. The Company received proceeds from 1998 placements of
common stock of $1,800,350 and paid stock issue costs of $346,922, a portion of
which related to common stock placements and a portion of which related to the
issuance of Series B Preferred stock as described below.
Series B Convertible Preferred Stock issuance: From late August 1998 until
December 31, 1998, the Company sold 67,192 units in a private placement of
securities. Each unit consisted of one share of Series B Preferred Stock (the
"Series B Stock") and one warrant to purchase shares of common stock. The
purchase price per unit was $32.50. Each share of Series B Stock entitles the
holder thereof to receive an annual dividend equal to 8% of the per share
purchase price. Beginning in February 1999, each share of Series B Stock is
convertible into that number of shares of common stock equal to the per unit
purchase price divided by 80% of the average closing bid price of the common
stock for the 20 consecutive trading days prior to the conversion date, subject
to certain adjustments; provided, however, that such average price may not be
greater than $12.50 nor less than $3.75. The beneficial conversion feature
present in the issuance of the Series B Stock as determined on the date of
issuance of the Series B Stock totaled $562,392 and is treated as a reduction in
earnings available (increase in loss attributable) to common stockholders over
the period from the date of issuance of the Series B Stock to the earliest date
such shares may be converted. All outstanding shares of Series B Preferred
Stock will be automatically converted into common stock on September 23, 2001 if
the Company has registered such common shares under the Securities Act and the
common stock is traded on the Nasdaq.
Each warrant issued in connection with the Series B Stock is a five-year
callable warrant to purchase common stock at $16.25 per share. The number of
shares of common stock for which the warrant in each unit will be exercisable is
equal to the number of shares of common stock into which the associated share of
Series B Preferred Stock contained in the unit will have been converted. In
connection with the offering of the Series B Stock, the Company agreed to use
its best efforts to register the shares of common stock underlying the Series B
Stock and associated warrants and to pay a penalty if such registration was not
effective by February 28, 1999. The Company has not yet registered these shares
and, as a result, is incurring a penalty owed to the investors in the offering
who have not formally waived this penalty equal to 1% of the purchase price of
the units for each of the first two 30-day periods following February 28, 1999
and 3% for every 30-day period thereafter until the registration statement has
been declared effective. During 1999, the Company incurred approximately
$370,000 in such penalties.
Series C Convertible Preferred Stock issuance: On March 25, 1999, the Company
issued 1,600 shares of its Series C Convertible Preferred Stock (the "Series C
Stock") to certain accredited investors in a private offering. Sixty days after
the issuance of the Series C Stock, each share of Series C Stock is convertible
into that number of shares of common stock equal to the stated value of each
such share ($1,000) divided by the lesser of $12.50 or 80% of the average of the
three lowest closing bid prices of the Common Stock during the 15 trading days
immediately
35
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
preceding the conversion date. The beneficial conversion feature present in the
issuance of the Series C Stock as determined on the date of issuance of the
Series C Stock totaled $522,972 and is treated as a reduction in earnings
available (increase in loss attributable) to common stockholders over the period
from the date of issuance of the Series C Stock to the earliest date such shares
may be converted. Holders of Series C Stock are entitled to receive dividends
at an annual rate of 8% of the per share purchase price. The dividends are
payable in either cash or shares of common stock, at the option of the Company.
The number of shares of common stock issuable as a dividend payment will equal
the total dividend payment then due divided by the conversion price calculated
as of the date that the dividend payment is due.
In addition, in connection with the Series C Stock offering, the Company also
issued warrants to the investors to purchase 20,000 shares of common stock at
$8.28 per share. A portion of the aggregate proceeds from the Series C Stock
offering equal to the $135,288 fair value of these warrants was allocated to
additional paid in capital. This fair value was determined by use of a Black-
Scholes valuation model, considering the following assumptions: expected
dividend yield 0%, risk-free interest rate of 5.5%, volatility of 112%, and
expected warrant lives of five years.
The Company issued 75 shares of Series C Stock to the placement agent in return
for capital raising services and incurred $96,000 in other capital raising cost
with respect to this private offering.
In connection with the offering of the Series C Stock, the Company agreed to use
its best efforts to register the shares of common stock underlying the Series C
Stock and associated warrants and to pay a penalty if such registration was not
effective 30 days after their issuance. The Company has not yet registered
these shares and, as a result, is incurring a penalty owed to the investors
equal to 1% of the purchase price of the shares for the first 30-day periods
following April 25, 1999 and 3% for every 30-day period thereafter until the
registration statement has been declared effective. During 1999, the Company
incurred approximately $400,000 in such penalties.
Series E Convertible Preferred Stock issuance: On December 30, 1999, the
Company issued 2,650 shares of its Series E Convertible Preferred Stock (the
"Series E Stock") to certain accredited investors in a private offering. At any
time after the issuance of the Series E Stock, each share of Series E Stock is
convertible into that number of shares of common stock equal to the stated value
of each such share ($1,000) divided by the lesser of $5.125 or 75% of the
average of the three lowest closing bid prices of the Common Stock during the 15
trading days immediately preceding the conversion date. The beneficial
conversion feature present in the issuance of the Series E Stock as determined
on the date of issuance of the Series E Stock totaled $1,683,453 and is treated
as a reduction in earnings available (increase in loss attributable) to common
stockholders upon the date of issuance of the Series E Stock since such shares
may be converted at any time following issuance. Subsequent to year-end, as a
result of the Series F Convertible Preferred offering (see Note 14), the 75%
conversion factor included in the formula described above was changed to 70%.
Holders of Series E Stock are entitled to receive dividends at an annual rate of
8% of the per share purchase price. The dividends are payable in either cash or
shares of common stock, at the option of the Company. The number of shares of
common stock issuable as a dividend payment will equal the total dividend
payment then due divided by the conversion price calculated as of the date that
the dividend payment is due.
In addition, in connection with the Series E Stock offering, the Company also
issued warrants to the investors to purchase 50,000 shares of common stock at
$6.375 per share. A portion of the aggregate proceeds from the Series E Stock
offering equal to the $260,370 fair value of these warrants was allocated to
additional paid in capital. This fair value was determined by use of a Black-
Scholes valuation model, considering the following assumptions: expected
dividend yield 0%, risk-free interest rate of 5.5%, volatility of 112%, and
expected warrant lives of five years.
The Company issued 25 shares of Series E Stock to the placement agent in return
for capital raising services and incurred approximately $292,000 in other
capital raising cost with respect to this private offering.
36
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In connection with the offering of the Series E Stock, the Company agreed to use
its best efforts to register the shares of common stock underlying the Series E
Stock and associated warrants and to pay a penalty if such registration was not
effective 30 days after their issuance. The Company has not yet registered
these shares and, as a result, is incurring a penalty owed to the investors
equal to 2% of the purchase price of the shares for the first 30-day period and
3% for every 30-day period thereafter until the registration statement has been
declared effective.
Common stock warrants: During 1999, the Company issued warrants to purchase
22,000 shares of its common stock for $2.19 to $7.50 per share in return for
various services received. In addition, the Company issued warrants to purchase
its common stock in connection with various acquisitions (see Note 7),
borrowings and issuance of notes payable (see Note 8), and issuance of common
and preferred stock (as described above). During 1998, the Company issued
warrants in conjunction with various sales of common and preferred stock and in
connection with the acquisition of various assets and assumption of certain
liabilities from ESI. The following table summarizes the Company's warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Range of Weighted average
exercise price Number exercise price
--------------- --------- -----------------
<S> <C> <C>
$ 1.80-4.00 29,200 $ 1.77
5.40-8.00 1,149,700 7.24
9.00-13.00 206,300 10.31
16.25 304,800 16.25
20.63 290,500 20.63
--------- -----------------
1,980,500 $ 10.83
========= =================
</TABLE>
Common stock options: The Company's stock option plan, provides for granting to
the Company's employees, directors and consultants, qualified incentive and
nonqualified options to purchase common shares of stock. Qualified incentive
options must be granted with exercise prices equal to the fair market value of
the common stock on the date of grant. Nonqualified options must be granted
with exercise prices equal to at least 85% percent of the fair market value of
the common stock on the date of grant.
At December 31, 1999, the Company has 3,500,000 shares of its common stock
reserved for issuance upon the exercise of options granted under the Company's
stock option plan.
37
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock option activity for the years ended December 31, 1999 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Number of Weighted average
shares exercise price
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997 720,000 $ 4.54
Granted 708,600 7.55
Exercised (15,400) 1.80
Canceled (77,400) 12.00
--------- ----------------
Outstanding at December 31, 1998 1,335,800 5.68
Granted 782,700 11.31
Exercised (36,600) 4.27
Canceled (380,400) 7.30
--------- ----------------
Outstanding at December 31, 1999 1,701,500 $ 6.42
========= ================
</TABLE>
The following table summarizes the Company's stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- --------------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise price Number life price Number price
--------------- ---------- --------- -------- ----------- --------
<S><C> <C> <C> <C> <C> <C>
$ 0.75-1.25 331,500 4.84 $ 0.78 331,500 $ 0.78
2.50-3.75 17,000 2.57 1.64 17,000 1.64
5.00-7.50 877,400 3.92 6.30 235,100 6.30
7.65-10.00 175,600 3.05 9.02 129,500 9.18
17.73 300,000 3.28 17.73 300,000 17.73
--------- ---------
1,701,500 1,013,100
========= =========
</TABLE>
The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock options. As a result no
compensation expense has been recognized for employee and director stock
options. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss would have been reported as
follows:
38
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Net loss:
As reported $ (38,897,293) $ (2,003,166)
Pro forma (39,620,293) (2,567,166)
Diluted loss per common share:
As reported $ (9.763) $ (0.643)
Pro forma (9.932) (0.080)
</TABLE>
Pro form amounts only reflect options granted during 1995 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 for years prior to 1999 is not reflected in the pro forma
amounts presented above because compensation cost is reflected over the options'
vesting period, and compensation cost for options granted prior to January 1,
1995 is not considered.
The per share weighted average fair value of stock options granted during 1999
and 1998 was $8.70 and $3.90, respectively, on the date of grant using the
Black-Scholes pricing model and the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
------- -------
<S> <C> <C>
Expected dividend yield 0% 0%
Risk-free interest rate 5.5% 4.5%
Annualized volatility 112% 113%
Expected life, in years 5 5
</TABLE>
Note 10. Income Taxes
At December 31, 1999, the Company had a net operating loss carryforward of
approximately $33 million. The net operating loss carryforward may be subject to
an annual limitation as defined by Section 382 of the Internal Revenue Code.
Current and future equity transactions could further limit the net operating
losses available in any one year.
39
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax effects of temporary differences from continuing operations that give
rise to significant portions of the deferred tax assets and liabilities as of
December 31, 1999 and 1998 are shown as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Deferred tax assets:
Write-downs of intangible assets $ 1,184,000 $ -
Allowance for doubtful accounts 258,000 127,000
Purchased technology 317,000 58,000
Net operating loss carryforward 8,360,000 2,911,000
----------------- ---------------
10,119,000 3,096,000
Less valuation allowance (9,145,000) (2,032,000)
----------------- ---------------
$ 974,000 $ 1,064,000
================= ===============
Deferred tax liabilities:
Depreciation (374,000) (153,000)
Capitalized software costs (600,000) (911,000)
----------------- ---------------
$ (974,000) $ (1,064,000)
================= ===============
</TABLE>
The total deferred tax assets indicated above do not include a $1.4 million
deferred tax asset attributable to discontinued operations. Additionally, the
valuation allowance indicated above does not include a valuation allowance of
$1.4 million attributable to discontinued operations used to completely offset
the deferred tax asset attributable to discontinued operations.
A valuation allowance is required to reduce a potential deferred tax asset when
it is likely that all or some portion of the potential deferred tax asset will
not be realized due to the lack of sufficient taxable income. The Company has
reviewed its taxable earnings history and projected future taxable income.
Based on this assessment, the Company has provided a valuation allowance for the
portion of the deferred tax assets that will likely not be realized due to lack
of sufficient taxable income in the future.
For the years ended December 31, 1999 and 1998, there was no income tax
provision.
40
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The income tax expense (benefit) from continuing operations differed from the
amounts computed by applying the U. S. federal income tax rate of 34% as a
result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Expense (benefit) at statutory rate $ (6,192,533) $ (681,076)
State income tax expense (benefit),
net of federal (928,880) (102,216)
Change in valuation allowance 7,113,000 820,000
Other 8,413 (36,708)
---------------- ----------------
Actual tax expense (benefit) $ - $ -
================ ================
</TABLE>
Note 11. Other Operating Expenses
During the fourth quarter of 1999, in conjunction with the Company's regular
review of the recoverability of intangible assets and of the valuation of
certain other assets, the Company recorded a charge of $5,441,539. The amount
of impairment losses recorded represented the excess of the carrying amount of
the impaired asset over the fair value of the asset. Generally, fair value
represents the expected future cash flows from the use of the asset or group of
assets, discounted at a rate commensurate with the risks involved. These
charges are summarized and further described below.
<TABLE>
<CAPTION>
($ 000's)
<S> <C>
Write-down of software related to Magnum products business $ 289,000
Write-down of purchased technology and intangible assets related to
to IGI Operations 2,470,000
Write-down of purchased technology and software related to ASI
software rights and development 420,000
Write-down of capitalized software development costs 1,938,000
Write-down of excess equipment 325,000
-----------------
$ 5,442,000
=================
</TABLE>
In December 1999, the Company approved a plan to dispose of the assets and
operations used in connection with a portion of its network monitoring and
analysis software and services business that was conducted under the Magnum
name. In January 2000, the Company sold the net assets associated with the
Magnum operations to a company established by two former employees of Global
MAINTECH Corporation and forgave certain advances to the two former employees in
return for a $214,000 note receivable from the acquiring company and the
assumption of certain liabilities. Based upon a review of the recoverability of
the net capitalized software development costs associated with the Magnum
operations, the Company recorded a charge of approximately $289,000 in December
1999 to state the capitalized software costs at fair value.
As discussed in Note 7, in November 1999, the Company received notice from IGI
of IGI's intent to terminate the licenses granted to the Company and to seek
recovery of the assets purchased by the Company under a February 1998 agreement
as a result of the Company's inability to pay IGI the outstanding balance of
contingent consideration due. In December 1999, the Company recorded a charge
of approximately $2,470,000 to write-down the net balance of purchased
technology and intangible assets related to the IGI Operations based upon the
terms of a settlement agreement proposed by both the Company and IGI, but
pending approval of certain holders of the Company's
41
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
secured debt. Under the terms of the proposed settlement, the license rights
and essentially all of the net assets of the IGI Operations, totaling
approximately $2,191,000 at December 31, 1999, would revert back to IGI in
exchange for the mutual release of claims arising under the February 1998
agreement, including IGI's release of the Company's contingent consideration
payment obligation. Writing-off these net assets, assumed legal costs and an
estimated loss on operations until the date of asset reversion results in a
charge of approximately $2,470,000.
During the fourth quarter of 1999, in conjunction with the Company's ongoing
review of recoverability of intangible assets, the Company recorded an
impairment charge of approximately $420,000 related to the net balance of ASI
intangible assets acquired in February 1998 (see Note 7). In March 2000, the
Company formally transferred the rights to the ASI software acquired back to ASI
along with the obligation to provide any future service to customers of the
Company utilizing certain ASI software. Under the terms of the agreement, the
Company is obligated to pay ASI $70,000 in return for ASI's assumption of this
obligation and for ASI's release of any claims against the Company.
Furthermore, should ASI later sell the software rights previously owned by the
Company or should ASI raise in excess of $200,000 in equity capital, ASI is
required to pay the Company $70,000.
In light of an assessment made by the Company in late 1999 with respect to new
product development, the Company recorded a charge of approximately $1,938,000
related to capitalized software development costs. The Company determined that
new product development would occur with different tools and techniques
available in the marketplace and that such techniques would not take advantage
of portions of software for which the Company had recorded a net balance of
capitalized software development costs. Based upon a review of the
recoverability of such capitalized costs the Company recorded a charge of in
December 1999 to state the remaining balance at fair value.
As part of certain cost containment efforts in late 1999, the Company reduced
staffing in various areas. In conjunction with these staffing changes, certain
excess equipment was identified and subsequently written-down to fair value.
The aggregate total of charge related to the write-down of equipment in 1999 was
approximately $325,000.
Note 12. Operating Leases
Company as lessor: The Company leases equipment, primarily VCC units, under
noncancellable operating leases expiring in various years. The cost of
equipment subject to such leases is recorded as leased equipment. Future
minimum lease payments to be received for operating leases in which the Company
is the lessor are $237,500, 172,200 and $8,200 for 2000, 2001 and 2002,
respectively.
Company as lessee: The Company has operating leases for various office space
and certain computers, and office equipment. The rental payments under these
leases are charged to expense as incurred. Many of the leases provide that the
Company pay taxes, maintenance, insurance, and other operating expenses
applicable to the leases. Lease expense in 1999 and 1998 was approximately
$264,200 and $94,000, respectively. Future minimum lease payments under these
noncancellable operating lease are approximately $361,800, $305,400, $146,868,
$24,200 and $12,100 for the years 2000, 2001, 2002, 2003, and 2004,
respectively.
Note 13. Major Customer and Concentration of Credit Risk
Sales to one unaffiliated customer aggregated approximately 30.4% of net sales
for 1999. In addition, accounts receivable from this unaffiliated customer
aggregated approximately 18% of total accounts receivable as of December 31,
1999. Historically, the Company has not experienced write-offs related to these
major customers, and no such losses are expected related to the balances of
accounts receivable due from this customer as of December 31, 1999.
42
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Subsequent Events
Private Placement of Series D Convertible Preferred Stock: On January 19, 2000,
the Company issued 2,725 shares of Series D Convertible Preferred Stock ("Series
D Stock") in a private placement. The shares were issued as follows: (1) 700
shares to new investors for $700,000 in the aggregate; (2) 300 shares to certain
investors upon conversion of $300,000 of promissory notes issued by the Company
(see Note 8); (3) 1,600 shares to the holders of the Company's then outstanding
Series C Convertible Preferred Stock in exchange for all of their Series C
shares; and (4) 125 shares to the placement agent, of which 75 shares were
issued in exchange for all of the Company's Series C Stock held by the placement
agent and of which 50 shares were compensation for placement agent services. At
any time after the issuance of the Series D Stock, each share of Series D Stock
is convertible into the number of shares of common stock calculated by dividing
the per share purchase price of $1,000 by the conversion price. The conversion
price equals the lesser of 75% of the average of the three lowest closing bid
prices of the common stock during the 15 trading days immediately before the
conversion date or $5.4375. The beneficial conversion feature present in the
issuance of the Series D Stock as determined on the date of issuance of the
Series D Stock totaled $2,386,830 and will treated as a reduction in earnings
available (increase in loss attributable) to common stockholders upon the date
of issuance of the Series D Stock since such shares may be converted at any time
following issuance. Holders of Series D Stock are entitled to receive dividends
at an annual rate of 8% of the per share purchase price. The dividends are
payable, upon conversion of the Series D Stock, in either cash or shares of
common stock, at the option of the Company. The number of shares of common stock
issuable as a dividend payment will equal the total dividend payment then due
divided by the conversion price calculated as of the date that the dividend
payment is due.
In addition, in connection with the Series D Stock offering the holders of
warrants issued in the Series C offering were issued warrants to purchase 20,000
shares of the Company's common stock in exchange for the warrants issued to them
in the Series C offering. Each new warrant issued entitles its holder to
purchase the Company's Common Stock at $8.30 per share at any time before the
fifth anniversary of the date of issuance of the warrant. In conjunction with
the Series D Stock offering, the Company also issued 30,000 shares of common
stock to the new investors and 120,000 shares of Common Stock to the holders of
the Series C Stock.
Issuance of Series F Convertible Preferred Stock: On February 23, 2000, the
Company issued 2,000 shares of its Series F Convertible Preferred Stock (the
"Series F Stock") to certain accredited investors in a private offering. At any
time after the issuance of the Series F Stock, each share of Series F Stock is
convertible into that number of shares of common stock equal to the stated value
of each such share ($1,000) divided by the lesser of $6.75 or 75% of the average
of the three lowest closing bid prices of the Common Stock during the 15 trading
days immediately preceding the conversion date. The beneficial conversion
feature present in the issuance of the Series F Stock as determined on the date
of issuance of the Series F Stock totaled $1,291,429 and is treated as a
reduction in earnings available (increase in loss attributable) to common
stockholders upon the date of issuance of the Series F Stock since such shares
may be converted at any time following issuance. All outstanding shares of
Series F Stock will be automatically converted into Common stock on February 23,
2002. The holders of Series F Stock are entitled to receive dividends at an
annual rate of 8% of the stated value ($1,000) of the Series F Stock, subject to
the prior declaration or payment of any dividend to which the holders of the
Company's Series A Stock, Series B Stock, Series D Stock or Series E Stock are
entitled. Dividends on shares of the Series F Stock are cumulative and are
payable only upon conversion of the Series F Stock.
In connection with such offering, the Company also issued warrants to the
investors to purchase 50,000 shares of common stock. Each warrant is a five-year
callable warrant to purchase common stock at $11.00 per share.
Due to certain provisions in effect with respect to the Series E Stock offering
(see Note 9), as a result of the Series F Stock offering, the conversion formula
with respect to the Series E Stock was modified. Based upon this modification,
an additional beneficial conversion feature was created with respect to the
Series E Stock. The value
43
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of this additional conversion benefit of $311,510 will be treated as a reduction
in earnings available (increase in loss attributable) to common stockholders
upon the date of the modification.
The Company agreed to use its best efforts to file a registration statement with
regard to sales of the shares of common stock underlying the Series F Stock and
the warrants and to pay a penalty if such registration statement is not
effective by the 120th day after issuance of the Series F Stock. This penalty is
equal to 2% of the purchase price of the Series F Stock for the first 30-day
period following such 120-day period and 3% of such purchase price for every 30-
day period thereafter until the registration statement has been declared
effective.
Patent infringement claim and settlement: The Company was named as a defendant
in a patent infringement claim filed in February 2000. The claim alleged, among
other things, that the Company's VCC product, when monitoring a mainframe
computer, infringed on a patent held by the plaintiffs. The Company believed
that the plaintiffs' claims were without merit, but in order to avoid protracted
and potentially costly litigation, the Company settled the claim on March 16,
2000.
Letter of intent--sale of certain software rights: On March 24, 2000, the
Company signed a letter of intent with another company (the "Potential
Acquirer") whereby the Company would sell substantially all the software rights,
trademarks, and copyrights used in the printed circuit board industry acquired
by the Company from Lavenir in September 1999 (see Note 7) and, in-turn, license
rights to certain source code from the Potential Acquirer. The letter of intent
indicates that the Potential Acquirer would pay approximately $4,000,000 for the
various software rights, trademarks, and copyrights, but would charge the
Company $1,100,000 to license, on a non-exclusive basis, certain source code
formerly owned by the Company with respect to the Company's raster photoplotter
technology and products. The rights, trademarks and copyrights acquired from
Lavenir related to hardware used in the printed circuit board industry are not
subject to this letter of intent.
Authorized Shares of Common Stock: On April 5, 2000, the shareholders of the
Company approved an increase in the number of authorized shares of common stock
to 18,500,000.
44
<PAGE>
Item 8. Changes in and disagreements with Accountants.
Not applicable.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Trent Wong 40 Chief Executive Officer and Director
James Geiser 50 Chief Financial Officer and Secretary
David H. McCaffrey 55 Director
John E. Haugo 64 Director
James G. Watson 56 Director
William Howdon 56 Director
</TABLE>
Mr. Wong has served as the Company's Chief Executive Officer and a
director since November 1999. He served as Group President of the Company from
September 1999 until becoming Chief Executive Officer. Mr. Wong has also served
as President of SSI since its acquisition by the Company in November 1998. Mr.
Wong co-founded and served as President of, from May 1994 until November 1998,
SSI's predecessor company, Enterprise Solutions, Inc.
Mr. Geiser has served as the Secretary of the Company since September
1993 and Chief Financial Officer of the Company since January 1994. Since 1991,
Mr. Geiser has served as President of G&B Financial Advisory Services, a firm
engaged in providing financial consulting services to corporations requiring
financial restructuring.
Mr. McCaffrey served as the Company's Chief Executive Officer from
January 1995 until November 1999 and has served as a director since January
1995. Mr. McCaffrey also served as GMI's Chief Executive Officer from December
1994 until November 1999.
Mr. Haugo has served as a director of the Company since June 1997.
Mr. Haugo also serves on the board of directors of St. Paul Software, Inc.,
Catalog Marketing Services, Inc. and Member Services International, Inc.
Mr. Watson became a director of the Company in May 1999. He joined
Breece Hill in 1995 as Vice President of Strategic Programs. In that capacity
he was responsible for all materials procurement, cost reduction programs, and
key strategic relationships with Breece Hill's suppliers and subcontractors. He
became President and CEO of Breece Hill in September of 1998.
Mr. Howdon became a director of the Company in May 1999 and currently
serves as Vice-President of Corporate Development of Breece Hill. Mr. Howdon
served as a director of Breece Hill from 1995 until April 1999. He served as
the Vice-Chairman of the board of directors of Breece Hill from September 1998
until April 1, 1999. Mr. Howdon has also served as a director of numerous
public and private companies, including the 20/20 Financial Group,
BioDevelopment Corp. and First Fidelity Acceptance Corp.
Prior to February 19, 1999, the Board did not have any standing audit,
compensation, stock option or nominating committees. On February 19, 1999, the
Board established an Audit Committee and a Compensation Committee.
The Audit Committee, consisting of Messrs. Haugo and Howdon, reviews
the results and scope of the audit and other services provided by the Company's
independent auditors, as well as the Company's accounting principles and its
systems of internal controls, and reports the results of its review to the full
Board and to management.
45
<PAGE>
The Compensation Committee, consisting of Messrs. Haugo and Howdon, makes
recommendations concerning executive salaries and incentive compensation for
employees and administers the Company's 1999 Stock Option Plan. The Board as a
whole administers the Company's 1989 Stock Option Plan.
The Company at present does not pay any director's fees. The Company may
reimburse its outside directors for expenses actually incurred in attending
meetings of the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, certain officers, and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership on Form 3 and changes in ownership on Forms 4 or 5 with the Securities
and Exchange Commission (the "SEC"). Such officers, directors and 10%
shareholders are also required by the SEC's rules to furnish the Company with
copies of all Section 16(a) reports filed by them.
Specific due dates for such reports have been established by the SEC and
the Company is required to disclose in this Proxy Statement any failure to file
reports by such dates during 1999. Based solely on its review of the copies of
such reports received by it or by written representations from certain reporting
persons, the Company believes that all Section 16(a) filing requirements
applicable to its officers, directors and 10% shareholders were complied with
during the year ended December 31, 1999.
Item 10. Executive Compensation.
Summary Compensation Table
The following table provides the cash compensation awarded to or
earned by the chief executive officer and any executive officer who earned in
excess of $100,000 during the year ended December 31, 1999. No other executive
officer of the Company earned salary and bonus in excess of $100,000 during the
year ended December 31, 1999.
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation Awards
------------------------------------------------------ ------------------------------
Name and Principal Position Year Salary Bonus Securities Underlying
- ----------------------------------- ------------- -------------- ------------------- ------------------------------
<S> <C> <C> <C> <C>
Trent Wong/(1)/ 1999 $121,000 $ -- 117,000
David H. McCaffrey/(2)/ 1999 103,500 -- --
1998 90,000 8,000 36,000
1997 97,000 -- 50,000
</TABLE>
(1) Mr. Wong has served as Chief Executive Officer since November 8, 1999.
(2) Mr. McCaffrey served as Chief Executive Officer from January 4, 1995 to
November 8, 1999.
Stock-Based Compensation
The following table provides information concerning individual grants of
stock options made to the persons named in the "Summary Compensation Table"
above. No stock appreciation rights were granted or exercised for the year
ended December 31, 1999.
46
<PAGE>
Option Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<CAPTION>
Name Number of % of Total Exercise or Expiration
Securities Options Base Price Date
Underlying Granted to ($/Share)
Options Employees in
Granted Fiscal Year
- --------------------------------------- -------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Trent Wong/(1)/ 117,600 13.1% $6.25 07/28/04
David H. McCaffrey -- -- -- --
</TABLE>
________________
(1) The right to purchase 117,600 shares will vest on May 31, 2000.
The following table provides information concerning stock option exercises
and the value of unexercised options at December 31, 1999 for the named
executive officers.
Aggregated Option Exercises in 1999
and Year End Option Values
<TABLE>
<CAPTION>
Name Shares Value Number of Securities Value of Unexercised
Acquired Realized Underlying Unexercised In-the-Money
on Exercise Options at FY-end Options at FY-end
-------------------------------- -------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ----------- ------------ ------------- --------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Trent Wong -- -- -- 284,000 $ 0 $781,000 (1)
David H. McCaffrey -- -- 254,000 0 $1,651,160 $ 0 (2)
</TABLE>
_______________
(1) Mr. Wong believes his stock options have no value, based on the low trading
volume of the common stock and the restrictive trading rules applicable to
insiders. Notwithstanding the foregoing, for reporting purposes only, Mr. Wong's
unexercised in-the-money options have a value of $781,000 calculated based on
the difference between the fair market value of $9.00 of the 284,000 shares of
common stock underlying in-the-money options at year end and the exercise price
of the options at February 23, 2000 (284,000 shares at $6.25).
(2) Mr. McCaffrey believes his stock options have no value, based on the low
trading volume of the common stock and the restrictive trading rules applicable
to insiders. Notwithstanding the foregoing, for reporting purposes only, Mr.
McCaffrey's unexercised in-the-money options have a value of $1,651,160,
calculated based on the difference between the fair market value of $9.00 of the
254,000 shares of common stock underlying in-the-money options at year end and
the exercise price of the options at February 23, 2000 (168,000 shares at $0.75,
50,000 shares at $5.00 and 36,000 shares at $7.1875).
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial
ownership of the Company's capital stock, as of February 25, 2000, by (1) each
person known to the Company to be the beneficial owner of 5% or more of any
class of the Company's voting securities, (2) each of the Company's directors,
(3) each of the Company's named executive officers and (4) the directors and
executive officers of the Company as a group.
Beneficial ownership is determined in accordance with the rules of the SEC,
and includes generally the voting and investment power of the securities.
Shares of common stock or preferred stock issuable upon exercise or conversion
of options, warrants, or other securities currently exercisable or exercisable
within 60 days of the date of
47
<PAGE>
determination are deemed outstanding for purposes of computing the percentage of
shares beneficially owned by the person holding those options, warrants, or
other securities, but are not deemed to be outstanding for purposes of computing
the percentage for any other person. Each person identified below has sole
voting and investment power of all shares of common stock and preferred stock
shown as beneficially owned by that person.
<TABLE>
<CAPTION>
Common Stock Beneficially Preferred Stock
Owned Beneficially Owned
------------------------------ ----------------------------------------------------------------------
Number of Percentage Number of Percentage Number of Percentage of
Shares of Shares Shares of of Shares Shares of Shares of
Series A of Series Series B Series B
Name and Address (1) Stock A Stock Stock Stock
- ----------------------- ------------- -------------- -------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Trent Wong -- -- -- -- -- --
David H. McCaffrey (2) 564,000 9.7% -- -- -- --
John E. Haugo (3) 31,000 * -- -- -- --
James Watson -- -- -- -- -- --
William Howdon -- -- -- -- -- --
Donald Brattain -- -- 2,133 16.0% -- --
Donald Fraser -- -- 5,333 40.0% -- --
James Lehr -- -- 2,133 16.0% -- --
Donald Hagen -- -- 1,067 8.0% -- --
Henry Mlekoday -- -- -- -- -- --
Douglas Swanson -- -- 1,333 10.0% -- --
Aaron Boxer Rev Trust
u/a dtd 8/1/89 -- -- -- -- 3,446 5.1%
WCN/GAN Partners, Ltd. (4) 409,026 7.1% -- -- -- --
John M. Liviakis 753,000 13.5% -- -- -- --
Industricorp & Co. FBO
1561000091 -- -- -- -- 5,000 7.4%
John O. Hanson -- -- -- -- 6,150 9.2%
Crow 1999 CRUT -- -- -- -- 3,385 5.0%
Esquire Trade &
Finance Inc. -- -- -- -- -- --
Austinvest Anstalt
Balzers -- -- -- -- -- --
Assanzon Capital
Development
Corporation -- -- -- -- -- --
Garros Ltd. -- -- -- -- -- --
Nash, LLC (5) 355,082 6.0% -- -- -- --
All officers and
directors
as a group (6 persons) (6) 669,000 11.4% -- -- -- --
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Beneficially Owned
-------------------------------------------------------------------
Number of Percentage Number of Percentage
Shares of of Shares Shares of of Shares
Series D of Series Series E of Series
Stock D Stock Stock E Stock
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trent Wong -- -- -- --
David H. McCaffrey (2) -- -- -- --
John E. Haugo (3) -- -- -- --
James Watson -- -- -- --
William Howdon -- -- -- --
Donald Brattain -- -- -- --
Donald Fraser -- -- -- --
James Lehr -- -- -- --
Donald Hagen -- -- -- --
Henry Mlekoday -- -- -- --
Douglas Swanson -- -- -- --
Aaron Boxer Rev Trust u/a dtd
8/1/89 -- -- -- --
WCN/GAN Partners, Ltd. -- -- -- --
John M. Liviakis -- -- -- --
Industricorp & Co. FBO
1561000091 -- -- -- --
John O. Hanson -- -- -- --
Crow 1999 CRUT -- -- -- --
Esquire Trade & Finance Inc. 575 21.1% -- --
Austinvest Anstalt Balzers 575 21.1% -- --
Assanzon Capital Development
Corporation 500 18.3% -- --
Garros Ltd. 350 12.8% -- --
Nash, LLC -- -- 2,500 94.3%
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
All officers and directors
as a group (6 persons) -- -- -- -- -- --
</TABLE>
_________________
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the above is c/o 7578
Market place Drive, Eden Prairie, Minnesota 55344.
(2) Includes 254,000 shares of common stock issuable to Mr. McCaffrey upon the
exercise of outstanding options.
(3) Includes 15,000 shares of common stock issuable to Mr. Haugo upon the
exercise of outstanding options.
(4) Includes 205,359 shares of common stock issuable upon the exercise of
outstanding warrants.
(5) Shares of common stock issuable upon the conversion of Series E Convertible
Preferred Stock.
(6) Includes 295,000 shares of common stock issuable to all officers and
directors as a group upon the exercise of outstanding options.
Item 12. Certain Relationships and Related Transactions.
On December 16, 1996, pursuant to the advice of the Company's financial
advisor, Bob Donaldson, David McCaffrey and Jim Geiser exercised certain stock
options to purchase 730,000, 840,000 and 240,000 shares of common stock,
respectively. Messrs. Donaldson, McCaffrey and Geiser paid their respective
exercise prices totaling $109,000, $126,000 and $59,000 in the form of personal
promissory notes payable to the Company. Each of these promissory notes had an
interest rate of 5.75% per annum and was scheduled to be repaid no later than
the termination date of the option to which the note related. Messrs. Donaldson
and Geiser repaid their personal promissory notes in full on March 2, 2000 and
November 15, 1999, respectively. Mr. McCaffrey intends to repay his personal
promissory note in full on or prior to April 30, 2000. Bob Donaldson is a
former director of the Company and former President. David McCaffrey is a
director of the Company and was its Chief Executive Officer until November 8,
1999. Jim Geiser is the Company's Chief Financial Officer and Secretary.
Effective January 1, 1995, the Company entered into a written employment
agreement with James Geiser. This agreement had an initial term of three years,
which ended on January 1, 1998. Thereafter, the agreement provides for
automatic extensions of the term of the agreement for additional one-year
periods unless the Company notifies Mr. Geiser of its intent not to renew the
agreement at least 90 days prior to the end of the then-current term. The
agreement was automatically extended until January 1, 2001. This agreement also
contains (1) a provision regarding repayment of Mr. Geiser's expenses that are
reasonably incurred in connection with the performance of his duties, and (2) a
severance arrangement which provides that, in the event the Company terminates
Mr. Geiser's employment without cause, the Company will continue to pay Mr.
Geiser his annual salary for the remainder of the then-current term of the
agreement. This agreement does not specify the amount of the salary to be paid
to Mr. Geiser pursuant to such agreement. Mr. Geiser's salary is established
from time to time by the Board. Mr. Geiser's salary currently is less than
$100,000.
The Company has entered into a Technology Purchase Agreement with XO
Technology, a California-based company, for the purchase of SSI's PhonePoint
technology. The sale is for a non-exclusive license of the product and a
development contract to assist in the enhancement of the technology for XO
Technology's specific use. Under the Technology Purchase Agreement, the Company
will receive cash and equity in XO Technology and have one seat on the board of
directors of XO Technology.
Item 13. Exhibits and Reports on Form 8-K.
(a) Index of Exhibits.
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger dated December 6, 1994, as amended,
among Global MAINTECH Corporation (the "Company"), Mirror
Consolidation Company, and MAINTECH Resources, Inc.
50
<PAGE>
(incorporated by reference to the Company's Form 8-K filed with the
SEC on January 19, 1995 (File No. 0-14692)).
2.2 Agreement and Plan of Merger dated March 5, 1999, among the Company,
Global MAINTECH, Inc. ("GMI"), BHT Acquisition, Inc., and Breece Hill
Technologies, Inc. (incorporated by reference to the Company's Form
10-KSB for the year ended December 31, 1998 (File No. 0-14692)).
2.3 Agreement and Plan of Reorganization dated as of July 1, 1999 by and
among GMI, the Company and Lavenir Technology, Inc. (incorporated by
reference to the Company's Form 8-K filed with the SEC on October 12,
1999 (File No. 0-14692)).
2.4 Common Stock and Series B Preferred Stock Purchase Agreement dated as
of February 3, 2000 by and among the Company, GMI, Tandberg Date ASA,
Hambrecht & Quist Guaranty Finance LLC, Greyrock Capital, and
Cruttenden Roth (incorporated by reference to the Company's
Definitive Proxy Statement on Schedule 14A filed with the SEC on
March 15, 2000 (File No. 000-14692)).
2.5 Amendment to and Cancellation of Asset Purchase Agreement dated March
31, 2000, by and among Asset Sentinel, Inc., the Company and GMI
(filed herewith).
2.6 Agreement of Purchase and Sale of Assets dated as of January 26, 2000
by and among MT Acquiring Corp., Tim Hadden, Greg Crow, the Company,
GMI, and GMI's division doing business under the name Magnum
Technologies (filed herewith).
3.1 Bylaws of the Company, as amended (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-34894)).
3.2 Third Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.2 to the Company's Registration
Statement on Form SB-2 filed with the SEC on March 7, 2000 (File No.
333-31736)).
3.3 Certificate of Designation of Series D Convertible Preferred Stock,
as corrected, filed on December 8, 1999 (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on Form SB-2
filed with the SEC on March 7, 2000 (File No. 333-31736)).
3.4 Certificate of Designation of Series E Convertible Preferred Stock,
filed on December 29, 1999 (incorporated by reference to Exhibit 3.4
to the Company's Registration Statement on Form SB-2 filed with the
SEC on March 7, 2000 (File No. 333-31736)).
3.5 Articles of Amendment of Third Restated Articles of Incorporation,
filed on April 10, 2000 (filed herewith).
3.6 Articles of Correction and Corrected Certificate of Designation of
Series F Convertible Preferred Stock of the Company, filed on April
21, 2000 (filed herewith).
4.1 Form of 11% Convertible Subordinated Debenture due July 1, 1996
(incorporated by reference to the Company's Form 10-K for the year
ended March 31, 1991 (File No. 0-14692)).
4.2 Form of Registration Agreement between the Company and holders of the
Company's 11% Convertible Subordinated Debentures Due July 1, 1996
(incorporated by reference to the Company's Form 10-K for the year
ended March 31, 1991 (File No. 0-14692)).
4.3 Form of Certificate of the Company Series A convertible Preferred
Stock (incorporated by reference to the Company's Form 10-KSB for the
year ended December 31, 1994 (File No. 0-14692)).
51
<PAGE>
4.4 Form of Certificate of the Company's Common Stock following change of
corporate name (incorporated by reference to the Company's Form 10-KSB
for the year ended December 31, 1995 (File No. 0-14692)).
4.5 Form of Promissory Note, dated June 19, 1997, issued to each of
Marquette Bancshares, Inc. and Mezzanine Capital Partners, Inc.
(incorporated by reference to the Company's Registration Statement on
Form SB-2, as amended (File No. 333-33477)).
4.6 Form of Preferred Stock and Warrant Purchase Agreement, including
Registration Rights exhibit thereto, relating to sale of Series B
Convertible Preferred Stock and Callable Common Stock Warrants during
the fourth quarter of 1998 (incorporated by reference to the Company's
Registration Statement on Form SB-2 filed with the SEC on February 17,
1999 (File No. 333-72513)).
4.7 Form of Certificate of the Company's Series B Convertible Preferred
Stock (incorporated by reference to the Company's Registration Statement
on Form SB-2 filed with the SEC on February 17, 1999 (File No. 333-
72513)).
4.8 Form of Series C Convertible Preferred Stock Purchase Agreement, dated
March 24, 1999, which sets forth the rights of the holders of Series C
Convertible Preferred Stock and the Warrants issued in connection
therewith (incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998 (File No. 0-14692)).
4.9 Form of Certificate of the Company's Series C Convertible Preferred
Stock (incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (File No. 0-14692)).
4.10 Form of Series D Convertible Preferred Stock Purchase Agreement,
including Registration Rights Agreement and Common Stock Purchase
Warrant attached as exhibits thereto (incorporated by reference to
Exhibit 4.10 to the Company's Registration Statement on Form SB-2 filed
with the SEC on March 7, 2000 (File No. 333-31736)).
4.11 Form of Certificate of the Company's Series D Convertible Preferred
Stock (incorporated by reference to Exhibit 4.11 to the Company's
Registration Statement on Form SB-2 filed with the SEC on March 7, 2000
(File No. 333-31736)).
4.12 Form of Securities Purchase Agreement for Series E Convertible Preferred
Stock, including Registration Rights Agreement and Common Stock Purchase
Warrant attached as exhibits thereto (incorporated by reference to
Exhibit 4.12 to the Company's Registration Statement on Form SB-2 filed
with the SEC on March 7, 2000 (File No. 333-31736)).
4.13 Form of Certificate of the Company's Series E Convertible Preferred
Stock (incorporated by reference to Exhibit 4.13 to the Company's
Registration Statement on Form SB-2 filed with the SEC on March 7, 2000
(File No. 333-31736)).
4.14 Form of Securities Purchase Agreement for Series F Convertible Preferred
Stock of the Company (filed herewith).
4.15 Form of Certificate of the Company's Series F Convertible Preferred
Stock (incorporated by reference to Exhibit 4.16 to the Company's
Registration Statement on Form SB-2 filed with the SEC on March 7, 2000
(File No. 333-31736)).
10.1 Global MAINTECH Corporation 1989 Stock Option Plan (incorporated by
reference to Exhibit 28 to the Company's Registration Statement on Form
S-8 (File No. 33-33576)).
52
<PAGE>
10.2 Amendments No. 1 and 2, dated October 17, 1991 and April 24, 1992,
respectively, to the Company's 1989 Stock Option Plan (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
March 31, 1992 (File No. 0-14692)).
10.3 Mirror Technologies, Incorporated 401(k) Plan effective April 1, 1992
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992 (File No. 0-14692)).
10.4 Exclusive Distributor and Licensing Agreement between Yutaka Takagi and
Circle Corporation and MAINTECH Resources, Inc. and the Company dated
December 20, 1994 (incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1994 (File No. 0-
14692)).
10.5 Amendment No. 3, dated May 15, 1995, to the Company's 1989 Stock Option
Plan (incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995 (File No. 0-14692)).
10.6 License and Asset Purchase Agreement between IGI and the Company dated
February 27, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997 (File No. 0-
14692)).
10.7 Asset Purchase Agreement, dated November 1, 1998, by and among GMI, the
Company, SinglePoint Systems, Inc. and Enterprise Solutions, Inc.
(incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on December 23, 1998 (File No. 0-14692)).
10.8 Office Lease between the Company and Compass Marketing, Inc., sublessor,
and Glenborough Realty Trust Incorporated, lessor, dated March 3, 1998
(incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997 (File No. 0-14692)).
21 Subsidiaries of the Company (incorporated by reference to the Company's
Registration Statement on Form SB-2 filed with the SEC on March 7, 2000
(File No. 333-31736)).
23 Consent of KPMG LLP (filed herewith).
27 Financial Data Schedules (filed herewith).
99 Cautionary Statement (filed herewith).
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on November 12, 1999 in connection
with the Company's acquisition of assets from Lavenir Technology, Inc. (File No.
0-14692).
53
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Global MAINTECH Corporation
Dated: April 21, 2000 By /s/ James Geiser
-------------------------------
James Geiser
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Trent Wong Chief Executive Officer April 21, 2000
- -------------------
Trent Wong (Principal Executive Officer) and
Director
/s/ James Geiser Chief Financial Officer and Secretary April 21, 2000
- -------------------
James Geiser (Principal Financial and Accounting
Officer)
/s/ David McCaffrey Chairman of the Board and Director April 21, 2000
- -------------------
David McCaffrey
/s/ John E. Haugo Director April 21, 2000
- -------------------
John E. Haugo
/s/ James G. Watson Director April 21, 2000
- -------------------
James G. Watson
/s/ William Howdon Director April 21, 2000
- -------------------
William Howdon
</TABLE>
54
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Description Number
- ------------------------------------------------------------------ -------
<S> <C>
Amendment to and Cancellation of Asset Purchase Agreement 2.5
dated March 31, 2000, by and among Asset Sentinel, Inc., the
Company and GMI
Agreement of Purchase and Sale of Assets dated as of 2.6
January 26, 2000 by and among MT Acquiring Corp., Tim Hadden,
Greg Crow, the Company, GMI, and GMI's division doing business
under the name Magnum Technologies
Articles of Amendment of Third Restated Articles of Incorporation 3.5
of the Company
Articles of Correction and Corrected Certificate of Designation 3.6
of Series F Convertible Preferred Stock of the Company
Form of Securities Purchase Agreement for Series F Convertible 4.14
Preferred Stock of the Company
Consent of KPMG LLP 23
Financial Data Schedule 27
Cautionary Statement 99
</TABLE>
<PAGE>
Exhibit 2.5
AMENDMENT TO AND CANCELLATION OF ASSET PURCHASE AGREEMENT
This AMENDMENT TO AND CANCELLATION OF ASSET PURCHASE AGREEMENT (this
"Agreement") is made and entered into effective as of March 31, 2000, by and
among Global MAINTECH Corporation, a Minnesota corporation ("GMC"), Global
MAINTECH, Inc., a Minnesota corporation and wholly owned subsidiary of GMC
("GMI"), and Asset Sentinel, Inc., a Minnesota corporation, d/b/a ASI ("ASI").
WHEREAS, the parties hereto entered into an Asset Purchase Agreement
dated as of October 1, 1998 (the "Asset Purchase Agreement"), which provided,
among other things, for a payment described therein as the Earn-Out; and
WHEREAS, disputes have arisen as to the amount of the Earn-Out; and
WHEREAS, the parties wish to resolve their disputes for the consideration
described herein.
NOW, THEREFORE, in consideration of the representations, warranties
and covenants contained herein, the parties agree as follows:
1. Transfer Back of Assets.
For one dollar ($1) and other good and valuable consideration the
sufficiency of which is hereby acknowledged, GMI and GMC hereby agree to sell,
grant, transfer, convey, assign and deliver to ASI, and ASI hereby agrees to
purchase, as of March 31, 2000, all of GMI's and GMC's right, title and interest
to the assets originally conveyed by ASI to GMI and GMC pursuant to the Asset
Purchase Agreement, and described in Annex A to this Agreement.
2. Assumption of Liabilities.
ASI shall, effective as of March 31, 2000, assume GMI's and GMC's
liabilities to customers of the CERBERUS products, but only insofar as those
liabilities relate to the sale of the CERBERUS products to those customers. ASI
shall further assume any liability to Charles H. Smoot, Pierre Asancheyev,
Lawrence Tivy and Howard Zumberge (the "CERBERUS staff")for any employment
agreement those individuals have or may claim to have with GMI or GMC,provided,
however, that ASI shall not be liable for any payroll or related obligations of
any employee or independent contractor for services rendered on or before March
31, 2000. ASI shall indemnify and hold harmless GMI for the liabilities
assumed hereby.
3. Assumption of CERBERUS staff obligations.
Effective as of March 31, 2000, ASI shall assume all of GMI's or GMC's
future obligations to employ the CERBERUS staff.
4. Assumption of Product and Customer Support Obligations.
ASI shall assume all of GMI's and/or GMC's obligations to provide
product or customer support on the CERBERUS products to GMI's and/or GMC's
customers of the CERBERUS products.
5. Payment by GMI and/or GMC.
On the later of March 31, 2000 or the date hereof, GMI and GMC shall
jointly pay ASI $40,000 by cashiers check. GMI and GMC shall jointly pay ASI an
additional $30,000 by cashiers check on April 30, 2000.
6. Use of GMI's and GMC's facilities.
<PAGE>
ASI shall continue to use the current office space currently being
used for the CERBERUS product until such time as GMI and GMC in good faith need
the office space for their own operations. ASI shall vacate the office space
upon thirty days written notice to ASI of GMI's and/or GMC's good faith need for
the office space. Notice shall be provided at the address and in the manner
described in Paragraph 8.5 of the Asset Purchase Agreement. During the time ASI
uses said office space, GMI and GMC shall pay for all reasonable utilities and
telephone service.
7. Contingent payment by ASI.
If ASI is able to sell the assets transferred back pursuant to
Paragraph 1 hereof for an amount in excess of $200,000, or if ASI is able to
raise in excess of $200,000 in equity capital for its business, ASI shall pay
GMC or its designee $70,000 at the closing of such sale or financing.
8. Cancellation of Asset Purchase Agreement.
Except as expressly stated herein, all of the parties' other
obligations under the Asset Purchase Agreement are hereby cancelled in total,
and are null and void.
9. Release.
The parties hereby release any and all claims they have or may have
had against each other relating in any way to the Asset Purchase Agreement.
Nothing herein shall, however, release any claims for failure to perform the
obligations under this Agreement.
10. Representations and Warranties.
The parties hereto incorporate by reference all of the representations
and warranties in the Asset Purchase Agreement as though set forth fully herein.
In addition, the parties mutually represent and warrant that:
a. they each have all requisite corporate power to execute
and deliver this Agreement, and
b. the transaction described hereunder is fully
authorized, and that the individual executing this Agreement is authorized
by the entity on whose behalf he is executing this Agreement to do so.
11. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Minnesota, without regard to its conflict of laws rules.
Any dispute with regard to this Agreement shall be resolved in Hennepin County,
Minnesota.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year set forth above.
GLOBAL MAINTECH, INC
By /s/ Trent Wong
----------------------
Trent Wong
Chief Executive Officer
GLOBAL MAINTECH CORPORATION
By /s/ Trent Wong
----------------------
Trent Wong
Chief Executive Officer
ASSET SENTINEL, INC.
By /s/ Charles Smoot
----------------------
Charles Smoot
Chairman
<PAGE>
Exhibit 2.6
AGREEMENT OF PURCHASE AND SALE OF ASSETS
This Agreement ("Agreement") is made as of January 26, 2000, at Eden
Prairie, Minnesota, by and among MT Acquiring Corp., a Minnesota corporation
("Buyer Corp"), Tim Hadden and Greg Crow ("Buyer's Principals," and, together
with Buyer Corp, "Buyers"), having their principal offices in Eden Prairie,
Minnesota, Global MAINTECH, Inc. ("Shareholder") and Magnum Technologies, Inc.,
a Minnesota corporation ("Seller Corp"), and Global MAINTECH Corporation, a
Minnesota corporation and Shareholder's parent company ("Shareholder's Parent")
(together with Seller Corp. and Shareholder, "Sellers" and, together with
Shareholder and Buyers, the "Parties"), having their principal offices in Eden
Prairie, Minnesota.
Buyer Corp desires to purchase from Sellers, and Sellers desire to sell to
Buyer Corp, on the terms and subject to the conditions of this Agreement,
including the release of all Claims (as defined below), all of the business and
properties of the business currently conducted by Buyer's Principals under the
name Magnum Technologies, Inc. (the "Business").
This Agreement also resolves a number of disputes among the Parties
respecting ownership of the common stock of Seller Corp, funds owed by Sellers
to Buyer's Principals, funds owed by Seller Corp to Shareholder (e.g., payroll
intercompany receivables), and the grant to Buyer's Principals of certain
options with respect to the common stock of Shareholder's Parent (the "Stock
Options"). In exchange for the conveyance, transfer, assignment and delivery to
Buyer Corp of the Assets and other consideration set forth herein, Buyers have
agreed, inter alia, that Seller Corp is a wholly-owned subsidiary of
Shareholder, and to resolve the disputes between them, and to purchase and sell,
respectively, the assets for the consideration set forth herein.
In consideration of the mutual covenants, agreements, representations, and
warranties contained in this Agreement, the Parties agree as follows:
ARTICLE ONE: PURCHASE AND SALE OF ASSETS
Sale and Transfer of Assets: Sellers hereby sell, convey, transfer, assign,
and deliver to Buyer Corp, and Buyer Corp hereby purchases from Sellers, all the
assets and properties used in the Business (the "Assets"), of every kind,
character, and description, whether tangible, intangible, personal, or mixed,
and wherever located, including, without limitation, the following:
All property and other rights of Sellers related to the
Business, including but not limited to those items listed in
the Exhibit A attached hereto, other than property and
---------
rights specifically excluded herein or therein; including
all supplies, materials, work in process, finished goods,
equipment, machinery, furniture, fixtures, claims and rights
under contracts, notes, evidences of indebtedness, purchase
and sales orders, copyrights, service marks, trademarks,
trade names, trade secrets, patents, patent applications,
licenses, royalty rights, deposits, and rights and claims to
refunds and adjustments of any kind (except contracts with
or obligations to Shareholder or Shareholder's Parent).
The Assets shall, without limitation, include all assets and property of the
Business reflected on its balance sheet as of December 31, 1999, and attached
hereto as Exhibit B, and all assets and property thereafter acquired by the
---------
Business before the date hereof, except those assets disposed of in the ordinary
course of business at the direction of Buyer's Principals or as permitted by
this Agreement.
Sellers' Release of Claims: Sellers hereby release Buyers from any and all
claims arising out of the association of Buyer's Principals with Sellers, and
hereby terminate all obligations of Buyer's Principals under any agreement,
written or oral, with Sellers, except the agreements contained herein.
<PAGE>
Consideration from Buyer Corp at Closing: The following, taken together
with Buyer's representations, warranties and covenants set forth herein, shall
constitute full payment for the transfer of the Assets by Sellers to Buyer Corp.
Assumption of Liabilities: Buyer Corp hereby assumes only those obligations
and contracts listed in Exhibit C attached hereto. It is expressly understood
---------
and agreed that Buyer Corp shall not be liable for any of the obligations or
liabilities of Sellers of any kind and nature other than those specifically
assumed by Buyer Corp under this paragraph. Specifically, and without limiting
the foregoing, Buyer Corp shall not and does not assume any inter-company
receivables owed to Shareholder's Parent for payroll advances made on behalf of
Seller Corp, nor for the withholding taxes payable for Seller Corp or its
employees prior to the date hereof. Furthermore, Buyer Corp does not assume any
liability for rent payable by Seller Corp to Shareholder's Parent for any period
prior to the date hereof.
The assumption by Buyer Corp of the debts, liabilities, and obligations set
forth on Exhibit C shall expressly exclude: (i) any tax imposed on Sellers
because of the sale of their assets and business; (ii) any of the liabilities or
expenses of Sellers incurred in negotiating and carrying out their obligations
under, or contemplated by, this Agreement; (iii) any obligations of Sellers
under employee agreements with existing employees of Sellers except Buyer's
Principals; (iv) any obligations incurred by Sellers after the Closing Date; and
(v) any liabilities or obligations incurred by Sellers in violation of, or as a
result of Sellers' violation of, this Agreement.
Subordinated Promissory Note: Buyer Corp agrees to deliver a subordinated
promissory note payable to Shareholder in the amount of $214,000 in
substantially the form attached hereto as Exhibit D (the "Subordinated
---------
Promissory Note").
Allocation of Consideration: The consideration provided Buyer Corp
hereunder (the "Purchase Price") shall be allocated as follows:
1. Total current assets $117,248
2. Machinery and equipment 79,038
3. Furniture and fixtures 10,000
4. Patents, trademarks and copyrights 147,086
5. Goodwill --
6. All other assets --
TOTAL PURCHASE PRICE $353,372
Each of the Parties agrees to report this transaction for federal tax
purposes in accordance with the foregoing allocation of the Purchase Price.
Excise, Withholding, and Property Taxes: Sellers shall pay all sales and
use taxes arising out of the transfer of the Assets and shall pay their portion,
prorated as of the Closing Date, of state and local real and personal property
taxes of the Business. Buyers shall not be responsible for any business,
occupation, withholding, or similar tax, or any taxes of any kind related to any
period before the Closing Date.
ARTICLE TWO: REPRESENTATIONS AND WARRANTIES OF SELLERS
The following representations and warranties of Sellers are expressly
limited to the extent that Buyers have any information not disclosed to Sellers
that would render such representations and warranties materially false,
misleading, incorrect, or inaccurate. Buyers shall have no right to
indemnification from Sellers for any damage caused by inaccuracies in the
following if prior to the date hereof Buyers knew in fact that such information
was
<PAGE>
materially false, misleading, incorrect, or inaccurate. Furthermore, the
following shall assume that Buyer's consideration set forth herein has been
given (i.e., the transfer of Buyer's interest in Sellers Corp has taken place).
Subject to the foregoing, Sellers, jointly and severally, represent and
warrant that:
Title to Assets: Sellers have good and marketable title to all of the
Assets. All of the Assets are free and clear of restrictions on or conditions
to transfer or assignment, and free and clear of mortgages, liens, pledges,
charges, encumbrances, equities, claims, easements, rights of way, covenants,
conditions, or restrictions, except for continuing servicing obligations upon
certain contracts with customers, which obligations are being assumed by Buyers
hereunder.
Other Tangible Personal Property: Exhibit A to this Agreement is a complete
---------
and accurate schedule describing, and specifying the location of, all machinery,
equipment, furniture, supplies, and all other tangible personal property owned
by, in the possession of, or used by Sellers in connection with the Business.
The property listed in Exhibit A constitutes all such tangible personal property
---------
necessary for the conduct of the Business as now conducted.
Except as stated in Exhibit A, no personal property used in connection with
---------
the Business is held under any lease, security agreement, conditional sales
contract, or other title retention or security arrangement, or is located other
than in the possession of Sellers.
Organization, Standing, and Qualification: Each Seller is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Minnesota and has all necessary corporate powers to own its properties
and to operate its business as now owned and operated by it.
Financial Statements: Exhibit B to this Agreement sets forth consolidated
---------
and consolidating balance sheets of the Business as reported internally, as of
November 30, 1999, and December 31, 1999, and the related consolidated and
consolidating statements of income for the fiscal periods ending on those dates.
The Financial Statements fairly present the transactions recorded throughout the
periods indicated and properly record those transactions in the balance sheets
and results of operations included in the Financial Statements.
Accounts Receivable: All accounts receivable of the Business shown on the
balance sheet of the Business as of December 31, 1999, included in the Financial
Statements, and all accounts receivable of the Business created after that date,
arose from valid sales in the ordinary course of business. With the exception
of any pledge or encumbrance created by or at the written direction of Buyers'
Principals, no account receivable of the Business is subject to pledge or
encumbrance.
Trade Names, Trademarks, and Copyrights: Exhibit A to this Agreement sets
---------
forth all trade names, trademarks, service marks, copyrights and their
registrations used in the Business and owned by Sellers or in which Sellers have
any rights or licenses, together with a brief description of same. Except as
set forth in Exhibit A, Sellers are not a party to any license, agreement, or
---------
arrangement, whether as licensor, licensee, or otherwise, with respect to any
trademarks, service marks, trade names, copyrights or applications for same. To
Sellers' knowledge, Sellers own, or hold adequate licenses or other rights to
use, all trademarks, service marks, trade names, and copyrights necessary for
the Business as now conducted and such use does not, and will not, conflict
with, infringe on, or otherwise violate any rights of others.
Patents and Patent Rights: Exhibit A to this Agreement sets forth all
---------
patents, inventions, industrial models, processes, designs, and applications for
patents used in the Business and owned by Sellers or in which Sellers have any
rights, licenses, or immunities. The patents and applications for patents
listed in Exhibit A are valid and in full force and effect and are not subject
---------
to any taxes, maintenance fees, or actions. Except as set forth in Exhibit G,
---------
there have not been any interference actions or other judicial, arbitration, or
other adversary proceedings concerning the patents or applications for patents
listed in Exhibit A. Each patent application is awaiting action by its
---------
respective patent office except as otherwise indicated in Exhibit A. The
---------
manufacture, use, or sale of the inventions, models, designs, and systems
covered by the patents and applications for patents listed in Exhibit A does not
---------
violate or infringe on any patent or any proprietary or personal right of any
person, firm, or corporation and, to Sellers'
<PAGE>
knowledge, Sellers have not infringed and are now not infringing on any patent
or other right belonging to any person, firm, or corporation. Except as set
forth in Exhibit A, Seller Corp is not a party to any license, agreement, or
---------
arrangement, whether as licensee, licensor, or otherwise, with respect to any
patent, application for patent, invention, design, model, process, trade secret,
or formula. To Sellers' knowledge, Sellers have the right and authority to use
such inventions, trade secrets, processes, models, designs, and formulas as are
necessary to enable them to conduct and to continue to conduct all phases of the
Business in the manner currently conducted by them, and such use does not, and
will not, conflict with, infringe on, or violate any patent or other rights of
others.
Trade Secrets: Exhibit A to this Agreement contains a true and complete
---------
list, without extensive or revealing descriptions, of all of Sellers' trade
secrets, including technical data, used in the Business. The specific location
of each trade secret's documentation, including its complete description,
specifications, charts, procedures, and other material relating to it, is also
set forth within Exhibit A. Each trade secret's documentation is current,
---------
accurate, and sufficient in detail and content to identify and explain it, and
to allow its full and proper use by Buyers without reliance on the special
knowledge or memory of others.
Sellers are the sole owners of each of these trade secrets, free and clear
of any liens, encumbrances, restrictions, or legal or equitable claims of
others, except as specifically stated in Exhibit A.
---------
To Sellers' knowledge, all these trade secrets are presently valid and
protectable, are not part of the public knowledge or literature, and have not
been used, divulged, or appropriated for the benefit of any past or present
employees or other persons or to the detriment of Seller Corp.
Existing Employment Contracts: Exhibit E to this Agreement is a list of all
---------
Sellers' material employment contracts, collective bargaining agreements, and
pension, bonus, profit sharing, stock option, or other agreements in writing, if
any, providing for employee remuneration or benefits in connection with the
Business. To the best of Sellers' knowledge, Sellers are not in default under
any of these agreements.
Insurance Policies: Sellers have maintained and now maintain (i) insurance
on all of the Assets which are of a type customarily insured, covering property
damage and loss of income by fire or other casualty, and (ii) adequate insurance
protection against all liabilities, claims, and risks against which it is
customary to insure.
Compliance with Laws: Sellers have received no notice of any violation of
any applicable federal, state, or local statute, law, or regulation (including,
without limitation, any applicable building, zoning, or other law, ordinance, or
regulation) affecting the Assets or the Business, and to the best of their
knowledge there are no such violations.
Litigation: Except as set forth in Exhibit F there is no suit, action,
---------
arbitration, or legal, administrative, or other proceeding, or governmental
investigation pending or, to the best knowledge of Sellers, threatened against
Sellers that would, if determined in a manner adverse to Sellers, affect
Sellers' ability to sell and transfer the Assets.
No Breach or Violation: The consummation of the transactions contemplated
by this Agreement will not result in or constitute any of the following: (i) a
default or an event that, with notice or lapse of time or both, would be a
default, breach, or violation of the articles of incorporation or by-laws of
Sellers or of any lease, license, promissory note, conditional sales contract,
commitment, indenture, mortgage, deed of trust, or other agreement, instrument,
or arrangement to which any Seller is a party or by which any Seller or the
property of any Seller is bound; (ii) an event that would permit any party to
terminate any agreement or to accelerate the maturity of any indebtedness or
other obligation of any Seller; or (iii) the creation or imposition of any lien,
charge, or encumbrance on any of the Assets.
Authority and Consents: Sellers have the right, power, legal capacity, and
authority to enter into, and to perform their respective obligations under, this
Agreement, and, except as set forth in Exhibit H hereto, no approvals or
---------
consents of any persons are necessary in connection with such execution and
performance. The execution, delivery and performance of this Agreement by
Sellers has been duly authorized by all requisite corporate action.
<PAGE>
Full Disclosure: None of the representations and warranties made by Sellers
herein or in any certificate or memorandum furnished or to be furnished by any
of them in connection herewith, or on their behalf, contains any untrue
statement of a material fact, or omits any material fact the omission of which
would be materially misleading.
ARTICLE THREE: BUYERS' REPRESENTATIONS AND WARRANTIES
Buyers represent and warrant that:
Organization, Standing, and Qualification: Buyer Corp is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Minnesota and has all necessary corporate powers to own its properties and to
operate its business as now owned and operated by it.
Ownership of Claims: Buyer Corp has good and marketable title to all of the
Claims and all interests in all of the Claims. All of the Claims are free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of mortgages, liens, pledges, charges, encumbrances, equities, claims,
covenants, conditions, or restrictions.
Authority and Consents: Buyers have the right, power, legal capacity, and
authority to enter into and perform their respective obligations under this
Agreement, and no approvals or consents of any persons are necessary in
connection with such execution and performance. The execution, delivery and
performance of this Agreement by Buyers has been duly authorized by all
requisite corporate action.
Full Disclosure: None of the representations and warranties made by Buyers
herein or in any certificate or memorandum furnished or to be furnished by any
of them in connection herewith, or on their behalf, contains any untrue
statement of a material fact, or omits any material fact the omission of which
would be materially misleading.
Operation of the Business: Buyers' Principals have at all times up to the
date hereof operated the Business in ordinary course and without delaying
revenue recognition in any manner or otherwise intentionally reducing the
apparent value of the Business.
Bulk Sales Law: Buyers hereby waive compliance with the provisions of the
Minnesota Commercial Code relating to bulk transfers in connection with this
sale of assets, subject to the indemnities of Sellers contained herein. Nothing
in this paragraph shall estop or prevent either Buyers or Sellers from asserting
as a bar or defense to any action or proceeding brought under that law that it
is not applicable to the sale contemplated hereunder.
ARTICLE FOUR: CONDITIONS PRECEDENT TO BUYER CORP'S OBLIGATIONS
The obligation of Buyer Corp to purchase the Assets under this Agreement is
subject to the satisfaction, at or before the Closing, of all the conditions set
forth below. Buyer Corp may waive any or all of these conditions in whole or in
part without prior notice; provided, however, that no such waiver of a condition
shall constitute a waiver by Buyer Corp of any of its other rights or remedies,
at law or in equity, if any of Sellers shall be in default of any of their
representations or warranties under this Agreement.
Accuracy of Sellers' Representations and Warranties: Except as otherwise
permitted by this Agreement, all representations and warranties by each of
Sellers herein or in any written statement that shall be delivered to Buyers by
any of Sellers under this Agreement shall be true on and as of the Closing Date.
Bill of Sale: Sellers shall execute and deliver to Buyer Corp a warranty
bill of sale (except as to matters caused by Buyers' Principals being in breach
of such warranty) with respect to all of the Assets (the "Bill of Sale").
Performance by Sellers: Sellers shall have satisfied all conditions
required by this Agreement to be satisfied by them, or any of them, on or before
the date hereof.
Opinion of Sellers' Counsel: Buyers shall have received from Dorsey &
Whitney LLP, counsel for Sellers, an opinion dated the date hereof, in form and
substance satisfactory to Buyers and their counsel, that:
<PAGE>
(i) Sellers are corporations duly organized and validly existing and
in good standing under the laws of the State of Minnesota, and
each has all necessary corporate power to own its properties as
now owned and operate its business as now operated;
(ii) This Agreement has been duly and validly authorized and, when
executed and delivered by Sellers, will be valid and binding on
all of them and enforceable in accordance with its terms, except
as limited by bankruptcy and insolvency laws and by other laws
affecting the rights of creditors generally;
(iii) Neither the execution nor delivery of the Agreement nor the
consummation of the transactions contemplated in the Agreement
will constitute (a) a default, or an event that would with
notice or lapse of time or both constitute a default under, or
violation or breach of, Sellers' articles of incorporation, by-
laws, or any indenture, license, lease, franchise, mortgage,
instrument, or other agreement known to us to which any Seller
is a party, or by which they or their properties may be bound,
(b) an event that would permit any party to any agreement or
instrument known to us to terminate it or to accelerate the
maturity of any indebtedness or other obligation of Sellers, or
(c) an event that would result in the creation or imposition of
any lien, charge, or encumbrance on any of the Assets; and
(iv) Except as set forth in Exhibit F and G to the Agreement, counsel
does not know of any suit, action, arbitration, or legal,
administrative, or other proceeding or governmental
investigation pending or threatened against or affecting Sellers
or any of the Assets.
Approval of Buyers' Counsel: Buyers shall have received from their counsel,
Michael B. Daugherty, an opinion that may be based on the opinion of counsel for
Sellers, on any evidence referred to in the opinion of Sellers' counsel, and on
any other evidence that Buyers' counsel may deem necessary or desirable.
Corporate Approval: The execution, delivery and performance of this
Agreement by Sellers shall have been duly authorized by all necessary corporate
action, and Buyers shall have received copies of all resolutions pertaining to
such authorization, certified by the respective secretaries of Sellers.
Consents: All necessary agreements and consents to the consummation of the
transactions contemplated by this Agreement, or otherwise pertaining to the
matters covered hereby, shall have been obtained by Sellers from the persons and
entities set forth in Exhibit H hereto and delivered to Buyers.
---------
Approval of Documentation: The form and substance of all certificates,
instruments, opinions, and other documents delivered to Buyers under this
Agreement shall be satisfactory in all reasonable respects to Buyers and their
counsel.
ARTICLE FIVE: CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS
The obligation of Sellers to sell and transfer the Assets under this
Agreement is subject to the satisfaction, at or before the Closing, of all the
following conditions:
Accuracy of Buyers' Representations and Warranties: All representations and
warranties of Buyers in this Agreement or in any written statement delivered by
Buyers under this Agreement to be satisfied by them shall be true on and as of
the Closing Date.
Buyers' Performance: Buyers shall have satisfied all conditions required by
this Agreement to be satisfied by them on or before the date hereof.
<PAGE>
Opinion of Buyers' Counsel: Buyers shall have furnished Sellers with an
opinion, dated the date hereof, of Michael B. Daugherty, counsel for Buyers, in
form and substance satisfactory to Sellers and their counsel, to the effect
that:
(i) Buyer Corp is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Minnesota
and has all requisite corporate power to perform its obligations
under the Agreement;
(ii) All corporate proceedings required by law or by the provisions
of the Agreement to be taken by Buyers on or before the Closing
Date in connection with the execution and delivery of the
Agreement and the consummation of the transactions contemplated
thereby have been duly and validly taken;
(iii) Buyer Corp has the corporate power and authority to acquire the
Assets for the consideration set forth herein;
(iv) Every consent, approval, authorization, or order of any court or
governmental agency or body that is required for the
consummation by Buyers of the transactions contemplated by the
Agreement has been obtained and will be in effect on the Closing
Date;
(v) The consummation of the transactions contemplated by the
Agreement does not violate or contravene any of the provisions
of any charter, by-law or resolution of Buyer Corp or of any
indenture, agreement, judgment, or order known to Buyers'
counsel to which Buyers are a party or by which Buyers are
bound.
In rendering its opinion, counsel for Buyers may rely on certificates of
governmental authorities.
Buyer Corp's Corporate Approval: The board of directors and holders of a
majority of the outstanding stock of Buyer Corp shall have duly authorized and
approved the execution and delivery of this Agreement and all corporate action
necessary or proper to fulfill the obligations of Buyers to be performed under
this Agreement on or before the Closing Date.
Consents: The parties listed on Exhibit H shall have consented to the
---------
transactions contemplated herein.
Approval of Documentation: The form and substance of all certificates,
instruments, opinions, and other documents delivered to Sellers under this
Agreement shall be satisfactory in all reasonable respects to Sellers and their
counsel.
ARTICLE SIX: THE CLOSING
Time and Place: The transfer of the Assets by Sellers to Buyer Corp (the
"Closing") occur concurrently with the execution of this Agreement on the date
first set forth above (the "Closing Date").
Sellers' Obligations at Closing: At the Closing, Sellers shall deliver or
cause to be delivered to Buyers:
(i) The Bill of Sale and all other necessary instruments of
assignment and transfer with respect to the Assets;
(ii) The opinion of counsel to Sellers, dated the Closing Date, as
provided for herein; and
(iii) The Assets.
Buyers' Obligations at Closing: At the Closing, Buyers shall deliver to
Sellers the following instruments and documents against delivery of the items
specified to be delivered by Sellers above:
<PAGE>
(i) Certificates representing the total number of shares of Seller
Corp or Shareholder's Parent in the possession of Buyers to be
delivered at the Closing;
(ii) The opinion of counsel to Buyers, dated the Closing Date, as
provided for herein;
(iii) Certified resolutions of Buyer Corp's board of directors, in
form satisfactory to counsel for Sellers, authorizing the
execution, delivery and performance of this Agreement and all
actions to be taken by Buyer Corp under this Agreement; and
ARTICLE SEVEN: SELLERS' OBLIGATIONS AFTER CLOSING
Sellers' Indemnity: Sellers shall indemnify, defend, and hold harmless
Buyers against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys' fees, that Buyers shall
incur or suffer, which arise, result from, or relate to any breach of, or
failure by Sellers to perform any of their representations, warranties,
covenants, or agreements in this Agreement or in any schedule, certificate,
exhibit, or other instrument furnished or to be furnished by Sellers under this
Agreement; provided, however, that Sellers shall be under no obligation to
indemnify Buyers in connection with any claims arising hereunder unless and
until the losses the subject of such claims exceed $25,000 in the aggregate, in
which event Buyers shall be entitled to seek indemnification from Sellers only
for the amount of such losses in excess of $25,000.
Buyers shall promptly notify Sellers of the existence of any claim, demand, or
other matter to which Sellers' indemnification obligations would apply, and
shall give Sellers a reasonable opportunity to defend the same at their own
expense and with counsel of their own selection. If Sellers shall fail to
defend within a reasonable time after this notice, Buyers shall have the right,
but not the obligation, to undertake the defense of, and to compromise or settle
(exercising reasonable business judgment) the claim or other matter on behalf,
for the account, and at the risk, of Sellers. If the claim is one that cannot
by its nature be defended solely by Sellers (including, without limitation, any
federal or state tax proceeding), then Buyers shall make available all
information and assistance that Sellers may reasonably request.
Seller Corp's Name: Sellers agree that after the Closing Date they shall
not use or employ in any manner directly or indirectly the name "Magnum
Technologies, Inc.," and that they will dissolve Seller Corp promptly after the
Closing Date.
Non-Compete: Sellers agree that for a period of one year from the Closing
Date, they will not compete, directly or indirectly, with Buyer Corp in any
business in which the Business is currently engaged.
Business Offices: Sellers agree to permit Buyers to remain at the current
location of the Business for a period not to exceed 120 days from Closing at a
gross rental of $2000 per month payable to Shareholder.
Further Assurances: Sellers, at any time before or after the Closing Date,
will execute, acknowledge, and deliver any further deeds, assignments,
conveyances, and other assurances, documents, and instruments of transfer
reasonably requested by Buyers, and will take any other action consistent with
the terms of this Agreement that may reasonably be requested by Buyers for the
purpose of assigning, transferring, granting, conveying, and confirming to
Buyers, or reducing to possession, any or all property to be conveyed and
transferred by this Agreement. If requested by Buyers, Sellers further agree to
prosecute or otherwise enforce in their own name for the benefit of Buyers any
claims, rights, or benefits that are transferred to Buyers by this Agreement and
that require prosecution or enforcement in Sellers' name. Any prosecution or
enforcement of claims, rights, or benefits under this paragraph shall be solely
at Buyers expense, unless the prosecution or enforcement is made necessary by a
breach of this Agreement by any of the Sellers.
<PAGE>
ARTICLE EIGHT: BUYERS' OBLIGATIONS AFTER CLOSING
Buyers' Release of Claims: Commencing on the Closing Date and forever
thereafter, Buyers shall not pursue, and hereby release Sellers from, any and
all claims relating to the following items (the "Claims"):
(i) any subscription payment owed by Shareholder to Seller Corp;
(ii) any shares of common stock of Seller Corp owned by Buyer's
Principals on or prior to the date hereof;
(iii) any web page and intranet services rendered by Buyer's
Principals as employees of Sellers;
(iv) any Stock Options or capital stock of Shareholder's Parent; and
(v) any obligations of Shareholder and/or Shareholder's Parent for
sums payable to Buyer's Principals pursuant to the grant of
stock options and the "earn out" formula(s) contemplated in the
April 1, 1998 letter agreement and its predecessor agreements
between Buyer's Principals and Shareholder.
(vi) the Parties' conduct prior to the date hereof, except for the
performance of the terms hereof.
Buyers' Indemnity: Buyers shall indemnify, defend, and hold harmless
Sellers against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys' fees, that Sellers
shall incur or suffer which arise, result from, or relate to any breach of, or
failure by Buyers to perform any of their representations, warranties,
covenants, or agreements in this Agreement or in any schedule, certificate,
exhibit, or other instrument furnished or to be furnished by Buyers under this
Agreement; provided, however, that Buyers shall be under no obligation to
indemnify Sellers in connection with any claims arising hereunder unless and
until the losses the subject of such claims exceed $25,000 in the aggregate, in
which event Sellers shall be entitled to seek indemnification from Buyers only
for the amount of such losses in excess of $25,000.
Sellers shall promptly notify Buyers of the existence of any claim, demand, or
other matter to which Sellers' indemnification obligations would apply, and
shall give Buyers a reasonable opportunity to defend the same at their own
expense and with counsel of their own selection. If Buyers shall fail to defend
within a reasonable time after this notice, Sellers shall have the right, but
not the obligation, to undertake the defense of, and to compromise or settle
(exercising reasonable business judgment) the claim or other matter on behalf,
for the account, and at the risk, of Buyers. If the claim is one that cannot by
its nature be defended solely by Buyers (including, without limitation, any
federal or state tax proceeding), then Sellers shall make available all
information and assistance that Buyers may reasonably request.
Non-Compete: Buyers agree that, for a period of one year from the Closing
Date, Buyers will not compete, directly or indirectly, with Sellers in any
business outside the scope of the Business as of the Closing Date.
ARTICLE NINE: PUBLICITY
All notices to third parties and all other publicity concerning the
transactions contemplated herein shall be jointly planned and coordinated by and
between Buyers and Sellers. None of the Parties shall act unilaterally in this
regard without the prior written approval of the others; provided, however, that
such approval shall not be unreasonably withheld.
<PAGE>
ARTICLE TEN: COSTS
Finder's or Broker's Fees: Each of the Parties represents and warrants that
it has dealt with no broker or finder in connection with any of the transactions
contemplated herein, and no broker or other person is entitled to any commission
or finder's fee in connection with any of these transactions.
Sellers and Buyers each agree to indemnify and hold harmless one another
against any loss, liability, damage, cost, claim, or expense incurred by reason
of any brokerage, commission, or finder's fee alleged to be payable because of
any act, omission, or statement of the indemnifying party.
ARTICLE ELEVEN: FORM OF AGREEMENT
Effect of Headings: The subject headings of the paragraphs and
subparagraphs of this Agreement are included for purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions.
Entire Agreement; Modification; Waiver: This Agreement constitutes the
entire agreement between the Parties pertaining to the subject matter hereof and
supersedes all prior and contemporaneous agreements, representations, and
understandings of the Parties. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in writing by all the Parties.
No waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not similar, nor shall
any waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver.
Counterparts: This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
ARTICLE TWELVE: PARTIES
Parties in Interest: Except as otherwise provided herein, nothing in this
Agreement, whether express or implied, is intended to confer any rights or
remedies under or by reason of this Agreement on any persons other than the
Parties to it and their respective successors and assigns, nor is anything in
this Agreement intended to relieve or discharge the obligation or liability of
any third persons to any party to this Agreement, nor shall any provision give
any third persons any right of subrogation or action over against any party to
this Agreement.
Assignment: This Agreement shall be binding on, and shall inure to the
benefit of, the Parties to it and their respective heirs, legal representatives,
successors, and assigns; provided, however, that Buyer Corp may not assign any
of its rights hereunder, except to a wholly owned subsidiary of Buyer Corp. No
such assignment by Buyer Corp to its wholly owned subsidiary shall relieve Buyer
Corp of any of its obligations or duties hereunder.
ARTICLE THIRTEEN: REMEDIES
Arbitration: Any controversy or claim arising out of, or relating to, this
Agreement, or the making, performance, or interpretation thereof, shall be
settled by arbitration in Minneapolis, Minnesota in accordance with the Rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitrators shall be persons experienced in
negotiating, and making and consummating acquisition agreements.
Specific Performance and Waiver of Rescission Rights: Each Party's
obligation under this Agreement is unique. Each of the Parties acknowledges
that if any Party should default in its obligations under this Agreement, it
would be extremely impracticable to measure the resulting damages; accordingly,
the nondefaulting party, in addition to any other available rights or remedies,
may sue in equity for specific performance, and the Parties each expressly waive
the defense that a remedy in damages will be adequate. Notwithstanding any
breach or default by any of the Parties of any of their respective
representations, warranties, covenants, or agreements under this Agreement, if
the purchase and sale contemplated hereunder shall be consummated at the
Closing, each of the Parties
<PAGE>
waives any rights that it or he may have to rescind this Agreement or the
transactions consummated hereunder; provided, however, this waiver shall not
affect any other rights or remedies available to the Parties under this
Agreement or under the law.
Recovery of Litigation Costs: If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to recover, in addition to any other relief to which
it or they may be entitled, reasonable attorneys' fees and other costs incurred
in that action or proceeding.
ARTICLE FOURTEEN: NATURE AND SURVIVAL OF
REPRESENTATIONS AND OBLIGATIONS
No representations or warranties whatever are made by any party, except as
specifically set forth in this Agreement or in any instrument, certificate,
opinion, or other writing provided for herein. All statements contained in any
of these instruments, certificates, opinions, or other writings shall be deemed
to be representations and warranties under this Agreement. The representations,
warranties, and indemnities made by the Parties in this Agreement, or in
instruments, certificates, opinions, or other writings provided for in the
covenants and agreements to be performed or complied with by the respective
Parties, shall be deemed to be continuing and shall survive the Closing, but
shall expire on the first anniversary date hereof. All claims on such matters
shall have been made, or an action at law or in equity shall have been commenced
or filed, before such anniversary date. Nothing in this paragraph shall affect
the obligations and indemnities of the Parties with respect to covenants and
agreements contained in this Agreement that are permitted to be performed, in
whole or in part, after the Closing Date.
The limitation period for the survival of the above-specified
representations and warranties shall not apply to any fraudulent breach,
representation, or warranty, or to any breach or inaccuracy in any
representations or warranties known to Sellers or Buyers on the Closing Date.
ARTICLE FIFTEEN: NOTICES
All notices, requests, demands, and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given on the
date of service if served personally on the party to whom notice is to be given,
or on the second day after mailing if mailed to the party to whom notice is to
be given, by first class mail, registered or certified, postage prepaid, and
properly addressed as follows:
To Sellers at: Global MAINTECH, Inc.
7578 Market Place Drive
Eden Prairie, MN 55344
Attention: Chief Executive Officer
To Buyers at: MT Acquiring Corp.
7578 Market Place Drive, Suite 200
Eden Prairie, MN 55344
Attn: Greg Crow, President
Any party may change its address for purposes of this paragraph by giving the
other Parties written notice of the new address in the manner set forth above.
ARTICLE SIXTEEN: GOVERNING LAW
This Agreement shall be construed in accordance with, and governed by, the
laws of the State of Minnesota without regard to conflicts of laws principles
thereof.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the Parties have duly executed this Agreement on the day
and year first above written.
GLOBAL MAINTECH, INC
By /s/ Trent Wong
----------------------
Trent Wong
Chief Executive Officer
GLOBAL MAINTECH CORPORATION
By /s/ Trent Wong
----------------------
Trent Wong
Chief Executive Officer
MAGNUM TECHNOLOGIES, INC.
By: /s/ James Geiser
-----------------------
James Geiser
Treasurer
MT ACQUIRING CORP.
By: /s/ Greg Crow
-----------------------
Greg Crow
President
/s/ Tim Hadden
--------------------------
Tim Hadden
/s/ Greg Crow
--------------------------
Greg Crow
<PAGE>
Exhibit 3.5
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATON
OF
GLOBAL MAINTECH CORPORATION
1. The name of the corporation is Global MAINTECH Corporation, a Minnesota
corporation.
2. The amendment adopted is:
"Paragraph 3.1 of Article 3 of the Company's Third Amended and
Restated Articles of Incorporation is hereby amended as follows:
3.1 Designation and Number. The aggregate number of authorized
----------------------
shares of the corporation is 18,500,000 shares, no par value, of which
887,980 shares shall be designated Series A Convertible Preferred
Stock (the "Series A Preferred Stock"), 123,077 shall be designated
Series B Convertible Cumulative Preferred Stock (the "Series B
Preferred Stock"), 1,675 shall be designated as Series C Convertible
Preferred Stock (the "Series C Preferred Stock"), and 9,698,992 shares
shall be divisible into such classes and series, have such
designations, voting rights, and other rights and preferences and be
subject to such restriction as the Board of Directors of the
corporation may from time to time establish, fix and determine
consistent with the provisions hereof. Unless otherwise designated in
these Third Restated Articles by the Board of Directors, all issued
shares shall be deemed "Common Stock" (as defined in Section 3.4(d))
with equal rights and preferences. The rights, preferences,
privileges and restrictions granted to and imposed upon the Common
Stock, the Series A Preferred Stock, the Series B Preferred Stock and
the Series C Preferred Stock are set forth in this Article 3."
3. The amendment has been adopted pursuant to Section 139 of the Minnesota
Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, James Geiser, Secretary of Global
MAINTECH Corporation, being duly authorized on behalf of Global MAINTECH
Corporation, has executed this document this 7th day of April, 2000.
/s/ James Geiser
-----------------------
James Geiser, Secretary
<PAGE>
Exhibit 3.6
ARTICLES OF CORRECTION
OF
GLOBAL MAINTECH CORPORATION
In order to correct the Global MAINTECH Corporation Certificate of
Designation of Series D Convertible Preferred Stock as filed with the Minnesota
Secretary of State on March 3, 2000, in accordance with the provisions set forth
in Minnesota Statutes Section 5.16, the undersigned hereby makes the following
statements.
1. The name of the person who filed the instrument is James Geiser.
2. The instrument to be corrected is the Global MAINTECH Corporation
Certificate of Designation of Series F Convertible Preferred Stock as
filed with the Minnesota Secretary of State on March 3, 2000.
3. The errors to be corrected are in the heading, in the first paragraph,
in Article II, in Article III, and in Article IX.
4. The attached Corrected Global MAINTECH Corporation Certificate of
Designation of Series F Convertible Preferred Stock reflects the
corrections (the attached is marked to show the corrections).
IN WITNESS WHEREOF, I have subscribed my name this 21/st/ day of April,
2000.
/s/ James Geiser
------------------------
James Geiser, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION
of
SERIES F CONVERTIBLE PREFERRED STOCK
of
GLOBAL MAINTECH CORPORATION
(Adopted pursuant to the Minnesota Business Corporation Act)
The undersigned hereby certifies that the Board of Directors of GLOBAL
MAINTECH CORPORATION, a Minnesota corporation (the "Company"), duly adopted the
following resolutions effective as of February 16, 2000:
RESOLVED, a series of preferred stock of the Company is created and
the relative rights, preferences, and limitations of the shares of such series
are as follows:
I. Designation and Amount. The shares of such series of Preferred Stock shall
----------------------
be designated as "Series F Convertible Preferred Stock" (the "Series F Preferred
Stock") and the number of shares constituting the Series F Preferred Stock shall
be 2,000. The Series F Preferred Stock shall have a stated value (the "Stated
Value") of $1,000 per share.
II. Dividends.
---------
A. The holders of shares of Series F Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, subject to the
prior declaration or payment of any dividend to which the holders of Series A
Convertible Preferred Stock of the Company (the "Series A Stock") the Series B
Convertible Cumulative Preferred Stock of the Company (the "Series B Stock") the
Series D Convertible Preferred Stock of the Company (the "Series D Stock") and
the Series E Convertible Preferred Stock of the Company (the "Series E Stock")
are entitled, and prior to, and in preference to, any declaration or payment of
any dividend on the Common Stock of this Company, at a per share rate equal to
eight percent (8%) per annum of the amount of the Stated Value of the Series F
Preferred Stock, which is payable upon conversion (based upon a 365 calendar day
year) as set forth below. Dividends shall begin to accrue as of the Issuance
Date (as defined below). Any dividends payable pursuant to the provisions of
this paragraph shall, at the Company's option, be payable in cash, or
unrestricted shares of Common Stock of the Company within five Business Days (as
defined below) of when due. The number of shares of Common Stock to be issued
by the Company in lieu of a cash payment for dividends due as set forth herein
shall be equal to the number of shares of Common Stock resulting from dividing
the dollar amount of dividends owed by the Conversion Price (as defined below)
on such date as the dividends are payable (if such date is not a Trading Day,
then the next Trading Day (as defined below) immediately thereafter).
B. Such dividends shall accrue on each share of Series F Preferred Stock
from the Issuance Date, and shall accrue from day to day whether or not earned
or declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series F Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series F
Preferred Stock, Common Stock or other security of the Company subordinate in
liquidation to the Series F Preferred Stock. Dividends on the Series F
Preferred Stock shall be non-participating and the holders of the Series F
Preferred Stock shall not be entitled to participate in any other dividends
beyond the cumulative dividends specified herein.
<PAGE>
III. Liquidation, Dissolution or Winding Up.
--------------------------------------
A. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, subject to the prior liquidation
preference of the holders of Series A Stock, Series B Stock, Series C Stock,
Series D Stock and Series E Stock, and prior and in preference to any
distribution of any assets of the Company to the holders of Common Stock,
holders of each share of Series F Preferred Stock shall be entitled to receive
out of the assets available for distribution to shareholders the Stated Value
per share of Series F Preferred Stock plus eight percent (8%) per annum thereon
from the Issuance Date (as defined below) to the Trading Day (as defined below)
immediately prior to such liquidation, dissolution or winding up of the Company
(the "Liquidation Amount").
B. Upon the completion of any required distribution to the holders of the
Series A Stock, Series B Stock, Series C Stock, Series D Stock and Series E
Stock, if the assets of the Company available for distribution to shareholders
shall be insufficient to pay the holders of shares of Series F Preferred Stock
the full Liquidation Amount to which they shall be entitled, then any such
distribution of assets of the Company shall be distributed ratably to the
holders of shares of Series F Preferred Stock.
C. After the payment of the Liquidation Amount shall have been made in
full to the holders of the Series F Preferred Stock or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series F Preferred Stock so as to be available for such payments,
the holders of the Series F Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Company, and the
remaining assets of the Company legally available for distribution to
shareholders shall be distributed among the holders of Common Stock and any
other classes or series of Preferred Stock of the Company in accordance with
their respective terms.
IV. Voting. Holders of Series F Preferred Stock shall have no voting rights
------
except as expressly required by law or as expressly provided herein.
V. Conversion of Series F Preferred Stock. The holders of Series F Preferred
--------------------------------------
Stock shall have the right, at such holder's option, to convert the Series F
Preferred Stock into shares of Common Stock, on the following terms and
conditions:
A. Subject to the provisions of Section XI hereof, at any time or times
after the earlier of (i) 61 days following the Effective Date, or (ii) 61 days
following the Issuance Date, any holder of the Series F Preferred Stock shall be
entitled to convert any whole number of such holder's shares of Series F
Preferred Stock into that number of fully paid and nonassessable shares of
Common Stock, which is determined (per share of Series F Preferred Stock) by
dividing (x) $1,000, by (y) the Conversion Price (as defined below) (the
"Conversion Rate").
B. For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A "Business Day" shall be any day other than a Saturday, Sunday,
national holiday or a day on which the New York Stock Exchange is closed.
The "Closing Bid Price" shall mean, for any security as of any date,
the last closing bid price for such security on the Nasdaq Stock Market as
reported by Bloomberg L.P. ("Bloomberg"), or, if the Nasdaq Stock Market is not
the principal trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price of such security in the over-the-counter
market on the NASD OTC Electronic Bulletin Board for such security as reported
by Bloomberg, or, the last closing trade price of such security as reported by
Bloomberg, or, if no last closing bid or trade price is reported for such
security by Bloomberg, the closing bid price shall be determined by reference to
the closing bid price as reported on the Principal Market. If the Closing Bid
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually agreed by the Company and the holders of two
thirds of the outstanding shares of Series F Preferred Stock.
<PAGE>
The "Conversion Price" shall mean, as of any Conversion Date (as defined
below) the lesser of (i) $6.75 (the lowest Closing Bid Price of the Common Stock
over the ten Trading Days ending on the Trading Day immediately prior to
February 17, 2000) (the "Maximum Conversion Price") or (ii) 75% of the average
of the three lowest Closing Bid Prices of the Common Stock during the 15 Trading
Days (the "Lookback Period") immediately prior to the Conversion Date. On the
last Trading Day of each month, starting on the first day of the fourth calendar
month immediately following the Issuance Date, the Lookback Period will be
increased by two Trading Days until the Lookback Period equals a maximum of 30
Trading Days.
"Effective Date" shall mean the date on which the Securities and Exchange
Commission (the "SEC") first declares effective a Registration Statement
registering the resale of up to 200% of the greater of (i) the number of shares
of Common Stock issuable upon conversion of all of the Series F Preferred Stock
outstanding on the Trading Day immediately preceding the day such Registration
Statement is filed (ii) the number of shares of Common Stock issuable upon
conversion of all of the Series F Preferred Stock outstanding on the Trading Day
immediately preceding the day any amendment to such Registration Statement is
filed.
The "Issuance Date" shall mean, with respect to each share of Series F
Preferred Stock, the date of issuance of the applicable share of Series F
Preferred Stock.
A "Trading Day" shall mean a day on which the Principal Market is open.
The "Principal Market" shall mean the Nasdaq National Market, the Nasdaq
Small Cap Stock Market, the American Stock Exchange, the NASD OTC Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.,
or the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.
Holders of Series F Preferred Stock may exercise their right to convert the
Series F Preferred Stock by telecopying an executed and completed notice of
conversion in the agreed upon form (the "Notice of Conversion") to the Company
and delivering to Company the original Notice of Conversion and the certificate
representing the Series F Preferred Stock being converted by reputable overnight
courier within three (3) Business Days thereafter. Each Business Day (between
the hours of 6:30 a.m. and 4:00 p.m. Pacific Time) on which a Notice of
Conversion is telecopied to and received by the Company shall be deemed a
"Conversion Date." The Company will deliver the certificates representing shares
of Common Stock issuable upon conversion of any share of Series F Preferred
Stock (together with the certificates representing the share or shares of Series
F Preferred Stock not so converted) to the holder thereof via reputable
overnight courier, by electronic transfer or otherwise within five Business Days
after the later of (i) receipt by the Company of the original Notice of
Conversion and the certificate representing the Series F Preferred Stock being
converted, and (ii) the Conversion Date (the "Delivery Date"). In addition to
any other remedies which may be available to the holders of shares of Series F
Preferred Stock, in the event that the Company fails to deliver such shares of
Common Stock within five Business Days after the Delivery Date, the holder will
be entitled to revoke the relevant Notice of Conversion by delivering a notice
(by similar method) to such effect to the Company whereupon the Company and such
holder shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion. The Notice of Conversion and Series F
Preferred Stock certificates representing the portion of the Series F Preferred
Stock converted shall be delivered as follows:
<PAGE>
To the Company:
Global MAINTECH Corporation
7578 Market Place Drive
Eden Prairie, MN 55344
Attention: CEO
Telephone: (612) 944-0400
Facsimile: (612) 944-3311
with a copy to:
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Attention: Ken Cutler
Telephone: (612) 340-2740
Facsimile: (612) 340-8378
The Company understands that a delay in the issuance of the shares of
Common Stock beyond the Delivery Date could result in economic loss to the
holder. As compensation to the holder for such loss, the Company agrees to pay
late payments to the holder in the event that Company's failure to issue and
deliver the shares on the Delivery Date in accordance with the following
schedule (where "No. Business Days Late" is defined as the number of Business
Days beyond five (5) Business Days after the Delivery Date):
Late Payment For Each $10,000
of Preferred Stock Liquidation
No. Business Days Late Amount Being Converted
---------------------- ----------------------
1 $100
2 $200
3 $300
4 $400
5 $500
*5 $500 +$200 for each Business Day Late beyond 10 days from The Delivery
Date
____
* greater than sign
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the
holder's right to pursue actual damages or to cause the Company to redeem the
Preferred Shares as provided below for the Company's actions or inactions
resulting in the transfer agent's failure to issue and deliver the Common Stock
to the holder. Furthermore, in addition to any other remedies which may be
available to the holder, in the event that the Company fails to deliver such
shares of Common Stock within five (5) Business Days after the Delivery Date,
the Holder will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Company whereupon the Company and the
holder shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion. In the event the Company's actions or
inactions result in the transfer agent's failure to issue and deliver the Common
Stock to the holder within ten (10) days after the Delivery Date, holder may, at
its option, require the Company (without limiting its other remedies hereunder)
to immediately redeem all outstanding Preferred Stock in accordance with Section
XI hereof.
If, by the relevant Delivery Date, the Company fails for any reason to
deliver the Shares to be issued upon conversion of the Preferred Stock and after
such Delivery Date, the holder of the Preferred Stock being converted (a
"Converting Holder") purchases, in an open market transaction or otherwise,
shares of Common Stock
<PAGE>
(the "Covering Shares") in order to make delivery in satisfaction of a sale of
Common Stock by the Converting Holder made after a Conversion Date (the "Sold
Shares"), which delivery such Converting Holder anticipated to make using the
Shares to be issued upon such conversion (a "Buy-In"), the Company shall pay to
the Converting Holder, in addition to all other amounts contemplated in other
provisions of this Certificate of Designation and other agreements related
hereto, and not in lieu thereof, the Buy-In Adjustment Amount (as defined
below). The "Buy-In Adjustment Amount" is the amount equal to the excess, if
any, of (x) the Converting Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares over (y) the net proceeds (after
brokerage commissions, if any) received by the Converting Holder from the sale
of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the
Converting Holder in immediately available funds immediately upon demand by the
Converting Holder. By way of illustration and not in limitation of the
foregoing, if the Converting Holder purchases shares of Common Stock having a
total purchase price (including brokerage commissions) of $11,000 to cover a
Buy-In with respect to shares of Common Stock it sold for net proceeds of
$10,000, the Buy-In Adjustment Amount which Company will be required to pay to
the Converting Holder will be $1,000. The remedies set forth in this Section
V.B. shall be cumulative.
C. If the Common Stock issuable upon the conversion of the Series F
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by capital reorganization,
reclassification or otherwise, then and in each such event, the holders of
Series F Preferred Stock shall have the right thereafter to convert such shares
into the kind and amount of shares of stock and other securities and property
receivable upon such capital reorganization, reclassification or other change
which such holders would have received had their shares of Series F Preferred
Stock been converted immediately prior to such capital reorganization,
reclassification or other change.
D. If at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section)
or a merger or consolidation of the Company with or into another corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person (any of which events is herein referred to as a
"Reorganization"), then as a part of such Reorganization, provision shall be
made so that the holders of the Series F Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series F Preferred Stock, the number
of shares of stock or other securities or property of the Company, or of the
successor corporation resulting from such Reorganization, to which such holder
would have been entitled if such holder had converted its shares of Series F
Preferred Stock immediately prior to such Reorganization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section with respect to the rights of the holders of the Series F Preferred
Stock after the Reorganization, to the end that the provisions of this Section
(including adjustment of the number of shares issuable upon conversion of the
Series F Preferred Stock) shall be applicable after that event in as nearly
equivalent a manner as may be practicable.
E. Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series F Preferred Stock as provided herein, the Company, at
its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of such
Series F Preferred Stock a certificate executed by the president and chief
financial officer (or in the absence of a person designated as the chief
financial officer, by the treasurer) setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment are based. The Company shall, upon written request at any time of
any holder of Series F Preferred Stock, furnish or cause to be furnished to such
holder a certificate setting forth (A) the Conversion Price at the time in
effect, and (B) the number or shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of Series F Preferred Stock.
F. Upon receipt by the Company of evidence of the loss, theft, destruction
or mutilation of any Series F Preferred Stock certificate(s), and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon the cancellation of the Series F Preferred Stock
certificate(s), if mutilated, the Company shall execute and deliver new
certificates for Series F Preferred Stock of like tenure and date. However, the
Company shall not be obligated to reissue such lost or stolen certificates for
shares of Series F Preferred Stock if
<PAGE>
the holder contemporaneously requests the Company to convert such shares of
Series F Preferred Stock into Common Stock.
G. The Company shall not issue any fraction of a share of Common Stock
upon any conversion. The Company shall round such fraction of a share of Common
Stock up to the nearest whole share.
H. In the event some but not all of the shares of Series F Preferred Stock
represented by a certificate or certificates surrendered by a holder are
converted, the Company shall execute and deliver to or on the order of the
holder, at the expense of the Company, a new certificate representing the number
of shares of Series F Preferred Stock which were not converted.
I. Each share of Series F Preferred Stock outstanding two years from the
Issuance Date shall automatically be converted into Common Stock on such date at
the Conversion Price and such date shall be deemed the Conversion Date with
respect to such shares.
J. The Company shall pay any and all original issue and/or transfer taxes
which may be imposed upon it with respect to the issuance and delivery of Common
Stock upon conversion of the Series F Preferred Stock.
K. Subject to the provisions of this Section, if the Company at any time
shall issue any shares of Common Stock prior to the conversion of the entire
Stated Value of the Series F Preferred Stock and dividends on such Series F
Preferred Stock, otherwise than: (i) pursuant to options, warrants, or other
obligations to issue shares outstanding on the date hereof (including issuances
pursuant to the Company's proposed transaction with Breece Hill Technologies,
Inc.) as described in writing to the holders prior to the Issuance Date or in
SEC filings made by the Company prior to the Issuance Date, or (ii) all shares
reserved for issuance pursuant to the Company's existing stock option,
incentive, or other similar plan, which plan and which grant is approved by the
Board of Directors of the Company ((i) and (ii) collectively referred to as the
"Existing Obligations"), for a consideration less than the fixed Conversion
Price set forth in (i) of the definition of Conversion Price in Section V.B.
above (as adjusted from the date hereof (the "Fixed Conversion Price"), then,
and thereafter successively upon each such issue, the fixed Conversion Price
shall, from such date forward, equal the resulting quotient of the following
formula: (y) the number of shares of Common Stock outstanding immediately prior
to such issue shall be multiplied by the Fixed Conversion Price in effect at the
time of such issue and the product shall be added to the aggregate
consideration, if any received by the Company upon such issue of additional
shares of Common Stock; and (z) the sum so obtained shall be divided by the
number of shares of Common Stock outstanding immediately after such issue.
Except for the Existing Obligations and options that may be issued under any
employee incentive stock option and/or any qualified stock option plan adopted
by the Company, for purposes of this adjustment, the issuance of any security of
the Company carrying the right to convert such security into shares of Common
Stock or of any warrant, right, or option to purchase Common Stock shall result
in an adjustment to the Fixed Conversion Price upon the issuance of shares of
Common Stock upon exercise of such conversion or purchase rights.
L. In the event a holder shall elect to convert any share or shares of
Series F Preferred Stock as provided herein, the Company cannot refuse
conversion based on any claim that such holder or anyone associated or
affiliated with such holder has been engaged in any violation of law, unless an
injunction from a court, restraining and/or enjoining conversion of all or part
of said shares of Series F Preferred Stock shall have been issued and the
Company posts a surety bond for the benefit of such holder in the amount of 133%
of the Stated Value of the Series F Preferred Stock and dividends sought to be
converted, which is subject to the injunction, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds
of which shall be payable to such holder in the event it obtains a favorable
judgment.
VI. No Reissuance of Series F Preferred Stock. No share or shares of Series F
-----------------------------------------
Preferred Stock acquired by the Company by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series F Preferred
Stock accordingly.
<PAGE>
VII. Reservation of Shares. The Company shall, so long as any share or shares
---------------------
of the Series F Preferred Stock are outstanding reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Series F Preferred Stock, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the Series F Preferred Stock then outstanding; provided that the number of
shares of Common Stock so reserved shall be up to 200% of the number of shares
of Common Stock for which the Series F Preferred Stock are at any time
convertible and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to maintain such number of shares of Common
Stock, the Company shall immediately take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
VIII. Restrictions and Limitations.
----------------------------
A. Except as expressly provided herein or as required by law, so long
as any shares of Series F Preferred Stock remain outstanding, the Company shall
not, without the approval by vote or written consent by the holders of at least
two thirds of the then outstanding shares of Series F Preferred Stock, voting as
a separate class take any action that would adversely affect the rights,
preferences or privileges of the holders of Series F Preferred Stock.
B. Without limiting the generality of the preceding paragraph, the
Company shall not so long as any shares of Series F Preferred Stock remain
outstanding amend its Articles of Incorporation without the approval by the
holders of all of the then outstanding shares of Series F Preferred Stock if
such amendment would:
1. create any other class or series of capital stock entitled to
seniority as to the payment of dividends in relation to the holders of Series F
Preferred Stock;
2. reduce the amount payable to the holders of Series F Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding up
of the Company, or change the relative seniority of the liquidation preferences
of the holders of Series F Preferred Stock to the rights upon liquidation of the
holders of other capital stock of the Company,
3. cancel or modify the conversion rights of the holders of Series
F Preferred Stock provided for in Section V herein; or
4. cancel or modify the rights of the holders of the Series F
Preferred Stock provided for in this Section.
IX. No Dilution or Impairment.
-------------------------
A. The Company shall not, by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
Certificate of Designation set forth herein, but shall at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
holders of the Series F Preferred Stock against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) shall not
establish a par value of any shares of stock receivable on the conversion of the
Series F Preferred Stock above the amount payable therefor on such conversion,
(b) shall take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
stock on the conversion of all Series F Preferred Stock from time to time
outstanding, and (c) shall not consolidate with or merge into any other person
or entity, or permit any such person or entity to consolidate with or merge into
the Company (if the Company is not the surviving person), unless such other
person or entity shall expressly assume in writing and will be bound by all of
the terms of the Series F Preferred Stock set forth herein.
B. If the Company at any time after the Issuance Date shall issue any
shares of Common Stock prior to the conversion of all shares of the Series F
Preferred and the dividends thereon, including without limitation, shares of
Common Stock issued (i) pursuant to options (including those options delivered
pursuant to any employee,
<PAGE>
officer or director stock option plan), warrants, or other contractual
obligations, (ii) upon any private placement or secondary offering (iii) as a
result of a stock dividend or split, then upon each such issuance of Common
Stock the Maximum Conversion Price shall be reduced by: (y)(I) the number of
shares of Common Stock outstanding immediately prior to such issuance,
multiplied by the Maximum Conversion Price in effect at the time of such
issuance, plus (II) the aggregate sum, if any, received by the Company in
consideration for such issuance; divided by (z) the number of shares of Common
Stock outstanding immediately after such issuance.
X. Notices of Record Date. In the event of:
----------------------
A. any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
B. any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger of the Company,
or any transfer of all or substantially all of the assets of the Company to any
other corporation, or any other entity or person, or
C. any voluntary or involuntary dissolution, liquidation or winding up of
the Company, then and in each such event the Company shall mail or cause to be
mailed to each holder of Series F Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, merger, dissolution, liquidation or winding up is
expected to become effective and (iii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up. Such notice shall be mailed at least ten Business Days prior to
the date specified in such notice on which such action is to be taken.
XI. Redemption.
----------
A. For so long as the Company has not received a Notice of Conversion for
such shares, the Company may, at its option, repay, in whole or in part, the
Series F Preferred Stock shares at the Redemption Price (as defined below). The
Series F Preferred Stock is redeemable as a series, in whole or in part, by the
Company by providing written notice (the "Redemption Notice") to the holder of
the Series F Preferred Stock via facsimile at his or her address as the same
shall appear on the books of the Company (the Business Day between the hours of
6:30 a.m. and 4:00 p.m. Pacific Time the Redemption Notice is received by the
holders of the Series F Preferred Stock via facsimile is defined to be the
"Redemption Notice Date"). Within ten Trading Days after the Redemption Notice
Date the Company shall make payment of the Redemption Price (as defined below)
in immediately available funds to the holder for the shares of Series F
Preferred Stock which are the subject of the Redemption Notice (such date of
payment referred to as the "Redemption Date"). Partial redemptions shall be in
an aggregate principal amount of at least $100,000. If fewer than all of the
outstanding shares of Series F Preferred Stock are to be redeemed, the Company
will select those to be redeemed pro-rata amongst the then holders of the Series
F Preferred Stock based on the number of shares of Series F Preferred Stock then
outstanding.
B. In the event the Company serves a Redemption Notice, the Redemption
Price shall be equal to the greater of (i) 125% of the Stated Value of the
shares of Series F Preferred Stock which are subject to such Redemption Notice,
plus all accrued but unpaid dividends on such shares, or (ii) the "Economic
Benefit" of the shares of Series F Preferred Stock which are the subject of such
Redemption Notice. "Economic Benefit" shall mean the dollar value derived if
the shares of Series F Preferred Stock which were the subject of the Redemption
Notice were converted on the Redemption Notice Date and sold on the Redemption
Notice Date at the Closing Bid Price of the Common Stock on the Redemption
Notice Date.
C. The Notice of Redemption shall set forth (i) the Redemption Date and
the place fixed for redemption, (ii) the Redemption Price, (iii) a statement
that dividends on the shares of Series F Preferred Stock to be redeemed will
<PAGE>
cease to accrue on such Redemption Date, (iv) a statement of or reference to the
conversion right set forth herein, and (v) confirmation that the Company has the
full Redemption Price reserved as set forth in F. below. If fewer than all the
shares of the Series F Preferred Stock owned by such holders are then to be
redeemed, the notice shall specify the number of shares thereof that are to be
redeemed and, if practicable, the numbers of the certificates representing such
shares. Within five Trading Days of the Redemption Notice Date, the Company
shall wire transfer the appropriate amount of funds to the holders of the Series
F Preferred Stock. If the Company fails to comply with the redemption provisions
set forth herein by the sixth Trading Day after the Redemption Notice Date (or
in the case of a public offering as contemplated in F below, by the sixth
Trading Day after the Redemption Notice Date) relating to the Redemption Notice,
the redemption will be declared null and void and the Company shall not be
permitted to serve another Redemption Notice. For the first five Trading Days
after the Redemption Notice Date, the holders of the Series F Preferred Stock
will retain their conversion rights with respect to a maximum of twenty percent
(20%) of the number of shares subject to the redemption. If the holders of the
Series F Preferred Stock elect to so convert the Series F Preferred Stock after
the receipt of the Redemption Notice, the Company must receive notice of such
election within twenty-four (24) hours from the time the Redemption Notice was
received by the holders of the Series F Preferred Stock. In the event the
Company has not complied with the redemption provisions set forth herein the
Company must comply with the delivery requirements of any then outstanding
Conversion Notice as set forth herein. The holders shall send the shares of
Series F Preferred Stock being redeemed or converted to the Company within three
(3) Business Days after they have received good funds for the Redemption Price
of the redeemed shares.
D. Subject to the receipt by the holders of the Series F Preferred Stock
being redeemed of the wire transfer of the Redemption Price as described above,
each share of Series F Preferred Stock to be redeemed shall be automatically
canceled and converted into a right to receive the Redemption Price, and all
rights of the Series F Preferred Stock, including the right to conversion shall
cease without further action.
E. The Redemption Price shall be adjusted proportionally upon any
adjustment of the Conversion Price as provided herein and in the event of any
stock dividend, stock split, combination of shares or similar event.
F. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure hereunder unless it has:
(a) the full amount of the Redemption Price in cash, available in
a demand or other immediately available account in a bank or similar
financial institution, specifically allotted for such redemption;
(b) immediately available credit facilities, in the full amount
of the Redemption Price with a bank or similar financial institution
specifically allotted for such redemption; or
(c) a combination of the items set forth in (i) and (ii) above,
aggregating the full amount of the Redemption Price.
Notwithstanding the foregoing, in the event the redemption is expected to be
made contemporaneously with the closing of a public offering of the Company's
securities for an amount in excess of the Redemption Price, the Company shall
not be required to have the full amount of the Redemption Price available to it
as set forth above.
XII. 4.99% Limitation. Notwithstanding the provisions hereof, in no
----------------
event shall each holder be entitled to convert any shares of the Series F
Preferred Stock to the extent that, after such conversion, the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted shares of the Series F Preferred
Stock), and (2) the number of shares of Common Stock issuable upon the
conversion of the shares of Series F Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by such holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"). Any issuance by the Company to a holder in excess of the limit
contained in this Paragraph shall be null and void, ab initio, and upon notice
of such invalid issuance, the Company shall correct its books and cause its
transfer agent's
<PAGE>
books to be corrected forthwith to reflect that the holder's ownership of Common
Stock is within the limit set forth herein. Holder shall immediately deliver any
certificates for invalidly issued Common Stock to the Company's transfer agent.
The Company further agrees to (i) immediately reissue certificates for Common
Stock to the extent that a portion of the Common Stock represented by said
certificates have been validly issued and (ii) immediately reissue all or a
portion of those shares which were deemed invalidly issued (at a price set forth
in the original conversion notices applicable to such shares) upon notice from
the holder that the reissuance of such shares would not cause such holder to
have a beneficial ownership interest in excess of 4.99%. The Company hereby
indemnifies and holds each holder free and harmless in connection with any and
all liabilities, losses, costs and expenses, including, without limitation,
attorneys' fees and costs arising from or relating to claims made by any third
parties with respect to any and all purported violations by each holder under
Sections 13(d) and 16 resulting from a conversion(s) of the Series F Preferred
Stock, unless such claim arises from such holder's default of its obligations
hereunder, or representations or warranties contained herein. The 4.99%
limitation shall not apply to the automatic conversion upon the Maturity Date as
contained herein.
XIII "Cap Regulations". The Company shall take all steps reasonably necessary
----------------
to be in a position to issue shares of Common Stock on conversion of the Series
F Preferred Stock without violating the "Cap Regulations". If despite taking
such steps, the Company is limited in the number of shares of Common Stock it
may issue by the "Cap Regulations," to the extent that the Company cannot issue
such shares of Common Stock, due upon a Notice of Conversion, without violating
the Cap Regulations, the Company shall immediately notify Buyer the number of
shares of the Series F Preferred Stock which are not convertible as a result of
said Cap Regulations (the "Unconverted Preferred Stock") and within five (5)
Business Days of the applicable Notice of Conversion redeem the Unconverted
Preferred Stock for an amount in cash (the "Redemption Amount") equal to the
"Economic Benefit" of such Unconverted Preferred Stock. "Economic Benefit" for
purposes of this Article XIII shall mean the dollar value derived if such
Unconverted Preferred Stock were converted into Common Stock as set forth in the
Notice of Conversion and the Common Stock was sold on the date of the Notice of
Conversion at the Closing Bid Price of the Common Stock on the date of the
Notice of Conversion.
IN WITNESS WHEREOF, I have subscribed my name this 3rd day of March, 1999.
GLOBAL MAINTECH CORPORATION
By: /s/ James Geiser
-------------------
Name: James Geiser
Title: Secretary
<PAGE>
Exhibit 4.14
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of February 23/rd/, 2000, is
entered into by and between Global MAINTECH Corp., a Minnesota corporation, with
headquarters located at 7578 Market Place Drive Eden Prairie, MN 55344 (the
"Company"), and the undersigned (referred to individually as the "Buyer" and
collectively as the ("Buyers").
W I T N E S S E T H:
WHEREAS, the Company and the Buyers are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
----- ----
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act;
WHEREAS, in consideration of the foregoing, the Buyer wishes to
purchase, upon the terms and subject to the conditions of this Agreement, 8%
Cumulative Convertible Redeemable Preferred Stock, Series F, $1,000 stated value
(the "Preferred Stock"), of the Company which will be convertible into shares of
Common Stock, no par value per share of the Company (the "Common Stock"),
together with the Common Stock Purchase Warrants described herein, upon the
terms and subject to the conditions of such Preferred Stock, and subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions. (i) The undersigned hereby agrees
to purchase from the Company shares of the Preferred Stock in the amount set
forth on the signature page of this Agreement, out of a total offering of up to
$2,000,000 of such Preferred Stock, and having the terms and conditions set
forth in the Certificate of Designations, attached hereto as Annex I (the
"Certificate of Designations"). The purchase price for the Preferred Stock
shall be as set forth on the signature page hereto (the "Purchase Price") and
shall be payable in United States Dollars.
(ii) As used herein, the term "Preferred Stock" includes all
preferred shares, if any, issued as dividends thereon, unless the context
otherwise requires.
(iii) As used herein, the term "Securities" means the Preferred
Stock and the Common Stock issuable upon conversion of the Preferred Stock.
b. Form of Payment. The Buyer shall pay the purchase price for the
Preferred Stock by delivering immediately available good funds in United States
Dollars to the bank account identified in the Wire Transfer Instructions
attached hereto as Annex II (the "Wire Transfer Instructions"). Promptly after
the Closing Date (as defined below), the Company shall deliver one or more
certificates representing the Preferred Stock duly executed on behalf of the
Company (collectively, the "Certificate") to the Signatory or Signatory's Agent.
By signing this Agreement, the Buyer and the Company each agrees to all of the
terms and conditions of, and becomes a party to all of the provisions of which
are incorporated herein by this reference as if set forth in full.
c. Method of Payment. Payment of the Purchase Price for the
Preferred Stock shall be made by wire transfer of funds to:
<PAGE>
Bank Windsor
IDS Center, 740 Marquette Avenue
Minneapolis, MN 55402
ABA# 091908661
For credit to the account of Global MAINTECH
Account No.: 101-2169
Not later than 1:00 p.m., CST time, on the date which is one (1) New York Stock
Exchange trading day after the Company shall have accepted this Agreement and
returned a signed counterpart of this Agreement to the Signatory or Signatory's
Agent by facsimile, the Buyer shall deposit, in accordance with the Wire
Transfer Instructions, the aggregate purchase price for the Preferred Stock, in
immediately available funds. Time is of the essence with respect to such
payment, and failure by the Buyer to make such payment shall allow the Company
to cancel this Agreement.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
Each Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant
to the Registration Statement (as that term is defined in the Registration
Rights Agreement defined below), the Buyer is purchasing the Preferred Stock and
will be acquiring the shares of Common Stock issuable upon conversion of the
Preferred Stock (the "Converted Shares") for its own account for investment, and
not with a view towards the public sale or distribution thereof and not with a
view to or for sale in connection with any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in any way by the Company
or any of its affiliates or selling agents), to protect its own interests in
connection with the transactions described in this Agreement, and the related
documents, and (iv) able to afford the entire loss of its investment in the
Securities.
c. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock representing the Converted Shares (such Common Stock
sometimes referred to as the "Shares") by the Buyer shall be made pursuant to
registration of the Shares under the 1933 Act or pursuant to an exemption from
registration.
d. The Buyer understands that the Preferred Stock are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Preferred Stock.
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including Annex IV hereto.
The Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity to obtain and to review (i) the Company's annual
report on Form 10-KSB for the year ending December 31, 1998, (ii) the Company's
reports on Form 10-QSB for the periods ending March 31, 1999, June 30, 1999,
September 30, 1999 and Forms 8-K (the "SEC Reports").
f. The Buyer understands that its investment in the Securities
involves a high degree of risk.
<PAGE>
g. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
i. Notwithstanding the provisions hereof or of the Preferred Stock,
in no event (except with respect to an automatic conversion of the Preferred
Stock as provided in the Certificate of Designations) shall each Buyer be
entitled to convert any Preferred Stock to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock beneficially
owned by such Buyer and its affiliates (other than shares of Common Stock which
may be deemed beneficially owned through the ownership of the unconverted
portion of the Preferred Stock), and (2) the number of shares of Common Stock
issuable upon the conversion of the Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by such Buyer and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"). Any issuance by the Company to the Buyer in excess of the limit contained
in this Paragraph 3.i. shall be null and void, ab initio, and upon notice of
such invalid issuance, the Company shall correct its books and cause its
transfer agent's books to be corrected forthwith to reflect that the Buyer's
ownership of Common Stock is within the limit set forth herein. Buyer shall
immediately deliver any certificates for invalidly issued Common Stock to the
Company's transfer agent. The Company further agrees to (i) immediately reissue
certificates for Common Stock to the extent that a portion of the Common Stock
represented by said certificates have been validly issued and (ii) immediately
reissue all or a portion of those shares which were deemed invalidly issued (at
a price set forth in the original conversion notices applicable to such shares)
upon notice from the Buyer that the reissuance of such shares would not cause
such Buyer to have a beneficial ownership interest in excess of 4.99%. The
Company hereby indemnifies and holds each Buyer free and harmless in connection
with any and all liabilities, losses, costs and expenses, including, without
limitation, attorneys' fees and costs arising from or relating to claims made by
any third parties with respect to any and all purported violations by each Buyer
under Sections 13(d) and 16 resulting from a conversion(s) of Preferred Stock,
unless such claim arises from such Buyer's default of its obligations hereunder,
or representations or warranties contained herein. Buyer agrees that it shall
not knowingly attempt to convert that number of shares of Common Stock that
would cause it to own beneficially an amount greater than 4.99% of the Common
Stock.
j. Buyer represents that it neither is nor will be obligated for any
finders' fee or commission nor is it aware of any such fee or commission payable
in connection with this transaction. Buyer agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which such Buyer or any of its
officers, partners, employees, or representatives is responsible.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants and hereby covenants and agrees
with each Buyer that:
a. Concerning the Preferred Stock and the Shares. The Preferred
Stock has been duly authorized and, when issued, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Preferred
Stock or the Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as
a foreign corporation to do business and is in good standing in each
jurisdiction where the nature of the business conducted or property owned by it
makes such qualification necessary, other than those jurisdictions in which the
failure to so qualify would not have a material adverse effect on the business,
operations or prospects or condition (financial or
<PAGE>
otherwise) of the Company and its subsidiaries, taken as a whole. The Company
has registered its Common Stock pursuant to Section 12 of the 1934 Act, and the
Common Stock is listed and traded on the NASDAQ "Bulletin Board" market. The
Company has received no notice, either oral or written, with respect to the
continued eligibility of the Common Stock for such listing, and the Company has
maintained all requirements for the continuation of such listing.
c. Authorized Shares. The Company has on November 15, 1999,
4,823,187 shares of Common Stock outstanding, and will seek to maintain
sufficient authorized and unissued Shares as may be reasonably necessary to
effect the conversion of the Preferred Stock (assuming all future conversions
occurred are based upon an average 5-day closing bid of the Common Stock, as
reported by Bloomberg, LP which was one-half (1/2) of the closing bid price of
the Common Stock on the Closing Date [the "Closing Date Bid"]) and exercise of
the Warrants (as defined in Section 4.h.) at the Closing Date Bid. The Common
Stock has been duly authorized and, assuming that the Company maintains a
sufficient number of shares of Common Stock for issuance upon the conversion of
the Preferred Stock and the exercise of the Warrants, when issued upon
conversion of the Preferred Stock in accordance with its terms, will be duly and
validly issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement and
Stock. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as Annex IV (the "Registration Rights Agreement"), and the
transactions contemplated hereby and thereby, have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
by the Company and this Agreement is, and the Preferred Stock, and the
Registration Rights Agreement, when executed and delivered by or on behalf of
the Company, will be, valid and binding agreements of the Company enforceable in
accordance with their respective terms, subject, as to enforceability, to
general principles of equity and to bankruptcy, insolvency, moratorium, and
other similar laws affecting the enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of the
Securities (assuming that the Company maintains a sufficient number of shares of
Common Stock for issuance upon the conversion of the Preferred Stock and the
exercise of the Warrants), and the consummation by the Company of the other
transactions contemplated by this Agreement, the Registration Rights Agreement,
and the Preferred Stock do not and will not conflict with or result in a breach
by the Company of any of the terms or provisions of, or constitute a default
under (i) the articles of incorporation or by-laws of the Company, each as
currently in effect, (ii) except as disclosed in Annex IV, any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
including any listing agreement for the Common Stock (except as herein set
forth), (iii) to its knowledge, any existing applicable law, rule, or regulation
or any applicable decree, judgment, or order of any court, United States federal
or state regulatory body, administrative agency, or other governmental body
having jurisdiction over the Company or any of its properties or assets, or (iv)
any listing agreement for its Common Stock, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC Filings. None of the Company's SEC Reports contained, at the
time they were filed, any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements made therein in light of the circumstances under which they were
made, not misleading, except as corrected by an amended filing made prior to the
date hereof. Except as set forth on Annex IV hereto, the Company has since June
1997 timely filed all requisite forms, reports and exhibits thereto with the
SEC.,
h. Absence of Certain Changes. Since December 31, 1998, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), or results
of operations of the Company and its subsidiaries, taken as a whole, except as
disclosed in
<PAGE>
Annex IV or in the Company's SEC Reports. Since December 31, 1998, the Company
has not (i) incurred or become subject to any material liabilities (absolute or
contingent) except liabilities incurred in the ordinary course of business
consistent with past practices; (ii) discharged or satisfied any material lien
or encumbrance or paid any material obligation or liability (absolute or
contingent), other than current liabilities paid in the ordinary course of
business consistent with past practices; (iii) declared or made any payment or
distribution of cash or other property to stockholders with respect to its
capital stock, or purchased or redeemed, or made any agreements to purchase or
redeem, any shares of its capital stock; (iv) suffered any substantial losses or
waived any rights of material value, whether or not in the ordinary course of
business, or suffered the loss of any material amount of existing business; (v)
made any changes in employee compensation, except in the ordinary course of
business consistent with past practices; or (vi) experienced any material
problems with labor or management in connection with the terms and conditions of
their employment.
i. Full Disclosure. There is no fact known to the Company (other
than general economic conditions known to the public generally or as disclosed
in the Company's SEC Reports), that has not been disclosed in writing to the
Buyer that (i) would reasonably be expected to have a material adverse effect on
the business or financial condition of the Company or (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement or any of the agreements
contemplated hereby (collectively, including this Agreement, the "Transaction
Agreements").
j. Absence of Litigation. Except as set forth in Annex IV hereto, and
in the Company's SEC Reports, which the Buyer has reviewed, there is no action,
suit, proceeding, inquiry or investigation before or by any court, public board
or body pending or, to the knowledge of the Company, threatened against or
affecting the Company, wherein an unfavorable decision, ruling or finding would
have a material adverse effect on the properties, business or financial
condition. results of operation or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by any of the Transaction
Agreements or which would adversely affect the validity or enforceability of, or
the authority or ability of the Company to perform its obligations under, any of
the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Annex IV
hereto or the Company's SEC Reports, no Event of Default (or its equivalent
term), as defined in the respective agreement to which the Company is a party,
and no event which, with the giving of notice or the passage of time or both,
would become an Event of Default (or its equivalent term) (as so defined in such
agreement), has occurred and is continuing, which would have a material adverse
effect on the Company's financial condition or results of operations.
l. Prior Issues. Except as set forth in Annex IV or the Company's SEC
Reports, during the twelve (12) months preceding the date hereof, the Company
has not issued any Common Stock or convertible securities in capital
transactions which have not been fully disclosed in the Company's filings with
the SEC. Except as set forth in Annex IV, all such issuances (except for
issuances to Buyer) have been fully converted into shares of common stock and
there are no outstanding unconverted debt or convertible securities from those
transactions.
m. No Undisclosed Liabilities or Events. Except as set forth in Annex
IV, the Company has no liabilities or obligations other than those disclosed in
the Company's SEC Reports or those incurred in the ordinary course of the
Company's business since December 31, 1998, and which, individually or in the
aggregate, do not or would not have a material adverse effect on the properties,
business, condition (financial or otherwise), results of operations or prospects
of the Company and its subsidiaries, taken as a whole. No event or
circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
n. No Default. Except as disclosed in Annex IV hereto or the
Company's SEC Reports, the Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property is bound.
<PAGE>
o. Dilution. The number of Shares issuable upon conversion of the
Preferred Stock may increase substantially in certain circumstances, including,
but not necessarily limited to, the circumstance wherein the trading price of
the Common Stock declines prior to the conversion of the Preferred Stock. The
Company's executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded
that, in its good faith business judgment, such issuance is in the best
interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Preferred Stock is binding
upon the Company and enforceable regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the Company.
p. Acknowledgment by Company. Company represents and
warrants that neither the Buyer, nor any persons or entities representing or
purporting to represent the Buyer have made any representation or warranty which
is not contained expressly in this Agreement or any other agreements referred to
herein. Without limiting the foregoing, Company specifically acknowledges that
the Buyer has made no representations that it is a "long term" investor in the
Company, or that it intends to hold the Preferred Stock or shares of stock in
the Company (obtained by conversions of the Preferred Stock) for any period
beyond that which is required under the Securities Act. Company further
acknowledges that the Buyer may hedge the shares of stock in the Company prior
to or after the conversions of any of the Preferred Stock, provided that such
hedging is done in compliance with the Securities Act, Securities Exchange Act,
any rules applicable to securities traded on the NASDAQ "Bulletin Board" and the
express terms of this Agreement, the Certificate of Designation for the
Preferred Stock and the Registration Rights Agreement. Notwithstanding the
foregoing, provided that the Company has not defaulted hereunder or under any
other agreement entered into in connection herewith (including, without
limitation, the Registration Rights Agreement and the Certificate of Designation
for the Preferred Stock, both dated the date hereof), each Buyer acting
individually shall not "short" (as such term is defined by the Securities Act)
shares of Common Stock (calculated pursuant hereto at the time such shares of
Common Stock are shorted) in excess of twenty percent (20%) of the sum of (i)
the aggregate number of shares of Common Stock the Buyer would receive if all of
the shares of Preferred Stock (then held by such Buyer) were converted by Buyer
on the day of the "short" sale, plus (ii) the number of shares of Common Shares
held by (or deliverable to) such Buyer on the day of the "short sale" as a
result of prior conversions.
q. Brokers Fee. The Company represents that it neither is nor will
be obligated for any finders' fee or commission nor is it aware of any such fee
or commission payable in connection with this transaction. The Company agrees to
indemnify and to hold harmless the Buyer from any liability for any commission
or compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, partners, employees, or representatives is responsible.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Preferred Stock and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration
<PAGE>
Rights Agreement and sold pursuant to an effective Registration Statement,
certificates and other instruments representing any of the Securities shall bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND
MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Preferred Stock to the Buyer under
any United States laws and regulations, or by any domestic securities exchange
or trading market, and to provide a copy thereof to the Buyer promptly after
such filing.
e. Reporting Status. So long as the Buyer beneficially owns any of
the Preferred Stock, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the sale
of the Preferred Stock (excluding amounts paid by the Company for legal fees,
finder's fees in connection with the sale of the Preferred Stock) for general
capital purposes and, without limiting the foregoing, shall not, directly or
indirectly, use any of such proceeds for investment in any other affiliate.
g. Available Shares. The Company will seek to maintain authorize
and reserved for issuance, free from preemptive rights, shares of Common Stock
up to two hundred percent (200%) of the number of shares of Common Stock
issuable upon conversion of all of the outstanding Preferred Stock, and the
exercise of the Warrants (as defined below).
h. Warrants. The Company agrees to issue to Buyer at the Closing,
transferable divisible warrants with cashless exercise provisions (the
"Warrants") for 50,000 shares of Common Stock. Such Warrants shall bear an
exercise price equal to $11.00, and shall be exercisable immediately upon
issuance, and for a period of five (5) years thereafter, in the form annexed
hereto as Annex V, together with piggy-back registration rights, and demand
registration rights under the Registration Rights Agreement.
i. Limitation on Issuance of Shares. The Certificate of Designation
for the Preferred Stock shall provide that the Company shall take all steps
reasonably necessary to be in a position to issue shares of Common Stock on
conversion of the Preferred Stock without violating the "Cap Regulations". If
despite taking such steps, the Company is limited in the number of shares of
Common Stock it may issue by the "Cap Regulations," to the extent that the
Company cannot issue such shares of Common Stock, due upon a Notice of
Conversion, without violating the Cap Regulations, the Company shall immediately
notify Buyer the number of shares of the Preferred Stock which are not
convertible as a result of said Cap Regulations (the "Unconverted Preferred
Stock") and within five (5) business days of the applicable Notice of Conversion
redeem the Unconverted Preferred Stock for an amount in cash (the "Redemption
Amount") equal to the "Economic Benefit" of such Unconverted Preferred Stock.
"Economic Benefit" for purposes of this Section 4.i. shall mean the dollar value
derived if such Unconverted Preferred Stock were converted into Common Stock as
set forth in the Notice of Conversion and the Common Stock was sold on the date
of the Notice of Conversion at the closing bid price of the Common Stock on the
date of the Notice of Conversion. The Certificate of Designation for the
Preferred Stock shall contain provisions substantially consistent with the above
terms, with such additional provisions as may be consented to by the Buyer. The
<PAGE>
provisions of this section are not intended to limit the scope of the provisions
otherwise included in the Certificate of Designation.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate
purchase price for the Preferred Stock in accordance with Section 1(c) hereof,
the Company will irrevocably instruct its transfer agent to issue Common Stock
from time to time upon conversion of the Preferred Stock in such amounts as
specified from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the Shares under the 1933 Act, registered in the name of the
Buyer or its nominee and in such denominations to be specified by the Buyer in
connection with each conversion of the Preferred Stock. The Company warrants
that no instruction other than such instructions referred to in this Section 5
and stop transfer instructions to give effect to Section 4(a) hereof prior to
registration and sale of the Shares under the 1933 Act will be given by the
Company to the transfer agent and that the Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement, and applicable
law. Nothing in this Section shall affect in any way the Buyer's obligations
and agreement to comply with all applicable securities laws upon resale of the
Securities. If the Buyer provides the Company with an opinion of counsel
reasonably satisfactory to the Company that registration of a resale by the
Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a)
of this Agreement is not required under the 1933 Act, the Company shall (except
as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer
of the Securities and, in the case of the Shares, promptly instruct the
Company's transfer agent to issue one or more certificates for Common Stock
without legend in such name and in such denominations as specified by the Buyer.
b. (i) The Company will permit the Buyer to exercise its right to
convert the Preferred Stock by telecopying an executed and completed Notice of
Conversion (as defined in the Certificate of Designation) to the Company and
delivering within three (3) business days thereafter, the original Notice of
Conversion, together with the original share certificate, by express courier.
(ii) The term "Conversion Date" means, with respect to any
conversion elected by the holder of the Preferred Stock after the Effective
Date, the date specified in the Notice of Conversion, provided the copy of the
Notice of Conversion is telecopied to or otherwise delivered to the Company in
accordance with the provisions hereof so that is received by the Company on or
before such specified date. (The term "Effective Date" means the effective date
of the Registration Statement covering the Registrable Securities (as defined in
the Registration Rights Agreement).) The Conversion Date for any mandatory
conversion at maturity shall be the Maturity Date of the Preferred Stock.
(iii) The Company shall, at its expense, take all actions and use
all means necessary and diligent to cause its transfer agent to transmit the
certificates representing the Shares issuable upon conversion of any Preferred
Stock (together with Preferred Stock not being so converted) to the Buyer via
express courier, by electronic transfer or otherwise, within five (5) business
days after the later of (i) receipt by the Company of the copy of the original
Notice of Conversion and share certificate, and (ii) the Conversion Date (the
"Delivery Date").
c. The Company understands that a delay in the issuance of the Shares
of Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer in the event that due entirely to the Company's
failure to issue and deliver the Shares upon Conversion in accordance with the
following schedule (where "No. Business Days Late" is defined as the number of
business days beyond five (5) business days from Delivery Date):
Late Payment For Each $10,000
of Preferred Stock Liquidation
No. Business Days Late Amount Being Converted
---------------------- ----------------------
1 $100
2 $200
3 $300
<PAGE>
4 $400
5 $500
*5 $500 + $200 for each Business
Day Late beyond 10 days from
The Delivery Date
______
* greater than sign
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the Buyer's
right to pursue actual damages or to cause the Company to redeem the Preferred
Shares as provided below for the Company's actions or inactions resulting in the
transfer agent's failure to issue and deliver the Common Stock to the Buyer.
Furthermore, in addition to any other remedies which may be available to the
Buyer, in the event that the Company fails to deliver such shares of Common
Stock within five (5) business days after the Delivery Date, the Buyer will be
entitled to revoke the relevant Notice of Conversion by delivering a notice to
such effect to the Company whereupon the Company and the Buyer shall each be
restored to their respective positions immediately prior to delivery of such
Notice of Conversion. In the event the Company's actions or inactions result in
the transfer agent's failure to issue and deliver the Common Stock to the Buyer
within ten (10) days after the Delivery Date, Buyer may, at its option, require
the Company (without limiting its other remedies hereunder) to immediately
redeem all outstanding Preferred Stock in accordance with Section 4(g).
d. If, by the relevant Delivery Date, the Company fails for any
reason to deliver the Shares to be issued upon conversion of the Preferred Stock
and after such Delivery Date, the holder of the Preferred Stock being converted
(a "Converting Holder") purchases, in an open market transaction or otherwise,
shares of Common Stock (the "Covering Shares") in order to make delivery in
satisfaction of a sale of Common Stock by the Converting Holder made after a
Conversion Date (the "Sold Shares"), which delivery such Converting Holder
anticipated to make using the Shares to be issued upon such conversion (a "Buy-
In"), the Company shall pay to the Converting Holder, in addition to all other
amounts contemplated in other provisions of the Transaction Agreements, and not
in lieu thereof, the Buy-In Adjustment Amount (as defined below). The "Buy-In
Adjustment Amount" is the amount equal to the excess, if any, of (x) the
Converting Holder's total purchase price (including brokerage commissions, if
any) for the Covering Shares over (y) the net proceeds (after brokerage
commissions, if any) received by the Converting Holder from the sale of the
Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Buyer in
immediately available funds immediately upon demand by the Converting Holder.
By way of illustration and not in limitation of the foregoing, if the Converting
Holder purchases shares of Common Stock having a total purchase price (including
brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of
Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount
which Company will be required to pay to the Converting Holder will be $1,000.
The remedies set forth in paragraphs 5(c) and (d) shall be cumulative.
e. In lieu of delivering physical certificates representing the
unlegended securities issuable upon conversion, provided the Company's transfer
agent is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Buyer and its compliance with
the provisions contained in this paragraph, so long as the certificates therefor
do not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
f. The original certificate representing the Preferred Stock shall be
delivered by the Buyer to the Company simultaneous with the final Notice of
Conversion.
6. DELIVERY INSTRUCTIONS.
The Preferred Stock shall be delivered by the Company to the Signatory or
Signatory's Agent pursuant to Section 1(b) hereof, on a delivery against payment
basis, promptly after the Closing Date.
<PAGE>
7. CLOSING DATE.
(i) The closing of the issuance and sale of the Preferred Stock shall occur
on February 23, 2000 (the "Closing Date").
(ii) The closing of the purchase and issuance of Preferred Stock shall
occur on the Closing Date, at the offices of the Company and shall take place no
later than 12:00 Noon, CST, on such day or such other time as is mutually agreed
upon by the Company and the Buyer.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
Preferred Stock on the Closing Date and to the Buyer pursuant to this Agreement
is conditioned upon:
a. The receipt and acceptance by the Buyer of this Agreement as
evidenced by execution of this Agreement by the Buyer for Two Million Dollars
($2,000,000) in principal amount of the Preferred Stock (or such lesser amount
as the Company, in its sole discretion, shall determine on the Closing Date);
b. Delivery by the Buyer to the Company of good funds as payment in
full of an amount equal to the Purchase Price for the Preferred Stock in
accordance with Section 1(c) hereof;
c. The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date, and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date;
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock on the Closing Date is conditioned upon:
a. Acceptance by the Company of this Agreement for the sale of
Preferred Stock, as indicated by execution of this Agreement;
b. Delivery by the Company to the Signatory or Signatory's Agent of
the appropriate Preferred Stock in accordance with this Agreement;
c. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date and the performance by the Company on or before the
Closing Date of all covenants and agreements of the Company required to be
performed on or before the Closing Date and as to Preferred Stock, and
d. On the Closing Date, Buyer having received the Registration
Rights Agreement annexed hereto as Annex III and the Warrants.
e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits or adversely
effects any of the transactions contemplated by this Agreement or the
Transaction Documents, and no proceeding or investigation shall have been
commenced or threatened which may have the effect of prohibiting or adversely
effecting any of the transactions contemplated by this Agreement or the
Transaction Documents.
f. If the date of this Securities Purchase Ageement and the Closing
Date are different, then from and after the date hereof to and including the
Closing Date, the trading of the Common Stock shall not have
<PAGE>
been suspended by the SEC, or the NASD and trading in securities generally on
the New York Stock Exchange, NASDAQ/Small Cap, or Bulletin Board, as applicable,
shall not have been suspended or limited, nor shall minimum prices been
established for securities traded on NASDAQ/Small Cap or Bulletin Board, as
applicable, nor shall there be any outbreak or escalation of hostilities
involving the United States or any material adverse change in any financial
market that in either case in the reasonable judgment of the Buyer makes it
impracticable or inadvisable to purchase the Preferred Stock.
10. GOVERNING LAW; MISCELLANEOUS.
a. This Agreement and all agreements entered into in connection
herewith shall be governed by and interpreted in accordance with the laws of the
State of Minnesota for contracts to be wholly performed in such state and
without giving effect to the principles thereof regarding the conflict of laws.
Any litigation based thereon, or arising out of, under, or in connection with,
this agreement or any course of conduct, course of dealing, statements (whether
oral or written) or actions of the Company or Buyer shall be brought and
maintained exclusively in the state or Federal courts of the State of Minnesota.
The Company hereby expressly and irrevocably submits to the jurisdiction of the
state and federal Courts of the State of Minnesota for the purpose of any such
litigation as set forth above and irrevocably agrees to be bound by any final
judgment rendered thereby in connection with such litigation. The Company
further irrevocably consents to the service of process by registered mail,
postage prepaid, or by personal service within or without the State of
Minnesota. The Company hereby expressly and irrevocably waives, to the fullest
extent permitted by law, any objection which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above and any claim that any such litigation has been brought in any
inconvenient forum. To the extent that the Company has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution or otherwise) with respect to itself or its property, the Company
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement and the related agreements entered into in connection herewith.
b. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
c. This Agreement may be signed in one or more counterparts, each
of which shall be deemed an original.
d. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
e. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
f. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
g. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
h. In the event of any action for breach of or to enforce or
declare rights under any provision of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees and costs, to be paid by the losing
party.
11. NOTICES.
Any notice or communication required or permitted by this Agreement shall be
given in writing addressed as follows:
<PAGE>
COMPANY: Global MAINTECH Corp.
7578 Market Place Drive
Eden Prairie, MN 55344
ATTN: CEO
Telecopier No.: (612) 944-0400
Telephone No.: (612) 944-3311
with a copy to:
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Attention: Ken Cutler
Telephone: (612) 340-2740
Facsimile: (612) 340-8378
BUYER: At the address set forth on the signature page of this Agreement.
All notices shall be served personally by telecopy, by telex, by overnight
express mail service or other overnight courier, or by first class registered or
certified mail, postage prepaid, return receipt requested. If served
personally, or by telecopy, notice shall be deemed delivered upon receipt
(provided that if served by telecopy, sender has written confirmation of
delivery); if served by overnight express mail or overnight courier, notice
shall be deemed delivered forty-eight (48) hours after deposit; and if served by
first class mail, notice shall be deemed delivered seventy-two (72) hours after
mailing. Any party may give written notification to the other parties of any
change of address for the sending of notices, pursuant to any method provided
for herein.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The Company's representations and warranties herein shall survive the
execution and delivery of this Agreement and the delivery of the Preferred Stock
and the Purchase Price, and shall inure to the benefit of the Buyer and its
successors and assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
NUMBER OF SHARES OF PREFERRED STOCK TO BE PURCHASED: 2,000
AGGREGATE PURCHASE PRICE OF SUCH PREFERRED STOCK: $ 2,000,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf as of this 23rd day of February,
2000.
RBB Bank Aktiengesellschaft
Burgring 16
8010 Graz
Austria
Telephone: 011-43-316 807 2354
Facsimile: 011-43-316 807 2392
By: ___________________________
Herbert Strauss
managing director - US equity
Date: ________________, 2000
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its behalf.
Global MAINTECH Corporation, a Minnesota corporation
By: _______________________________
James Geiser
Secretary
Date: ________________, 2000
<PAGE>
ANNEX I CERTIFICATE OF DESIGNATION
ANNEX II WIRE TRANSFER INSTRUCTIONS
ANNEX III REGISTRATION RIGHTS AGREEMENT
ANNEX IV COMPANY DISCLOSURE MATERIALS
ANNEX V COMMON STOCK PURCHASE WARRANT
<PAGE>
ANNEX IV
COMPANY DISCLOSURE
------------------
[TO BE SUPPLIED BY COMPANY]
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Global MAINTECH Corporation:
We consent to incorporation by reference in the registration statement (No.33-
33576) on Form S-8 of Global MAINTECH Corporation of our report dated April 14,
2000, relating to the consolidated balance sheets of Global MAINTECH Corporation
and subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended, which report appears in the December 31, 1999 annual report on
Form 10-KSB of Global MAINTECH Corporation.
Our report dated April 14, 2000, contains an explanatory paragraph that states
that the Company has suffered losses from operations and has a working capital
deficiency and an accumulated deficit that raise substantial doubt about its
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
Our report refers to a change in the method of accounting for depreciation.
/s/ KPMG LLP
Minneapolis, Minnesota
April 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 2,172 664
<SECURITIES> 0 0
<RECEIVABLES> 2,128 2,584
<ALLOWANCES> 115 300
<INVENTORY> 1,322 861
<CURRENT-ASSETS> 5,784 4,057
<PP&E> 823 1,042
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 20,326 9,133
<CURRENT-LIABILITIES> 23,221 1,990
<BONDS> 0 1,700
0 0
5,185 2,244
<COMMON> 34,882 7,068
<OTHER-SE> (43,031) (3,869)
<TOTAL-LIABILITY-AND-EQUITY> 20,326 9,133
<SALES> 9,831 6,209
<TOTAL-REVENUES> 9,831 6,209
<CGS> 3,625 2,323
<TOTAL-COSTS> 24,752 8,028
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<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 that 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 one 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.
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
<PAGE>
you that we will be successful in developing and maintaining demand or in
developing and selling additional products.
Products Under Development
We are currently in development to expand the functionality of all of our
products. We are also developing software products that will bridge the gap
between operational data from the mainframe environment and open systems
management tools. Although preliminary tests indicate that these products will
perform as intended and can be integrated with other Company's products, 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 recently purchased the following new product lines:
- In September 1999, we acquired from Lavenir Technology, Inc., a
California corporation ("Lavenir"), a suite of CAD/CAM software
products, including the ability to design, test, verify and repair
precision graphics designs.
- 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.
There is a risk that we will not be able to successfully integrate the
employees we hired from Lavenir and ESI into our own workforce. There is also a
risk that we will not be able to market and sell these newly acquired product
lines on a profitable basis for the next several years.
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. There is always a risk that we will not
be successful in maintaining profitability and avoiding losses in any future
period. 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
Future Capital Requirements; No Assurance Future Capital Will Be Available
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 two technicians, Per Liljesater and Norm Freedman, to
further develop the Company's products. In addition, we rely heavily on Trent
Wong and Desmond DosSantos for technical or business
<PAGE>
development for products of Singlepoint Systems, Inc. Even though these four
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 patent
law, copyright law, statutory and common law trademark and trade secret laws,
customer licensing agreements, employee and third-party non-disclosure
agreements and other methods.
We have been granted United States Patent Nos. 6,035,264 and 6,044,393. We
believe the VCC will be protected by other patents currently pending. We
license 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. The VCC is also licensed
under U.S. Patent No. 5,689,637. The initial term of this license expires on
March 16, 2005.
Although we have taken 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.
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.
