-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WY2q6vs/Zk84NQZGbldYi+FjkH2EDjViPrpYZqPJr2tZBH0Zm/g1/Xd9ArU9+HHi fxGxP7swae6EFa8Qm6dmFg== 0000783738-97-000001.txt : 19970520 0000783738-97-000001.hdr.sgml : 19970520 ACCESSION NUMBER: 0000783738-97-000001 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBAL MAINTECH CORP CENTRAL INDEX KEY: 0000783738 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 411523657 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14692 FILM NUMBER: 97606911 BUSINESS ADDRESS: STREET 1: 6468 CITY WEST PARKWAY CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 612-944-0400 MAIL ADDRESS: STREET 1: 6468 CITY WEST PKY CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-3245 FORMER COMPANY: FORMER CONFORMED NAME: MIRROR TECHNOLOGIES INC /MN/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER AIDED TIME SHARE INC DATE OF NAME CHANGE: 19900122 10QSB 1 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, 1997 Commission File Number 0-14692 ______________________________________________ Global MAINTECH Corporation Minnesota 41-1523657 State of Incorporation I.R.S. Employer Identification No. 6468 City West Parkway, Eden Prairie, MN 55344 Telephone Number: (612) 944-0400 ______________________________________________ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ ______________________________________________ On April 15, 1997 there were 15,254,147 shares of the Registrant's no par value common stock outstanding. Transitional small business issuer format: No Page 1 of 11 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the uncertainty in the Company's ability to continue to operate profitably in the future; failure of the Company to meet its future additional capital requirements; loss of key personnel; failure of the Company to respond to evolving industry standards and technological changes; inability of the Company to compete in the industry in which it operates; lack of market acceptance of the Company's products; failure of the Company to secure adequate protection for the Company's intellectual property rights; and the Company's exposure to product liability claims. The forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in Exhibit 99, under the caption "CautionaryStatement," to this Quarterly Report on Form 10-KSB for the year ended December 31, 1996. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
March 31, December 31, 1997 1996 CURRENT ASSETS Cash and cash equivalents $ 253,655 $ 32,890 Accounts receivable, less allowance for doubtful accounts of $15,000 938,608 451,599 Other receivables 21,369 21,519 Inventory 256,656 217,943 Prepaid expenses and other 50,744 26,706 --------- --------- Total current assets 1,521,032 750,657 Property and equipment, net 67,123 31,221 Leased equipment, net 83,060 82,377 Patent costs, net 73,279 61,779 Software development costs, net 628,650 425,519 --------- --------- TOTAL ASSETS $2,373,144 $1,351,553
The accompanying notes are an integral part of these consolidated statements. Page 2 of 11 GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31, 1997 1996 CURRENT LIABILITIES Accounts payable $ 306,669 $ 396,004 Current portion of notes payable 149,360 211,613 Convertible subordinated debentures 101,172 151,750 Accrued liabilities Compensation and payroll taxes 83,516 79,655 Interest 3,323 13,960 Other 52,625 38,325 Deferred revenue 172,036 259,747 --------- --------- Total current liabilities 868,701 1,151,054 Notes payable, less current portion - 16,600 --------- --------- Total liabilities 868,701 1,167,654 STOCKHOLDERS' EQUITY (DEFICIT) Voting, convertible preferred stock - Series A, convertible into one common stock share for each preferred share, no par value; 887,980 shares authorized;365,185 shares issued and outstanding;total liquidation preference of outstanding shares-$685,000 171,259 328,601 Common stock, no par value; 49,112,020 shares authorized; 15,248,816 shares issued and outstanding - - Additional paid-in-capital 3,504,817 2,243,438 Notes receivable-officers (324,500) (324,500) Accumulated deficit (1,847,133) (2,063,640) --------- --------- Total stockholders' equity 1,504,443 183,899 --------- --------- $2,373,144 $1,351,553
The accompanying notes are an integral part of these consolidated statements. Page 3 of 11 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, 1997 1996 Net sales $ 706,551 $ 492,347 Cost of sales 120,580 199,432 --------- --------- Gross profit 585,971 292,915 Operating expenses Selling, general and administrative 316,091 111,673 Research and development 104,326 53,637 --------- --------- Income from operations 165,554 127,605 Other income (expense): Interest expense 16,547 24,189 Interest income - - Other - 464 --------- --------- Total other expense, net 16,547 24,653 --------- --------- Income from continuing operations before income taxes 149,007 102,952 Provision for income taxes 2,500 - --------- --------- Income from continuing operations 146,507 102,952 Recovery of discontinued operations 70,000 - --------- --------- Net income $ 216,507 $ 102,952 --------- --------- Net earnings (loss) per common and common equivalent share: Continuing operations $0.009 $0.010 Discontinued operations 0.004 - --------- --------- Net earnings/(loss) $ 0.013 $0.010 --------- --------- Weighted average number of common and common equivalent shares outstanding 16,732,492 10,423,448 ---------- ----------
The accompanying notes are an integral part of these consolidated statements page 4 of 11 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 1997 1996 Cash flows from operating activities: Net income $ 216,507 $ 102,952 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 82,598 9,586 Changes in operating assets and liabilities: (Increase) decrease in accounts and other receivables (486,859) (187,486) Increase in inventory (38,713) (586) Increase in leased equipment (10,729) - Increase in prepaid expenses (24,038) (5,493) Decrease in accounts payable (82,548) (74,290) Increase (decrease) in accrued expenses (4,277) 38,192 Decrease in deferred revenue (87,711) - Increase in other - - --------- --------- Cash used by operating and discontinued activities (435,770) (117,125) Cash flows from investing activities: Purchase of property and equipment (42,454) - Investment in software development costs (263,131) - Investment in patent costs (17,500) - --------- --------- Cash used by investing activities (323,085) - --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 1,104,037 164,710 Decrease in short-term notes payable (107,817) (2,750) Decrease in long-term notes payable (16,600) (58,000) --------- --------- Cash provided (used) by financing activities 979,620 103,960 --------- --------- Net increase (decrease) in cash 220,765 (13,165) Cash and cash equivalents at beginning of period 32,890 39,365 --------- --------- Cash and cash equivalents at end of period $ 253,655 $ 26,200 --------- ---------
The accompanying notes are an integral part of these consolidated statements. Page of 5 of 11 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General At the Company's annual shareholders meeting on May 15, 1995, the shareholders approved, among other things, the change of its name to Global MAINTECH Corporation from Mirror Technologies, Incorporated. Global MAINTECH, Inc. ("MAINTECH") is the operating entity resulting from the merger between MAINTECH and Mirror Technologies, Incorporated ("Mirror") effective January 1, 1995 (see note 2). In late 1994, the Company became the exclusive distributor, outside of Japan, of the monitoring system of Circle Corporation of Japan. In 1995, the Company adapted this monitoring system which is oriented to single-unit users and to simple functions, to meet the more complex requirements of the U. S. market. While the Company continues to buy some hardware and software from Circle Corporation, the Company has added significant architecture, compiling and source code. The updated system provides enhanced operational control over computer hardware and software. In 1995, the Company made its first three installations of this system, now called the Virtual Command Center or VCC, in the data centers of a large industrial and financial company. In 1996 the Company sold an additional 7 systems and added two additional customers. The VCC is a tool designed to do three functions: the first is to consolidate consoles (computer terminals with access to the internal operation of a computer) into one monitor, a "virtual console" or single point of control; the second is to monitor and control the computers connected to the virtual console; and, the third is to automate most, if not all, of the routine processes performed by computer operators in data centers. The VCC can be operated from a remote location and accepts multiple computer platforms and operating systems. It is an external system that monitors and controls the subject mainframe and other data center computers from a workstation quality RISC computer, which is housed separately from the computers it controls. VCC users are able to reduce staffing levels, consolidate all data center operations and technical support functions to a single location regardless of the physical location of the data center(s) and achieve improved levels of operational control and system availability. 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, 1996. Reverse Stock Split The Company effected a 1-for-5 reverse stock split of the Company's common stock and series A preferred stock on November 12, 1996. As a result, the aggregate number of authorized shares of the Company was reduced from 250,000,000 to 50,000,000 shares. Excluding the preferred stock, the aggregate number of authorized shares is now 49,112,020. Common Equivalent Shares Outstanding The preferred stock is, because of its terms and the circumstances under which it was issued, in substance a common stock equivalent. The preferred stockholders can convert, at their option, to common stock on a one-for-one basis and can expect to participate in the appreciation of the value of the common stock. Accordingly, the weighted average common and common equivalent shares outstanding for the quarter ended March 31, 1997 include the Page 6 of 11 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) weighted average of 13,736,390 common shares outstanding, 365,185 shares of preferred stock outstanding since their issuance on September 13, 1994, and stock options and warrants which have a dilutive effect. The stock options and warrants included as common equivalent shares outstanding total 2,630,917 shares and are computed by application of the treasury stock method. Capitalized Computer Software Costs In the quarter ended March 31, 1997, the Company recorded software development costs, net of amortization, of approximately $628,650, which represent costs incurred after technological feasibility has been established in connection with the development of enhancements to one or more particular software programs. The establishment of technological feasibilty and the ongoing assessment of the recoverablity 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. The software development costs are being amortized over a 36 month period using the staight-line method. Patent Costs Patents are stated at cost and are amortized over a 36 month period using the straight-line method. Operating Leases The Company began leasing its Virtual Command Center (VCC) to Customers in 1996. The Company offers flexible lease terms to meet its customers' preferences. In some cases the lease may be classified as an operating lease on the Company's financial statements. Generally, a lease will be classified as an operating lease if the lease extends for a term less than the full economic life of the product and the Company retains a residual interest at the end of the lease term. Operating leases require the lessee to pay fair market value for the product if it chooses to purchase the VCC at the end of the lease term. Since the Company is the manufacturer and seller of the VCC, the Company is comfortable with the risk of retaining a residual interest. The net investment in leased equipment was $117,869 less accumulated depreciation of $34,809 for a total of $83,060. A majority of the Company's VCC leases were assigned to a third party, on a non-recourse basis, for a lump sum payment to the Company in 1996. Under the terms of this assignment, the Company retained a residual value in the equipment under lease. The present value of the cash received was recorded as deferred revenue, and is being recognized into revenue over the term of the lease. Lease revenue assigned to third parties recorded in 1996 and the quarter ended March 31, 1997 was $91,000 and $28,500, respectively. The annual lease revenue in 1997 and 1998 is $114,000 and $23,000, respectively. Page 7 of 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net cash used in operating and discontinued activities for the first quarter ended March 31, 1997 was approximately $436,000 compared to a use of cash of approximately $117,000 for such activities in the quarter ended March 31, 1996. Cash was provided from net income, depreciation and amortization totaling approximately $299,000. Cash was used to fund the approximate increases in accounts receivable of $487,000, inventory of $39,000, prepaid expenses of $24,000 and leased equipment of $11,000. Cash was also used to reduce accounts payable by approximately $83,000, deferred revenue of approximately $88,000 and accrued expenses of approximately $4,000. In the three month period ended March 31, 1996, the Company used cash to fund an increase in accounts receivable and to reduce accounts payable which were partially offset by cash sources such as income and depreciation. Sales from continuing operations for the first quarter ended March 31, 1997 were approximately $707,000 compared to sales of continuing operations for the first quarter of 1996 of approximately $492,000. The $215,000 increase is primarily related to licensing fees of $144,000 and consulting fees of nearly $70,000 which were non- existent in the first quarter of 1996. In both comparative periods the Company recorded two unit sales of the Virtual Command Center (VCC). Cost of sales in the first quarter of 1997 were lower primarily due to reduced unit costs. As a result, the gross margin in the first quarter of 1997 was 82.9% compared to 59.5% in the first quarter of 1996. Selling, general and administrative costs in the first quarter of 1997 were approximately $316,000 compared to $112,000. The increase of $204,000 is primarily due to an increase in salaries of $97,000. The salary increase is entirely due to an increase in employees the majority of which is due to an increase in the areas of sales and sales support. The remaining portion of the $204,000 increase is primarily due to increases in professional and technical costs of approximately $45,000, marketing and advertising costs of approximately $39,000, and travel and entertainment costs of approximately $15,000. The increase in professional costs is related to increases in audit and tax fees and financial public relations costs. The increases in travel and marketing costs is related to increased sales activity and the need to promote the Company's technology to facilitate sales efforts. Research and development costs in the first quarter of 1997 were approximately $104,000 compared to $54,000 in the first quarter of 1996, one year ago. The $50,000 increase is due to amortization of capitalized software development costs. Non-operating expenses in both periods under comparison consisted of interest expense which declined due to a decrease in debt between March 31, 1996 and March 31, 1997. Cash used by investing activities of approximately $323,000 reflects investments of $263,000 in capitalized computer software development costs, which represent costs incurred after technological feasibility has been established in connection with the development of enhancements to one or more particular software programs, and approximately $17,500 of patent costs. The Company also purchased $42,000 of additions to machinery and equipment during the first quarter of 1997. During the first quarter ended 1996, there was no cash used by investing activities. Net cash provided by financing activities in the first quarter of 1997 was approximately $980,000. This is due to the receipt of net proceeds from the issuance of common stock of approximately $1,100,000 at a per share price of $0.75 in connection with a private offering of such securities. Offsetting this increase was a $124,000 use of cash to reduce notes payable. In the prior first quarter of 1996, the Company raised $165,000 from the issuance of common stock which was offset by a reduction of notes payable of $61,000. Liquidity and Capital Resources As of March 31, 1997, the Company had positive working capital of approximately $652,000 compared to negative working capital as of December 31, 1996 of $400,000. The positive working capital was substantially enhanced by the net proceeds of approximately $1,100,000 received in January and February 1997 from the issuance of common stock in connection with a private offering of such securities. As of March 31, 1997, the Company remained delinquent in making principal payments on its convertible subordinated debentures of approximately $101,000. Page 8 of 11 During the quarter ended March 31, 1997, the Company's liquidity and capital resources were substantially improved. As a result of the positive working capital, the Company believes it has sufficient working capital to pay its current liabilities. This depends, partially, on the Company's ability to collect its accounts receivable and to continue to make sales sufficient to realize the full value of its current inventory. Since the Company has demonstrated its ability to realize gross margins of 70% or greater on its sales and has not experienced any bad debts on its accounts receivable, management believes the Company's financial health will continue to improve as additional sales are realized. To that end, the Company has continued to purchase additional inventory in anticipation of additional sales. The Company's operating plan for the year ending December 31, 1997 anticipates an increase in sales over the year ended December 31, 1996 with a commensurate increase in net income. As a result, this operating plan projects a significant increase in the liquidity and capital resources of the Company. While the Company believes in the viability of its operating plan and currently anticipates that its operating plan will be achieved, there can be no assurances to that effect. To the extent this plan is delayed, the Company will seek the continued forbearance of its creditors or will seek to raise additional capital, however, there can be no assurance such additional capital can be raised on terms favorable to the Company. Page 9 of 11 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the first quarter of 1997, the Company issued 1,652,801 shares of common stock to certain accredited and non-accredited investors at a purchase price of $0.75 per share in a private offering pursuant to the terms of a private placement memorandum dated November 25, 1996, as amended on February 10, 1997 (the "Memorandum"). Maven Securities, Inc. ("Maven") acted as placement agent for such sale and was paid a 10% commission and a 3% fee for expenses. As additional compensation, the Company issued Maven a warrant to purchase up to 10% of the number of shares of common stock issued in connection with such offering at an exercise price of $0.75 per share. The aggregate offering price for such shares was $1,239,600.75 and the aggregate placement agent commissions and expenses were $161,148.10. The shares issued pursuant to the Memorandum were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. ITEM 3. DEFAULT UPON SENIOR DEBT AND CONVERTIBLE SUBORDINATED DEBENTURES The Company is more than thirty days in default on principal payments of convertible subordinated debentures, all of which matured on July 1, 1996. During the first quarter of 1997, the Company made principal payments of $50,578 on this debt. As of March 31, 1997,the principal payments in default had been reduced to $101,172. In addition, interest payments have been disbursed monthly for the period July 1996 through April 1997 on the applicable delinquent principal amount. The company is not delinquent on any other debt. 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. Page 10 of 11 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 13, 1997 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 13, 1997 By: /s/ David McCaffrey David McCaffrey Chief Executive Officer Page 11 of 11 EX-27 2
5 This schedule contains summary financial information extracted from the March 31, 1997 SEC Form 10-QSB and is qualified in its entirety by reference to such financial statements. 0000783738 GLOBAL MAINTECH CORPORATION 1000 3-MOS DEC-31-1996 JAN-01-1997 MAR-31-1997 254 0 960 0 257 1521 67 0 2373 307 0 0 171 3180 (1847) 2373 707 707 121 0 420 0 17 149 2 147 70 0 0 217 0.013 0.013
EX-99 3 Exhibit 99 CAUTIONARY STATEMENT The Company, or persons acting on behalf of the Company, or outside reviewers retained by the Company, or underwriters, from time to time, may make, in writing or orally, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. When used in conjunction with an identified forward-looking statement, this Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of such sections and is intended to be readily available written document that contains factors which could cause results to differ materially from such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the contest of a forward-looking statement or statements shall be deemed to be a statement that any or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements: Doubt as to the Company's ability as a Going Concern. The Company had suffered losses prior to 1996. On January 4, 1995, MAINTECH Resources, Inc. was merged with a wholly-owned subsidiary of the Company. MAINTECH Resources, Inc. incurred a substantial loss in 1994, and, on a post-merger basis, the Company had negative working capital and its liabilities exceeded its assets. As of December 31, 1996, the Company had negative working capital but assets exceeded liabilities by a moderate amount and the Company was delinquent in making principal payments on its convertible subordinated debentures. These aforementioned conditions raise doubt about the Company's ability to continue as a going concern. Management believes that the Company will continue as a going concern and that the Company is currently operating on a profitable basis. The working capital deficit declined from approximately $2 million as of December 31, 1994, to approximately $1 million as of December 31, 1995, to $400,000 as of December 31, 1996 and as of March 31, 1997 the Company had positive working capital of approximately $436,000. Although management believes sales of the VCC product will continue to increase and will provide additional operating capital to satisfy the Company's ongoing requirements, there can be no assurance that either sufficient sales increases will occur or that, if sales are insufficient, the Company will be able to raise additional capital. If the Company is not successful in one or both of these areas, the affect on the business would be material and adverse. The Company's 11% Subordinated Convertible Debentures (the "Debentures") are in payment default. The Debentures matured on June 30, 1996 and have been paid in full. An event of Default may be waived but only if all of the debentureholders consent. The Company has not received, nor sought, a waiver of the Payment Event of Default. As a result the Company remains in default on the Debentures which through negotiation, conversion and pro-rata payments have been reduced from $261,750 to $101,172 in principal. Liquidity and Capital Resources. As of March 31, 1997, the Company had positive working capital of approximately $436,000. The Company has recently been and intends to continue to meet its cash requirements by structuring the Debentures for delayed payment and operating the Company at a profit. While there can be no assurance the Company will be successful with any of its plans, the Company expects its working capital position to continue to improve during 1997. Reliance Upon Key Personnel. The Company will be relying heavily upon the abilities of key personnel, in particular, two technicians, Jeff Jensen and Norm Freedman, and division head Bob Donaldson, to further develop the VCC. If any of these employees should cease to be employed by the Company or for any reason be unable to continue in their respective capacities as employees of the Company, the Company would be required to hire a comparable employee. There can be no assurance that it would be able to do so quickly and at an affordable compensation rate. While these three employees have incentive options and are bound by a confidentiality requirement, the Company does not have "key man" insurance for them and cannot guarantee their continued employment. Competitive Conditions. The Company's industry is characterized by rapidly evolving technology and intense competition. The Company is aware of several other competitors. These competitors have substantially greater resources and experience in research and development and marketing than the Company and may therefore represent significant competition for the Company. However, unlike the Company, no competitor produces a complete enterprise computing system, but rather components that could be combined to form such a system. The Company's management believes that the Company's ability to produce an integrated whole gives the Company a competitive advantage. Nevertheless, there can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective than those developed or marketed by the Company or that would render the Company's technology and products obsolete or noncompetitive. New Product with Uncertain Demand. The concept of an external monitor and control system for compute hardware is relatively new, and the demand for the product is not yet fully known. It is difficult to project the overall size of the future market for such a product. The Company estimates the market size for internal systems to be several billion dollars per year. The Company believes the market for an external system could be much larger based upon the fact that external control systems also soon could be used to solve networking problems associated with linking computers containing different processors together, a process commonly called enterprise computing. Based on recent feedback from the Company's current and potential customers, management believes the demand for the VCC is large. However, to date, the Company has sold only five customers (General Electric Capital Corporation, Burlington Northern Santa Fe, Storage Technology Corporation, Ferntree Computer Corporation and another unnamed company); and there is no certainty that additional customers will purchase the Company's products. Product Under Development. The Company currently is developing a software product which monitors networking and communication devices used by mainframes. Although preliminary tests indicate that this product will perform as intended and can be integrated with the VCC, there can be no assurance that it will do so or, even if it does, that the Company will be able to establish a market for such a product. Future Capital Requirements; No Assurance Future Capital Will Be Available. The proceeds of the Company's recent equity offerings are expected to fund the Company's operations through June 1997. The Company may require additional funds to continue the marketing of its product and meet its working capital requirements. In order to meet its needs, the Company may be required to raise additional funding through public or private financings, including equity financings. Any additional equity financings may be dilutive to the shareholders of the Company, and debt financing, if available, may involve restrictive covenants. Adequate funds for the Company's operations, whether from financial markets or from other sources, may not be available when needed on terms attractive to the Company, or at all. Whether the Company would be able to secure such financing and, if so, whether such financing would be available at reasonable rates and terms is uncertain. Failure to secure such additional financing could adversely affect the Company. Intellectual Property Rights. The Company holds no patents. However, applications have been completed, and the Company believes the VCC will be protected by patents that are currently under review by the U.S. Patent and Trademark Office. Another patent was filed by Circle Corporation, a Japanese corporation, on December 28, 1993 and the Company licenses a portion of the product from Circle Corporation. The license agreement provides the Company with exclusive distribution rights outside of Japan. Dependence on Diversification of Product Offerings. The Company currently has a limited number of product offerings, and existing customers of the Company's products are not required to purchase additional products but each of them pays certain license fees to the Company. Accordingly, a significant portion of the Company's revenues are generated from non-recurring revenue sources, and the success of the Company is dependent, in part, on its ability to develop sustained demand for its current products and to develop and sell additional products. There can be no assurance that the Company will be successful in developing and maintaining such demand or in developing and selling additional products. Fluctuations in Operating Results. The Company's future operating results may vary substantially from quarter to quarter. At its current stage of operations, the Company's quarterly revenues and results of operations may be materially affected by the timing of the development and market acceptance of the Company's products. Generally, operating expenses will be higher during periods in which product development costs are incurred and marketing efforts are commenced. Due to these and other factors, including the general economy, stock market conditions and announcements by the Company or its competitors, the market price of the Company's securities may be highly volatile. Lack of Product Liability Insurance. The Company may face a risk of exposure to product liability claims in the event that use of its products is alleged to have resulted in damage to its customers. The Company does not currently carry product liability insurance. There can be no assurance that such assurance that such insurance, even if obtained, would adequately covers any product liability claim. A product liability or other claim with respect to uninsured liabilities or in excess of insured liabilities or in excess of insured liabilities could have a material adverse effect on the business and prospects of the Company. -----END PRIVACY-ENHANCED MESSAGE-----