<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 0-14692
______________________________________________
Global MAINTECH Corporation
Minnesota 41-1523657
State of Incorporation I.R.S. Employer Identification No.
7578 Market Place Drive, Eden Prairie, MN 55344
Telephone Number: (952) 944-0400
______________________________________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----------- ______
______________________________________________
On May 2, 2000 there were 6,215,241 shares of the Registrant's no par value
common stock outstanding.
Transitional small business issuer format: No
Page 1 of 15
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are
not limited to, inability of the Company to compete in the industry in which it
operates; failure of the Company to successfully integrate the operations of
newly acquired businesses; failure to successfully adjust the Company's product
mix and product sales following divestiture of some businesses; failure of the
Company to meet its future additional capital requirements; lack of market
acceptance of the Company's products, including products under development; the
uncertainty in the Company's ability to operate profitably in the future; loss
of key personnel; failure of the Company to secure adequate protection for the
Company's intellectual property rights; failure of the Company to respond to
evolving industry standards and technological changes; and the Company's
exposure to product liability claims. The forward-looking statements are
qualified in their entirety by the cautions and risk factors set forth in
Exhibit 99, under the caption "Cautionary Statement," to this Quarterly Report
on Form 10-QSB for the quarter ended March 31, 2000
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,293,237 $ 2,171,648
Accounts receivable, less allowance for doubtful
accounts of $210,000 and $190,000, respectively 1,678,052 2,013,371
Other receivables 154,631 94,211
Inventories 1,408,812 1,322,336
Prepaid expenses and other 159,217 161,252
Current portion of investment in
sales-type leases 15,093 20,753
----------------- -----------------
Total current assets 4,709,042 5,783,571
Property and equipment, net 719,479 823,286
Leased equipment,net 105,834 123,285
Software development costs, net 812,182 1,092,283
Purchased technology and other intangibles, net 11,632,980 12,371,739
Other assets, net 357,171 131,835
----------------- -----------------
TOTAL ASSETS $ 18,336,688 $ 20,325,999
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,647,533 $ 2,103,764
Current portion of notes payable 3,858,173 5,390,270
Accrued liabilities, compensation and payroll taxes 821,860 1,103,004
Accrued consideration related to acquisitions 7,548,310 7,264,519
Accrued interest and penalties 517,994 802,801
Accrued dividends 395,836 259,919
Deferred revenue 1,091,577 997,141
Net liabilities of discontinued operations 6,839,000 5,300,000
----------------- -----------------
Total current liabilities 22,720,283 23,221,418
----------------- -----------------
Notes payable, less current portion 16,181 68,012
----------------- -----------------
Total liabilities 22,736,464 23,289,430
STOCKHOLDERS' EQUITY (DEFICIT)
Voting, convertible preferred stock - Series A, no par value; 887,980
shares authorized; 86,896 in 2000 and in 1999 issued and
outstanding; total liquidation preference of outstanding
shares-$32,586 $ 40,765 $ 40,765
Voting, convertible preferred stock - Series B, no par value; 123,077
shares authorized; 51,632 in 2000 and in 1999 issued and
outstanding; total liquidation preference of outstanding
shares-$1,678,040 1,678,069 1,678,069
Convertible preferred stock - Series C, no par value; 1,675
shares authorized; none in 2000 and 1,675 shares in 1999 issued
and outstanding - 1,368,712
Convertible preferred stock - Series D, no par value;
2,775 shares authorized; 2,725 shares in 2000 and none in
1999 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; none in 2000 and 2,675 shares in
1999 issued and outstanding; total liquidation preference of
outstanding shares-$2,675,000 2,097,605 2,097,605
Convertible preferred stock - Series F, no par value;
2,000 shares authorized; 2,000 shares in 2000 and none in
1999 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 in 2000 and 5,404,099 shares in 1999 issued and
outstanding - -
Additional paid-in-capital 38,182,588 35,117,564
Notes receivable-officers (126,000) (235,500)
Accumulated deficit (49,533,740) (43,030,646)
----------------- ------------------
Total stockholders' deficit (4,399,776) (2,963,431)
----------------- ------------------
$ 18,336,688 $ 20,325,999
================= ==================
</TABLE>
The accompanying notes are in integral part of these consolidated statements.
3
<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)
=============== ==============
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.
4
<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 to purchase common stock issued
for services 31,725 -
Loss from purchased technology write-off 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.
5
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
The Company, through its subsidiaries, Global MAINTECH, Inc. ("GMI")
and Singlepoint Systems, Inc. ("SSI"), supplies world class systems and services
to data centers; manufactures and sells event notification software and provides
professional services to help customers implement enterprise management
solutions; and manufactures and sells printed circuit board design software and
plotters.
The Company's Breece Hill Technologies, Inc. ("BHT") subsidiary, which was
acquired in April 1999 and formerly represented the Company's tape library
storage products segment, is presented as a discontinued operation.
Basis of Presentation
The interim consolidated financial statements are unaudited, but in
the opinion of management, reflect all adjustments necessary for a fair
presentation of results for such periods. All such adjustments are of a normal
recurring nature.
The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
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 and quarter ended March 31, 2000, the Company incurred
losses from operations of $14,920,021 and $4,461,629, respectively. 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 issuance of equity securities for certain
acquisition earnout obligations. The completion of the disposal of BHT and
resolution of earnout liabilities will aid in alleviating the Company's working
capital deficit. In January and February 2000, the Company issued Series D and F
Convertible Preferred Stock with combined gross proceeds of $2,400,000.
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 believes 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 is primarily comprised of a charge taken by
the Company in February 2000 related to certain technology acquired during the
quarter ended March 31, 2000. In February 2000, the Company contracted to
purchase the full rights to certain software currently used by the Company in
its Virtual Command Center (VCC) product from a company owned by an employee of
Global Maintech Corporation for aggregate consideration with a value of
$1,800,000. This consideration is comprised of (a) $400,000 in cash, $100,000 of
which was paid in February and the remainder payable in installments through
December 31, 2001; (b) 70,600 shares of common stock valued at approximately
$600,000, 17,650 shares of which were issued in February 2000 and the remainder
to be issued through December 31, 2000; and (c) options to purchase 100,000
shares of the Company's common stock at $7.3125 per share during the five year
term of such options, the aggregate value of which, determined by use of a
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 VCC product. The Company determined in the fourth quarter of 1999
that the expected future cash flows from certain software related assets were
impaired and, as a result, certain software assets were written down to their
recoverable amount. Since the Global Watch MVS software has insufficient history
to provide evidence of satisfactory future cash flows, the Company 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 (a)
"in-the-money" stock options and warrants, (b) the amount of weighted average
common shares which would be added by the conversion of outstanding convertible
preferred stock and convertible debt, (c) the number of weighted average common
shares which would be added upon the satisfaction of certain conditions with
respect to arrangements involving contingently issuable shares, and (d) the
number of weighted average common shares that may be issued subject to
contractual arrangements entered into by the Company that may be settled in
common stock or in cash at the election of either the Company or the holder.
During the first fiscal quarters ended March 31, 2000 and 1999,
respectively, potentially dilutive shares were excluded from the diluted loss
per common share computation as their effect was antidilutive. The weighted
average numbers of antidilutive option and warrant shares excluded from the
calculation of diluted loss per common share were the following for 2000 and
1999:
6
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2000 1999
---------- --------
Weighted average antidilutive option shares 402,186 6,600
Weighted average antidilutive warrant shares 801,604 486,586
At March 31, 2000 and 1999, the numbers of common shares issuable (and
excluded from the calculation of diluted loss per common share) upon conversion
of the then outstanding preferred shares and convertible debt were the
following:
<TABLE>
<CAPTION>
March 31,
2000 1999
--------------------
<S> <C> <C>
Number of common shares issuable upon conversion of:
Series A Convertible Preferred Stock 17,379 17,379
Series B Convertible Preferred Stock 256,408 223,231
Series C Convertible Preferred Stock - -
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 BHT subsidiary's Series B Preferred Stock was
outstanding. Such shares were convertible to 80,000 shares of the of Company's
common stock. Similar to the items discussed above, such shares were excluded
from the calculation of diluted loss per common share because their inclusion
would have been antidilutive.
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 to the arrangement as stipulated in such contracts. These contractual
arrangements include accrued dividends with respect to the Company's preferred
stock, a minimum earnout payment related to certain assets acquired from
Enterprise Solutions, Inc., earnout payment related to the purchase of Breece
Hill Technologies, Inc., and various other contractual arrangements. The
settlement of such contractual obligations, if sought by either party through
the issuance of common shares, would have required 2,309,519 and 10,166 shares
as of March 31, 2000 and 1999, respectively. 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 set forth in SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," capitalization
of software development costs begins upon the establishment of technological
feasibility of the software. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years.
7
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Discontinued Operations-Breece Hill Technologies, Inc.
On December 27, 1999, the Company approved a formal plan with regards
to the disposal of its Breece Hill Technologies, Inc. subsidiary, which was
acquired on April 14, 1999 and which formerly represented the Company's tape
storage products business segment. Accordingly, the estimated loss from the
disposal of this segment and the financial position, results of operations and
cash flows of BHT have been separately presented as discontinued operations, and
eliminated from the continuing operations amounts in the consolidated financial
statements. The net liabilities of discontinued operations was increased
$1,664,000 in the quarter ended March 31, 2000 to reflect a revised calculation
of liability for the earnout 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,
through its GMI subsidiary, purchased substantially all the assets and rights to
certain hardware and software products, trademarks and copyrights of Lavenir
Technology, Inc., a California corporation ("Lavenir"), pursuant to an Agreement
and Plan of Reorganization (the "Lavenir Agreement") by and among the Company,
GMI and Lavenir. Subject to the Lavenir Agreement, the Company also assumed
certain liabilities of Lavenir, including Lavenir's outstanding debt, ongoing
leases, and contract obligations. The assets and rights acquired relate
primarily to a suite of CAD/CAM software and certain hardware products sold for
use in the printed circuit board industry.
Under the terms of the Lavenir Agreement, the total purchase price of
$5,300,000 was comprised of the following: (a) 266,000 shares of the Company's
common stock initially paid to Lavenir on the closing date, (b) $400,000
originally in the form of a payable due on January 31, 2000, and (c) additional
shares totaling 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 the March 31, 2000. In
November 1999 the Company negotiated the $400,000 liability due on January 31,
2000 to a $100,000 amount due on January 31, 2000 in return for 100,000 shares
of the Company's common stock to be issued in January 2000. This negotiation of
the satisfaction of the original $400,000 liability and related issuance of
additional shares of common stock 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 SSI
subsidiary, acquired all of the outstanding stock of Singlepoint Limited ("SSI
Ltd"), a distributor of SSI products and services. In return for the SSI Ltd
shares, the Company paid $80,000. In addition, under the terms of the related
acquisition agreement, the Company is required to pay an earnout payment based
upon net income of SSI Ltd for a period subsequent to the acquisition date
through April 30, 2000. Through March 31, 2000, no additional earnout amounts
have been required with respect to SSI Ltd.
The Company recorded the acquisition of SSI Ltd using the purchase
method of accounting. The net liabilities in excess of identifiable assets of
SSI Ltd as of the acquisition date totaled $115,437. Based upon the $80,000 of
consideration paid, the Company recorded an increase in other intangible assets
of $195,437 in 1999 as a result of the SSI Ltd acquisition.
Unaudited 1999 pro forma financial information: The following tables
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 assumption of the described liabilities
with respect to the transactions with Lavenir and SSI Ltd described above had
occurred as January 1, 1999:
Three months
ended March 31, 1999
--------------------
Net sales $ 4,150
Loss from continuing operations (589)
Diluted loss per common share from
continuing operations $(0.226)
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 and final share determination,
17,650 shares for the purchaser 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 ("Series
D Stock") in a private placement. The shares were issued as follows: (1) 700
shares to new investors for $700,000 in the aggregate; (2) 300 shares to certain
investors upon conversion of $300,000 of promissory notes issued by the Company;
(3) 1,600 shares to the holders of the Company's then outstanding Series C
Convertible Preferred Stock in exchange for all of their Series C shares; and
(4) 125 shares to the placement agent, of which 75 shares were issued in
exchange for all of the Company's Series C Stock held by the placement agent and
of which 50 shares were compensation for placement agent services. At any time
after the issuance of the Series D Stock, each share of Series D Stock is
convertible into the number of shares of common stock calculated by dividing the
per share purchase price of $1,000 by the conversion price. The conversion price
equals the lesser of 75% of the average of the three lowest closing bid prices
of the common stock during the 15 trading days immediately before the conversion
date or $5.4375. The beneficial conversion feature present in the issuance of
the Series D Stock as determined on the date of issuance of the Series D Stock
totaled $2,386,830 of which $1,863,858 was treated as a reduction in earnings
available (increase in loss attributable) to common stockholders upon the date
of issuance of the Series D Stock since such shares may be converted at any time
following issuance. 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 addition, in connection with the Series D Stock offering the holders
of warrants issued in the Series C offering were issued warrants to purchase
20,000 shares of the Company's common stock in exchange for the warrants issued
to them in the Series C offering. Each new warrant issued entitles its holder to
purchase the Company's Common Stock at $8.30 per share at any time before the
fifth anniversary of the date of issuance of the
8
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
warrant. In conjunction with the Series D Stock offering, the Company also
issued 30,000 shares of common stock to the new investors and 120,000 shares of
Common Stock to the holders of the Series C Stock.
Issuance of Series F Convertible Preferred Stock: On February 23, 2000,
the Company issued 2,000 shares of its Series F Convertible Preferred Stock (the
"Series F Stock") to certain accredited investors in a private offering. At any
time after the issuance of the Series F Stock, each share of Series F Stock is
convertible into that number of shares of common stock equal to the stated value
of each such share ($1,000) divided by the lesser of $6.75 or 75% of the average
of the three lowest closing bid prices of the Common Stock during the 15 trading
days immediately preceding the conversion date. The beneficial conversion
feature present in the issuance of the Series F Stock as determined on the date
of issuance of the Series F Stock totaled $1,291,429 and is treated as a
reduction in earnings available (increase in loss attributable) to common
stockholders upon the date of issuance of the Series F Stock since such shares
may be converted at any time following issuance. All outstanding shares of
Series F Stock will be automatically converted into Common stock on February 23,
2002. The holders of Series F Stock are entitled to receive dividends at an
annual rate of 8% of the stated value ($1,000) of the Series F Stock, subject to
the prior declaration or payment of any dividend to which the holders of the
Company's Series A Stock, Series B Stock, Series D Stock or Series E Stock are
entitled. Dividends on shares of the Series F Stock are cumulative and are
payable only upon conversion of the Series F Stock.
In connection with such offering, the Company also issued warrants to
the investors to purchase 50,000 shares of common stock. Each warrant is a
four-year callable warrant to purchase common stock at $11.00 per share.
Due to certain provisions in effect with respect to the Series E Stock
offering, as a result of the Series F Stock offering, the conversion formula
with respect to the Series E Stock was modified. Based upon this modification,
an additional beneficial conversion feature was created with respect to the
Series E Stock. The value of this additional conversion benefit of $311,510 was
treated as a reduction in earnings available (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 and to pay a penalty if such registration
statement is not effective by the 120th day after issuance of the Series F
Stock. This penalty is equal to 2% of the purchase price of the Series F Stock
for the first 30-day period following such 120-day period and 3% of such
purchase price for every 30-day period thereafter until the registration
statement has been declared effective.
Patent infringement claim and settlement:
The Company was named as a defendant in a patent infringement claim
filed in February 2000. The claim alleged, among other things, that the
Company's VCC product, when monitoring a mainframe computer, infringed on a
patent held by the plaintiffs. The Company believed that the plaintiffs' claims
were without merit, but in order to avoid protracted and potentially costly
litigation, the Company settled the claim on March 16, 2000.
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 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.
Subsequent Events
On March 24, 2000 the Company signed a letter of intent with another
company (the "Potential Acquirer") whereby the Company would sell substantially
all the software rights, trademarks, and copyrights used in the printed circuit
board industry acquired by the Company from Lavenir in September 1999. In April
2000 the Company and the Potential Acquirer mutually agreed to terminate the
letter of intent and not
9
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
proceed with the purchase of the Lavenir software rights. The Company will
continue to operate the Lavenir software business and may seek other potential
acquirers of the business.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The consolidated financial statements that accompany this discussion
show the operating results from continuing operations of the Company for the
quarters ended March 31, 2000 and 1999. These results include the operations of
GMI and its subsidiaries. The Company's Breece Hill Technologies segment is
treated as a discontinued operation.
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 a decrease of the Company's Virtual Command Center (VCC)
product sales. The decline in the VCC sales 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 VCC product sales until the second quarter
of 2000.
Cost of sales decreased in the first quarter of 2000 by $266,000, and
cost of sales as a percentage of total revenue decreased to 23% in the first
quarter of 2000 from 29% in 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 total revenue in the first quarter of 2000 was 77%
compared to 71% in the first quarter of 1999.
Selling, general and administrative costs (SG&A) in the first quarter
of 2000 were approximately $3,722,000 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 the Company since March 31,
1999, the majority of which is related to salaries. The remaining increase in
SG&A is due to increases in payroll and professional expenses. Payroll increased
in the Singlepoint Systems, Inc. subsidiary and also in the portion of the
business that the Company intends to return to Infinite Graphics, Inc.
Professional expenses include legal, audit, investor relations expenses and
other professional services. Legal expenses increased due to the divestitures of
business units which the Company undertook as well as expenses incurred that
were related to the patent lawsuit. Audit expenses increased due to the
complexity of the Company's 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 costs in the first quarter of 2000 were
$119,000 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.
The Company incurred $2,227,000 of other operating expenses in the
first quarter 2000 primarily for the expensing of purchased technology. While
the Company believes the purchased technology has value, the technology has
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 (expense) consists of interest expense, amortization of
debt issue costs and interest income. The increase in interest expense is due to
the increase in debt of the Company since March 31, 1999. The amortization of
deferred debt costs declined due to the full amortization or write-off of
unamortized debt subsequent to March 31, 1999.
Loss on disposal of discontinued operations of $1,664,000 reflects a
charge in 2000 to increase the Company's earnout liability to the former
shareholders of Breece Hill Technologies, Inc.
Liquidity and Capital Resources
As of March 31, 2000, the Company 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 2000.
11
<PAGE>
Net cash used in operating activities for the quarter ended March 31,
2000 was $2,324,000 compared to $19,000 used by such activities in the quarter
ended March 31, 1999. 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. With respect to 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.
Cash used by investing activities in the quarter ended March 31, 2000
was $256,000 and 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. In 1999 the Company invested approximately $865,000 in
capitalized computer software development, and $154,000 in property and
equipment.
Net cash of approximately $1,701,000 was provided by financing
activities in the quarter ended March 31, 2000. This reflects net proceeds from
the issuance of convertible preferred stock of approximately $2,370,000 through
the issuance of Series D Stock and Series F Stock. Net cash of $506,000 was
provided by the issuance of common stock as a result of the exercise of stock
options primarily by former employees. In addition the Company received $110,000
in proceeds from a note receivable. These proceeds were partially offset by the
$1,284,000 reduction of notes payable. In the first quarter ended March 31 1999
the Company received proceeds from the issuance of convertible preferred stock
and common stock of approximately $2,068,000 and proceeds from the issuance of
short-term notes payable of approximately $607,000 offset by a payment on
long-term notes payable of $50,000.
Presently, the Company will need to raise additional capital to support
operations through the second quarter. The Company expects that its Breece Hill
subsidiary will not be a substantial drain on the cash resources of the Company
and believes Breece Hill will be sold sometime during the year 2000. The Company
believes its working capital will improve as the Company's profitability
improves. The Company expects its profitability to improve as a result of
further increases in sales and the expense reduction programs implemented during
fourth quarter 1999. Nevertheless, the Company can provide no assurance as to
its future profitability, access to the capital markets nor the completion of
its projected asset and business sales.
Recent Developments
On March 24, 2000 the Company signed a letter of intent with another
company (the "Potential Acquirer") whereby the Company would sell substantially
all the software rights, trademarks, and copyrights used in the printed circuit
board industry acquired by the Company from Lavenir in September 1999. In April
2000 the Company and the Potential Acquirer mutually agreed to terminate the
letter of intent and not proceed with the purchase of the Lavenir software
rights. The Company will continue to operate the Lavenir software business and
may seek other potential acquirers of the business.
12
<PAGE>
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES
On January 19, 2000, the Company issued 2,725 shares of Series D
Convertible Preferred Stock ("Series D Stock") in a private placement. The
shares were issued as follows: (1) 700 shares to new investors for $700,000 in
the aggregate; (2) 300 shares to certain investors upon conversion of $300,000
of promissory notes issued by the Company; (3) 1,600 shares to the holders of
the Company's then outstanding Series C Convertible Preferred Stock in exchange
for all of their Series C shares; and (4) 125 shares to the placement agent, of
which 75 shares were issued in exchange for all of the Company's Series C Stock
held by the placement agent and of which 50 shares were compensation for
placement agent services. At any time after the issuance of the Series D Stock,
each share of Series D Stock is convertible into the number of shares of common
stock calculated by dividing the per share purchase price of $1,000 by the
conversion price. The conversion price equals the lesser of 75% of the average
of the three lowest closing bid prices of the common stock during the 15 trading
days immediately before the conversion date or $5.4375. The beneficial
conversion feature present in the issuance of the Series D Stock as determined
on the date of issuance of the Series D Stock totaled $2,386,830 of which
$1,863,858 was treated as a reduction in earnings available (increase in loss
attributable) to common stockholders upon the date of issuance of the Series D
Stock since such shares may be converted at any time following issuance. The
other $522,972 was attributed to Series C Stock and was treated as a reduction
in earnings available for 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 addition, in connection with the Series D Stock offering the
holders of warrants issued in the Series C offering were issued warrants to
purchase 20,000 shares of the Company's common stock in exchange for the
warrants issued to them in the Series C offering. Each new warrant issued
entitles its holder to purchase the Company's Common Stock at $8.30 per share at
any time before the fifth anniversary of the date of issuance of the warrant. In
conjunction with the Series D Stock offering, the Company also issued 30,000
shares of common stock to the new investors and 120,000 shares of Common Stock
to the holders of the Series C Stock.
On February 23, 2000, the Company issued 2,000 shares of its Series F
Convertible Preferred Stock (the "Series F Stock") to certain accredited
investors in a private offering. At any time after the issuance of the Series F
Stock, each share of Series F Stock is convertible into that number of shares of
common stock equal to the stated value of each such share ($1,000) divided by
the lesser of $6.75 or 75% of the average of the three lowest closing bid prices
of the Common Stock during the 15 trading days immediately preceding the
conversion date. The beneficial conversion feature present in the issuance of
the Series F Stock as determined on the date of issuance of the Series F Stock
totaled $1,291,429 and is treated as a reduction in earnings available (increase
in loss attributable) to common stockholders upon the date of issuance of the
Series F Stock since such shares may be converted at any time following
issuance. All outstanding shares of Series F Stock will be automatically
converted into Common stock on February 23, 2002. The holders of Series F Stock
are entitled to receive dividends at an annual rate of 8% of the stated value
($1,000) of the Series F Stock, subject to the prior declaration or payment of
any dividend to which the holders of the Company's Series A Stock, Series B
Stock, Series D Stock or Series E Stock are entitled. Dividends on shares of the
Series F Stock are cumulative and are payable only upon conversion of the Series
F Stock.
In connection with such offering, the Company also issued warrants to
the investors to purchase 50,000 shares of common stock. Each warrant is a five-
year callable warrant to purchase common stock at $11.00 per share.
The Company agreed to use its best efforts to file a registration
statement with regard to sales of the shares of common stock underlying the
Series F Stock and the warrants and to pay a penalty if such registration
statement is not effective by the 120th day after issuance of the Series F
Stock. This penalty is equal to 2% of the purchase price of the Series F Stock
for the first 30-day period following such 120-day period and 3% of such
purchase price for every 30-day period thereafter until the registration
statement has been declared effective.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. A special meeting of shareholders was held on April 5, 2000. The
Company solicited proxies and filed its definitive proxy
statement with the Securities and Exchange Commission pursuant to
Regulation 14A. The only matters voted upon at the meeting were
the approval of the sale of the Company's subsidiary, Breece Hill
Technologies, Inc. and to amend the Company's Articles of
Incorporation to increase the number of authorized shares. All
items presented to shareholders were passed.
B. The shareholders voted to approve the Common Stock and Series B
Preferred Stock Purchase Agreement, dated as of February 3, 2000,
by and among the Company, Tandberg Data ASA, Global MAINTECH,
Inc., Hambrecht & Quist Guaranty Finance, LLC, Greyrock Capital,
and Cruttenden Roth, Incorporated. There were 3,667,658 shares
represented at the special meeting of a total of 5,734,418
entitled to vote. Of the total shares entitled to vote, 3,652,658
voted for, 13,509 against, 1,869 abstained, and there were no
broker non-votes.
C. The shareholders voted to approve the proposal to amend the
Company's Articles of Incorporation to increase the number of
authorized shares of the Company's capital stock from 10,711,724
to 18,500,000. There were 3,667,658 shares represented at the
special meeting and of the shares represented, 3,626,439 voted
for, 30,236 voted against, 10,983 abstained, and there were no
broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27--Financial Data Schedule
99--Cautionary Statement
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL MAINTECH CORPORATION
May 15, 2000 By: /s/ James Geiser
----------------------------------------
James Geiser
Chief Financial and Chief Accounting
Officer
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
May 15, 2000 By: /s/ Trent Wong
----------------------------------------
Trent Wong
Chief Executive Officer
15
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