-----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, PUE4ykKuY/qWYe9kEytzmtDvtKasQ72agv3NwY63s7H2DSsGEdDt2vBdGbrL+9W0 /cS3yqU+nnXz+7fhf37WOg== 0000783738-97-000003.txt : 19971117 0000783738-97-000003.hdr.sgml : 19971117 ACCESSION NUMBER: 0000783738-97-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBAL MAINTECH CORP CENTRAL INDEX KEY: 0000783738 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 411523657 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-14692 FILM NUMBER: 97718999 BUSINESS ADDRESS: STREET 1: 6468 CITY WEST PARKWAY CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 612-944-04 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 September 30, 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ ______________________________________________ On November 7, 1997 there were 16,910,221 shares of the issuer'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 Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the uncertainty in the Company's ability to continue to operate profitably in the future; failure of the Company to meet its future additional capital requirements; loss of key personnel; inability of the Company to compete in the industry in which itoperates; failure of the Company to respond to evolving industry standards and technological changes; lack of market acceptance of the Company's products; failure of the Company to secure adequate protection for the Company's intellectual property rights; failure by the Company to sustain demand incurrent products or to expand its product lines to meet demand or to meet the costs associated with product expansion; 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 September 30, 1997. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
September 30, December 31, 1997 1996 (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 2,597,472 $ 32,890 Accounts receivable, less allowance for doubtful accounts of $15,000 1,566,738 451,599 Other receivables 85,622 21,519 Inventory 372,661 217,943 Prepaid expenses and other 81,744 26,706 ----------- ----------- Total current assets 4,704,237 750,657 Property and equipment, net 152,089 31,221 Leased equipment, net 58,678 82,377 Patent costs, net 70,525 61,779 Deferred subordinated debt costs 200,898 - Software development costs, net 832,009 425,519 ----------- ----------- TOTAL ASSETS $ 6,018,436 $ 1,351,553
The accompanying notes are an integral part of these consolidated statements. page 2 of 11 GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) September 30, December 31, 1997 1996 (Unaudited) CURRENT LIABILITIES Accounts payable $ 258,664 $ 396,004 Current portion of notes payable - 211,613 Convertible subordinated debentures - 151,750 Accrued liabilities Compensation and payroll taxes 92,153 79,655 Interest 70,000 13,960 Other 18,813 38,325 Deferred revenue 44,852 259,747 ----------- ----------- Total current liabilities 484,482 1,151,054 Subordinated notes payable, less current portion 2,000,000 16,600 ----------- ----------- Total liabilities 2,484,482 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; 258,780 shares issued and outstanding; total liquidation preference of outstanding shares-$485,000 121,368 328,601 Common stock, no par value; 49,112,020 shares authorized; 16,810,221 shares issued and outstanding - - Additional paid-in-capital 5,125,184 2,243,438 Notes receivable-officers (294,500) (324,500) Accumulated deficit (1,418,098) (2,063,640) ----------- ----------- Total stockholders' equity 3,533,954 183,899 ----------- ----------- $ 6,018,436 $ 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 Nine Months Ended September 30 September 30 1997 1996 1997 1996 Net sales $ 1,181,043 $ 421,486 $ 2,756,430 $ 1,471,487 Cost of sales 304,020 43,932 701,113 424,961 ----------- ----------- ----------- ----------- Gross Profit 877,023 377,554 2,055,317 1,046,526 Operating expenses Selling, general and administrative 497,271 197,071 1,199,917 506,054 Research and development 78,988 39,993 159,995 186,102 ----------- ------------ ----------- ----------- Income from operations 300,764 140,491 695,405 354,370 Other income (expense): Interest expense (72,845) (20,829) (106,791) (39,744) Other (10,574) - (10,574) (2,554) ----------- ----------- ----------- ------------ Total other expense, net (83,418) (20,829) (117,365) (42,298) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 217,345 119,662 578,040 312,072 Provision for income taxes - 18,500 2,500 18,500 ----------- ----------- ----------- ----------- Income from continuing operations 217,345 101,162 575,540 293,572 Recovery of discontinued operations - - 70,000 - ----------- ----------- ----------- ----------- Gain from discontinued operations - - 70,000 - ----------- ----------- ----------- ----------- Net income $ 217,345 $ 101,162 $ 645,540 $ 293,572 Net earnings (loss) per common and common equivalent share: Continuing operations $ 0.012 $ 0.007 $ 0.033 $ 0.021 Discontinued operations - - 0.004 - ------- ------- ------- ------- Net earnings $ 0.012 $ 0.007 $ 0.038 $ 0.021 Weighted average number of common and common equivalent shares outstanding 18,845,064 14,689,871 17,189,261 14,254,034
The accompanying notes are an integral part of these consolidated statements. page 4 of 11 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1997 1996 Cash flows from operating activities: Net income $ 645,540 $ 293,572 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 283,849 22,911 Changes in operating assets and liabilities: (Increase) decrease in accounts and other receivables (1,179,242) 278,610 Increase in inventory (154,718) (181,298) Increase in leased equipment (6,437) (107,140) Increase in prepaid expenses (55,039) (24,786) Decrease in accounts payable (125,541) (298,979) Increase (decrease) in accrued expenses 37,226 48,462 Increase (decrease) in deferred revenue (214,895) 167,398 Increase in other - - ----------- ----------- Cash provided(used) by operating activities (769,256) 198,750 ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (166,006) (20,130) Increase in deferred debt costs (211,472) - Investment in software development costs (586,489) (314,929) Investment in patent costs (26,746) - ----------- ----------- Cash used by investing activities (990,713) (335,059) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 2,704,513 284,511 Decrease in short-term notes payable (363,363) (85,095) Increase (decrease) in long-term notes payable 1,983,400 (58,000) ----------- ----------- Cash provided (used) by financing activities 4,324,551 141,416 ----------- ----------- Net increase (decrease) in cash 2,564,582 5,107 Cash and cash equivalents at beginning of period 32,890 39,364 ----------- ----------- Cash and cash equivalents at end of period $ 2,597,472 $ 44,471
The accompanying notes are an integral part of these consolidated statements. page 5 of 11 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General The Company, through its wholly owned subsidiary Global MAINTECH, Inc., designs, develops and markets a computer system, consisting of hardware and software, which monitors mainframe and mid-range computer operations and consolidates control of large corporate data centers. This system is called the Virtual Command Center ("VCC") and is designed to perform three primary functions: (a) consolidate consoles (computer terminals with access to the internal operation of a computer) into one monitor, a "virtual console" or single point of control; (b) monitor and control the computers connected to the virtual console; and (c) 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. The VCC competes with internal monitoring software, which monitors certain pieces of hardware and software in the computer in which it is installed, sold by other companies. Sales of such software were estimated to be $3 billion in November 1996. It is believed this market will grow to almost $9 billion by 2000, which would represent a compound annual growth rate of approximately, 30%. The Company believes the VCC also is well suited for use in enterprise computing applications. Enterprise computing is the term associated with the hardware and software which enables computers that contain different processors to be linked together. The Company has adapted the VCC and coupled it with its own proprietary software to form an enterprise computing management system. The VCC can be used to monitor and control desktops, mid-range servers and mainframes. Sales of all such UNIX-based systems in 1995 were $19 billion. 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. Reclassifications Certain reclassifications have been made to the fiscal 1996 data to conform with the fiscal 1997 presentation. Reverse Stock Split The Company effected a one-for-five 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. page 6 of 11 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 any appreciation of the value of the common stock. Accordingly, the weighted average common and common equivalent shares outstanding for the quarter ended September 30, 1997 include the weighted average of 15,927,008 common shares outstanding, 258,780 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 2,659,275 shares and are computed by application of the treasury stock method. Capitalized Computer Software Costs In the quarter ended September 30, 1997, the Company recorded software development costs, net of amortization, of approximately $832,009, which represent costs incurred aftertechnological feasibility has been established in connection with the development of enhancements to one or more particular software programs. 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. The software development costs are being amortized over a 36 month period using the straight-line method. Operating Leases The Company began leasing its Virtual Command Center product (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 VCC if the lessee chooses to purchase the product 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 $47,000 for a total of $70,869. 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 September 30, 1997 was $91,000 and $85,500, respectively. The annual lease revenue in 1997 and 1998 is expected to be $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 nine month period ended September 30, 1997 was approximately $769,000. Cash provided from net income,before depreciation and amortization, for this nine month period was approximately $930,000. However, cash was used to fund increases in current assets, primarily accounts receivable and inventory totaling approximately $1,334,000 and to reduce accounts payable and deferred revenue totaling approximately $340,000. In the same period in the prior year operating activities generated cash of approximately $199,000, which was largely due to net income of $293,572. Sales for the third quarter ended September 30, 1997 were approximately $1,181,000 compared to sales of continuing operations for the third quarter of 1996 of approximately $421,000. Sales for the nine months ended September 30, 1997 were approximately $2.8 million compared to $1.5 million in the same nine month period of 1996. The increase in sales of $760,000 for the third quarter of 1997 is primarily due to an increase in product sales of approximately $920,000 offset by a decrease in licensing fees of approximately $160,000. In the quarter ended September 30, 1996, the Company recorded a one-time licensing fee sale of $225,000. Otherwise, ongoing licensing fees sales, exclusive of the one-time sale, increased $60,000. The increase in sales of $1.3 million for the nine month period ended September 30, 1997 is primarily due to an approximate $1.0 million increase in product sales, an approximate $50,000 increase in ongoing licensing fees and an increase in consulting fees of approximately $100,000. The gross profit margin percentage in the third quarter of 1997 was approximately 74% compared to approximately 90% in the same quarter in the prior year and was approximately 75% for the nine month period ended September 30, 1997 compared to approximately 71% in the same period in the prior year. The decrease in gross profit margin in the quarter ended September 30, 1997 compared to the same quarter in the prior year is due to the one-time license fee sale in the quarter ended September 30, 1996. The increase in gross profit margin for the nine months ended September 30, 1997 compared to the same period in the prior year is primarily due to a decrease in the cost of sales. The Company attributes this decrease in costs of sales to temporary decreases in equipment costs which fluctuate from time to time. Selling, general and administrative expenses in the third quarter of 1997 were approximately $500,000 compared to $200,000 for the third quarter of 1996. For the nine month period ended September 30, 1997 these expenses were approximately $1,200,000 compared to $500,000 in the same period in the prior year. The increase of $300,000 for the third quarter ended September 30, 1997 is due primarily to increases in salaries, professional and technical, travel and expenses, marketing, insurance and depreciation expenses. Salaries increased due to increases in the number of employees the majority of which is due to new hires in sales and sales support. Professional and technical expenses increased in the areas of legal and investor relations. These increases in corporate governance expenses are largely related to expenses incurred from the registration of certain common stock securities previously issued in a series of private issues of such securities. The increases in travel expenses are due to increases in sales activities; marketing expense increases are due to increased product marketing efforts; insurance expense increases are related to increased sales and inventory levels; and, depreciation expense increases are due to purchases of machinery and equipment for software development. The $700,000 increase for the nine month period ended September 30, 1997 compared to the nine month period ended September 30, 1996 is primarily due to increases in salaries, professional and technical, travel and expenses, marketing, insurance and depreciation expenses. These increases are primarily attributable to the same factors that caused the increases in these same expense categories in the third quarter comparison above, with one exception: Legal expenses increased in the nine month period primarily due to the settlement in the prior year's nine month period ended September 30, 1996 of old claims from continuing operations at less than the accrued amount. Research and development costs in the third quarter of 1997 were approximately $79,000 compared to $40,000 in the third quarter of 1996, one year ago. For the nine month period ended September 30, 1997 research and development costs were approximately $160,000 compared to $186,000 in the same period in the prior year. The increase in the comparative three month periods is due to increases in consulting expenses related to the development of certain improvements to the hardware used in the VCC. The decrease in the comparative nine month period is primarily due to changes in salary expenses. The Company reduced its administrative engineering activities and increased its focus on enhancements to existing products, the costs of which are recorded in costs of goods sold. page 8 of 11 Non-operating expenses in both periods under comparison primarily consisted of interest expense. Interest expense increased in the three and nine month periods ending September 30, 1997 compared to the same periods in the prior year. This is due to the issuance in June 1997 of $2,000,000 of subordinated debt. The increase in other non-operating expenses is entirely due to the amortization of deferred subordinated debt costs, which costs are being amortized over the term of the related subordinated debt. Cash used by investing activities of approximately $991,000 reflects investments of $586,000 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. The Company also incurred costs of approximately $211,000 in connection with the issuance of five year subordinated notes payable in the amount of $2,000,000 in June 1997 which costs will be amortized on a straight-line basis over the term of the related debt. The Company also purchased approximately $166,000 of additions to machinery and equipment during the first nine months of 1997. During the nine months ended September 30,1996, the Company invested approximately $315,000 in software development and $20,000 in machinery and equipment. Net cash provided by financing activities in the nine month period ended September 30, 1997 was approximately $4,325,000. This is due to the receipt of net proceeds from the issuance of common stock of approximately $2,705,000 in two private issues, one ending in February 1997 with common stock issued at a per share price of $0.75 and one ending in June 1997 at a per share price of $1.40 raising approximately $1,104,00 and $1,601,000, respectively. In addition, on June 19, 1997 the Company received $2,000,000 in return for the issuance of five year subordinated notes payable. Offsetting this increase was a $363,000 use of cash to reduce notes payable. In the nine month period ending September 30, 1996, the Company raised approximately $284,000 from the issuance of common stock which was offset by reductions of short and long-term notes payable of $143,000 resulting in a net use of cash by financing activities of $141,000. Liquidity and Capital Resources As of September 30, 1997, the Company had positive working capital of approximately $4,220,000 compared to negative working capital as of December 31, 1996 of approximately $400,000. The positive working capital was substantially enhanced by the net proceeds of approximately $2,705,000 received from the issuance of common stock in connection with two private placements of such securities and the issuance of five year subordinated notes payable in the amount of $2,000,000. The Company used these proceeds to pay all other outstanding debt, a portion of which had been delinquent as to principal payments. Due to continued profitability and the equity and long-term debt financings, the Company's liquidity and capital resources currently appear adequate to meet the expected needs of the Company's operations. Although the Company is not currently dependent on its earnings to provide liquidity, it has recently demonstrated an ability to realize gross margins of better than 70% in all periods under review and to produce a profit. Accordingly, management believes the liquidity and capital resources of the Company are sufficient to meet its operational needs and to allow the Company to realize the value of its assets. page 9 of 11 PART II. OTHER INFORMATION 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 November 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. November 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 SEC Form 10-QSB and is qualified in its entirety by reference to such financial statements 0000783738 GLOBAL MAINTECH CORPORATION 1000 U.S. DOLLARS 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUL-1-1997 JAN-1-1997 SEP-30-1997 SEP-30-1997 999,999.99999 999,999.99999 2,597 2,597 0 0 1,652 1,652 0 0 373 373 4,704 4,704 152 152 0 0 6,018 6,018 484 484 0 0 0 0 121 121 4,831 4,831 (1,418) (1,418) 6,018 6,018 1,181 2,756 1,181 2,756 304 701 576 1,360 11 11 0 0 73 106 217 578 0 3 217 575 0 70 0 0 0 0 217 645 0.012 0.038 0.012 0.038
EX-99 3 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 a readily available written document that contains factors which could cause results to differ materially from such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements: 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. The prior existence of such conditions has raised 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 has 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. The Company had positive working capital of approximately $4,220,000 as of September 30, 1997. As a result management believes the issues affecting the Company as a Going Concern are no longer prevalent in the short-term. However, as a start-up company, there can be no assurance of the long term viability in the marketplace of the Company's products. 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 cannot guarantee their continued employment and only has "key man" insurance for Bob Donaldson. 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 no competitor of the Company produces as complete enterprise computing system as does the Company, but rather the Company's competitors produce components that could be combined to form such a system. Management believes that the Company's ability to produce an integrated whole gives the Company a competitive advantage in this respect. 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 computer 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 significant. However, to date, the Company has sold VCC units to only nine customers, including General Electric Capital Corporation, Burlington Northern Santa Fe, Storage Technology Corporation, Ferntree Computer Corporation, System Management Specialists, Inc., Deluxe Corporation, and SAP America; and there can be no assurance 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 and mid-range computers. 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 and debt offerings are expected to fund the Company's operations through at least December 31, 1998. Thereafter, 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. 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 regards its products as proprietary and relies primarily on a combination of statutory and common law patent, copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. Although the Company currently holds no patents, the Company believes the VCC will be protected by two patents that are currently under review by the U.S. Patent and Trademark Office and by a patent that was filed by Circle Corporation, a Japanese corporation, on December 28, 1993 (the "Circle Corp. Patent"). The Circle Corp Patent relates to certain hardware developed by Circle Corporation that has been licensed to the Company and incorporated by the Company into the VCC. This license provides the Company with exclusive distribution rights to such hardware worldwide, except Japan. The initial term of this license expires in November 2004. Despite the foregoing precautions, it may be possible for a third party to copy or otherwise obtain or use the Company's products or technology without authorization, or to develop similar products or technology independently. If unauthorized use or copying of the Company's products were to occur to any substantial degree, the Company's business and operating results could be materially adversely affected. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar products. The Company requires its consultants and developers to assign their rights in materials provided to, or made for, the Company and to represent that the inclusion or use of such representations, the Company's relationships with such consultants and developers and initial marketing of the VCC, the company has no reason to believe that its products infringe on the proprietary rights of third parties. The Company has not commissioned an independent investigation to reaffirm the basis for such belief, however, and there can be no assurance that third parties will not claim that the Company's current or future products infringe on the proprietary rights of others. The Company believes that developers of control systems may increasingly be subject to such claims as the number of products and competitors in the industry grows and the functionality of such products in the industry overlaps. Any such claim, with or without merit, could result in costly litigation and could have a material adverse effect on the Company. Dependence on Limited Product Offerings and Customer Base. The Company currently has a limited number of product offerings, and existing customers of the Company's products are not required to purchase additional hardware products or to renew software license and maintenance agreements when such agreements expire. 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 product developments and public 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 be liable for 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 insurance will be available on commercially reasonable terms, or at all, or that such insurance, even if obtained, would adequately cover any product liability claim. Although the Company is not aware of any pending or threatened product liabilty or other legal claim against it, a product liability or other claim with respect to uninsured liabilities or in excess of insured liabilities could havea material adverse effect on the business and prospects of the Company. -----END PRIVACY-ENHANCED MESSAGE-----