-----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, KHVSy904nBpmUgU68KGwWDaknwT3NJdFoJ/FbccAjJEyqbqSSR6zmqXmNO7esmYI uyz2v5zqyHnfWIKacgUtrg== 0001045969-98-000810.txt : 19981116 0001045969-98-000810.hdr.sgml : 19981116 ACCESSION NUMBER: 0001045969-98-000810 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98748526 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 FORM 10-QSB 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, 1998 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: (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 required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ---------------------------------------------- On November 3, 1998 there were 18,131,361 shares of the Registrant's no par value common stock outstanding. Transitional small business issuer format: No Page 1 of 13 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 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 it operates; 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; 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, 1998. - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
September 30, December 31, 1998 1997 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 299,871 $1,726,889 Accounts receivable, less allowance for doubtful accounts of $15,000 2,407,743 576,573 Other receivables 199,724 26,111 Inventories 1,397,272 797,435 Prepaid expenses and other 158,951 77,308 Notes receivable 170,000 75,000 Current portion of investment in sales-type leases -- 286,997 ---------- ---------- Total current assets 4,633,561 3,566,313 Property and equipment, net 308,118 308,347 Leased equipment 128,541 209,033 Software development costs, net 2,352,893 955,835 Net investment in sales-type leases, net of current portion -- 492,918 Other assets, net 1,000,957 331,003 ---------- ---------- TOTAL ASSETS $8,424,070 $5,863,449 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 2 GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1998 1997 ----------- ----------- CURRENT LIABILITIES Accounts payable $ 494,545 $ 396,159 Current portion of notes payable 175,000 100,000 Accrued liabilities Compensation and payroll taxes 256,729 123,605 Other 24,389 10,588 Deferred revenue 21,927 52,443 ----------- ----------- Total current liabilities 972,590 682,795 ----------- ----------- Subordinated notes payable, less current portion 1,750,000 1,900,000 ----------- ----------- Total liabilities 2,722,590 2,582,795 STOCKHOLDERS' EQUITY Voting, convertible preferred stock - Series A, convertible into one common stock share for each preferred share, no par value; 887,980 shares authorized; 134,510 shares in 1998 and 244,113 shares in 1997 issued and outstanding; total liquidation preference of outstanding shares-$50,441 61,859 114,489 Voting, convertible preferred stock - Series B, convertible on or before September 23, 2001 based on price of common stock; conversion price not to exceed $2.50 per share or be less than $0.75; dividend of 8% payable in cash or common stock; no par value; 615,385 shares authorized; 74,152 shares in 1998 and none in 1997 issued and outstanding; total liquidation preference of outstanding shares-$481,988 481,988 -- Common stock, no par value; 48,496,635 shares authorized; 18,175,362 shares in 1998 and 17,084,857 shares in 1997 issued and outstanding Additional paid-in-capital 6,975,466 5,295,829 Notes receivable-officers (294,500) (294,500) Accumulated deficit (1,523,333) (1,835,164) ----------- ----------- Total stockholders' equity 5,701,480 3,280,654 ----------- ----------- $ 8,424,070 $ 5,863,449 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 3 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales Systems 1,378,093 $ 968,647 $ 4,325,499 $ 2,176,294 Maintenance, consulting and other 280,517 $ 212,396 $ 806,369 $ 580,136 ------------ ------------ ------------ ------------ Total net sales $ 1,658,610 $ 1,181,043 $ 5,131,868 $ 2,756,430 Cost of sales Systems 243,386 $ 231,318 $ 1,117,380 $ 509,930 Maintenance, consulting and other 275,624 $ 72,702 $ 652,564 $ 191,183 ------------ ------------ ------------ ------------ Total cost of sales 519,010 304,020 1,769,944 701,113 ------------ ------------ ------------ ------------ Gross profit 1,139,600 877,023 3,361,924 2,055,317 Operating expenses Selling, general and administrative 838,494 491,272 2,440,027 1,181,568 Research and development 212,463 84,987 485,984 178,344 ------------ ------------ ------------ ------------ Income from operations 88,643 300,764 435,913 695,405 Other income (expense): Interest expense (68,591) (73,955) (215,257) (107,901) Interest income 607 1,110 124,395 1,110 Other (11,073) (10,574) (33,220) (10,574) ------------ ------------ ------------ ------------ Total other income (expense), net (79,057) (83,419) (124,082) (117,365) ------------ ------------ ------------ ------------ Income from continuing operations before income taxes 9,586 217,345 311,831 578,040 Provision for income taxes -- -- -- 2,500 ------------ ------------ ------------ ------------ Income from continuing operations 9,586 217,345 311,831 575,540 Gain from discontinued operations -- -- -- 70,000 ------------ ------------ ------------ ------------ Net earnings $ 9,586 $ 217,345 $ 311,831 $ 645,540 ============ ============ ============ ============ Basic earnings per common share: Continuing operations $ 0.001 $ 0.014 $ 0.018 $ 0.040 Discontinued operations -- -- -- 0.005 ------------ ------------ ------------ ------------ Net earnings $ 0.001 $ 0.014 $ 0.018 $ 0.045 ============ ============ ============ ============ Diluted earnings per common share: Continuing operations $ 0.000 $ 0.012 $ 0.015 $ 0.033 Discontinued operations -- -- -- 0.004 ------------ ------------ ------------ ------------ Net earnings $ 0.000 $ 0.012 $ 0.015 $ 0.038 ============ ============ ============ ============ Shares used in calculations: Basic 17,910,212 16,081,176 17,609,610 14,425,373 Diluted 19,993,323 18,845,064 20,302,729 17,189,261
The accompanying notes are an integral part of these consolidated statements. 4 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, -------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $ 311,831 $ 645,540 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 990,238 283,849 Changes in operating assets and liabilities: Increase in accounts receivable (1,831,170) (1,115,139) Increase in other receivables (173,613) (64,103) Increase in inventories (599,837) (154,718) Increase in prepaid expenses and other (81,643) (55,039) Increase (decrease) in accounts payable 98,386 (125,541) Increase in accrued liabilities 146,925 37,226 Decrease in deferred revenue (30,516) (214,895) ----------- ----------- Cash used by operating activities (1,169,399) (762,820) ----------- ----------- Cash flows from investing activities: Sale of investment in sales-type leases 679,634 -- Purchase of property and equipment (204,770) (166,006) Reduction (increase) in leased equipment 37,156 (6,437) Investment in software development costs (1,904,808) (586,489) Investment in other assets (803,826) (25,746) Investments in notes receivable (170,000) -- Payments received on notes receivable 75,000 -- ----------- ----------- Cash used by investing activities (2,291,614) (784,678) ----------- ----------- Cash flows from financing activities: Disbursements for deferred debt costs -- (212,470) Net proceeds from issuance of common stock 1,627,007 2,704,513 Net proceeds from issuance of preferred stock 481,988 -- Payments of short-term notes payable -- (363,363) Payments of long-term notes payable (75,000) 1,983,400 ----------- ----------- Cash provided by financing activities 2,033,995 4,112,080 ----------- ----------- Net increase (decrease) in cash (1,427,018) 2,564,582 Cash and cash equivalents at beginning of period 1,726,889 32,890 ----------- ----------- Cash and cash equivalents at end of period $ 299,871 $ 2,597,472 =========== =========== Supplemental disclosures of cash flow information: Cash paid for: Interest $ 215,257 $ 13,960 Income taxes $ -- $ 9,999
The accompanying notes are an integral part of these consolidated statements. 5 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 and controls diverse computers in a data center from a single, master console. The Virtual Command Center ("VCC" or "VCC Unit") can simultaneously manage mainframes, mid-range computers (e.g., UNIX, Microsoft and Windows NT platforms) and networks. The VCC is designed to perform three primary functions: (a) consolidate consoles (computer terminal 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 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 reduced instruction set computer ("RISC") 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. In 1995, the Company installed its first three VCC Units in the data centers of a large industrial and financial company. In 1996, the Company sold or leased seven additional VCC Units and added two new customers. As of December 31, 1997, the Company had sold or leased a cumulative total of 26 VCC Units to a total of eight customers and had shipped four VCC Units for evaluation purposes to three prospective customers. As of September 30, 1998, the Company had sold an additional 10 VCC Units for a total of 36. The Company's customers include: General Electric Capital Corporation, Burlington Northern Santa Fe Railroad, Storage Technology Corporation, Systems Management Specialists, Inc., Ferntree Computer Corp. (Australia), SAP America, Inc., Deluxe Corporation, Bank One Services Corp., BMC Software, Frontier Information Technologies, Inc., Merrill Lynch & Co. Inc., Southern California Gas Company, Alltel Information Services, Spiegel Inc. and Minnesota Mining and Manufacturing Company. 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, 1997. Basic and Diluted Earnings Per Share Basic earnings per share represent earnings, reduced by any dividends on preferred stock, divided by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share represent earnings divided 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 "in the money" stock options and warrants for the purchase of shares of common stock and the amount of common shares which would be added by conversion of the outstanding convertible preferred stock. The number of shares added for stock options and warrants is determined by the treasury stock method, which assumes exercise of these securities and the use of any proceeds from these actions to repurchase a portion of these shares at the average market price for the period. When the results of continuing operations are a loss, other potentially dilutive securities will not be included in the calculation of loss per share. 6 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The weighted average shares and total dilutive shares used in the calculation of basic and diluted earnings per share are as follows:
Nine Months Ended September 30, 1998 1997 ---------- ---------- Basic Earnings Per Share Weighted average shares 17,609,610 14,425,373 Diluted Earnings Per Share Weighted average shares 17,609,610 14,425,343 Stock options and Warrants 2,558,609 2,505,108 Conversion of preferred stock 134,510 258,780 ---------- ---------- Total dilutive shares 20,302,729 17,189,261 ========== ==========
Capitalized Software Development Costs Capitalized software development costs 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 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 using the straight-line method over the estimated economic life of the software not to exceed three years. Other Assets Other assets is comprised of patents, capitalized software license fees, and capitalized debt issuance costs. Patents and capitalized software license fees are stated at cost and are amortized over their useful life of three to five years using the straight-line method. Capitalized debt issuance costs are stated at cost and are amortized over the term of the related debt agreement. Recorded amounts for patents and license fees 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. Asset Purchase and Software License On February 27, 1998 the Company licensed certain software and purchased certain assets relating to the system software business of Infinite Graphics Incorporated ("IGI"), a Minnesota corporation based in Minneapolis. The acquisition has been recorded as an asset purchase. The acquisition agreement provides for initial payments of $700,000 and additional payments of up to $3,300,000, the payment of which is contingent on the future revenue generated by this business segment and is determinable as of May 31, 1999. In the twelve months ended December 31, 1997 the unaudited revenue of IGI's software segment was $1,683,000 and the gross margin was $621,000. 7 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The acquired software and assets will be used by the Company to design, assemble and market computer-aided design and manufacturing software systems that operate on a variety of mid-range and personal computer platforms. Assets purchased in the acquisition include inventory, machinery, equipment, furniture and fixtures, used in IGI's system software business. In connection with such transaction, the Company also obtained a perpetual exclusive software license of a majority of IGI's software products used in IGI's system software business and a non-exclusive license of certain software used in IGI's remaining business segment. The company has recorded the initial payments of $700,000 primarily as software licenses to be amortized over a useful life not to exceed five years. IGI will reimburse the Company for the liabilities of IGI explicitly assumed by the Company in connection with the acquisition. The Company also agreed to satisfy IGI's unrecorded service obligations to the software end users in return for which the Company expects to receive support payments from such end users. Stock Issuance In February 1998, the Company began a 400,000 share private placement of common stock at $1.90 per share. This offering was later amended to include an additional 100,000 shares for a total of 500,000 shares. This offering terminated on July 9, 1998 and a total of 426,500 shares were sold. Maven Securities, Inc. ("Maven") acted as the placement agent. The Company paid Maven a 10% commission, a 3% fee for expenses and issued a warrant to purchase 42,650 shares of common stock at an exercise price of $1.90 per share to Maven. The shares of common stock issued pursuant to this issuance are exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. On August 11, 1998, the Company completed a 1,667,000 share private placement of units, each consisting of one share of Common Stock and one Warrant to purchase a fraction of a share of Common Stock, at a price of $2.20 per unit. The offering began on July 21, 1998. A total of 450,000 units were sold in such offering. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Recent Developments" and "ITEM 2. CHANGES IN SECURITIES." At the end of August 1998, the Company began a private placement of up to 615,384 units, each consisting of one share of Series B Cumulative Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase shares of common Stock. The purchase price per unit is $6.50. As of September, 30, 1998, the Company had sold 74,152 of such units for total gross proceeds of $481,988. The offering is expected to terminate on or before December 31, 1998. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Recent Developments" and "ITEM 2. CHANGES IN SECURITIES." Reclassifications Certain amounts previously reported in 1997 have been reclassified to conform to the 1998 presentation. New Accounting Pronouncements The Company is currently reviewing the potential impact of the recently released FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for Global MAINTECH Corporation in January 2000. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales from operations for the third quarter ended September 30, 1998 were approximately $1,659,000 compared to sales from operations for the third quarter of 1997 of approximately $1,181,000. Sales for the nine months ended September 30, 1998 were approximately $5.1 million compared to $2.8 million in the same nine month period of 1997. The $478,000 increase for the third quarter is primarily related to an approximate increase of $409,000 in system sales which includes both the Virtual Command Center (VCC) and computer- aided design software products, and an increase of $68,000 in maintenance, consulting and other fees. The $2.4 million increase for the nine months ended September 30, 1998 is substantially due to a $2.1 million increase in system sales and increases in maintenance, consulting and other fees is the primary reason for the remaining $0.3 million increase. Cost of sales increased in the third quarter ended September 30, 1998 to 31% from 26% in the third quarter of 1997 and for the nine months ended September 30, 1998 increased to 34% from 25% in the nine months ended September 30, 1997. Nearly all of the increase in the third quarter ended September 30, 1998 is due to increased amounts of software amortization. The increase in cost of sales for the nine months ended September 30, 1998 is evenly split between increases in software amortization and product costs. Product costs include increased distribution costs which are the result of certain of the sales in the nine months ended 1998 being made through a third party distributor. The Company had no third party distribution costs in the same nine month period of 1997. Software amortization increased in 1998 as a result of increases in capitalized software development costs. As a result, the gross margin in the third quarter ended September 30, 1998 was approximately 69% compared to 74% in the third quarter of 1997 and for the nine months ended September 30, 1998 the gross margin was approximately 66% compared to 75% in the same nine month period in 1997. Selling, general and administrative expenses in the third quarter of 1998 were approximately $838,000 compared to $491,000. For the nine month period ended September 30, 1998 these expenses were approximately $2,440,000 compared to $1,182,000 in the same period in 1997. These increases of $347,000 and $1,258,000 are both primarily due to increases in salaries and secondarily to increases in travel, depreciation and marketing expenses. The salary increase is almost 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 increase in travel expenses is related to sales activity, depreciation expenses increased due to the additional equipment purchases for new employees and the rapid depreciation method used by the Company, and marketing expenses increased as part of a plan to communicate with the marketplace. Research and development costs in the third quarter of 1998 were approximately $212,000 compared to $85,000 in the third quarter of 1997, one year ago. For the nine month period ended September 30, 1998 research and development costs were approximately $486,000 compared to $178,000 in the same period in the prior year. The increases of $127,000 in the third quarter and $308,000 for the nine months ended September 30, 1998 are substantially due to increased salary expenses relating to additional employees in this expense category and secondarily to fees paid to employee search firms. Non-operating expenses include interest expense, amortization of capitalized debt issuance costs and interest income. Interest expense increased due to the issuance in June 1997 of subordinated notes payable and amortization is related to cost of this debt. The increase in interest income is related to the sale of sales-type leases in March 1998. Net cash used in operating activities for the nine month period ended September 30, 1998 was approximately $1,169,000. Cash generated from net income for this nine month period was approximately $311,000 and was $990,000 from depreciation and amortization. However, cash was used to fund increases in current assets, primarily receivables and inventory totaling approximately $2,605,000. Cash was also provided by accounts payable and accrued expenses totaling approximately $245,000. In the same period in the prior year operating activities used cash of approximately $763,000, which was largely due to net income and depreciation and amortization of approximately $929,000 which was more than offset by cash used to increase current assets and to reduce current liabilities. 9 Cash used by investing activities of approximately $2,291,000 reflects investments of $2,709,000 in software licenses purchased in March 1998, included in other assets, and in capitalized computer software 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 purchased approximately $205,000 of additions to machinery and equipment during the first nine months of 1998, invested $170,000 in notes receivable and received payments on notes receivable of $75,000. During the nine months ended September 30, 1997, the Company invested $785,000 primarily in capitalized computer software development costs of $586,000, and $166,000 in machinery and equipment. Net cash provided by financing activities in the nine month period ended September 30, 1998 was approximately $2,034,000. This is due to the receipt of net proceeds from the issuance of common stock of approximately $2,109,000 in three private placements of the Company's securities. See "ITEM 2. CHANGES IN SECURITIES." Offsetting this increase was a $75,000 use of cash to reduce subordinated notes payable. In the nine month period ending September 30, 1997, the Company raised $2,705,000 in two private issues of common stock at per share prices of $0.75 and $1.40. In addition, in the nine month period ending September 30, 1997, the Company issued five year subordinated notes payable of $2,000,000, disbursed $212,000 for debt issuance costs, and reduced short term debt of $363,000 resulting in net cash provided by financing activities of $4,112,000. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had positive working capital of approximately $3,661,000 compared to positive working capital as of December 31, 1997 of approximately $2,884,000. The increase in positive working capital is related to the net earnings plus depreciation and amortization recorded in the nine months ended September 30, 1998 which was partially offset by an increase in current liabilities. During the nine months ended September 30, 1998, the Company's liquidity and capital resources were reduced by cash investments in accounts receivable and inventory and cash was invested in long-term assets as described above. As a result the Company's liquidity was reduced from year-end 1997. The Company is now more dependent on the collection of its accounts receivable and the liquidation of its inventory through sales. The growing demand for the Company's technology from new customers suggests the Company will continue to invest in inventory and accounts receivable during the remainder of the year. Accordingly, management expects cash will continue to be invested in short-term assets. The Company's operating plan for the year ending December 31, 1998 anticipates a continuing increase in sales over the year ended December 31, 1997 with a commensurate increase in net income. As a result, this operating plan projects the working capital of the Company will increase. Furthermore, the Company is committed to making long-term investments in the form of additional software development, additional purchases of software licenses, such as the IGI software business, and additional purchases of property and equipment. As a result of the growth in short-term and long-term investments, management expects the Company will continue to raise cash in the capital markets. While management 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, nor can management provide any assurance of the Company's continued access to the capital markets. At this point management believes the Company's growth will be funded by a combination of operating income and access to outside capital. Management believes these sources will be sufficient to meet the Company's liquidity needs for the foreseeable future. RECENT DEVELOPMENTS On July 21, 1998, the Company began a 1,667,000 share private placement of units, each consisting of one share of Common Stock (subject to certain adjustments) and one Warrant to purchase a fraction of a share of Common Stock, at a price of $2.20 per unit. This offering terminated on August 11, 1998 and a total of 450,000 units were sold for a total offering price of $990,000. For a more detailed description of this offering, see "ITEM 2. CHANGES IN SECURITIES." At the end of August 1998, the Company began a private placement of up to 615,384 units, each consisting of one share of Series B Cumulative Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase shares of common Stock. The purchase price per unit is $6.50. As of November 2, 1998, the Company had sold 74,152 of such units for total gross proceeds of 481,988 and had commitments to purchase an additional 76,925 units. This offering is expected to terminate on or before December 31, 1998. For a more detailed description of this offering, see "ITEM 2. CHANGES IN SECURITIES." 10 YEAR 2000 ISSUE Background. Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities). As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with year 2000 requirements. The potential global impact of the year 2000 problem is not known, and, if not corrected in a timely manner, could affect the Company and the U.S. and world economy generally. State of Readiness. The Company has analyzed the potential effect of the year 2000 issue on both the system software included in the Company's products and its internal systems (e.g., word processing and billing software), including its information technology ("IT") and non-IT systems (which systems contain embedded technology in manufacturing or process control equipment containing microprocessors or other similar circuitry). The Company's year 2000 compliance program includes the following phases: identifying systems that need to be modified or replaced; carrying out remediation work to modify existing systems or convert to new systems; and conducting validation testing of systems and applications to ensure compliance. The Company is currently in the remediation phase of this program with respect to software purchased or licensed from software vendors by the Company and used internally and has completed the validation phase of this program with respect to its own products. The amount of remediation work required to address year 2000 problems is not expected to be extensive. The Company has tested all of the system software included in its products and determined that it is year 2000 compliant. In addition, the Company has requested and received documentation from vendors supplying software for its primary business applications addressing year 2000 compliance. In all cases, vendors' responses indicated that their applications were either currently year 2000 compliant or that they would be compliant by the end of 1998. Therefore, the Company will be required to modify some of its existing software applications in order for its internal computer systems to function properly in the year 2000 and thereafter. The Company estimates that it will complete its year 2000 compliance program for all of its significant internal systems no later than July 1, 1999. The Company also has had informal discussions with its major suppliers and customers regarding their efforts to address the year 2000 problem. These actions are intended to help mitigate the possible external impact of the year 2000 problem. However, it is impossible to fully assess the potential consequences in the event service interruptions from suppliers occur or in the event that there are disruptions in such infrastructure areas as utilities, communications, transportation, banking and government. Costs. Because essentially all of the Company's products and internal systems were created in the last few years, such products and internal systems were designed to avoid the year 2000 problem. As a result, the total cost for resolving the Company's year 2000 issues is expected to be less than $10,000, a negligible amount of which has been spent through September 30, 1998. The total cost estimate includes the cost of replacing or upgrading non-compliant systems that were otherwise planned (but perhaps accelerated due to the year 2000 issue) or which have significant improvements and benefits unrelated to year 2000 issues. Estimates of year 2000 costs are based on numerous assumptions, and there can be no assurance that the estimates are correct or that actual costs will not be materially greater than anticipated. Contingency. The Company has not yet developed a contingency plan to provide for continuity of processing in such event of various problem scenarios, but it will assess the need to develop such a plan based on the outcome of the validation phase of all of its systems and any additional results from surveys of its major suppliers and customers with respect to their year 2000 compliance. Risk. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of year 2000 problems with respect to its products and the third-party systems it uses for its internal functions, and, in any event, the Company does not anticipate the year 2000 issues it will encounter will be significantly different than those encountered by other computer hardware and software manufacturers, including its competitors. For example, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. Assuming no major disruption in service from utility companies or other critical third-party providers, the Company believes that it will be able to manage its total year 2000 transition without any material effect on the Company's results of operations or financial condition. 11 - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 2. CHANGES IN SECURITIES (a) Change to Articles of Incorporation: During September 1998, the Company amended its Ariticles of Incorporation twice in connection with the August 1998 private placement of up to 615,384 units, each consisting of one share of Series B Stock and one Warrant to purchase shares of common Stock. On October 2, 1998, the Company then restated its Articles of Incorporation by filing Second Amended and Restated Articles of Incorporation with the Secretary of State of the State of Minnesota. Such Second Amended and Restated Articles of Incorporation are filed as an exhibit to this Form 10-QSB. (b) Effect of Series B Issuance on Outstanding Securities: At the end of August 1998, the Company began a private placement of up to 615,384 units, each consisting of one share of Series B Stock and one Warrant to purchase shares of common Stock. Prior to such offering, the Company's Board of Directors created a new class of preferred stock, the Series B Stock. Each share of Series B Stock entitles the holder thereof to receive an annual dividend equal to $.52. Such dividend shall be cumulative and shall be payable upon conversion into Common Stock. Such dividends shall be payable by the Company, in its sole discretion, all in cash or all by the issuance of a number of shares of Common Stock. Further, holders of Series B Stock are entitled to a liquidation preference. In the event of any liquidation, dissolution or winding up of the Company, subject to the prior liquidation preference of the holders of the previously issued Series A Convertible Preferred Stock, the Series B Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Stock, an amount per share equal to the sum of (1) $6.50, subject to certain adjustments as set forth in the Company's Second Amended and Restated Articles of Incorporation, and (2) and amount equal to the cumulative unpaid dividends on such shares. On all matters submitted to the Company's shareholders, the holder of each share of Series B Stock is entitled to vote that number of shares of Common Stock into which such Series B Stock is then convertible. (c) Sales of Unregistered Securities: Between February 1998 and July 9, 1998, the Company issued 426,500 shares of common stock to certain accredited investors at a purchase price of $1.90 per share in a private offering pursuant to the terms of a private placement agreement dated February 19, 1998. 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 42,650 shares of common stock (equal to 10% of the number of shares of common stock issued in connection with such offering which occurred during the first and second quarters of 1998) at an exercise price of $1.90 per share. The aggregate offering price for the shares offered was $810,350 and the aggregate placement agent commissions and expenses were approximately $105,350. The shares issued were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. On July 21, 1998, the Company began a 1,667,000 share private placement of units, each consisting of one share of Common Stock (subject to possible adjustment as described below) and one Warrant to purchase a fraction of a share of Common Stock (determined as described below), at a price of $2.20 per unit. Each Warrant entitles the holder thereof to purchase .2667 shares of Common Stock at $2.60 per share for each $1 such investor invested in the offering. In addition, the number of shares purchased in the offering may be increased based on the future market price of the Common Stock. In the event that the average closing price per share for the Company's Common Stock for all trading days in December 1998 (the "Average Price") is less than $2.93, then the number of shares issued to an investor in the offering will be adjusted in accordance with the following formula: the number of adjusted shares will equal the result obtained by dividing the aggregate investment by 75% of the Average Price; provided, however, that the Average Price is subject to a minimum value of $2.00. This offering terminated on August 11, 1998 and a total of 450,000 units were sold for a total offering price of $990,000. The Company offered this private placement without the assistance of a placement agent. The shares of Common Stock issued pursuant to this issuance are exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. At the end of August 1998, the Company began a private placement of up to 615,384 units, each consisting of one share of Series B Cumulative Convertible Preferred Stock ("Series B Stock") and one Warrant to purchase shares of common Stock. The purchase price per unit is $6.50. Each share of Series B Stock entitles the holder thereof to receive an annual dividend equal to $.52. Until February 15, 1999, each share of Series B Stock is convertible into that number of shares of Common Stock equal to the per unit purchase price divided by $3.25, subject to certain adjustments. Thereafter, each share of Series B Stock is convertible into that number of shares of Common Stock equal to the per unit purchase price divided by 80% of the average closing bid price of the Common Stock for the 20 consecutive trading days prior to the conversion date, subject to certain adjustments; provided, however, that such average price may not be greater than $2.50 nor less than $.75. All outstanding shares of Series B Stock will be automatically converted into Common Stock on September 23, 2001 if the Company has registered such common shares under the Securities Act of 1933, as amended, and the Common Stock is traded on Nasdaq. Each Warrant is a five-year callable warrant to purchase Common Stock at $3.25 per share. The number of shares of Common Stock for which the Warrant in each Unit will be exercisable will equal the number of shares of Common Stock into which the associated share of Series B Stock contained in the unit will have been converted. The Warrants are callable by the Company provided the Common Stock has not traded below $4 3/8 for 20 consecutive trading days prior to the call exercise date and the underlying shares are registered under the Securities Act of 1933, as amended, and the Common Stock is traded on Nasdaq. The Company has agreed to register the shares of Common Stock underlying the Series B Stock and the Warrants and to pay a penalty if such registration is not effective by February 28, 1999. This penalty is equal to 1% of the purchase price of the units for each of the first two 30-day periods following February 28, 1999 and 3% for every 30-day period thereafter until the registration statement has been declared effective. The units will be sold only to accredited investors and this offering is exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. Miller, Johnson & Kuehn Incorporated ("MJK") is acting as the placement agent and Miller & Schroeder Financial, Inc. ("MSF") and RJ Steichen & Company ("RJS") are acting as sub-agents. In consideration for MJK's services, it will receive a cash fee equal to 8% of the proceeds from the units it sells and a cash fee equal to 2% of the proceeds from the units either MSF or RJS sells. In addition, at each closing held in connection with the offering, MJK will receive a warrant to purchase that number of shares of Common Stock equal to 20% the number of units it sells and 4% of the number of units MSF and RJS sell, with a per share exercise price equal to 110% of the average closing bid price of the Common Stock for the 20 trading day period immediately prior to such closing. Further, the Company agreed to reimburse MJK for all reasonable legal fees incurred by MJK in connection with the offering. In consideration for MSF's and RJS' services, each of them will receive a cash fee equal to 2% of the proceeds from the units it sells and, at each closing held in connection with the offering, each of them will receive a warrant to purchase that number of shares of Common Stock equal to 16% the number of units it sells, with a per share exercise price equal to 110% of the average closing bid price of the Common Stock for the 20 trading day period immediately prior to such closing. As of September, 30, 1998, the Company had sold 74,152 of such units for total gross proceeds of $481,988. Commissions paid on this amount totaled $38,559 to MJK for placement agent commisions and $18,726 for the payment of MJK's legal expenses incurred by MJK in connection with the offering. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 28, 1998, the Company held a special meeting at which the Company asked the holders of its Series A Convertible Preferred Stock ("Series A Stock") to approve a proposal to create and issue a new class of preferred stock, the Series B Stock, in connection with the offering of units that began in late August 1998. "See ITEM 2. CHANGES IN SECURITIES." At this meeting, 774,006 of the shares voted to approve such proposal, no shares voted against it and 280,000 shares abstained. On September 18, 1998, the Company held a special meeting at which the Company asked the holders of its Series A Stock to ratify the approval of the creation and issuance of the Series B Stock and to approve certain corrections thereto with respect to the conversion price, the number of shares designated as Series B Stock and the annual dividend rate. At this meeting, 774,006 of the shares voted to approve such proposal, no shares voted against it and 280,000 shares abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3--Articles of Incorporation 27--Financial Data Schedule 99--Cautionary Statement (b) Reports on Form 8-K None. 12 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, 1998 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, 1998 By: /s/ David McCaffrey -------------------------------- David McCaffrey Chief Executive Officer 13 EX-3 2 AMENDED ARTICLES OF INCORPORATION EXHIBIT 3 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GLOBAL MAINTECH CORPORATION Article 1. Name The name of the corporation is Global MAINTECH Corporation. Article 2. Registered Office The address of the registered office of the corporation is 7578 Market Place Drive, Eden Prairie, MN 55344. Article 3. Authorized Shares 3.1 Designation and Number. The aggregate number of authorized shares of the corporation is 50,000,000 shares, no par value, of which 887,980 shares shall be designated Series A Convertible Preferred Stock (the "Series A Preferred Stock") and 615,385 shall be designated Series B Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") and 48,496,635 shares shall be divisible into such classes and series, have such designations, voting rights, and other rights and preferences and be subject to such restriction as the Board of Directors of the corporation may from time to time establish, fix and determine consistent with Articles 4 and 5 hereof. Unless otherwise designated in these Amended and Restated Articles by the Board of Directors, all issued shares shall be deemed Common Stock with equal rights and preferences. The rights, preferences, privileges and restrictions granted to and imposed upon the Common Stock, the Series A Preferred Stock and the Series B Preferred Stock (the Series A Preferred Stock and the Series B Preferred Stock sometimes referred to together as the "Preferred Stock") are set forth in this Article 3. 3.2 Dividend Provisions. (a) Dividends shall be payable on the Series A Preferred Stock out of funds legally available for the declaration of dividends, only if and when declared by the Board of Directors. In no event shall any dividend be paid or declared, nor shall any distribution be made, on the Common Stock, unless holders of the Series A Preferred Stock shall participate in such dividend on a pro rata basis with the holders of Common Stock, counting shares of Series A Preferred Stock on an as-if-converted basis. (b) Upon issuance, dividends shall accrue on each share of outstanding Series B Preferred Stock at an annual rate equal to $.52 per share per annum (8% of the Series B Original Issue Price, as defined below). Such dividends shall be cumulative and shall be payable upon any conversion of the Series B Preferred Stock pursuant to Section 3.4 below. Such dividends shall be payable by the corporation, in its sole discretion, all in cash out of legally available funds of the corporation or all by the issuance of a number of shares of the corporation's unrestricted, freely tradable Common Stock equal to the dividends owing on the Series B Preferred Stock; provided, however, that prior to the payment of any such dividend by the issuance of shares of the corporation's Common Stock, the corporation shall deliver to the investors of the Series B Preferred Stock an opinion of counsel stating that all such shares have been validly registered under the Securities Act of 1933, as amended (the "Securities Act"), so as to be freely tradable, and that such shares are duly authorized, validly issued and nonassessable . For the purposes hereof, the number of shares of the corporation's Common Stock issuable in lieu of any cash dividend payment shall equal the total dividend payment then due divided by the average closing bid price for one share of Common Stock as quoted on the Nasdaq Stock Market (or, if not so quoted on the Nasdaq Stock Market, as quoted in the over-the-counter market) for the ten consecutive trading days prior to the payment of such dividends. Dividends on shares of the Series B Preferred Stock shall accrue beginning on the date of issuance of the shares of Series B Preferred Stock, shall compound on an annual basis and shall be payable upon conversion of the Series B Preferred Stock. All accrued and unpaid dividends on the Series B Preferred Stock must be paid before any dividends may be declared or paid on any other junior series of Preferred or Common Stock issued by the corporation. 3.3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of Series A Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reasons of their ownership thereof, an amount equal to $.375 per share, subject to adjustment in the event of any stock dividend, split, distribution or combination with respect to such shares. If upon the occurrence of such event, the assets and funds of the corporation available for the distribution to its stockholders shall be insufficient to pay the holders of the Series A Preferred Stock the full amounts to which they shall be entitled, the holders of the Series A Preferred Stock shall share ratably in any distribution of assets and funds of the corporation legally available for distribution in proportion to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, subject to the prior liquidation preference of the holders of the Series A Preferred Stock, the Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $6.50, as adjusted pursuant to Section 3.5(c) hereof (the "Series B Original Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such shares (such sum referred to as a "Liquidation Amount"). If upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid - 2 - preferential amounts, then, the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock. (c) Upon the completion of the distribution required by subparagraphs (a) and (b) of this Section 3.3, if assets remain in the corporation, the remaining assets of the corporation shall be distributed ratably among the holders of the corporation's Common Stock, Series A Preferred Stock and the Series B Preferred Stock in proportion to the number of shares of Common Stock held by each (assuming full conversion of all shares of Series A Preferred Stock and Series B Preferred Stock). (d) (i) For purposes of this Section 3.3, a liquidation, dissolution or winding up of the corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the corporation by another entity by means of any transaction or series of related transactions (including any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the corporation); or (B) a sale of all or substantially all of the assets of the corporation, unless the corporation's shareholders as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (ii) In any of such events, if the consideration received by the corporation is other than cash, its value will be deemed its fair market value. (iii) In the event the requirements of this Section 3.3 are not complied with, the corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 3.3 have been complied with, or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 3.3(d)(iv) hereof. (iv) The corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than 30 days prior to the shareholders' meeting called to approve such transaction, or 30 days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction; provided, however, that the holder of any shares of then outstanding Preferred Stock shall have the right during such applicable period to convert such shares pursuant to Section 3.3 hereof. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 3.3, and the corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 30 days, 20 days in the case of the holders of Series B Preferred Stock, after the corporation has given the first notice - 3 - provided for herein or sooner than ten days after the corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of the Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of Preferred Stock, each voting as a series. 3.4. Conversion. (a) Conversion of Series A Preferred Stock. Each share of Series A Preferred Stock shall be convertible at the option of the holder thereof at any time into the number of shares of Common Stock of the corporation equal to the number obtained by dividing the Series A Issuance Price (as defined below) per share of such Series A Preferred Stock by the conversion price computed as hereinafter set forth (the "Series A Conversion Price") in effect for such Series A Preferred Stock at the time of conversion. The Series A Issuance Price is $.375 per share, and the initial Series A Conversion Price for Series A Preferred Stock is $.375 per share. The Series A Conversion Price is subject to adjustment from time to time as hereinafter provided. In order to exercise the conversion privilege, a holder of Series A Preferred Stock shall surrender the certificate to the corporation at its principal office, accompanied by written notice to the corporation that the holder elects to convert a specified portion or all of such shares. Series A Preferred Stock shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of such holder of such shares of Series A Preferred Stock, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of the Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, certificates representing the number of shares of Common Stock issuable upon conversion, rounded to the nearest full share, and a certificate or certificates for the balance of the Preferred Stock surrendered, if any, not so converted into Common Stock. (1) Adjustment to Series A Conversion Price. The Series A Conversion Price is subject to adjustment from time to time as follows: (i) Dividends. In case the corporation shall declare a dividend upon its shares of Common Stock payable otherwise than in cash out of earnings or surplus (including a dividend payable in shares of Common Stock), then thereafter each holder of shares of Series A Preferred Stock upon conversion thereof will be entitled to receive the number of shares of Common Stock into which such Series A Preferred Stock shall be converted and, in addition and without payment thereof, the cash, stock or other securities and other property (including Common Stock) which such holder would have received by way of dividends or distributions (otherwise than out of earnings or surplus) if continuously since the record date for any such dividend or distribution such holder (i) had been the record holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock shall be convertible, and (ii) had retained all dividends or distributions in stock or securities payable in respect of such Common Stock or in respect of any - 4 - stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. (ii) Subdivisions and Combinations. In case the corporation shall at any time subdivide or split its outstanding shares of Common Stock into a greater number of shares, the Series A Conversion Price in effect immediately prior to such subdivision or split shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the Series A Conversion Price in effect immediately prior to such combination shall be proportionately increased. (iii) Reorganizations. In any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Series A Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified in such reorganization, reclassification, consolidation, sale or merger in lieu of the shares of Common Stock of the corporation immediately theretofore receivable upon the conversion of the Series A Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to number of shares of Common Stock immediately theretofore receivable upon the conversion of the Series A Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Series A Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the Series A Conversion Price for the Series A Preferred Stock and of the number of shares receivable upon the conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of the Series A Preferred Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Series A Preferred Stock at the last address of such holders appearing on the books of the corporation the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive. (2) Notice Regarding Series A Conversion Price Adjustments. Upon any adjustments of the Series A Conversion Price for the Series A Preferred Stock, then and in each such case the corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of the Series A Preferred Stock at the addresses of such holders as shown on the books of the corporation, which notice shall state the Series A Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such - 5 - price upon the conversion of the Series A Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (3) Other Notices. In case at any time: (i) the corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (ii) the corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization, reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the corporation; then, in any one or more said cases, the corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of the Series A Preferred Stock at the addresses of such holders as shown on (aa) the books of the corporation, on the date on which the books of the corporation shall close or a record shall be take for such dividend, distribution or subscription rights, or (bb) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation's transfer books are closed in respect thereto. (b) Conversion of Series B Preferred Stock. At the option of the holder thereof, each share of Series B Preferred Stock shall be convertible at any time during the period commencing on the day on which the resale of the Common Stock underlying the Series B Preferred Stock (the "Series B Conversion Stock") is registered under the Securities Act and expiring on September 23, 2001; provided, however, that if upon such expiration date the Series B Conversion Stock is not subject to an effective Registration Statement under the Securities Act, such expiration date shall be extended until 30 days after the Series B Conversion Stock is subject to an effective registration statement under the Securities Act (the "Extension Period"). Each share of Series B Preferred Stock shall be convertible at the office of the corporation or any transfer agent for such stock into such number of fully paid and nonassessable shares of the corporation's Common Stock as is determined by dividing the Series B Original Issue Price, subject to adjustment as provided in - 6 - Section 3.5, by the Series B Conversion Price applicable to such shares determined as hereafter provided, in effect on the date the certificate representing such share is surrendered for conversion (the "Series B Conversion Date"). The Series B Conversion Price initially will be $3.25. After February 15, 1999, the Series B Conversion Price shall be equal to the average closing bid price of one share of the corporation's Common Stock as quoted by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal exchange upon which shares of the corporation's Common Stock may be listed, or, if the corporation's Common Stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq National Market or listed on a national securities exchange, but shall otherwise be traded in the over-the-counter market, on such over-the-counter market, for the 20 consecutive trading days prior to the Series B Conversion Date (the "Trading Period") multiplied by .8 (the "Series B Conversion Price"); provided, however, that in no event shall the Series B Conversion Price exceed $2.50 per share or be less than $0.75 (the "Maximum Price" and "Minimum Price," respectively) per share; and provided, further, that appropriate adjustments shall be made in determining the average closing bid price if a recapitalization or other event affecting the corporation's Common Stock shall occur during the Trading Period. (1) Dividend Payment. Should the corporation, pursuant to Section 3.2 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series B Preferred Stock in shares of its Common Stock, the corporation shall pay, in immediately available funds, to the holder of any shares of Series B Preferred Stock being converted, all such dividends within five business days of the date that it receives notice of such holder's intent to convert such shares pursuant to (3) below. Separately, should the corporation elect to pay all outstanding, cumulative, accrued and unpaid dividends on the Series B Preferred Stock in shares of its Common Stock, it shall, within five business days of receiving a holder's notice of intent to convert, deliver certificates representing such shares to the holder of the Series B Preferred Stock. (2) Automatic Conversion. Any shares of Series B Preferred Stock remaining outstanding on the later of September 23, 2001 or the expiration of any Extension Period shall be automatically converted as of such date pursuant to the conversion terms of Section 3.4(b) above. In any event, the corporation shall, within five business days after automatic conversion of the Series B Preferred Stock, issue and deliver a certificate or certificates for the number of shares of the corporation's Common Stock to which each former holder of Series B Preferred Stock is entitled. Notwithstanding the foregoing, no automatic conversion of the Series B Preferred Stock shall occur pursuant to this Section unless (i) all shares of the corporation's Common Stock underlying the shares of Series B Preferred Stock may be sold pursuant to an effective registration statement under the Securities Act, (ii) the corporation's Common Stock is listed and trading on The Nasdaq Stock Market, and (iii) the corporation has reserved and available for issuance a number of shares of its Common Stock sufficient to cover conversion of all outstanding shares of Series B Preferred Stock. (3) Mechanics of Conversion. Before any holder of Series B Preferred Stock shall be entitled to convert the same into shares of the corporation's Common Stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of the - 7 - corporation or of any transfer agent for the Series B Preferred Stock, and shall give written notice, via facsimile, to the corporation, at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of the corporation's Common Stock are to be issued. The corporation shall, immediately thereafter (and in any event no more than five business days thereafter), issue and deliver to such holder of Series B Preferred Stock at the address shown on the corporation's records or at such other address as such party may designate by written notice to the corporation, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of the corporation's Common Stock to which such holder shall be entitled pursuant to Section 3.4(b) and a certificate representing unconverted shares of Series B Preferred Stock, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the Series B Conversion Date, and the person or persons entitled to receive the shares of the corporation's Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the corporation's Common Stock as of such date. (4) Mechanics of Automatic Conversion. On the Series B Conversion Date with respect to the automatic conversion pursuant to subsection 3.4(b)(2) above, the certificates representing shares of Series B Preferred Stock shall immediately represent that number of shares of the corporation's Common Stock into which such shares are convertible. Holders of Series B Preferred Stock shall deliver their certificates, duly endorsed in blank, to the principal office of the corporation, together with a notice setting out the name or names (with addresses) and denominations in which the certificates representing such shares of Common Stock issuable upon conversion are to be issued and including instructions for delivery thereof. The person entitled to receive the shares of the corporation's Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at and on the Series B Conversion Date, and the rights of such person as a holder of shares of Series B Preferred Stock shall cease and terminate at and on the Series B Conversion Date, in any case without regard to any failure by such holder to deliver the certificates or the notice required by this subsection 3.4(b)(4). On the Series B Conversion Date with respect to automatic conversion, the corporation shall pay all outstanding, cumulative, accrued and unpaid dividends, either by the issuance of shares of its Common Stock or in cash, pursuant to the provisions set forth in 3.2(b)(1) above; provided, however, that should the corporation elect to pay such dividends by the issuance of additional shares of its Common Stock, the person entitled to receive such shares of the corporation's Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such additional shares on the Series B Conversion Date (5) Notice of Adjustment. The corporation shall provide all holders of shares of Series B Preferred Stock five business days prior written notice of any adjustments in the Series B Original Issue Price, the Maximum Price, the Minimum Price or any other adjustments made pursuant to the provisions hereof. - 8 - (c) General Provisions. (1) Common Stock Defined. As used in this Section 3.4, the term "Common Stock" shall mean and include the corporation's presently authorized Common Stock and shall also include any capital stock of any class of the corporation hereafter authorized which shall have the right to vote on all matters submitted to the shareholders of the corporation and shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of this corporation; provided that the shares receivable pursuant to conversion of the Preferred Stock shall include shares designated as Common Stock of this corporation as of the date of issuance of such Preferred Stock, or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in section 3.4(a)(1)(iii) above. (2) No Impairment. The corporation will not, by amendment of these Amended and Restated Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3.4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against impairment. (3) No Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of the corporation's Common Stock to be issued in connection with each conversion shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into shares of the corporation's Common Stock and the number of shares of such Common Stock issuable upon such aggregate conversion. (4) Notices of Record Date. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the corporation shall mail to each holder of Series A Preferred Stock, at least 30 days, 20 days in the case of the holders of Series B Preferred Stock, prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (5) Reservation of Stock Issuable Upon Conversion. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of its Common Stock as shall from time to time be sufficient to effect the conversion - 9 - of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of the corporation's Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the corporation's Amended and Restated Articles of Incorporation. (6) Notices. Any notice required by the provisions of this Section 3.4 to be given to the holders of shares of Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the corporation. 3.5. Anti-Dilution Provisions. (a) In case at any time the corporation shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Series B Original Issue Price, the Maximum Price and the Minimum Price in effect immediately prior to such subdivision shall be proportionately reduced, and the corporation shall subdivide the Series B Preferred Stock in the same proportion. In case at any time the outstanding shares of the corporation's Common Stock shall be combined into a smaller number of shares, the Series B Original Issue Price, the Maximum Price and the Minimum Price in effect immediately prior to such combination shall be proportionately increased, and the corporation shall combine the Series B Preferred Stock in the same proportion. Any adjustment under this paragraph 3.5(a) shall become effective at the close of business on the date the subdivision or combination shall become effective. The corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series B Preferred Stock to such number of shares as shall be sufficient for any such purposes, including engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the corporation's Amended and Restated Articles of Incorporation. (b) The corporation shall provide the holders of Series B Preferred Stock with at least ten days prior written notice of any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of the corporation's assets to another corporation. Further, if any of the foregoing events shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Series B Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the corporation immediately theretofore receivable upon the conversion of shares of Series B Preferred Stock, such stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to - 10 - the number of shares of such stock immediately theretofore receivable upon the conversion of shares of Series B Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of Series B Preferred Stock to the end that the provisions hereof (including provisions for adjustments of the Series B Conversion Price and of the number of shares of Common Stock issuable upon the conversion) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion of such Series B Preferred Stock. The corporation shall not effect any such reorganization, reclassification, consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by operation of law or written instrument, the obligation to deliver to such holders of Series B Preferred Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders of Series B Preferred Stock may be entitled to receive. Notice of such assumption shall be promptly mailed to the registered holders of Series B Preferred Stock hereof at the last address of such holder appearing on the books of the corporation. (c) Upon any adjustment of the Series B Original Issue Price, the Maximum Price or the Minimum Price, then, and in each such case, the corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to each registered holder of Series B Preferred Stock at the address of such holder as shown on the books of the corporation, which notice shall state the Series B Original Issue Price, the Maximum Price or the Minimum Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (d) If any event occurs as to which in the good faith determination of the Board of Directors of the corporation the other provisions of this Section 3.5 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the holders of Series B Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. 3.6. Voting Rights of Preferred Stock. The holder of each share of Preferred Stock shall have the right to vote on all matters submitted to the corporation's shareholders the number of votes that shall be equal to the number of shares of the corporation's Common Stock into which such holder's shares of Preferred Stock shall then be convertible (assuming a conversion as of the record date set for the vote). 3.7 Special Voting Rights for Series A Preferred Stock. Without the affirmative vote or consent of holders of at least a majority of the Series A Preferred Stock at the time outstanding, voting separately as a class, the corporation shall not: - 11 - (a) Authorize or issue any (i) additional Series A Preferred Stock or (ii) shares of stock having priority over the Series A Preferred Stock or ranking on a parity therewith as to the payment of dividends or as to the payment or distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of the corporation; or (b) Declare or pay any dividend or make any other distribution on any shares of capital stock of the corporation at any time created and issued ranking junior to Series A Preferred Stock with respect to the right to receive dividends and the right to the distribution of assets upon liquidation, dissolution or winding up of the corporation (the "Junior Stock"), other than dividends or distributions payable solely in shares of Junior Stock, or purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock) or set aside as a sinking fund for the redemption or repurchase of any shares of Junior Stock; or (c) Amend the articles of incorporation of the corporation so as to adversely affect any of the rights, preferences or privileges of the holders of Series A Preferred Stock. 3.8. Status of Converted Stock. In the event any shares of Preferred Stock shall be converted pursuant to Section 3.4 hereof, the shares of Preferred Stock so converted shall be canceled. Article 4. No Cumulative Voting There shall be no cumulative voting by the shareholders of the corporation. Article 5. No Preemptive Rights The shareholders of the corporation shall not have any preemptive rights to subscribe for or acquire securities or rights to purchase securities of any class, kind or series of the corporation. Article 6. Written Action by Directors An action required or permitted to be taken at a meeting of the board of directors of the corporation may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by the number of directors that would be required to take the same action at a meeting of the board of directors of the corporation at which all of the directors were present. - 12 - Article 7. Director Liability A director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80 A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article 7 became effective. If the Minnesota Business Corporation Act is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. Any repeal or modification of the foregoing provisions of this Article 7 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. - 13 - EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 299 299 0 0 2,607 2,607 0 0 1,397 1,397 4,633 4,633 308 308 0 0 8,424 8,424 972 972 1,750 1,750 0 0 544 544 6,681 6,681 (1,523) (1,523) 8,424 8,424 1,659 5,132 1,659 5,132 519 1,770 1,051 2,926 (11) 91 0 0 (69) (215) 9 312 0 0 9 312 0 0 0 0 0 0 9 312 .001 .018 .000 .015
EX-99 4 CAUTIONARY STATEMENT Exhibit 99 CAUTIONARY STATEMENT The Company, or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time, may make, in writing or orally, "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in conjunction with an identified forward-looking statement, this Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of such sections and is intended to be a readily available written document that contains factors 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: Liquidity and Capital Resources. As of September 30, 1998, the Company had working capital of approximately $3,661,000. The Company believes it has sufficient working capital to pay its current liabilities. The Company believes its working capital will be sufficient to fund its liabilities and believes its working capital may improve as the Company's profitability improves and access to capital markets remains available to the Company. Nevertheless, the Company can provide no assurance as to its continued profitability and access to the capital markets. 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 computer hardware is relatively new, and the demand for the product is not yet fully know. 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 to only fourteen customers, 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. If the current capital of the Company is insufficient to meet its operating and working capital 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 are being prepared, and the Company believes the VCC will be protected by a patent that is currently under review by the U.S. Patent and Trademark Office. This patent was filed by Circle Corporation, a Japanese corporation, on December 28, 1993 and the Company licenses 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 none of the existing customers of the Company's products are required to purchase additional products. 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 insurance will be available on commercially reasonable terms, or at all, or 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 could have a material adverse effect on the business and prospects of the Company. -----END PRIVACY-ENHANCED MESSAGE-----