<PAGE>
Filed pursuant to Rule 424(b)(1)
File No: 333-31736
PROSPECTUS
Global MAINTECH Corporation
5,230,629 shares of common stock
This prospectus relates to shares of common stock of Global MAINTECH
Corporation that may be offered for resale by the selling shareholders listed on
page 9. We will not receive any proceeds from the sale of the shares.
Our stock is quoted on the Over-the-Counter Bulletin Board under the symbol
GLBM. On July 24, 2000, the closing price was $2 per share.
---------------------
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 24, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY............................................................2
RISK FACTORS..................................................................4
FORWARD-LOOKING STATEMENTS....................................................8
NOTE TO INVESTORS.............................................................8
USE OF PROCEEDS...............................................................8
SELLING SHAREHOLDERS..........................................................9
PLAN OF DISTRIBUTION.........................................................14
BUSINESS.....................................................................15
MANAGEMENT...................................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................................25
EXECUTIVE COMPENSATION.......................................................27
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................29
DIVIDEND POLICY..............................................................29
DESCRIPTION OF CAPITAL STOCK.................................................29
RELATED PARTY TRANSACTIONS...................................................33
LEGAL PROCEEDINGS............................................................34
DESCRIPTION OF PROPERTY......................................................34
EXPERTS......................................................................34
LEGAL MATTERS................................................................35
WHERE YOU CAN FIND MORE INFORMATION..........................................35
FINANCIAL STATEMENTS........................................................F-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. You
should read the entire prospectus, including "Risk Factors" and our financial
statements and related notes, before making an investment decision.
Global MAINTECH Corporation
We supply systems and network management products and services primarily to
computer data centers. We offer these products and services to help our
customers monitor and manage their information technology operations. We also
sell software and precision imaging equipment for the printed circuit board
market.
Monitoring Products and Services
Virtual Command Center. Our primary product is the Virtual Command Center
system, which is a centralized console that provides simultaneous operation and
monitoring of multiple computer platforms and networks. This product enables
customers to control their entire information technology system.
Global Watch MVS/SNA. Global Watch MVS/SNA is designed to manage a
customer's networked environment for IBM's mainframe-based NetView application.
This product can be deployed on a stand-alone basis or on a fully-integrated
basis with our Virtual Command Center product.
AlarmPoint(TM). AlarmPoint is a notification software system. AlarmPoint
receives messages from event and system management tools operating on the
customer's computer system to detect critical events, such as system failures,
and provides automated notification of the event to the customer's technical
personnel. This product can be deployed on a stand-alone basis or on a
fully-integrated basis with our Virtual Command Center product.
Professional Services. We provide enterprise system management services.
Our services are aimed at helping customers to design and implement system
management and notification tools for managing their data and network
environments. We offer these services in support of and independent of our
products.
Printed Circuit Board Products
We also supply computer-aided manufacturing software that designs, tests
and repairs precision graphic designs and precision imaging equipment that is
used to help build master printed circuit boards. We acquired these products and
related rights from Lavenir Technology in September 1999.
Corporate Information
We were incorporated in Minnesota in 1985 under the name Computer Aided
Time Share, Inc. In 1995, we changed our name to Global MAINTECH Corporation. We
are a holding company with two wholly-owned subsidiaries, Global MAINTECH, Inc.
and Singlepoint Systems, Inc., and one majority-owned subsidiary, Breece Hill.
The address of our principal executive offices is 7578 Market Place Drive, Eden
Prairie, Minnesota 55344 and our phone number is (612) 944-0400.
The Offering
The selling shareholders named in this prospectus are offering shares of
common stock which are presently outstanding and shares which they may acquire
upon the conversion of their Series B, Series D and Series E convertible
preferred stock and exercise of warrants.
2
<PAGE>
Summary Financial Data
The following table should be read together with our consolidated financial
statements and the notes to those statements beginning on page F-1.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
March 31,
-------------------------- -----------------------
1998 1999 1999 2000
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................................... $ 6,209 $ 9,831 $ 2,850 $ 2,091
Cost of sales ............................................... 2,323 3,625 750 485
------------- ------------ ----------- -----------
Gross profit ................................................ 3,886 6,206 1,830 1,606
Operating expenses .......................................... 5,705 21,126 2,019 6,068
Other income (expense), net ................................. (184) (3,443) (218) (241)
------------- ------------ ----------- -----------
Loss from continuing operations ............................. (2,003) (18,363) (407) (4,703)
Discontinued Operations:
Loss from discontinued operations, net of tax ............ - (4,410) - -
Loss on disposal of discontinued operations, net of tax .. - $ (16,356) - (1,664)
------------- ------------ ----------- -----------
Loss before cumulative effect of change in accounting
principle ................................................ (2,003) (39,129) (407) (6,367)
Cumulative effect of change in method of depreciation ....... - 232 232 -
------------- ------------ ----------- -----------
Net loss .................................................... $ (2,003) $ (38,897) $ (175) $ (6,367)
Accrual of cumulative dividends on preferred stock .......... (31) (264) (44) (136)
Attribution of beneficial conversion feature on preferred
stock .................................................... (327) (2,443) (287) (3,467)
------------- ------------ ----------- -----------
Net loss attributable to common stockholders ................ $ (2,361) $ (41,604) $ (506) $ (9,970)
============= ============ =========== ===========
Basic loss per share:
Loss from continuing operations .......................... $ (0.64) $ (4.94) $ (0.19) $ (1.45)
Loss from discontinued operations ........................ - (4.87) - (0.29)
------------- ------------ ----------- -----------
Loss before cumulative effect of change in accounting
principle ............................................. (0.64) (9.81) (0.19) (1.74)
Cumulative effect of change in accounting principle ...... - 0.05 0.06 -
------------- ------------ ----------- -----------
Net loss ................................................. $ (0.64) $ (9.76) $ (0.13) $ (1.74)
============= ============ =========== ===========
Diluted loss per share:
Loss from continuing operations .......................... $ (0.64) $ (4.94) $ (0.19) $ (1.45)
Loss from discontinued operations ........................ - (4.87) - (0.29)
------------- ------------ ----------- -----------
Loss before cumulative effect of change in accounting
principle ............................................. (0.64) (9.81) (0.19) (1.74)
Cumulative effect of change in accounting principle ...... - 0.05 .06 -
------------- ------------ ----------- -----------
Net loss ................................................. $ (0.64) $ (9.76) $ (0.13) $ (1.74)
============= ============ =========== ===========
Shares used in calculations (in thousands):
Basic .................................................... 3,670 4,261 3,805 5,741
Diluted .................................................. 3,670 4,261 3,805 5,741
December 31,
----------------- March 31,
1998 1999 2000
------- -------- --------
Balance sheet data:
Cash and cash equivalents ................................... $ 664 $ 2,172 $ 1,293
Working capital (deficit) ................................... 2,068 (17,438) (18,011)
Total assets ................................................ 9,133 20,326 18,337
Total stockholders' equity (deficit) ........................ 5,443 (2,963) (4,400)
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to purchase the securities offered. Any of
the following risks could have a material adverse effect on our business,
financial condition or results of operations or on the value of the securities
you purchase.
Risks Related to Our Business
We have experienced substantial losses and we cannot assure you that we will
operate profitably in the future.
We reported net losses of approximately $38.9 million for 1999 and $6.4
million for the first quarter ended March 31, 2000. At March 31, 2000, we had
negative working capital of approximately $18 million. Our losses in 1999 are
primarily attributable to approximately $26.2 million in charges related to
discontinued operations and writedowns of intangible and other assets. We cannot
be certain that we can achieve or sustain profitability in the future.
If we are unable to continue as a going concern, you could lose your entire
investment.
The report of our independent auditors on our December 31, 1999 financial
statements contains an explanatory paragraph stating that substantial doubt
exists about our ability to continue as a going concern. If we are unable to
continue as a going concern, your entire investment in our common stock could be
lost. Our ability to improve our working capital position will depend, in part,
on our ability to:
* timely complete the disposal of our Breece Hill operations;
* resolve $7.3 million of our acquisition-related earnout obligations
through the issuance of equity securities;
* increase the size of our customer base for our products and services;
and
* raise additional capital.
We cannot assure you that we will be successful in accomplishing any or all
of the above factors.
If we fail to compete effectively with current or future competitors, our
revenues and operating results will be harmed.
We compete in the systems and network management market. The market for our
products and services is highly competitive and we expect competition to
intensify in the future. Most of our competitors have significantly greater
financial, technical and marketing resources than we do. These competitors may
be able to respond more rapidly than us to new technologies or changes in
customer requirements. They may also devote greater resources to the development
and promotion of their products than we do.
Increased competition could result in price reductions, reduced margins and
loss of market share. New products or technologies developed by our competitors
could reduce sales and market acceptance of our products or make our products
obsolete. Our failure to compete successfully against current or future
competitors could seriously harm our business, financial condition and results
of operations.
If our Virtual Command Center product does not achieve broad market acceptance,
our product revenue will decrease and may decrease significantly.
Our Virtual Command Center product is still relatively new and we cannot be
certain that it will achieve high levels of demand and market acceptance. As of
the date of this prospectus, we have sold approximately 50 units of the Virtual
Command Center system to 17 customers. If we are not able to increase the number
of
4
<PAGE>
customers, or if we are not able to renew a significant portion of our
maintenance agreements with existing customers, our business and financial
performance will be adversely affected.
One customer accounted for 30% of our net sales in 1999. The loss of business
from this customer or failure to obtain new customers, will materially reduce
our revenues.
In 1999, we realized 30.4% of our net sales from professional services
provided to one customer. At December 31, 1999, this customer represented 18% of
our total accounts receivable. We expect that our services to this customer will
diminish throughout the year 2000. If we are not able to generate sufficient new
business from this customer or other customers, our revenues may decline.
If our efforts to sell our other lines of business and products and to focus on
the systems and network management business is not successful, our business may
fail.
We have decided to sell our other lines of business and products and to focus
our business on our enterprise management professional services and on our
Virtual Command Center system. We are actively seeking to sell our tape storage
products and printed circuit board software businesses, as well as other assets.
If we are not successful in completing these sales, our business will be
adversely affected.
If we fail to develop new and enhanced products, we will be unable to remain
competitive and our revenues may decline.
We operate in a highly competitive market that is characterized by rapid
technological change and changing customer requirements. Our future success
depends in part on our ability to develop and introduce new products and
enhancements to existing products on a successful and timely basis. If we fail
to develop and introduce new products or product enhancements on a successful
and timely basis, we may not be able to compete effectively and our revenues may
decline.
For example, we are currently developing software products that are
intended to bridge the gap between operational data from the mainframe
environment and open distributed systems management tools. We may not be
successful in developing or introducing to the market these or any other new
products.
If we do not meet our future capital needs, our ability to grow and continue as
a going concern will be limited.
We will need additional financing to develop and market products and to
meet our long-term growth needs. In the past, we have relied on the issuance of
equity securities and borrowings to finance our operations. We cannot be certain
that additional financing will be available to us on favorable terms when
required, or at all. If we are not able to obtain sufficient additional capital,
we may not be able to grow our operations or compete effectively and there could
be substantial doubt as to our ability to continue as a going concern. If we
raise additional funds through the issuance of equity or debt securities, those
securities may have rights, preferences or privileges senior to those of our
common stock and the percentage ownership of our shareholders may be reduced.
If we are unable to expand by means of acquisitions, our business could be
materially harmed and we may be unable to compete effectively.
Our efforts to expand our operations by making acquisitions of products,
technologies or businesses may not be successful. Our ability to expand by means
of acquisitions involves many risks, including:
* the difficulty of integrating operations, products, technology and
personnel of the acquired business with us;
* unanticipated costs associated with acquisitions; and
* the difficulty in realizing the anticipated benefits of the
transaction in a timely manner.
5
<PAGE>
We are dependent on key personnel. If we are not able to attract and retain key
employees, our business could be harmed.
Our success depends to a large extent on the continued services of our key
personnel. In particular, we are highly dependent on the services of Trent Wong,
our chief executive officer, Norm Freedman, our vice president of development,
and Desmond Dos Santos, our vice president of operations. We do not carry
key-man life insurance for any of our officers or employees. The loss of key
personnel, or the failure to attract and retain additional key personnel, could
negatively affect our business.
If third parties infringe on our intellectual property, our business and our
ability to compete effectively will be significantly harmed.
Our success depends in part on our ability to protect our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secrets, confidentiality agreements and licensing arrangements. We may be
required to spend significant financial and managerial resources to monitor and
police our intellectual property rights. We may not be able to detect
infringement or misappropriation. If we fail to protect or enforce our
intellectual property rights, our business and competitive position could
suffer.
Third parties may claim we are infringing their intellectual property, and we
could incur substantial costs or be prevented from selling products if these
claims are successful.
Third parties may claim that we are infringing their intellectual property
rights. Any litigation regarding patents or other intellectual property could
result in substantial costs to us, a loss of revenues and a diversion of key
personnel from our business operations. If we become subject to an infringement
claim, we may be required to modify our products and technologies or obtain a
license to permit our continued use of those rights. We may not be able to do
either of these things on terms acceptable to us, or at all. We also may be
subject to significant damages or injunctions from developing and selling our
products.
Undetected errors may increase our costs and impair the market acceptance of our
products.
Our products have occasionally contained and may contain in the future
undetected errors when first introduced or when new versions are released.
Errors in our products or technology could result in:
* loss of revenues;
* liability claims for damages; and
* failure to achieve market acceptance.
We do not have product liability insurance. We cannot assure you that
disclaimer of warranty and limitation-of-liability provisions included in our
customer agreements will be successful in limiting our liability.
Risks Related to the Offering
Sales of substantial amounts of our common stock could cause our stock price to
decline.
Sales of substantial amounts of our common stock in the public market could
cause the market price of our common stock to drop. This factor could make it
more difficult for us to raise funds in the future through the sale of equity
securities.
As of June 27, 2000, we had 5,764,880 shares of our common stock
outstanding. A substantial portion of these shares are eligible for sale in the
public market. We also currently have registered for public sale 5,230,629
shares of common stock, of which 3,597,179 shares may be sold upon conversion
of our outstanding Series B, Series D and Series E convertible preferred stock
and exercise of outstanding warrants.
6
<PAGE>
Our stock price is volatile, which may result in significant losses to
shareholders.
The market price of our common stock could be subject to significant
fluctuations due to factors such as:
* variations in our operating results;
* announcements by us or our competitors; and
* realization of any of the risks described in this section.
The stock market has experienced extreme price and volume fluctuations.
These broad market fluctuations may adversely affect the trading
price of our common stock.
7
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting our business. The
words "believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect" and similar words are intended to identify forward-looking statements.
You should not put undue reliance on these forward-looking statements, which are
not a guarantee of performance and are subject to risks and uncertainties. Our
actual results could differ materially from those expressed or implied by the
forward-looking statements as a result of various factors, including those
discussed in "Risk Factors" and elsewhere in this prospectus. We assume no
obligation to publicly update or revise any forward-looking statements because
of new information or future events. These cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our behalf.
NOTE TO INVESTORS
Investors should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with different information. This
prospectus is not an offer to sell common stock in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in the prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.
USE OF PROCEEDS
Although we will pay the expenses of registration of the shares, including
legal and accounting fees, we will not receive any proceeds from the sale of
shares by the selling shareholders.
8
<PAGE>
SELLING SHAREHOLDERS
The shares of common stock being offered by this prospectus are shares that
have been issued and shares that are issuable upon conversion of our Series B,
Series D and Series E convertible preferred stock and the exercise of warrants.
We originally issued these securities in transactions exempt from registration
under the Securities Act.
Series B Preferred Stock
From August 15, 1998 to December 31, 1998, we sold 67,192 units. Each unit
consisted of one share of Series B convertible preferred stock and one warrant
to purchase shares of common stock. The warrants have an exercise price of
$16.25 per share and expire five years after the date of issuance. The number of
shares of common stock subject to each warrant is equal to the number of the
shares of common stock into which the associated share of Series B convertible
preferred is convertible. We also issued warrants to purchase 3,475 shares of
common stock with per share exercise prices ranging from $5.80 to $7.35 to
Miller, Johnson & Kuehn Incorporated as compensation for its role as placement
agent.
Series C Preferred Stock
On March 25, 1999, we issued an aggregate of 1,675 shares of Series C
convertible preferred stock and warrants to purchase a total of 40,000 shares of
common stock. Intercoastal Financial Services Corp. received 75 shares of Series
C convertible preferred stock and a warrant to purchase 20,000 shares of common
stock as compensation for its role as placement agent.
Series D Preferred Stock
On January 19, 2000, we issued an aggregate of 2,725 shares of Series D
convertible preferred stock and 150,000 shares of common stock. As part of this
transaction, we issued 1,675 shares of Series D convertible preferred stock in
exchange for all of the outstanding Series C convertible preferred stock and
warrants to purchase a total of 20,000 shares of common stock in exchange for
the warrants issued in the Series C preferred stock transaction. The new
warrants have an exercise price of $8.30 per share and expire in January 2005.
Intercoastal Financial Services received 50 shares of Series D convertible
preferred stock and 30,000 shares of common stock as compensation for its role
as placement agent.
Series E Preferred Stock
On December 30, 1999, we issued an aggregate of 2,675 shares of Series E
convertible preferred stock and warrants to purchase a total of 50,000 shares of
common stock. The warrants have an exercise price of $5.125 per share and expire
in December 2004. Greenfield Capital Partners, LLC received 25 shares of Series
E convertible preferred stock as compensation for its role as placement agent.
Other Shares
This prospectus also covers an aggregate of 1,666,197 shares of common
stock that were purchased or received in various private placements or in return
for services provided to us, including 773,000 shares issued to public relations
consultants. In addition, this prospectus covers 89,468 shares issued to Lavenir
Technology as a settlement of a penalty payment to Lavenir for failure to have
the registration statement relating to this prospectus effective by June 30,
2000.
Conversion of Preferred Stock
The number of shares of common stock into which our outstanding convertible
preferred stock is convertible depends, in part, upon the market price of our
common stock at the time of conversion. As a result, we cannot determine at this
time the actual number of shares of common stock that will be issued upon
conversion of our outstanding convertible preferred stock. We have agreed to
register a number of shares of common stock that exceeds the number of shares of
common stock into which the convertible preferred stock is currently
convertible.
The following table shows the number of shares that each of the selling
shareholders named below may sell
9
<PAGE>
under this prospectus. The term "selling shareholders" includes those holders
listed below, as well as their pledgees or donees. Assuming the selling
shareholders sell all of the shares offered by this prospectus, after completion
of this offering the selling shareholders will not own any shares of our common
stock.
<TABLE>
<CAPTION>
Shares Shares
beneficially Shares to be beneficially
owned before sold in the owned after the
Name the offering offering offering
-------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Industricorp & Co. FBO Twin Cities Carpenters & Joiners 22,863 22,863 -0-
Pension Fund (1)
Robert W. Clark Self-Declared Trust 4,573 4,573 -0-
Robert W. Clark Trustee, dated 11/12/90
Isadore J. Goldstein Revocable Living Trust 7,035 7,035 -0-
Isadore J. Goldstein, Trustee, dated 3/14/90
James N. Owens Revocable Trust 14,069 14,069 -0-
James N. Owens, Trustee, dated 9/10/70
David A. Lawrence 3,517 3,517 -0-
Gary S. Kohler IRA First Trust NA Trustee 3,521 3,521 -0-
Gary Kohler 3,517 3,517 -0-
John O. Hanson 28,140 28,140 -0-
John R. Albers 14,070 14,070 -0-
VBS General Partnership (2) 3,517 3,517 -0-
David A. Lawrence IRA First Trustee NA Trustee 3,517 3,517 -0-
Betty L. Johnson 14,070 14,070 -0-
Aaron Boxer Revocable Trust 29,829 29,829 -0-
Aaron Boxer Trustee, dated 8/1/89
David W. Johnson and Linda M. Johnson, as Joint Tenants 13,718 13,718 -0-
John M. Liviakis 125,000 125,000 -0-
Liviakis Financial Communications, Inc. (3) 628,000 628,000 -0-
Earl L. Ferris 3,517 3,517 -0-
CROW 1999 CRUT 15,477 15,477 -0-
Johnson Family CRUT #3 10,551 10,551 -0-
Gary L. Tooker Charitable Remainder 5,628 5,628 -0-
Tooker Family Ltd. Partnership 10,552 10,552 -0-
Welstad Charitable Remainder Unitrust I dated 12/26/97 14,070 14,070 -0-
George D. Marx 1,759 1,759 -0-
Paul R. Owings & Lenore Owings, as joint tenants 3,517 3,517 -0-
Lenore Owings & Paul R. Owings, as joint tenants 3,517 3,517 -0-
Robert Terhaar & Harriet Terhaar, as joint tenants 2,286 2,286 -0-
Esquire Trade & Finance Inc. (4) 391,561 391,561 -0-
Paul R. Kuehn 1,304 1,304 -0-
David B. Johnson 1,304 1,304 -0-
Eldon C. Miller 435 435 -0-
Stanley D. Rahm 435 435 -0-
Austinvest Anstalt Balzers (5) 391,561 391,561 -0-
Nesher, Inc. (6) 68,603 68,603 -0-
Amro International (7) 323,640 323,640 -0-
Raymond James & Associates, Inc. (8) 900 900 -0-
Intercoastal Financial Services Corp. (9) 107,160 107,160 -0-
Assanzon Capital Development Corporation (10) 343,015 343,015 -0-
Garros Ltd. (11) 226,548 226,548 -0-
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially Shares to be beneficially
owned before sold in the owned after the
Name the offering offering offering
-------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Carbon Mesa, LLC (12) 28,392 28,392 -0-
Nash, LLC (13) 487,805 487,805 -0-
Greenfield Capital Partners, LLC (14) 19,512 19,512 -0-
Geneva Group, Inc. (15) 6,000 6,000 -0-
Joseph B. LaRocco 6,000 6,000 -0-
TeamWork Kommunikations, Gmbh(16) 5,000 5,000 -0-
Charles van Musscher 2,000 2,000 -0-
Mark Rolland 1,000 1,000 -0-
Joe Bicknell 1,207 1,207 -0-
Halina Bukowinski 603 603 -0-
Sandie Campbell 242 242 -0-
James A. Cherne 24,142 24,142 -0-
Jill Cherne 3,017 3,017 -0-
Tom Clark 2,414 2,414 -0-
Don Doru Davidson 8,449 8,449 -0-
Dan Ellis 603 603 -0-
Anthony Fernandes 483 483 -0-
Marty Fernandes 145 145 -0-
William R. Gardner 9,656 9,656 -0-
Silvia Patricia Gil 48 48 -0-
Ray Gott and Carol Gott 4,867 4,867 -0-
Janet Gray 27 27 -0-
Richard L. Green 11,588 11,588 -0-
Prentis Cobb Hale, as Trustee of the Prentis Cobb Hale
Family Trust dated July 13, 1993 17,659 17,659 -0-
Prentis C. Hale III 7,846 7,846 -0-
Maria A. Henzi 398 398 -0-
Max P. Henzi 120,706 120,706 -0-
Lois M. Holt 120 120 -0-
Bernard R. Kaim 120 120 -0-
Felipe Loh 12,071 12,071 -0-
Caesar Lucas 18,106 18,106 -0-
Carter Lucas 362 362 -0-
Harry and Marian Luoma Community Property 2,414 2,414 -0-
E. Thomas Luoma 55,525 55,525 -0-
Marius Matioc 120,706 120,706 -0-
Troy McAlpin and Carol McAlpin 40,299 40,299 -0-
Kari Pacheco 362 362 -0-
Catherine Pelham 2,414 2,414 -0-
Jack A. Petersen and Patricia A. Petersen 6,171 6,171 -0-
Chronicle Publishing (17) 34,067 34,067 -0-
Eric Renger 3,017 3,017 -0-
Mary Ressler 242 242 -0-
Rubicon Limited Partnership (17) 196,447 196,447 -0-
David R. Ryan 30,787 30,787 -0-
Adelino C. Sousa and Dawn M. Sousa 38,626 38,626 -0-
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially Shares to be beneficially
owned before sold in the owned after the
Name the offering offering offering
-------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Kenji Spencer 362 362 0
Peter D. Stent 10,401 10,401 0
John B. Stuppin 24,895 24,895 0
Jennifer Vergara 603 603 0
John R. Vrolyk 6,814 6,814 0
Lydia Wentz and Keith Wentz JT WROS 15,422 15,422 0
Alliant Partners (18) 11,754 11,754 0
Prentis C. Hale III, Trustee U/W Linda Hoag Hale FBO 13,342 13,342 0
Prentis C. Hale
</TABLE>
----------------
(1) Patrick Bristol, financial secretary of Industricorp & Co. FBO Twin Cities
Carpenters & Joiners Pension Funds has voting and investment control over
the shares held by this entity.
(2) Peter C. Von Halen, general partner of VBS General Partnership has voting
and investment control over the shares held by this entity.
(3) John M. Liviakis, president of Liviakis Financial Communications, Inc., has
voting and investment control over the shares held by this entity.
(4) Roland Winiger, director of Esquire Trade & Finance Inc., has voting and
investment control over the shares held by this entity.
(5) Dr. Walter Grill, director of Austinvest Anstalt Balzers, has voting and
investment control over the shares held by this entity.
(6) David Grim, director of Nesher, Inc., has voting and investment control
over the shares held by this entity.
(7) H.U. Bachofen, managing director of Amro International, has voting and
investment control over the shares held by this entity.
(8) Daniel French, vice president of Raymond James & Associates, Inc., has
voting and investment control over the shares held by this entity.
(9) Roy Zentz, president of Intercoastal Financial Services Corp., has voting
and investment control over the shares held by this entity.
(10) Alan Woods, director of Assanzon Capital Development Corp., has voting and
investment control over the shares held by this entity.
(11) Giora Vavie, managing director of Garros Ltd., has voting and investment
control over the shares held by this entity.
(12) Michael Rosenblum, general counsel of Carbon Mesa, LLC, has voting and
investment control over the shares held by this entity.
(13) David Sims, managing director of Nash, LLC, has voting and investment
control over the shares held by this entity.
(14) Caryn Kahn, president of Greenfield Capital Partners, LLC, has voting and
investment control over the
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shares held by this entity.
(15) Michael Bardaky, president of Geneva Group, Inc., has voting and investment
control over the shares held by this entity.
(16) Sven Joesting, managing director of TeamWork Kommunikations, Gmbh, has
voting and investment control over the shares held by this entity.
(17) Peter D. Stent has voting and investment control over the shares held by
these entities.
(18) James L. Kochman, managing partner of Alliant Partners, has voting and
investment control over the shares held by this entity.
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PLAN OF DISTRIBUTION
The shares will be offered and sold from time to time by the selling
shareholders for their own accounts. The selling shareholders may sell the
shares in transactions in the over-the-counter market or in private
transactions. These sales may be made at market prices prevailing at the time of
sale or at negotiated prices. The selling shareholders may use one or more of
the following methods when selling shares:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
* purchases by a broker or dealer as principal and resale by the broker
or dealer for its account;
* privately negotiated transactions; and
* any other legally available means.
If the selling shareholders use broker-dealers to sell their shares, the
broker-dealers may receive discounts or commissions from the selling
shareholders or the purchasers of shares for whom they acted as agent or to whom
they may sell as principal. As of the date of this prospectus, we are not aware
of any agreement, arrangement or understanding between any broker or dealer and
the selling shareholders.
The selling shareholders and any brokers or dealers acting in the sale of
the shares offered under this prospectus may be deemed to be underwriters within
the meaning of Section 2(11) of the Securities Act. Any commissions they receive
and any profit they realize on the resale of the shares as principals may be
deemed underwriting compensation under the Securities Act.
Any shares of our common stock covered by this prospectus that qualify for
sale under Rule 144 of the Securities Act may be sold under Rule 144, rather
than under this prospectus.
We have agreed to pay the expenses of registration of the shares, including
legal and accounting fees.
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BUSINESS
Overview
We supply world class systems and network management products primarily to
computer data centers and provide professional services to help our customers
implement enterprise system management solutions. We also sell computer-aided
manufacturing software and precision imaging equipment for the printed circuit
board market.
Industry Background
Increased Complexity in Data Center Operations. Computer data centers
operate a wide range of computer devices that are used to perform automated
tasks, such as:
* monitoring and controlling external equipment;
* data manipulation;
* data storage; and
* data retrieval.
In recent years, systems and network management tools have become
increasingly important to the efficient operation of computer data centers,
which have evolved to perform more complex and diverse tasks. This growing
complexity and diversity is in part due to the shift of emphasis from
centralized computer centers, many of which were based upon mainframe
technology, to large scale, networked distributed systems, known as local area
networks and wide area networks. Distributed systems connect multiple computer
workstations in one location or in numerous locations across a wide geographic
area. Centralized computer centers use different devices, operating systems,
configurations and applications, while distributed systems typically use only
one of two operating systems: UNIX or Windows NT.
Systems and network management tools perform one or more of the following
primary functions:
* event management;
* problem or fault management;
* performance management;
* capacity management;
* storage management;
* enterprise scheduling;
* change management; and
* security management.
Complexity and diversity in enterprise data center operation is widespread
and a growing trend in the industry. In December 1998, the Gartner Group
estimated that by 2003 80% of all data centers will be managing multiple
platform environments. This estimate is based upon the fact that most
application systems have long lives and relatively few applications move from
one platform type to another during the life of the application. For example,
Microsoft's Windows 95 application was designed to be used on personal computers
and cannot be used on IBM's MVS operating system or the UNIX platform. As
computer users adopt new platforms and computer technology, data centers must
adapt to support a mixture of platforms and operating systems. In 2003,
mainframe-based applications will likely still be in production and operating
alongside applications designed for
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high-end UNIX servers and an increasing number of new applications will be
targeted to Windows NT servers. As a result, data centers must adapt to support
existing and future applications and operating systems.
Market for Systems and Network Management Products. Systems and network
management products are usually designed to be used with one of three computer
platforms, either mainframes, UNIX-based computers or Windows NT workstations.
The systems and network management market size is difficult to measure precisely
because the market size frequently is defined as products sold only for one
platform or some other aspect of the market, rather than for products sold for
all platforms. For example, sales of all UNIX-based enterprise computing
software in 1998 were approximately $30 billion and systems and network
management software is a part of this total. We believe that total annual sales
in the system and network management market was $6.8 billion at the end of 1996
and that this market has been growing at a rate of approximately 30% per year.
Our Products and Services
Monitoring Products and Services
Virtual Command Center
Our Virtual Command Center product is a computer system, consisting of
hardware and software, that 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. Our product can
simultaneously manage servers, networks, mainframes and mid-range computers,
such as those with UNIX, Microsoft and Windows NT platforms. We believe our
Virtual Command Center system is a platform to which we can add new products to
meet other systems and network management needs not currently met by existing
competitive products. We intend to continue to provide new products through our
internal research and development efforts or through acquisitions to meet
changes in customer needs.
Functions and Features. Our Virtual Command Center product is designed to
perform three primary functions:
* consolidate consoles into one monitor, known as a virtual console or
single point of control;
* monitor and control the computers connected to the virtual console;
and
* automate most or all of the routine processes performed by computer
operators in data centers.
The Virtual Command Center is an external system that monitors and controls
the 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.
The primary feature 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 our Virtual Command Center product can
consolidate the management of entire data centers into a single workstation that
provides the complete inter-connectivity and control over a network. This can be
accomplished regardless of whether the computing devices comprising the data
center are located in one location or distributed across the world. The
product's ability to consolidate operational computer consoles reduces the need
for operational staff, technical support and software licenses. Our Virtual
Command Center product is easy to install and use and is scalable to accommodate
data center growth. Other features 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.
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Differentiation from Software-Only Products. The majority of systems and
network management products are represented by software-only products employing
invasive software agents, known as active agents. Active agents 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, which is one of the 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
device. This process may be extensive depending on which systems and network
management software is used.
The Virtual Command Center 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
Virtual Command Center becomes. Some of the other products we offer employ
passive agents to collect information from host devices or networks before
passing that information on to the Virtual Command Center.
Global Watch MVS/SNA
Global Watch MVS/SNA manages a customer's networked environment for IBM's
mainframe-based NetView application. It can operate as a stand-alone or fully
integrated basis with our Virtual Command Center system. Customers have
confirmed it uses only approximately 5% of the processing capacity required by
NetView. It also 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 our Virtual Command Center
system, the customer can take advantage of the MVS Logical Console. The logical
console enables the customer to receive and respond to status messages, in real
time, from all logical partitions. Logical partitions divide a mainframe device
into multiple internal devices or hard drives. The logical console allows the
user to look at all partitions without having to access each partition. The
status messages from each partition are displayed in a single logical console
alert window in the Virtual Command Center system. There is no need for any
customization on the host computer's devices and messages can be collected from
a nearly infinite number of central processing units and logical partitions.
By the end of 2000, we intend to reintroduce GlobalWatch using the standard
Internet communications protocol and with the ability to link management
information from mainframes and UNIX workstations. This will bring the
functionality of GlobalWatch to additional platforms.
AlarmPoint(TM)
AlarmPoint is a notification software system designed to receive status
messages from event and system management tools to alert the proper personnel of
critical events. For example, if a customer's ATM banking management application
detects that an ATM at a particular location is low on cash, AlarmPoint contacts
the cash replenishment vendor to replenish cash in the machine before it runs
out of cash. AlarmPoint can receive messages from leading system and network
management tools, including Hewlett-Packard's OpenView, IBM's Tivoli TME,
Computer Associates' Unicenter and Cabletron's SPECTRUM. Notification is given
by a phone call, page, fax or e-mail with predefined automated messages.
AlarmPoint can automatically recognize when a voicemail system or answering
machine picks up the call and will leave a message or try an alternate contact.
AlarmPoint can be installed on nearly every hardware platform or operating
system. AlarmPoint can operate on a stand-alone or fully integrated basis with
our Virtual Command Center product.
Professional Services
We offer system management services that help our customers to design and
implement network and system management products to manage their information
technology environment. We specialize in integrating multiple products into a
complete enterprise-wide solution for corporate data centers. We support our
Virtual Command Center product as well as implement the industry's leading
system and network management products, including Hewlett-Packard's OpenView,
BMC Software's COMMAND/POST and IBM's Tivoli TME.
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Our capabilities include:
* strategic planning and implementation;
* installation of enterprise system management tools;
* product training;
* product conversions; and
* consulting.
In December 1998, we signed an agreement to provide system management
services to State Farm Insurance. The initial term of the agreement is June
2000, which has been extended to December 2000. State Farm Insurance accounted
for 30.4% of our net sales in 1999.
Printed Circuit Board Products
We also manufacture and sell computer-aided manufacturing software and
photoplotters, or precision imaging equipment, for the printed circuit board
market. Our software is capable of designing, testing and repairing precision
graphic designs. Our precision imaging equipment is used to help our customers
build master printed circuit boards. We acquired these products from Lavenir
Technology in September 1999.
Tape Library Storage Products
Since April 1999, we have been supplying automated tape libraries used to
backup, restore and archive information stored in networks on servers, personal
computers and workstations, and on-line data storage subsystems. In December
1999, we approved a formal plan to sell this business. This business segment is
presented in our financial statements as a discontinued operation. We cannot be
certain when a sale will occur and how long we will continue to offer these
products.
Sales and Marketing
We sell primarily through direct sales using our sales force. Our direct
sales force is supported by a dedicated telemarketing process and sales support
team which produces written materials, CD-ROM presentations, VCR tape
presentations and remote personal computer-based presentation routines which are
available on the salespersons laptop computer.
We also sell our products, excluding storage management products, through
resellers and strategic arrangements with other companies that have products
complementary to ours. For example, Hewlett-Packard has certified our AlarmPoint
product for its OpenView network management product. Our software-only products
may also be downloaded from our web-site for free trial for a limited time.
Our professional services are sold directly to customers or through
strategic alliances with companies such as BMC Software.
Competition
Our Virtual Command Center product competes with internal monitoring
software. This software monitors hardware and software applications in the
computer in which the internal software is installed. Annual sales of systems
and network management software were estimated to be $17 billion as of December
1998. According to Salomon Brothers' Server and Enterprise Hardware Report dated
January 1999, this market is expected to grow to almost $26 billion by 2001.
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We compete with the following major products and companies in the system
and network management industry:
Products Maker Base Platform
------------------- ------------------------- -------------------------------
Net View IBM Mainframe
TME IBM's Tivoli subsidiary Mid-range server
Unicenter Computer Associates Mainframe
COMMAND/POST BMC Software Mainframe
OpenView Hewlett-Packard Mid-range server
Most of the makers listed above are expanding their base focus to include
other platforms through partnerships, acquisition or further internal
development. All of 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 consolidate from 7 to 16 computer consoles. However, their
technology does not allow significant console consolidation into one monitor.
Due primarily to the invasive nature of the active software agent, we believe
each of these products requires a significant number of people to install and
maintain.
Our AlarmPoint product competes against several other products, including
products supplied by companies such as Telamon and Attention. We believe
AlarmPoint has more features than other similar products currently available 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 difficult to measure 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 niche oriented. This has allowed us to build a reputation without
competing against large consulting services organizations, such as IBM and EDS.
As our customer base grows, we believe we will compete more directly with these
companies.
Research and Development
The systems and network management industry is characterized by rapid
technological change, including changes in customer requirements, frequent new
product introductions and enhancements, and evolving industry standards. We
believe that continued research and development efforts are an important factor
in our ability to maintain technological competitiveness.
Our recent research and development activities have been substantial. Other
than the Virtual Command Center and Global Watch products, all of our products
were developed in 1998. Our research and development costs were approximately
$2.8 million in 1999 and approximately $1.3 million in 1998. We are currently
focusing our product development efforts on extending the application of our
software products across multiple platforms, including the various versions of
UNIX and Linux.
Patents, Trademarks and Copyrights
We have three patent issued and one patent pending for the Virtual Command
Center and related products. Our trademarks include Global MAINTECH(TM),
AlarmPoint(TM) and Datal(TM). In June 1999, we applied to register substantially
all of our software products with the U.S. copyright office.
We license hardware that is used in our Virtual Command Center product from
Circle Corporation. Under the license, we can distribute the hardware worldwide,
except in Japan. The initial term of this license expires on December 20, 2004.
Employees
As of March 31, 2000, we had 82 full-time employees in our continuing
operations.
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MANAGEMENT
Directors and Executive Officers
The following table lists our current directors and executive officers:
Name Age Position
---- --- --------
Trent Wong 40 Chief Executive Officer and Director
James Geiser 50 Chief Financial Officer and Secretary
W. Patrick Kranz 48 Chief Operating Officer
David H. McCaffrey 55 Director
John E. Haugo 64 Director
James G. Watson 56 Director
William Howdon 56 Director
Mr. Wong has served as our chief executive officer since November 1999. He
served as our group president from September 1999 to November 1999. Mr. Wong has
also served as president of Singlepoint Systems, Inc. since its acquisition by
us in November 1998. Mr. Wong was president and co-founder of Singlepoint's
predecessor company, Enterprise Solutions, Inc., from May 1994 until November
1998.
Mr. Geiser has served as our secretary since September 1993 and as our
chief financial officer 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.
Effective July 3, 2000, Mr. Geiser will resign as our chief financial officer
and secretary.
Mr. Kranz joined our company in January 2000 and has served as our chief
operating officer since March 2000. From 1995 to 1999, Mr. Kranz was executive
vice president of Minnesota Pizza Company, LLC. Mr. Kranz holds an M.B.A. from
the University of Michigan and a B.S. from the University of Illinois. He is a
certified public accountant.
Mr. McCaffrey served as our chief executive officer from January 1995 until
November 1999 and has served as a director since January 1995. Mr. McCaffrey
also served as chief executive officer of our subsidiary, Global MAINTECH, Inc.,
from December 1994 until November 1999. Mr. McCaffrey served as president, chief
executive officer and chief financial officer of Rimage Corporation from April
1989 to October 1994 and as a director of Rimage Corporation from November 1992
until October 1994.
Mr. Haugo has served as a director since June 1997. Mr. Haugo is currently
chief executive officer and chairman of the board of directors of MedServe Link
Inc., a company that develops intranets to connect healthcare providers and
payers. He was vice president and general manager of the Serving Software Group
of HBO and Company from 1994 to 2000. Mr. Haugo also serves on the board of
directors of St. Paul Software, Inc., Catalog Marketing Services, Inc. and
Mediserve Information Systems, Inc.
Mr. Watson became a director 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 reductions programs, and key strategic
relationships with Breece Hill's suppliers and subcontractors. He became
president and chief executive officer of Breece Hill in September 1998. From
1993 to 1995, Mr. Watson served as vice president of marketing and sales for
Areal Technology.
Mr. Howdon became a director in May 1999 and serves as vice president of
corporate development of Breece Hill. Mr. Howdon served as a director of Breece
Hill from 1995 until 1999 and as vice chairman of the
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board from September 1998 until April 1999. Mr. Howdon has served as a director
of several public and private companies, including the 20/20 Financial Group,
BioDevelopment Corp. and First Fidelity Acceptance Corp.
Effective as of July 3, 2000, Charles Smart will replace Mr. Geiser as our
new chief financial officer. Mr. Smart previously served as chief financial
officer and treasurer of Contractors eSource, Inc., an e-commerce company, since
March 1999. From July 1997 to February 1999, he served as chief financial
officer and treasurer of California ISO Corporation, an independent system
operator managing the California electric power system. From 1991 until June
1997, he served as Treasurer and Manager of Treasury Services of Consolidated
Freightways, Inc., a land and airfreight transportation company. Before 1991, he
served for over ten years as Vice President and Manager of Corporate Services
Division at First Interstate Bank, N.A.
Board Committees
Before February 19, 1999, our board of directors did not have any standing
audit, compensation, stock option or nominating committees. On February 19,
1999, our board of directors 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 our independent
auditors, as well as our accounting principles and systems of internal controls,
and reports the results of its review to the full board of directors and to
management.
The compensation committee, consisting of Messrs. Haugo and Howdon, makes
recommendations concerning executive salaries and incentive compensation for
employees and administers our 1999 stock option plan. The board of directors as
a whole administers our 1989 stock option plan.
Directors' Compensation
We do not pay any director's fees. We may reimburse our outside directors
for expenses actually incurred in attending meetings of the board.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that reflect
our plans, estimates and beliefs.
In December 1999, we announced a planned sale of our Breece Hill business.
We have classified our Breece Hill business as discontinued operations in our
consolidated financial statements.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net Sales. Net sales for the first quarter of 2000 were $2,090,000 compared
to net sales for the first quarter of 1999 of $2,580,000. The $490,000 decrease
is primarily related to decreased sales of our Virtual Command Center product.
The decline in sales for our Virtual Command Center product is related to the
impact of a patent suit filed in February 2000 which was settled in March 2000.
While the patent claim was settled to avoid protracted and potentially costly
litigation, the suit delayed the closing of several product sales until the
second quarter of 2000.
Cost of Sales. Cost of sales decreased in the first quarter of 2000 by
$266,000. Cost of sales as a percentage of net sales decreased to 23% in the
first quarter of 2000 from 29% in the first quarter of 1999. The majority of the
decrease is related to a decrease in software amortization, which is due to the
write-off of portions of capitalized software costs in the fourth quarter of
1999. As a result, gross margin as a percentage of net sales was 77% in the
first quarter of 2000 compared to 71% in the first quarter of 1999.
Selling General and Administrative. Selling, general and administrative
costs were approximately $3,722,000 in the first quarter of 2000 compared to
$1,669,000 in the first quarter of 1999. The increase of $2,053,000 is primarily
due to an increase of approximately $1,204,000 from acquisitions made by us
since March 31, 1999. The majority of that increase is related to salaries. The
remaining increase is due to increases in payroll
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and professional expenses. Payroll increased in our Singlepoint Systems
subsidiary and also in the portion of the business that we intend to return to
Infinite Graphics. Professional expenses include legal, audit, investor
relations expenses and other professional services. Legal expenses increased due
to the divestitures of business units as well as expenses attributable to the
patent lawsuit. Audit expenses increased due to the complexity of our
acquisition and divestiture activities. Investor relations expenses were high in
the first quarter of 2000 as a result of the special shareholders meeting held
on April 5, 2000.
Research and Development. Research and development costs were $119,000 in
the first quarter of 2000 compared to $349,000 in the first quarter of 1999. The
decrease of $230,000 is substantially due to decreases in payroll and staffing
levels devoted to product research and development.
Other Operating Expenses. Other operating expenses were approximately
$2,227,000 in the first quarter of 2000, primarily for the expensing of
purchased technology. While we believe the purchased technology has value, the
technology has an insufficient history to provide evidence of satisfactory
future cash flows, discounted at a rate commensurate with the risks involved as
determined in the fourth quarter of 1999.
Other Income and Expenses. Other income and expenses consist of interest
expense, amortization of debt issue costs and interest income. The increase of
approximately 164,000 in interest expense is due to the increase in debt since
March 31, 1999. The amortization of deferred debt costs declined due to the full
amortization or write-off of unamortized debt issuance costs subsequent to March
31, 1999.
We have granted registration rights to the holders of 7,400 shares of our
Series D, E and F convertible preferred stock that require us to register the
shares of common stock underlying these convertible securities. If the
registration statement registering those shares is not declared effective by the
SEC by:
* the 90th day after January 19, 2000 for the Series D convertible
preferred stock;
* the 120th day after December 30, 1999 for the Series E convertible
preferred stock; or
* the 120th day after February 23, 2000 for the Series F convertible
preferred stock,
then we must pay to each holder affected by the event listed above an amount
equal to 2% of the stated purchase price of the series of convertible preferred
stock held by the holder. The amount will increase to 3% of the stated purchase
price per month for each subsequent monthly period until the event listed above
is cured. The aggregate stated purchase price was approximately $2.7 million for
the Series D stock, approximately $2.7 million for the Series E stock and 2.0
million for the Series F stock. As of May 16, 2000, the registration statement
is not effective and, unless we obtain a waiver, we will begin to incur these
expenses during the second quarter of 2000.
Loss from Discontinued Operations. The loss on disposal of discontinued
operations of $1,664,000 in the first quarter of 2000 reflects a charge to
increase our earnout liability to the former shareholders of Breece Hill.
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31,
1998
Net Sales. Net sales 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
system sales between 1999 and 1998 was primarily due to reduced sales of our
Virtual Command Center product.
Maintenance fees on previously sold systems were $1,299,000 in 1999
compared to $948,000 in 1998. The increase in maintenance fees relates to fees
on new products in 1999. Consulting fees were $3,458,000 in 1999 compared to
$704,000 in 1998. The increase in consulting fees in 1999 is due to the
increased consulting fees earned by our subsidiary Singlepoint Systems, which we
acquired in November 1998.
Other revenues increased to $2,199,000 in 1999 from $312,000 in 1998. Other
revenues primarily consist of software product sales, which increased
significantly in 1999 due to the inclusion of Singlepoint Systems and the
printed circuit board division sales for the full year.
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Cost of Sales. Cost of sales as a percentage of net sales decreased to
36.9% in 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 net sales compared to 1998. Cost of sales for 1999 includes
$210,000 for writedown of inventory, primarily component parts for our Virtual
Command Center product. Gross margin from continuing operations in 1999 was
63.1% compared to 62.6% in 1998.
Selling, General and Administrative. Selling, general and administrative
costs were $12,855,000 in 1999 compared to $4,414,000 for 1998. The year-to-year
increase of $8,441,000 is related to non-cash equity transactions and to
acquisitions. In 1999, we 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 us to reflect this cost at
the start of the program. We do 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 the assets
acquired from Lavenir Technologies, Inc. on September 29, 1999 were $628,000.
Selling, general and administrative expenses attributable to acquisitions and
start-up operations made during 1998 increased $4,022,000 over the prior year as
a result of including those 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
our financing and acquisition activities in 1999. Rent increased as a result of
our additional space requirements for which multiple year commitments were made
during 1998. The increase in advertising expenses is consistent with the
additional products we sell and the development of materials for distribution to
potential customers.
In the fourth quarter of 1999, we took action to reduce expenses in our
Virtual Command Center system business, primarily in the software development
function, and reduced the number of employees by approximately 20 from a total
of 40 in the Virtual Command Center product and corporate administration areas.
Research and Development. Research and development costs were approximately
$2,830,000 in 1999 compared to $1,291,000 in 1998. 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. Other operating expenses of $5,442,000 for 1999
consist of restructuring charges for writedowns of capitalized software
development costs, purchased technology and equipment. In the fourth quarter of
1999, we determined that capitalized development costs with a net book value of
$1,938,000 would not be recoverable due to our decision to use different tools
and techniques in future development. We also entered into settlement
discussions with Infinite Graphics to transfer back specified assets previously
acquired by us and to resolve mutual claims. This resulted in a charge of
$2,470,000, primarily for the writedown 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. Other income and expenses in 1999 consisted of
interest expense, interest income and expenses related to the issuance of debt
and equity. The increased interest expense is due to the higher level of debt
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 the registration of the underlying common stock into which Series B and
Series C convertible preferred stock are convertible and approximately
$1,658,000 for the intrinsic value of warrants issued to lenders. In 1998, 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 we have acted as lessor of our Virtual Command Center
systems. These lease activities did not occur in 1999.
Loss from Discontinued Operations. 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 our decision to sell our Breece Hill subsidiary,
which we acquired in April 1999. We determined that Breece Hill would require
additional
23
<PAGE>
capital funding and decided to sell Breece Hill to focus capital resources on
our core software products and services businesses. The loss from discontinued
operations includes $2,920,000 of amortization of purchased technology.
Liquidity and Capital Resources
Working Capital. As of March 31, 2000, we had negative working capital of
$18,011,000 compared to negative working capital of $17,438,000 as of December
31, 1999. The increase is primarily due to the increase in net liabilities of
discontinued operations of $1,539,000, and a liability for purchased technology
of $750,000 which was partially offset by a paydown of notes payable from
proceeds of equity raised in the first quarter of 2000.
Net Cash Used in Operating Activities. Net cash used in operating
activities for the quarter ended March 31, 2000 was $2,324,000. The major
adjustments to reconcile the net loss in the first quarter of 2000 to net cash
used in operating activities were depreciation and amortization of $1,015,000
and loss from discontinued operations of $1,539,000 and a non-cash loss from
purchased technology write-offs of $1,800,000. Cash used by changes in operating
assets and liabilities was $305,000. For operating assets, cash of $107,000 was
provided by current assets primarily from a decrease in accounts receivable and
cash of approximately $412,000 was used by current liabilities primarily by
reductions in accounts payable and other accrued liabilities.
Net cash used in operating activities was approximately $1,189,000 for the
year ended December 31, 1999. 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 and the loss on disposal of discontinued
operations, both of which relate to our decision to sell our Breece Hill
subsidiary. In 1999, we 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. For 1999, cash used by changes in operating assets and liabilities was
attributable to an increase in accounts receivable and prepaid expenses of
$634,000, offset in part by an increase in accounts payable of $912,000, an
increase in accrued interest and penalties of $804,000 and an increase in
accrued liabilities of $567,000.
Cash Used by Investing Activities. Cash used by investing activities in the
quarter ended March 31, 2000 was approximately $256,000. This primarily reflects
an investment in purchased technology of $100,000, net purchases of property and
equipment of $122,000, and investment of $56,000 in patents.
Cash used by investing activities in the year ended December 31, 1999 was
approximately $6,801,000. These activities included 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 for the development of enhancements to one or more particular
software programs occurring in the first nine months of our fiscal year. In the
last quarter of 1999, we decided to change the direction of our software
development program and significantly curtailed our software development costs.
We wrote off $1,938,000 of these costs in 1999. The investment in property and
equipment in 1999 also occurred substantially in the first nine months of the
year.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities was approximately $1,701,000 in the quarter ended March 31, 2000.
This reflects net proceeds of approximately $2,370,000 from the issuance of
Series D and Series F convertible preferred stock and net cash of approximately
$506,000 from the issuance of common stock as a result of the exercise of stock
options. We also received $110,000 in proceeds from a note receivable. These
proceeds were partially offset by the $1,284,000 reduction of notes payable.
Net cash provided by financing activities was approximately $9,498,000 in
the year ended December 31, 1999. This is attributable to approximately
$3,862,000 in proceeds from the issuance of Series C and Series E convertible
preferred stock and $2,637,000 from the sale of common stock. Cash was also
provided from the issuance of long-term debt in the amount of approximately
$4,311,000, offset by the disbursement for deferred debt costs of approximately
$139,000. In 1999, we made payments of $1,232,000 on long-term debt.
We will need to raise additional capital to support operations through the
second quarter. We expect that our Breece Hill subsidiary will not be a
substantial drain on our cash resources and believe that Breece Hill will be
sold during the year 2000. We believe our working capital will improve as our
profitability improves. We expect
24
<PAGE>
our profitability to improve as a result of further increases in sales and the
expense reduction programs implemented during fourth quarter of 1999.
Nevertheless, we can provide no assurance as to our future profitability, the
availability of additional equity or debt financing, or the completion of our
projected asset and business sales.
Recent Developments
Proposed Sale of Breece Hill Technologies, Inc. On February 3, 2000, we entered
into a stock purchase agreement with Tandberg Data ASA, Hambrecht & Quist
Guaranty Finance LLC, Greyrock Capital and Cruttenden Roth, Incorporated, under
which Tandberg would purchase our Breece Hill subsidiary. The transaction
required approval by both our and Tandberg's shareholders. Our shareholders
approved the transaction at a special meeting held on April 5, 2000. Tandberg
informed us that it did not believe that its shareholders would approve the
transaction and, in a meeting on May 4, 2000, Tandberg's shareholders failed to
approve the acquisition. Together with Breece Hill, we have commenced a lawsuit
in federal district court against Tandberg for various claims arising out of
Tandberg's shareholders' failure to approve the acquisition. We are considering
additional strategic options for Breece Hill.
Proposed Sale of Lavenir Software Operations. On March 24, 2000, we entered
into a letter of intent with a third party to sell substantially all of the
software rights, including the source code, trademarks and copyrights relating
to a suite of computer-aided design and manufacturing software. We originally
acquired these assets and rights from Lavenir Technology, Inc. in September
1999. In April 2000, we and the third party mutually agreed to terminate the
letter of intent and not to proceed with the proposed sale. We will continue to
operate the Lavenir software business and may seek other potential acquirers of
this business.
Proposed Settlement Agreement with Infinite Graphics Incorporated. We
entered into a letter of intent with Infinite Graphics to transfer back assets
used in computer-aided design and manufacturing software systems and to
terminate the related software licenses in exchange for the release of our
contingent consideration payment obligation under the original asset purchase
agreement. We originally acquired the assets and licenses from Infinite Graphics
in February 1998. Because we were unable to reach an agreement with Infinite
Graphics, we have returned the assets effective as of May 1, 2000 and are no
longer operating or supporting this software business.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table shows information about the beneficial ownership of our
voting securities as of June 27, 2000 by:
* each person known to us to beneficially own more than 5% of any class
of our voting securities;
* each of our executive officers named in the summary compensation
table;
* each of our directors; and
* all of our directors and executive officers as a group.
Shares of common stock subject to options, warrants and convertible
securities that are exercisable within 60 days of June 27, 2000 are treated as
outstanding for purposes of computing the percentage ownership of the person
holding those options, warrants or convertible securities. Those shares,
however, are not treated as outstanding for purposes of computing the percentage
ownership of any other person.
The address of each shareholder is c/o 7578 Market Place Drive, Eden
Prairie, Minnesota 55344. Except as otherwise indicated in the footnotes to the
table, each of the shareholders identified below has sole voting and investment
power for all shares shown as beneficially owned by that shareholder.
25
<PAGE>
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Beneficially Owned Beneficially Owned
---------------------------- ----------------------------------------------------------
Number of Percentage Number of Percentage
Shares of of Shares Shares of of Shares
Number of Percentage Series A of Series A Series B of Series B
Name Shares of Shares Stock Stock Stock Stock
------------------------- ------------ ------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Trent Wong 284,200 4.7% -- -- -- --
David H. McCaffrey 532,000(1) 8.8% -- -- -- --
John E. Haugo 31,000(2) 0.5% -- -- -- --
James G. Watson 130,000 2.2%
William Howdon 60,000 1.0%
Donald Fraser 5,334(3) 0.1% 26,670 47.6% -- --
James Lehr 2,134(3) 0.1% 10,670 19.0% -- --
Donald Hagen 1,067(3) 0.1% 5,335 9.5% -- --
Henry Mlekoday 1,334(3) 0.1% 6,670 11.9% -- --
Douglas Swanson 1,334(3) 0.1% 6,670 11.9% -- --
Aaron Boxer Rev Trust
u/a dtd 8/1/89(5) 11,946(4) 0.2% -- -- 3,446 5.1%
WCN/GAN Partners, Ltd. 409,026 6.8% -- -- -- --
John M. Liviakis 753,000 13.1% -- -- -- --
Industricorp & Co. FBO
1561000091 17,334(5) 0.3% -- -- 5,000 7.4%
John O. Hanson 21,320(6) 0.4% -- -- 6,150 9.2%
Crow 1999 CRUT 11,734(7) 0.2% -- -- 3,385 5.0%
Nash, LLC 537,805(8) 9.3% -- -- -- --
All officers and
directors as a group (7
persons) 1,101,200(9) 16.9% -- -- -- --
</TABLE>
----------
(1) Includes 254,000 shares of common stock issuable upon the exercise of
outstanding options.
(2) Includes 15,000 shares of common stock issuable upon the exercise of
outstanding options.
(3) Shares issuable upon the conversion of Series A convertible preferred
stock.
(4) Consists of 5,973 shares issuable upon the conversion of Series B
convertible preferred stock, assuming a conversion price of $3.75, and
5,973 shares issuable upon the exercise of warrants.
(5) Consists of 8,667 shares issuable upon the conversion of Series B
convertible preferred stock, assuming a conversion price of $3.75, and
8,667 shares issuable upon the exercise of warrants.
(6) Consists of 10,660 shares issuable upon the conversion of Series B
convertible preferred stock, assuming a conversion price of $3.75, and
10,660 shares issuable upon the exercise of warrants.
(7) Consists of 5,867 shares issuable upon the conversion of Series B
convertible preferred stock, assuming a conversion price of $3.75, and
5,867 shares issuable upon the exercise of warrants.
(8) Consists of 487,805 shares issuable upon the conversion of Series E
convertible preferred stock, assuming a conversion price of $1.36, and
50,000 shares issuable upon the exercise of warrants.
(9) Includes 743,200 shares of common stock issuable to all officers and
directors as a group upon the exercise of outstanding options.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides the cash compensation awarded to or earned by
our chief executive officer and any employee who earned in excess of $100,000
during the year ended December 31, 1999. No other executive officer earned
salary and bonus in excess of $100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Annual Compensation Awards
------------------------------------------- --------------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options
------------------------------------- ------------- ------------- ------------- --------------------------
<S> <C> <C> <C> <C>
Trent Wong (1) 1999 $ 21,500 $ -- 117,000
Chief Executive Officer
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.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted Fiscal Year ($/Share) Date
------------------------------------------ --------------- ---------------- ---------- --------------
<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.
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<PAGE>
The following table provides information concerning stock option exercise
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>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at FY-end Options at FY-end
Acquired on Value ---------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------- ------------- ------------- ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Trent Wong -- -- -- 284,200 $ 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. Nonetheless, 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.
(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. Nonetheless, 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.
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<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "GLBM." Before November 12, 1996, our common stock was quoted on the
Nasdaq Small Cap Market under the symbol "GBMT." Our common stock has been
listed on the Frankfurt Stock Exchange since September 7, 1999.
As of June 27, 2000, we had approximately 3,165 shareholders of
record of its common stock. The following table shows the high and low bid
quotations for our common stock as reported in the over-the-counter market
during the periods indicated. These quotations represent prices quoted between
dealers, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. We effected a one-for-five reverse
stock split of our common stock and our Series B convertible preferred stock on
September 2, 1999. All prices below are shown as if that split had occurred
before the periods presented.
1998 High Low
------ -----
First Quarter $13.75 $9.40
Second Quarter 13.75 9.70
Third Quarter 11.70 5.65
Fourth Quarter 8.45 5.30
1999
First Quarter $12.19 $7.19
Second Quarter 9.84 5.94
Third Quarter 12.25 6.09
Fourth Quarter 8.16 5.13
2000
First Quarter $10.37 $6.25
Second Quarter (through June 27, 2000) 5.75 2.09
On April 19, 2000, Nasdaq notified us that it closed our application for
listing on the Nasdaq SmallCap Market because our share price had fallen below
$4.00, the minimum closing bid price required for initial inclusion in the
SmallCap Market. Nasdaq also noted that we did not file our 1999 Annual Report
in a timely manner. We filed a Notification of Late Filing on Form 12b-25 with
the SEC on March 31, 2000 and our Annual Report would have been considered
timely if filed on or before April 14, 2000. Because of the complexities of our
operations, acquisitions and discontinued operations we were not able to
finalize our financial statements until after that date. We expect to reapply
for listing on the SmallCap Market as soon as we meet the SmallCap Market's
requirements for initial inclusion.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. We are currently accruing
dividends on our Series B, Series D, Series E and Series F convertible preferred
stock at the annual rate of 8% per year, payable at our option in either cash or
common stock. No dividends are payable until the preferred stock is converted to
common stock.
DESCRIPTION OF CAPITAL STOCK
At our special meeting of shareholders on April 5, 2000, our shareholders
approved an amendment to our Articles of Incorporation to increase our
authorized capital stock to 18,500,000 shares. As of June 27, 2000, there
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<PAGE>
were 5,764,880 shares of common stock outstanding. Our board of directors has
designated from our authorized capital stock the following preferred series
stock:
o 887,980 shares of Series A convertible preferred stock;
o 123,077 shares of Series B convertible preferred stock;
o 1,675 shares of Series C convertible preferred stock;
o 2,775 shares of Series D convertible preferred stock;
o 2,675 shares of Series E convertible preferred stock; and
o 2,000 shares of Series F convertible preferred stock.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors, so that the holders of more
than 50% of the aggregate voting power of the outstanding common stock and
preferred stock can elect all directors. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive dividends declared by our board of directors out of funds
legally available for dividends and in liquidation proceedings. Holders of
common stock have no preemptive rights to subscribe for additional shares from
us. The common stock is not subject to redemption.
Preferred Stock
Our articles of incorporation authorize our board of directors, without
further shareholder action, to issue preferred stock in one or more classes or
series and to fix the voting rights, liquidation preferences, dividend rights,
repurchase rights, conversion rights, redemption rights and terms, including
sinking fund provisions, and other rights and preferences, of the preferred
stock. The issuance of preferred stock could adversely affect the voting,
dividend and other rights of the holders of our common stock.
As June 27, 2000, we had:
* 86,896 shares of Series A convertible preferred stock outstanding,
which were held of record by approximately 6 shareholders;
* 51,632 shares of Series B convertible preferred stock outstanding,
which were held of record by 25 shareholders;
* 2,725 shares of Series D convertible preferred stock outstanding,
which were held of record by 7 shareholders;
* 2,675 shares of Series E convertible preferred stock outstanding,
which were held of record by 3 shareholders; and
* 2,000 shares of Series F convertible preferred stock outstanding,
which were held of record by 1 shareholder.
No shares of Series C convertible preferred stock are currently
outstanding.
Voting Rights. The holders of Series A and Series B convertible preferred
stock are entitled to vote on all matters submitted to a vote of shareholders.
The number of votes for each share held of record equal to the number of shares
of common stock into which each share of preferred stock is then convertible.
The holders of Series D, Series E and Series F convertible preferred stock have
no voting rights, unless we intend to issue shares of preferred
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<PAGE>
stock which could adversely affect the rights of those holders, or voting is
required by law. There is no cumulative voting for the election of directors.
Dividends. Holders of Series A stock are entitled to receive ratably any
dividends declared by any board of directors. Holders of Series B, Series D,
Series E and Series F convertible preferred stock are entitled to receive
dividends at an annual rate of 8% per share. Dividends on the Series B, Series
D, Series E and Series F convertible preferred stock are cumulative and are only
payable upon conversion of the corresponding series of preferred stock.
At our option, we may pay dividends in cash or shares of common stock. The
number of shares of common stock issuable as a dividend on the Series B
convertible preferred stock will equal the total dividend payment then due
divided by the average closing bid price of the common stock for the 10
consecutive trading days immediately before the payment of the dividends. The
number of shares of common stock issuable as a dividend on the Series D, E and F
convertible preferred stock will equal the total dividend payment then due
divided by the conversion price in effect on the date that the dividend payment
is due.
Conversion. Each series of our convertible preferred stock is immediately
convertible into shares of common stock at the option of the holder. The
calculation for determining the number of shares of common stock into which our
convertible preferred stock is convertible is described below:
* Series A preferred stock. For each share of Series A convertible
preferred stock, the holder will receive that number of shares of
common stock which equals the number obtained by dividing $0.375 by
the conversion price of $1.875.
* Series B preferred stock. For each share of Series B convertible
preferred stock, the holder will receive that number of shares of
common stock which equals the per unit purchase price of $32.50
divided by the conversion price. The conversion price is based on 80%
of the average closing bid price of the common stock for the 20
consecutive trading days immediately before the conversion date. The
conversion price may not be more than $12.50 or less than $3.75 per
share.
* Series D preferred stock. For each share of Series D convertible
preferred stock, the holder will receive that number of shares of
common stock which equals the per share purchase price of $1,000
divided by the conversion price. The conversion price equals the
lesser of 75% of the average of the three lowest closing bid prices of
our common stock during the 15 days immediately before the conversion
date or $5.4375.
* Series E preferred stock. For each share of Series E convertible
preferred stock, the holder will receive that number of shares of
common stock which equals the per share purchase price of $1,000
divided by the conversion price. The conversion price equals the
lesser of 70% of the average of the three lowest closing bid prices of
our common stock during the 15 trading days immediately before the
conversion date or $5.125.
* Series F preferred stock. For each share of Series F convertible
preferred stock, the holder will receive that number of shares of
common stock which equals the per share purchase price of $1,000
divided by the conversion price. The conversion price equals the
lesser of 75% of the average of the three lowest closing bid prices of
our common stock during the 15 trading days immediately before the
conversion date or $6.75.
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<PAGE>
The table below shows the total number of shares of common stock into which
each series of our convertible preferred stock is convertible as of June 27,
2000, based on the conversion prices described above.
<TABLE>
<CAPTION>
Shares of Common
Number of Preferred Conversion Stock Issuable
Series of Preferred Stock Shares Outstanding Price Upon Conversion
------------------------- --------------------- --------------- ------------------
<S> <C> <C> <C>
Series A 86,896 $ 1.875 17,379
Series B 51,632 $ 12.50 134,660
$ 3.75 448,865
Series D 2,725 $ 1.76 1,548,295
Series E 2,675 $ 1.64 1,631,098
Series F 2,000 $ 1.76 1,136,364
</TABLE>
The table below shows the date on which our convertible preferred stock
will automatically convert into common stock.
Series of Preferred Stock Mandatory Conversion Date
------------------------- -------------------------
Series B September 23, 2001
Series D January 19, 2002
Series E December 30, 2001
Series F February 23, 2002
The Series B convertible preferred stock automatically converts only if the
underlying shares of common stock are registered under the Securities Act and
our common stock is quoted on Nasdaq. The Series A convertible preferred stock
does not automatically convert into common stock.
Ownership Limitation. A holder may not convert shares of convertible
preferred stock if after conversion the holder, together with its affiliates,
would beneficially own more than 4.99% of the outstanding shares of our common
stock. This limitation does not apply to an automatic conversion.
Redemption. We have the option to redeem all of our outstanding Series D,
Series E and Series F convertible preferred stock at a redemption price equal to
the greater of:
* 130% of the stated value of $1,000 per share for the Series D
convertible preferred stock and 125% of the stated value of $1,000 per
share for the Series E and Series F convertible preferred stock, plus
accrued dividends on the shares; or
* the dollar value obtained if the convertible preferred stock had been
converted and the underlying shares were sold at the closing bid price
on the redemption notice date.
We do not have the right to redeem the Series A or Series B convertible
preferred stock.
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<PAGE>
Warrants and Options
As of June 27, 2000, we had outstanding options to purchase 1,423,286
shares of common stock with a weighted average exercise price of $8.31 per
share. These options expire between August 16, 2001 and January 4, 2005.
As of June 27, 2000, we also had outstanding warrants to purchase a total
of 1,883,226 shares of common stock, with a weighted average exercise price of
$11.13 per share. These warrants are all currently exercisable and expire
between December 31, 2000 to March 1, 2006.
All of our outstanding warrants and options provide for anti-dilution
adjustments if there are changes in our corporate structure, such as mergers,
consolidations, reorganizations, recapitalizations, stock dividends, or stock
splits.
Anti-Takeover Provisions of the Minnesota Business Corporation Act
The provisions of Minnesota law described below could have an anti-takeover
effect. These provisions are intended to provide management flexibility to
enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by our board. They are also
designed to discourage an unsolicited takeover of us if our board determines
that a takeover is not in our best interests and the interests of our
shareholders. These provisions, however, could have the effect of discouraging
attempts to acquire us, which could deprive shareholders of opportunities to
sell their shares of common stock at prices higher than prevailing market
prices.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in some mergers and exchanges to which we are a party, that
results in the beneficial ownership of 20 percent or more of the voting stock
then outstanding. Section 302A.671 requires approval of the acquisition by a
majority vote of our shareholders before its consummation. In general, shares
acquired in the absence of that approval are denied voting rights and are
redeemable at their then fair market value by us within 30 days after the
acquiring person has failed to give a timely information statement to us or the
date the shareholders voted not to grant voting rights to the acquiring person's
shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any subsidiaries, with any
shareholder that purchases ten percent or more of our voting shares within four
years from the date the shareholder first acquired ten percent or more ownership
in our company. The business combination may be permitted if it is approved by a
committee of all of the disinterested members of our board of directors before
the date the shareholder first acquired ten percent or more ownership interest.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Norwest Bank,
Minnesota N.A.
Limitation of Liability and Indemnification Matters
Our restated articles of incorporation limit the liability of directors to
the maximum extent permitted by Minnesota law. Our restated articles of
incorporation include a provision that eliminates the personal liability of our
directors for monetary damages for breach of fiduciary duty as a director,
except for liability:
* for any breach of the director's duty of loyalty to the corporation or
our shareholders;
* for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
* under Sections 302A.559 or 80A.23 of the Minnesota Statutes; and
* for any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we will indemnify our officers and directors to the
extent permitted by Minnesota law.
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<PAGE>
RELATED PARTY TRANSACTIONS
Our management believes that the terms of the transactions described below
were no less favorable to us than would have been obtained from an unaffiliated
third party. Any future material transactions and loans with officers, directors
or 5% beneficial shareholders of our common stock, or affiliates of those
persons, will be on terms no less favorable to us than could be obtained from
unaffiliated third parties and will be approved by a majority of the outside
members of our board of directors who do not have an interest in the
transactions.
We have agreed with the State of Minnesota Department of Commerce that so
long as the shares covered by this prospectus are registered in the State of
Minnesota, or one year from the date of this prospectus, whichever is longer, we
will not make loans to our officers, directors, employees, or principal
shareholders, except for loans made in the ordinary course of business, such as
travel advances, expense account advances, relocation advances, or reasonable
salary advances.
Stock Option Exercises
On December 16, 1996, based on the advice of our financial advisor, the
following persons exercised stock options:
o Bob Donaldson, former director and president, exercised stock options
to purchase 146,000 shares of common stock ,
o David McCaffrey, one of our directors, exercised stock options to
purchase 168,000 shares of common stock
o Jim Geiser, our chief financial officer and secretary, exercised stock
options to purchase 48,000 shares of common stock.
Each of these persons paid their exercise prices in the form of personal
promissory notes payable to us. Each promissory note bears an interest rate of
5.75% per year and is scheduled to be repaid no later than the termination date
of the option. Mr. Donaldson repaid his promissory note in full, in the amount
of $109,000, on March 2, 2000. Mr. Geiser repaid his promissory note in full, in
the amount of $59,000, on November 15, 1999. Mr. McCaffrey repaid his personal
note in full, in the amount of $126,000, during the second quarter of 2000.
Employment Agreement
Effective January 1, 1995, we entered into a written employment agreement
with James Geiser. This agreement had an initial term of three years, which
ended on January 1, 1998, and automatically renews for additional one-year
periods unless we notify Mr. Geiser of our intent not to renew the agreement at
least 90 days before the end of the then-current term. This agreement does not
specify the amount of the salary to be paid to Mr. Geiser. Mr. Geiser's salary
is established from time to time by the Board. Mr. Geiser's salary currently is
less than $100,000. This agreement contains a provision on repayment of Mr.
Geiser's expenses that are reasonably incurred in the performance of his duties.
If we terminate Mr. Geiser's employment without cause, Mr. Geiser is entitled to
receive his annual salary for the remainder of the then-current term of the
agreement.
Purchase of Dabew, Inc.
On February 25, 2000, we entered into an agreement to purchase the Global
Watch product from Dabew, Inc. Mr. Freedman, our vice president of development,
owns Dabew. We have agreed to pay to Dabew the following consideration:
* $400,000 in cash, payable in four equal installments beginning on
February 28, 2000 and ending on December 31, 2001;
* 70,600 shares of our common stock, issuable in four equal installments
beginning on February 28, 2000 and ending on December 31, 2000; and
* options to purchase 100,000 shares of common stock at an exercise
price equal to the average closing bid and asked price of our common
stock on January 31, 2000.
Sale of PhonePoint
On March 28, 2000, we entered into a technology purchase agreement with XO
Technology for the purchase of our 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
agreement, XO Technology has agreed to pay us approximately $750,000, payable in
cash or stock, upon its acceptance of the technology. As of the date of this
prospectus, acceptance has not occurred. We also will have one seat on the board
of directors of XO Technology.
34
<PAGE>
LEGAL PROCEEDINGS
On February 15, 2000, we and our wholly owned subsidiary, Global MAINTECH,
were named as defendants in a patent infringement suit brought by K. Brent
Johnson and I.D.G. Incorporated in federal court for the Northern District of
Oklahoma. The suit alleged that our VCC product, when monitoring a mainframe
computer, infringed on a patent held by the plaintiffs. Although we believe that
the plaintiffs' claims were without merit, we settled the claims on March 16,
2000 to avoid protracted and costly litigation.
There are no material legal proceedings pending against us.
DESCRIPTION OF PROPERTY
Our headquarters are located at 7578 Market Place Drive, Eden Prairie, MN
55344. We lease 17,369 square feet at this location under a lease that expires
on September 30, 2000. In conjunction with our recent acquisitions, we acquired
leases for 53,590 square feet of office space in Boulder, Colorado, 2,062 square
feet of office space in San Jose, California, and 12,000 square feet of office
space in Pleasant Hill, California. These are net leases that provide for
monthly payments through October 31, 2002. We or one of our subsidiaries are
responsible for utilities, insurance and other operating expenses at all
locations. We expect to relocate our headquarters to San Jose, California by
July 31, 2000.
EXPERTS
Our financial statements as of December 31, 1999 and 1998, and for each of
the years in the two-year period ended December 31, 1999, have been included in
this prospectus and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, included in this prospectus,
given on their authority as experts in accounting and auditing.
The report of KMPG LLP contains an explanatory paragraph that states that
we have suffered losses from operations and have a working capital deficiency
and an accumulated deficit that raise substantial doubt about our ability to
continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The report of KPMG LLP also refers to our change in the method of accounting for
depreciation.
LEGAL MATTERS
The validity of the shares offered under this prospectus has been passed
upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act for the common stock offered
under this prospectus. This prospectus does not include all of the information
contained in the registration statement. You should refer to the registration
statement and its exhibits for additional information.
We are subject to the informational requirements of the Exchange Act, and
file reports, proxy statements and other information with the Commission. You
may inspect and copy our reports, proxy statements and other information at the
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of this material at published rates from the public reference branch of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549. Please call the
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference facilities. You may also access our SEC filings over the
Internet at the Commission's website at http:www.sec.gov.
35
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.................F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998................................................F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1999 and 1998....................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998................................................F-7
Notes to Consolidated Financial Statements...................................F-8
Consolidated Balance Sheet as of March 31, 2000 (unaudited).................F-29
Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 (unaudited)......................................F-32
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (unaudited)......................................F-33
Notes to Unaudited Consolidated Financial Statements........................F-34
F-1
<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
F-2
<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 $190,000 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
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
GLOBAL MAINTECH CORPORATATION AND SUBSIDIARIES
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 1,678,069 2,183,769
Convertible preferred stock - Series C, no par value;
1,675 shares authorized; 1,675 shares in 1999 and none in
1998 issued and outstanding; total liquidation preference
of outstanding shares-$1,675,000 1,368,712 -
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.
F-4
<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 principle (39,129,229) (2,003,166)
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.
F-5
<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 Preferred Stock E
------------------ --------------------- ------------------ -----------------
Shares amount Shares amount Shares amount Shares amount
------- --------- ------- ---------- ------ --------- ------ ---------
<S> <C> <C> <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 - - - - - - 2,650 2,389,630
Stock issue costs - - - - 75 (96,000) 25 (292,025)
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 2,675 $2,097,605
=================================================================================
[TABLE CONTINUES]
<CAPTION>
Common stock Additional Notes
----------------- paid in receivables Accumulated
Shares amount capital officers deficit Total
------ ------ ------- ---------- ------------ -----------
Balance at December 31, 1997 3,416,972 - $ 5,295,829 $(294,500) $ (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 218,400 - 1,800,350 - - 1,800,350
Value of stock options issued in acquisition - - 524,000 - - 524,000
Stock issue costs - - (346,922) - - (346,922)
Exercise of common stock options and warrants 23,520 - 35,634 - - 35,634
Sales of series B preferred stock - - - - - 2,183,769
Converted preferred shares Series A 22,987 - 53,905 - - -
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,681,879 - $ 7,362,796 $(294,500) $ (3,869,379) $ 5,443,270
Net loss - - - - (38,897,293) (38,897,293)
Sales of common stock 534,578 - 2,713,399 - - 2,713,399
Sales of series C preferred stock - - 135,288 - - 1,600,000
Sales of series E preferred stock - - 260,370 - - 2,650,000
Stock issue costs - - (235,439) - - (623,464)
Stock, options, and warrants issued for services 648,000 - 2,994,785 - - 2,994,785
Warrants issued in connection with debt - - 1,196,970 - - 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 - - 4,900,000
Breece Hill 45,000 - 11,960,782 - - 11,960,782
SSI - - 2,381,080 - - 2,381,080
Amortization of beneficial conversion
feature on convertible debt - - 460,624 - - 460,624
Exercise of common stock options and warrants 73,575 - 158,740 - - 158,740
Accrual of dividends on preferred stock - - - - (263,974) (263,974)
Payment of preferred dividends with
common stock 6,149 - 35,104 - - 35,104
Conversion of preferred shares 96,880 - 525,519 - - -
Conversion of debt and accrued interest 52,038 - 267,546 - - 267,546
Receipt of payment on notes receivable - - - 59,000 - 59,000
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 5,404,099 - $35,117,564 $(235,500) $ (43,030,646) $ (2,963,431)
========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<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.
F-7
<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: Global MAINTECH Corporation, through its subsidiaries,
Global MAINTECH, Inc. and Singlepoint Systems, Inc., 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. Global MAINTECH Corporation and its
subsidiaries are referred to as the Company in these notes to consolidated
financial statements.
As further discussed in Note 3, the Company's Breece Hill Technologies, Inc.
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
financial statements of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
New accounting pronouncements: Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 as 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, as amended by SAB 101A,
summarizes views of the SEC staff in applying generally accepted accounting
principles to revenue recognition in financial statements. Some aspects of SAB
101 relate to the timing of recognition of revenue and expenses for arrangements
that involve the receipt of nonrefundable up-front fees. SAB 101 requires that
in particular situations the nonrefundable fees and 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 basis, known as FIFO, 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 for
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.
F-8
<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:
Years Ended December 31,
------------------------------
1999 1998
------------- ------------
Loss from continued operations $(18,362,710) $(1,792,108)
Net loss (38,979,851) (1,748,442)
Basic loss per common share:
Loss from continued 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)
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 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, if a signed contract exists, the fee is fixed
and determinable, collection of resulting receivables is probable, and product
returns are reasonably estimable. Delivery is deemed to have occurred upon
shipment or final acceptance, whichever is later. 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 these elements. The
determination of fair value is based on vendor specific objective evidence. If
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, for applicable elements of the arrangement,
evidence of fair value does exist or until these 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, known as 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 these 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.
Capitalized software development costs: Under the criteria prescribed by SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software
F-9
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as to external factors, such as 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, "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 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 Series B stock. As a result
of these stock splits, the applicable conversion prices of 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.
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:
o "in-the-money" stock options and warrants;
o the amount of weighted average common shares which would be added by
the conversion of outstanding convertible preferred stock and
convertible debt;
o the number of weighted average common shares which would be added upon
the satisfaction of conditions for arrangements involving contingently
issuable shares; and
F-10
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o 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 because their inclusion would have been
antidilutive. The following table sets forth the weighted average number of
antidilutive option and warrant shares excluded from the calculation of diluted
loss per common share for the periods indicated:
Years Ended December 31,
---------------------------
1999 1998
--------- -------
Weighted average antidilutive option shares 1,402,200 888,785
Weighted average antidilutive warrant shares 1,498,820 423,044
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:
December 31,
-------------------
1999 1998
------- -------
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 -
In addition to the above convertible securities, at December 31, 1999, there
were 400,000 shares of the Company's Breece Hill subsidiary's Series B preferred
stock outstanding. See Note 3 for additional information. These shares were
convertible into 80,000 shares of the Company's common stock at December 31,
1999. These shares also 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 relating to the
acquisition of various assets and liabilities of Lavenir Technology, Inc. See
Note 7 for additional information. 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 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 the contracts. These contractual arrangements
include accrued dividends on the Company's preferred stock, a minimum earnout
payment for assets acquired from Enterprise Solutions, Inc. and various other
contractual arrangements. See Note 7 for additional information regarding the
Enterprise Solutions acquisition. The settlement of these contractual
obligations, if sought by either party through the issuance of common shares,
would have required 1,202,289 as of December 31, 1999 and 6,523 shares as of
December 31, 1998. 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
F-11
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: Some 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
stockholders' deficit of $2,963,431. In December 1999, the Company approved a
plan to dispose its Breece Hill 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 for additional information. The
Company is also not in compliance with various 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 various acquisition
earnout obligations. The completion of the disposal of Breece Hill and
resolution of various 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 for additional information. 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. Although 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.
Note 3. Discontinued Operations--Breece Hill Technologies, Inc.
On December 27, 1999, the Company approved a formal plan for the disposal of its
Breece Hill 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 Breece Hill have been separately
presented as discontinued operations, and eliminated from the continuing
operations amounts in the accompanying consolidated financial statements and
notes.
F-12
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Breece Hill during 1999: The Company acquired all of the issued
and outstanding common stock and Series A convertible preferred stock of Breece
Hill in a merger with Breece Hill which was effective in April 1999. Under the
terms of the merger, in exchange for the cancellation of their outstanding
Breece Hill shares, holders of Breece Hill 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 Breece Hill's
sales over the twelve months following the acquisition. In addition, in
conjunction with the acquisition of Breece Hill, the Company issued options to
purchase 300,000 shares of the Company's common stock at $17.73 per share to
employees of Breece Hill in exchange for options the employees had to purchase
shares of Breece Hill and warrants to purchase 290,488 shares of the Company's
common stock at $20.63 per share to creditors of Breece Hill in exchange for
warrants the creditors had to purchase shares of Breece Hill. 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 of the Company's common stock at $9.00 per share and
30,000 shares at $10.00 per share, in return for services provided in the Breece
Hill 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 for Breece Hill was $18,663,448. This amount
was comprised of the fair value of the warrants, options, and common stock
issued in the merger 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 the merger was determined by use of the
Black-Scholes valuation model, assuming an expected dividend yield of 0%, a
risk-free interest rate of 5.5%, stock volatility of 112%, and an 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 Breece Hill.
In the Breece Hill merger, the Breece Hill 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 various assets of Breece Hill. The
Company recorded the Breece Hill preferred stock issued as a Breece Hill
minority interest.
Discontinued operations treatment of Breece Hill: As a result of the Company
approving a formal plan for the disposal of Breece Hill on December 27, 1999,
the Company reported Breece Hill's financial position, results of operations and
estimated loss on disposal as discontinued operations.
The Breece Hill 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 various 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.
Loss from operations of Breece Hill from the period of acquisition by the
Company in April 1999 through the discontinued operations measurement date on
December 27, 1999 of $4,409,727 reflects net sales of $24,953,139. The estimated
loss on disposal of Breece Hill 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.
F-13
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Inventories
Inventories consist of the following:
December 31,
-----------------------
1999 1998
---------- --------
Raw materials $ 915,205 $568,167
Completed systems and finished goods 407,131 293,251
---------- --------
Total $1,322,336 $861,418
========== ========
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:
December 31,
-------------------
1999 1998
--------- --------
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
========= ========
Note 6. Capital Assets
The Company's capital assets are comprised of the following:
F-14
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
-------------------------
1999 1998
------------ ------------
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
=========== ===========
Note 7. Acquisitions
Lavenir assets and liabilities: On September 29, 1999, the Company purchased
substantially all the assets and rights to hardware and software products,
trademarks and copyrights of Lavenir Technology, Inc., a California corporation,
under an Agreement and Plan of Reorganization. Subject to the Lavenir Agreement,
the Company also assumed various liabilities of Lavenir, including Lavenir's
outstanding debt, ongoing leases, and contract obligations. The assets and
rights acquired relate primarily to a suite of computer-aided design and
manufacturing software and hardware products sold for use in the printed circuit
board industry.
Under the terms of the Lavenir Agreement, the total purchase price of $5,300,000
is comprised of:
o 266,000 shares of the Company's common stock initially paid to Lavenir
on the closing date;
o $400,000 originally in the form of a payable due on January 31, 2000;
and
o 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
F-15
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for the
software used in the printed circuit board industry acquired as described above.
See Note 14 for additional information. 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 acquired all of the
outstanding stock of Singlepoint Limited, a distributor of Singlepoint Systems,
Inc.'s products, for $80,000. Under the terms of the related acquisition
agreement, the Company is required to pay an earnout payment based upon net
income of Singlepoint Limited for a period after the acquisition date through
April 30, 2000. Through December 31, 1999, no additional earnout amounts have
been required for Singlepoint Limited.
The Company recorded the acquisition of Singlepoint Limited using the purchase
method of accounting. The net liabilities in excess of identifiable assets of
Singlepoint Limited 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 Singlepoint Limited
acquisition.
Enterprise Solutions, Inc. assets and liabilities: On November 1, 1998, the
Company purchased various assets and rights and assumed various liabilities from
Enterprise Solutions, Inc. The net assets and rights acquired relate primarily
to items used in manufacturing and selling event notification software and in
providing services for the implementation of enterprise management solutions.
Total consideration under the terms of the Enterprise Solutions asset purchase
agreement includes:
o $200,000 at the close of the transaction;
o options to purchase 80,000 shares of the Company's common stock at
$6.25 per share; and
o 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
Enterprise Solutions assets acquired for a period of 18 months
following the closing of the acquisition.
The options would be exercisable for a term of 5 years from the asset
acquisition date. In addition, under the Enterprise Solutions agreement, if
Enterprise Solutions does not meet earnout calculations reaching a minimum of
$5,000,000, the Company, at its option, would either pay Enterprise Solutions
the difference in cash or common stock or return the purchased assets and
assumed liabilities, as of the date the earnout calculation is made, to
Enterprise Solutions.
In 1998, based upon the terms described above, the Company recorded the
Enterprise Solutions 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, assuming stock volatility of 112%, a dividend rate of 0%, a
risk-free interest rate of 4.5 % and a five-year option life. The fair value of
the identifiable assets of the operations acquired totaled $326,969 and
consisted of cash of $57,796, accounts 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 Enterprise
operations acquisition.
During 1999, the Company pledged the assets of the Enterprise Solutions
operations to secure borrowings of the Company. In addition, based upon the
operating results of the Enterprise Solutions 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
F-16
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earnout amount that would be required in excess of the $5,000,000 minimum
amount. Negotiations for 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 Enterprise
Solutions 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 the Black-Scholes valuation model, assuming an
expected dividend yield of 0%, a risk-free interest rate of 5.5% to 5.6%, stock
volatility of 112%, and an expected life of four to five years. These items,
correspondingly resulted in a 1999 increase in gross purchased technology for
Enterprise Solutions operations of $7,381,840.
In November 1999, one of the principal shareholders of Enterprise Solutions 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. Initial consideration for the software rights was $425,000 and was
comprised of a $146,680 note payable to Asset Sentinel due six months from the
closing date and forgiveness of an Asset Sentinel 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 sales milestones of the Asset Sentinel products for 18
months after the 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 five
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 Asset Sentinel related
purchased technology.
Infinite Graphics Incorporated assets and liabilities: On February 27, 1998, the
Company acquired various assets, and perpetual software licenses and assumed
various liabilities of a division of Infinite Graphics Incorporated engaged in
the development and sale of computer-aided design and manufacturing software for
the printed circuit board industry. The consideration for the purchase of the
Infinite Graphics assets included $700,000 in cash and contingent consideration
of up to $3,300,000 based on operating results for the Infinite Graphics assets
acquired 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
Infinite Graphics 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 Infinite Graphics operations
met the thresholds surrounding the $3,300,000 contingent consideration element
of the February 1998 agreement with Infinite Graphics. As a result, the Company
increased purchased technology for the Infinite Graphics operations, assigned
$1,435,481 of accounts receivable to Infinite Graphics 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 Infinite Graphics of Infinite
Graphics'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 the Company's inability to pay Infinite Graphics the
outstanding $1,864,519 balance of contingent consideration. As further discussed
in Note 11, as a result of the notice given by Infinite Graphics 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 Infinite Graphics operations.
Unaudited pro forma financial information: The following table summarizes
unaudited pro forma consolidated financial information for the Company's results
of operations as if the acquisitions described above had occurred as of the
beginning of the periods presented:
F-17
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31,
----------------------------
1999 1998
------------ -----------
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)
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 amendments to this debt agreement that provided for a senior
revolving loan maturing in May 2000, a convertible term
F-18
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
loan and 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 modifications based upon
forbearance agreements discussed below, as of December 31, 1999 for 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 Breece Hill subsidiary. Borrowings for the senior revolving loan are subject
to a limit of the lesser of (1) $3,300,000 minus 10% of equity, as defined in
the 1999 debt agreement, and minus any unpaid balance of the convertible term
loan, (2) 80% of eligible receivables, or (3) 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 forbearance agreements with the lender. These agreements
established a forbearance period through March 31, 2000 during which, among
other things: (1) collection of accounts receivable is made through a bank
lockbox and these proceeds are immediately applied to outstanding borrowings;
(2) interest rates on borrowings subject to the 1999 debt agreement are
increased 3% per year; (3) modifications to the borrowing base formula are in
effect; and (4) 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 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 the 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 for 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, as discussed in Note 7, the
Company assumed 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 into 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 an
aggregate value of $212,624. Together 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 the 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. The Company also issued to 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.
F-19
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation of warrants issued in conjunction with debt as described above was
determined by use of the Black-Scholes valuation model, assuming an expected
dividend yield of 0%, a risk-free interest rate of 5.5%, stock volatility of
112%, and an expected life of 4.5 to five years.
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 under 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. The Company also issued 648,000 shares of common stock in
return for investor relations services, 311,000 shares for acquisitions as
described in Note 7, 52,038 shares for the conversion of notes payable as
described in Note 8, and 176,604 shares for 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 under 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.
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 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 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 the 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 before
the conversion date, subject to adjustments. However, the 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. This amount is treated as a
reduction in earnings available, or an increase in loss attributable, to common
stockholders over the period from the date of issuance of the Series B stock to
the earliest date these shares may be converted. All outstanding shares of
Series B stock will be automatically converted into common stock on September
23, 2001 if the Company has registered these common shares under the Securities
Act and the common stock is traded on Nasdaq.
Each warrant issued in 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 stock
contained in the unit will have been converted. In 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 this 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 after February 28, 1999 and 3% for every 30-day period after that until
the registration statement has been declared effective. During 1999, the Company
incurred approximately $370,000 in penalties.
Series C Convertible Preferred Stock issuance: On March 25, 1999, the Company
issued 1,600 shares of its Series C convertible preferred stock to 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 the number of shares of
common stock equal to the $1,000 stated value of each share divided by the
lesser of $12.50 or 80% of the average of the three lowest closing bid prices of
the Company's common stock during the 15 trading days
F-20
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
immediately before 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. This amount is treated as a
reduction in earnings available, or an increase in loss attributable, to common
stockholders over the period from the date of issuance of the Series C stock to
the earliest date these 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 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 the Black-Scholes valuation
model, assuming an expected dividend yield of 0%, a risk-free interest rate of
5.5%, stock volatility of 112%, and an expected life 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
for this private offering.
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 this 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 period after April 25, 1999 and 3% for every 30-day period after
that until the registration statement has been declared effective. During 1999,
the Company incurred approximately $400,000 in penalties.
Series E Convertible Preferred Stock issuance: On December 30, 1999, the Company
issued 2,650 shares of its Series E convertible preferred stock to 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 the number of shares of
common stock equal to the $1,000 stated value of each of these shares 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 before 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. This amount is treated as a reduction in earnings available,
or an increase in loss attributable, to common stockholders upon the date of
issuance of the Series E stock since these shares may be converted at any time
after issuance. After year-end, as a result of the Series F convertible
preferred offering described in 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 the Series E stock offering, the Company also issued warrants to the
investors to purchase 50,000 shares of common stock at $5.125 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 the Black-Scholes valuation
model, assuming an expected dividend yield of 0%, a risk-free interest rate of
5.5%, stock volatility of 112%, and an expected life 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 in this private offering.
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 the registration was not effective 30 days after their
F-21
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 after that
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 various acquisitions as described in Note 7, in various
borrowings and issuances of notes payable as described in Note 8, and in various
issuances of common and preferred stock as described above in this Note 9.
During 1998, the Company issued warrants in various sales of common and
preferred stock and in the acquisition of various assets and assumption of
liabilities from Enterprise Solutions. The following table summarizes the
Company's warrants outstanding at December 31, 1999:
exercise price Number exercise price
-------------- --------- --------------
$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
========= ======
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.
Stock option activity for the years ended December 31, 1999 and 1998 is
summarized as follows:
Number of Weighted average
shares exercise price
--------- --------------
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
========= ======
F-22
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's stock options outstanding at
December 31, 1999:
Options outstanding Options exercisable
-------------------------------- -----------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise price Number life price Number price
-------------- ------ ---- ----- ------ -----
$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
========= =========
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. If the Company had 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:
Years Ended December 31,
---------------------------
1999 1998
------------ -----------
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)
Pro forma 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 before 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 before January 1, 1995
is not considered.
The per share weighted average fair value of stock options granted was $8.70
during 1999 and $3.90 during 1998, on the date of grant using the Black-Scholes
pricing model and the following assumptions:
Years Ended December 31,
-------------------------
1999 1998
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 5.5% 4.5%
Annualized volatility 112% 113%
Expected life, in years 5 5
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
F-23
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Revenue Code. Current and future equity transactions could further
limit the net operating losses available in any one year.
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:
Years Ended December 31,
--------------------------
1999 1998
----------- -----------
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)
=========== ===========
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.
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:
Years Ended December 31,
----------------------------
1999 1998
----------- ---------
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) $ - $ -
=========== =========
F-24
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Other Operating Expenses
During the fourth quarter of 1999, based on the Company's regular review of the
recoverability of intangible assets and of the valuation of 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. The components of the charge are
summarized below.
Write-down of software related to Magnum products business $ 289,000
Write-down of purchased technology and intangible assets
related to Infinite Graphics operations 2,470,000
Write-down of purchased technology and intangible assets
related to Asset Sentinel 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
==========
In December 1999, the Company approved a plan to dispose of the assets and
operations used in 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 the Company and forgave advances to the
two former employees in return for a $214,000 note receivable from the acquiring
company and the assumption of various 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 of
Infinite Graphics's intent to terminate the licenses granted to the Company and
to seek recovery of the assets purchased by the Company in February 1998 as a
result of the Company's inability to pay the outstanding balance of contingent
consideration due to Infinite Graphics. 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 Infinite Graphics operations
based upon the terms of a settlement agreement proposed by both the Company and
Infinite Graphics, but pending approval of holders of the Company's secured
debt. Under the terms of the proposed settlement, the license rights and
essentially all of the net assets of the Infinite Graphics operations, totaling
approximately $2,191,000 at December 31, 1999, would revert back to Infinite
Graphics in exchange for the mutual release of claims arising under the February
1998 agreement, including Infinite Graphics'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, based on 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 Asset Sentinel
intangible assets acquired in February 1998 as described in Note 7. In March
2000, the Company formally transferred the rights to the Asset Sentinel software
acquired back to Asset Sentinel along with the obligation to provide any future
service to customers of the Company utilizing Asset Sentinel software. Under the
terms of the agreement, the Company is obligated to pay Asset Sentinel $70,000
in return for Asset Sentinel's assumption of this obligation and for Asset
Sentinel's release of any claims against the Company. Furthermore, should Asset
Sentinel later sell the software rights previously owned by the Company or
should Asset Sentinel raise in excess of $200,000 in equity capital, Asset
Sentinel is required to pay the Company $70,000.
In light of an assessment made by the Company in late 1999 of its new product
development, the Company recorded a charge of approximately $1,938,000 related
to capitalized software development costs. The
F-25
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company determined that new product development would occur with different tools
and techniques available in the marketplace and that these 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 these capitalized costs, the Company recorded a charge in
December 1999 to state the remaining balance at fair value.
As part of cost containment efforts in late 1999, the Company reduced staffing
in various areas. In conjunction with these staffing changes, excess equipment
was identified and subsequently written-down to fair value. The Company recorded
a charge of approximately $325,000 related to the write-down of equipment in
1999.
Note 12. Operating Leases
Company as lessor: The Company leases equipment, primarily Virtual Command
Center units, under noncancellable operating leases expiring in various years.
The cost of equipment subject to these 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 for 2000, 172,200 for 2001 and $8,200 for
2002.
Company as lessee: The Company has operating leases for various office space and
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 was approximately $264,200 in 1999 and approximately
$94,000 in 1998. Future minimum lease payments under these noncancellable
operating lease are approximately as follows:
Year Minimum Lease Payments
---- ----------------------
2000 $361,800
2001 $305,400
2002 $146,868
2003 $ 24,200
2004 $ 12,100
Note 13. Major Customer and Concentration of Credit Risk
Sales to one unaffiliated customer aggregated approximately 30% 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.
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 in a
private placement. The shares were issued as follows:
o 700 shares to new investors for $700,000 in the aggregate;
o 300 shares to investors upon conversion of $300,000 of promissory
notes issued by the Company as described in Note 8;
o 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
F-26
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o 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. This amount will be treated as a
reduction in earnings available, or an increase in loss attributable, to common
stockholders upon the date of issuance of the Series D stock since these shares
may be converted at any time after 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, 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 common stock at $8.30 per share at any time
before the fifth anniversary of the date of issuance of the warrant. 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 to
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 the number
of shares of common stock equal to the $1,000 stated value of each share 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 before 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. This amount is treated as a reduction in earnings available,
or an increase in loss attributable, to common stockholders upon the date of
issuance of the Series F stock since these shares may be converted at any time
after issuance. All outstanding shares of Series F stock will be automatically
converted into common stock on February 23, 2002.
Holders of Series F stock are entitled to receive dividends at an annual rate of
8% of the stated $1,000 value 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 this 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 provisions in effect in the Series E stock offering as described in Note
9, the conversion formula for the Series E stock was modified as a result of the
Series F stock offering. Based upon this modification, an additional beneficial
conversion feature was created for the Series E stock. The value of this
additional conversion benefit of $311,510 will be treated as a reduction in
earnings available, or an 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 for
sales of the shares of common stock underlying the Series F stock and the
warrants and to pay a penalty if the 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
F-27
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price of the Series F stock for the first 30-day period after
the 120-day period and 3% of the purchase price for every 30-day period after
that 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 that
the Company's Virtual Command Center 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 software rights: On March 24, 2000, the Company signed
a letter of intent with a potential acquirer to sell substantially all the
software rights, trademarks, and copyrights used in the printed circuit board
industry and acquired by the Company from Lavenir in September 1999 as described
in Note 7. In-turn, the Company would obtain license rights to a source code
from the potential acquirer. 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, the
source code formerly owned by the Company for the Company's raster photoplotter
technology and products. The rights, trademarks and copyrights 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 capital stock
to 18,500,000.
F-28
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2000
--------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,293,237
Accounts receivable, less allowance for
doubtful accounts of $210,000 1,678,052
Other receivables 154,631
Inventories 1,408,812
Prepaid expenses and other 159,217
Current portion of investment in
sales-type leases 15,093
-----------
Total current assets 4,709,042
Property and equipment, net 719,479
Leased equipment, net 105,834
Software development costs, net 812,182
Purchased technology and other intangibles, net 11,632,980
Other assets, net 357,171
-----------
TOTAL ASSETS $18,336,688
===========
The accompanying notes are an integral part of these
consolidated statements.
F-29
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2000
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,647,533
Current portion of notes payable 3,858,173
Accrued liabilities, compensation and payroll taxes 821,860
Accrued consideration related to acquisitions 7,548,310
Accrued interest and penalties 517,994
Accrued dividends 395,836
Deferred revenue 1,091,577
Net liabilities of discontinued operations 6,839,000
------------
Total current liabilities 22,720,283
------------
Notes payable, less current portion 16,181
------------
Total liabilities 22,736,464
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A, no par value;
887,980 shares authorized; 86,896 shares issued and
outstanding; total liquidation preference of outstanding
shares-$32,586 $ 40,765
Voting, convertible preferred stock - Series B, no par value;
123,077 shares authorized; 51,632 shares issued and
outstanding; total liquidation preference of outstanding
shares-$1,678,040 1,678,069
Convertible preferred stock - Series C, no par value; 1,675
shares authorized; no shares outstanding -
Convertible preferred stock - Series D, no par value; 2,775
shares authorized; 2,725 shares issued and outstanding;
total liquidation preference of outstanding
shares-$2,725,000 1,887,462
Convertible preferred stock - Series E, no par value; 2,675
shares authorized; 2,675 shares issued and outstanding;
total liquidation preference of outstanding
shares-$2,675,000 2,097,605
Convertible preferred stock - Series F, no par value; 2,000
shares authorized; 2,000 shares issued and outstanding;
total liquidation preference of outstanding
shares-$2,000,000 1,373,475
Common stock, no par value; 17,479,818 shares authorized;
6,344,106 shares issued and outstanding -
Additional paid-in-capital 38,182,588
Notes receivable-officers (126,000)
Accumulated deficit (49,533,740)
------------
Total stockholders' deficit (4,399,776)
------------
$ 18,336,688
============
The accompanying notes are an integral part of these
consolidated statements.
F-30
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net sales:
Systems $ 871,332 $1,516,590
Maintenance, consulting and other 1,219,165 1,063,626
----------- ----------
Total net sales 2,090,497 2,580,216
Cost of sales:
Systems 162,864 201,285
Maintenance, consulting and other 321,755 549,296
----------- ----------
Total cost of sales 484,619 750,581
----------- ----------
Gross profit 1,605,878 1,829,635
Operating expenses:
Selling, general and administrative 3,721,730 1,668,792
Research and development 119,275 349,379
Other operating expenses 2,226,502 -
----------- ----------
Loss from operations (4,461,629) (188,536)
Other income (expense):
Interest expense (242,550) (78,507)
Interest income 1,002 1,527
Other expenses - (141,002)
----------- ----------
Total other income (expense), net (241,548) (217,982)
----------- ----------
Loss from continuing operations (4,703,177) (406,518)
Discontinued operations:
Loss on disposal of discontinued operations; net of tax (1,664,000) -
----------- ----------
Loss before cumulative effect of change in accounting principle (6,367,177) $ (406,518)
----------- ----------
Cumulative effect of change in method of depreciation - 231,936
----------- ----------
Net loss (6,367,177) (174,582)
Accrual of cumulative dividends on preferred stock (135,917) (43,675)
Attribution of beneficial conversion feature on preferred stock (3,466,797) (287,441)
----------- ----------
Net loss attributable to common stockholders $(9,969,891) $ (505,698)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-31
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Basic loss per common share:
Loss from continuing operations $ (1.447) $ (0.194)
Loss from discontinued operations (0.290) -
--------- ---------
Loss before cumulative effect of change in accounting principle (1.737) (0.194)
Cumulative effect of change in accounting principle - 0.061
--------- ---------
Net loss $ (1.737) $ (0.133)
========= =========
Diluted loss per common share:
Loss from continuing operations $ (1.447) $ (0.194)
Loss from discontinued operations (0.290) -
--------- ---------
Loss before cumulative effect of change in accounting principle (1.737) (0.194)
Cumulative effect of change in accounting principle - 0.061
--------- ---------
Net loss $ (1.737) $ (0.133)
========= =========
Shares used in calculations:
Basic 5,741,384 3,805,368
Diluted 5,741,384 3,805,368
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-32
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,367,177) $ (174,582)
Adjustments to reconcile net loss to net cash used in
operating activities:
Warrants issued for services 31,725 -
Loss on write-off of purchased technology 1,800,000 -
Loss on disposal of discontinued operations 1,539,000 -
Depreciation and amortization 1,015,130 916,045
Loss on sales of property and equipment (36,687) -
Cumulative effect of change in accounting principle - (231,936)
Changes in operating assets and liabilities:
Accounts receivable 236,791 (716,612)
Other receivables (60,420) (85,710)
Inventories (86,477) (151,291)
Prepaid expenses and other 15,901 (120,807)
Accounts payable (355,982) 318,940
Accrued liabilities (115,644) (7,220)
Accrued consideration related to acquisition (166,209) -
Accrued interest and penalties 115,192 -
Deferred revenue 110,938 233,989
----------- -----------
Cash used by operating activities: (2,323,919) (19,184)
----------- -----------
Cash flows from investing activities:
Sale of investment in sales-type leases 5,660 5,307
Purchase of property and equipment (121,626) (154,002)
Increase in leased equipment 17,449 6,633
Investment in software development costs - (865,107)
Investment in purchased technology (100,000) -
Investment in other assets (57,072) (1,975)
----------- -----------
Cash used by investing activities: (255,589) (1,009,144)
----------- -----------
Cash flows from financing activities:
Proceeds from note receivable-officers 109,500 -
Proceeds from issuance of preferred stock 2,369,725 1,504,000
Proceeds from issuance of common stock 505,799 563,875
Proceeds from short-term notes payable - 606,768
Payments of long-term notes payable (1,283,927) (50,000)
----------- -----------
Cash provided by financing activities: 1,701,097 2,624,643
----------- -----------
Net increase (decrease) in cash: (878,411) 1,596,315
Cash and cash equivalents at beginning of period: 2,171,648 664,066
----------- -----------
Cash and cash equivalents at end of period: $ 1,293,237 $ 2,260,381
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-33
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
Global MAINTECH Corporation, through its subsidiaries, Global MAINTECH,
Inc. and Singlepoint Systems, Inc. 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. Global MAINTECH Corporation and its subsidiaries are referred to in
these notes to unaudited consolidated financial statements as the Company.
The Company's Breece Hill Technologies, Inc. subsidiary, which was acquired
in April 1999 and formerly represented the Company's tape library storage
products segment, is presented as a discontinued operation.
Basis of Presentation
The interim consolidated financial statements are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair presentation
of results for the periods presented. All of these adjustments are of a normal
recurring nature.
The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
Continuation as a Going Concern
The accompanying consolidated financial statements are prepared assuming
the Company will continue as a going concern. The Company incurred losses from
operations of $14,920,021 during the year ended December 31, 1999 and $4,461,629
during the quarter ended March 31, 2000. At March 31, 2000, the Company had a
working capital deficit of $18,011,241 and a stockholders' deficit of
$4,399,776.
The Company is currently in negotiation to resolve approximately $7,300,000
of current liabilities included in the Company's March 31, 2000 consolidated
financial statements by the issuance of equity securities for various
acquisition earnout obligations. The completion of the disposal of Breece Hill
and resolution of various earnout liabilities will aid in alleviating the
Company's 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. 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. 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 in its financial plan
to improve the Company's working capital position, there can be no assurances to
that effect.
Other Operating Expenses
Other operating expenses are primarily comprised of a charge taken by the
Company in February 2000 related to technology acquired during the quarter ended
March 31, 2000. In February 2000, the Company contracted to purchase the full
rights to software currently used by the Company in its Virtual Command Center
product from a company owned by an employee of the Company for aggregate
consideration with a value of $1,800,000. This consideration is comprised of:
o $400,000 in cash, of which $100,000 was paid in February and the
remainder is payable in installments through December 31, 2001;
o 70,600 shares of common stock valued at approximately $600,000, of
which 17,650 shares were issued in February 2000 and the remainder
will be issued through December 31, 2000; and
F-34
<PAGE>
o options to purchase 100,000 shares of common stock at $7.3125 per
share with a five year term, the aggregate value of which, based on
the Black-Scholes valuation model, was approximately $800,000.
The software technology acquired, Global Watch MVS, can be sold on a
stand-alone basis or as part of the Virtual Command Center product. The Company
determined in the fourth quarter of 1999 that the expected future cash flows
from software related assets were impaired and, as a result, those software
assets were written down to their recoverable amount. Since the Global Watch MVS
software has an insufficient history to provide evidence of satisfactory future
cash flows, the Company has expensed the cost of the software technology
acquired.
Loss Per 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:
o "in-the-money" stock options and warrants;
o the amount of weighted average common shares which would be added by
the conversion of outstanding convertible preferred stock and
convertible debt;
o the number of weighted average common shares which would be added upon
the satisfaction of conditions with respect to arrangements involving
contingently issuable shares; and
o 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 the first fiscal quarters ended March 31, 2000 and 1999, potentially
dilutive shares were excluded from the diluted loss per common share computation
because their inclusion would have been antidilutive. The following table sets
forth the weighted average number of antidilutive option and warrant shares
excluded from the calculation of diluted loss per common share for the periods
indicated:
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Weighted average antidilutive option shares 402,186 6,600
Weighted average antidilutive warrant shares 801,604 486,586
The following table sets forth the number 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 as of the date
indicated:
F-35
<PAGE>
<TABLE>
<CAPTION>
March 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Number of common shares issuable upon conversion of:
Series A convertible preferred stock 17,379 17,389
Series B convertible preferred stock 256,408 223,231
Series C convertible preferred stock - 326,829
Series D convertible preferred stock 441,784 -
Series E convertible preferred stock 517,073 -
Series F convertible preferred stock 134,189 -
Number of common shares with respect to convertible debt 121,773 -
</TABLE>
In addition to the above convertible securities, at March 31, 2000, 400,000
shares of the Company's Breece Hill subsidiary's Series B preferred stock were
outstanding. These shares were convertible into 80,000 shares of the Company's
common stock. These shares also were excluded from the calculation of diluted
loss per common share because their inclusion would have been antidilutive.
As part of the acquisition of the Global Watch MVS software, the Company
agreed to issue 70,600 shares of the Company's common stock through December
2000.
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. These contractual arrangements include accrued dividends with respect to
the Company's preferred stock, a minimum earnout payment related to assets
acquired from Enterprise Solutions, Inc., an earnout payment related to the
purchase of Breece Hill and various other contractual arrangements. The
settlement of these contractual obligations through the issuance of common
shares would have required 2,309,519 shares as of March 31, 2000 and 10,166
shares as of March 31, 1999. These shares were excluded from the calculation of
diluted loss per common share because their inclusion would have been
antidilutive.
Capitalized Software Development Costs
Under the criteria prescribed by 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 several 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. 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.
Discontinued Operations-Breece Hill Technologies, Inc.
On December 27, 1999, the Company approved a formal plan for the disposal
of its Breece Hill 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
F-36
<PAGE>
operations and cash flows of Breece Hill have been separately presented as
discontinued operations, and eliminated from the continuing operations amounts
in the consolidated financial statements. The net liabilities of discontinued
operations increased $1,664,000 in the quarter ended March 31, 2000 to reflect a
revised calculation of liability for the earn-out period of March 15, 1999
through March 14, 2000. No further adjustment was deemed necessary for the loss
on disposal of discontinued operations.
Acquisitions
Lavenir assets and liabilities: On September 29, 1999, the Company
purchased substantially all the assets and rights to specified hardware and
software products, trademarks and copyrights of Lavenir Technology, Inc.
pursuant to an Agreement and Plan of Reorganization. The Company also assumed
specified 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 specified hardware products sold
for use in the printed circuit board industry.
Under the terms of the Lavenir Agreement, the total purchase price of
$5,300,000 was comprised of:
o 266,000 shares of the Company's common stock initially paid to Lavenir
on the closing date;
o $400,000 originally in the form of a note payable due on January 31,
2000; and
o an additional 404,085 shares of the Company's common stock issued as
of March 31, 2000 to cause the aggregate value of the shares
previously issued and the original $400,000 liability to total
$5,300,000 as of 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. The
satisfaction of the original $400,000 liability and the related issuance of
additional shares of common stock did not impact the number of common shares to
be issued in 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.
Singlepoint Limited: On May 27, 1999, the Company, through its subsidiary,
acquired all of the outstanding stock of Singlepoint Limited, a distributor of
Singlepoint Systems, Inc.'s products, for $80,000. In addition, under the terms
of the acquisition agreement, the Company is required to pay an earn-out payment
based upon the net income of Singlepoint Limited for a period subsequent to the
acquisition date through April 30, 2000. Through March 31, 2000, no additional
earn-out amounts have been required.
The Company recorded the acquisition of Singlepoint Limited using the
purchase method of accounting. The net liabilities in excess of identifiable
assets of Singlepoint Limited 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 Singlepoint
Limited acquisition.
Unaudited 1999 pro forma financial information: The following table
summarizes unaudited pro forma 1999 consolidated financial information with
respect to results of operations of the Company as if the acquisitions of the
assets, licenses and various rights and the assumption of the liabilities with
respect to the Lavenir and Singlepoint Limited transactions had occurred as of
January 1, 1999:
Three months ended
March 31, 1999
--------------
Net sales $ 4,150
Loss from continuing operations (589)
Diluted loss per common share from
continuinig operations $(0.226)
F-37
<PAGE>
Common Stock Issuance
During the first quarter ended March 31, 2000, the Company issued 232,164
shares of common stock as a result of exercises of stock options. The Company
received $558,496 in proceeds for these exercises. The Company also issued
504,085 shares of common stock to Lavenir Technology, Inc. in settlement of a
previously negotiated acquisition liability, 17,650 shares for the purchase of
Global Watch MVS, 150,000 shares in connection with the issuance of Series D
convertible preferred stock, and 36,106 shares to satisfy a previous commitment.
Preferred Stock Issuance
Issuance of Series D convertible preferred stock: On January 19, 2000, the
Company issued 2,725 shares of Series D convertible preferred stock in a private
placement. In this transaction, the Company issued:
o 700 shares to new investors for $700,000 in the aggregate;
o 300 shares to investors upon conversion of $300,000 of promissory
notes issued by the Company;
o 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
o 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
totaled $2,386,830, of which $1,863,858 was treated as a reduction in earnings
available, or an increase in loss attributable, to common stockholders upon the
date of issuance of the Series D stock since these shares may be converted at
any time following issuance. The other $522,972 was attributed to Series C stock
and was treated as a reduction in earnings available to common stockholders in
the year ended December 31, 1999.
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 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 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. As part of the Series D offering, the holders of Series
C stock agreed to waive $400,000 in penalties, which were payable to them
because a registration statement covering the common shares underlying the
Series C stock was not filed under the Securities Act of 1933 within the time
period required under the registration rights agreement. In addition, the
Company 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 to
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 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 totaled $1,291,429
and is treated as a reduction in earnings available, or an increase in loss
attributable, to common stockholders upon the date of issuance of the Series F
stock since these 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.
F-38
<PAGE>
The holders of Series F stock are entitled to receive dividends at an
annual rate of 8% of the stated value 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 this offering, the Company also issued warrants to the
investors to purchase 50,000 shares of common stock. Each warrant is a four-year
callable warrant to purchase common stock at $11.00 per share.
Due to provisions in effect with respect to the Series E stock offering,
the conversion formula for the Series E stock was modified as a result of the
Series F stock offering. Based upon this modification, an additional beneficial
conversion feature was created with respect to the Series E stock. The value of
this additional conversion benefit of $311,510 was treated as a reduction in
earnings available, or an increase in loss attributable, to common stockholders
in the first quarter of 2000.
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. If the registration statement is not effective by the 120th
day after issuance of the Series F stock, the Company must pay a monetary
penalty. This penalty is equal to 2% of the purchase price of the Series F stock
for the first 30-day period following the 120-day period and 3% of the 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
Virtual Command Center 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.
Reclassifications
Certain amounts previously reported in 1999 have been reclassified to
conform to the 2000 presentation.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management 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.
Subsequent Events
On March 24, 2000, the Company signed a letter of intent with another
company 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 Technology, Inc. in September 1999. In April 2000,
the Company and the potential acquirer mutually agreed to terminate the letter
of intent and not to proceed with the proposed sale. The Company will continue
to operate the Lavenir software business and may seek other potential acquirers
of the business.
F-39
<PAGE>
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5,230,629 Shares
Global
MAINTECH
Corporation
Common Stock
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PROSPECTUS
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July 24, 2000
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