-----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, BO0wVV+RWnXCQ4SVKh/SAHidjnFsI8nUCFfARhSahdY2Xj1ZGkJldag8/qnVWeIA 4jfVMhdAauinhSWnpa9cvg== 0001045969-99-000375.txt : 19990518 0001045969-99-000375.hdr.sgml : 19990518 ACCESSION NUMBER: 0001045969-99-000375 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99628386 BUSINESS ADDRESS: STREET 1: 7578 MARKET PLACE DRIVE CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129440400 MAIL ADDRESS: STREET 1: 7578 MARKET PLACE DRIVE 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 March 31, 1999 Commission File Number 0-14692 ---------------------------------------------- Global MAINTECH Corporation Minnesota 41-1523657 State of Incorporation I.R.S. Employer Identification No. 6468 City West Parkway, Eden Prairie, MN 55344 Telephone Number: (612) 944-0400 ---------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- ---------------------------------------------- On April 26, 1999 there were 19,026,839 shares of the Registrant's no par value common stock outstanding. Transitional small business issuer format: No Page 1 of 14 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward- looking statements. Factors that might cause such differences include, but are not limited to, the uncertainty in the Company's ability to continue to operate profitably in the future; failure of the Company to meet its future additional capital requirements; loss of key personnel; failure of the Company to respond to evolving industry standards and technological changes; inability of the Company to compete in the industry in which it operates; failure of the Company to successfully integrate the operations of newly acquired businesses; lack of market acceptance of the Company's products, including products under development; 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 qualified in their entirety by the cautions and risk factors set forth in Exhibit 99, under the statements are caption "Cautionary Statement," to this Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999. - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, December 31, 1999 1998 ----------- ------------ CURRENT ASSETS Cash and cash equivalents $ 2,260,381 $ 664,066 Accounts receivable, less allowance for doubtful accounts of $300,000, respectively 3,000,190 2,148,825 Employee receivables 233,176 147,466 Inventories 1,012,709 996,171 Prepaid expenses and other 200,901 80,094 Deferred debt issue costs 518,962 -- Current portion of investment in sales-type leases 21,270 20,776 ----------- ----------- Total current assets 7,247,589 4,057,398 Property and equipment, net 1,086,192 1,042,432 Leased equipment 118,025 124,658 Software development costs, net 2,782,157 2,273,834 Purchased technology and other intangibles, net 1,352,000 1,419,008 Net investment in sales-type leases, net of current portion 16,609 22,410 Other assets, net 174,835 193,191 ----------- ----------- TOTAL ASSETS $12,777,407 $ 9,132,931 =========== =========== The accompanying notes are an integral part of these consolidated statements. 2 GLOBAL MAINTECH CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) March 31, December 31, 1999 1998 ----------- ----------- CURRENT LIABILITIES Accounts payable $ 1,186,060 $ 963,049 Current portion of notes payable 1,002,448 395,680 Convertible subordinated debentures 225,000 200,000 Accrued liabilities compensation and payroll taxes 260,361 267,581 Other 74,724 31,049 Deferred revenue 462,220 132,302 ----------- ----------- Total current liabilities 3,210,813 1,989,661 ----------- ----------- Subordinated notes payable, less current portion 1,625,000 1,700,000 ----------- ----------- Total liabilities 4,835,813 3,689,661 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; 129,176 shares in 1998 and 244,113 shares in 1997 issued and outstanding; total liquidation preference of outstanding shares-$242,200 $ 60,584 $ 60,584 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 of Company; no par value; 615,385 shares authorized; 335,961 shares issued and outstanding; total liquidation preference of outstanding shares-$2,183,769 2,183,769 2,183,769 Voting, convertible preferred stock - Series C, convertible on or before March 31, 2002 based on price of common stock; conversion price not to exceed $2.50 per share; dividend of 8% payable in cash or common stock of Company; no par value; 1,675 shares authorized; 1,675 shares in 1999 and none in 1998 issued and outstanding; total liquidation preference of outstanding shares-$1,675,000 1,504,000 - Common stock, no par value; 48,496,635 shares authorized; 19,026,839 shares in 1998 and 18,409,397 shares in 1998 issued and outstanding - - Additional paid-in-capital 8,575,375 7,362,796 Notes receivable-officers (294,500) (294,500) Accumulated deficit (4,087,634) (3,869,379) ----------- ----------- Total stockholders' equity 7,941,594 5,443,270 ----------- ----------- $12,777,407 $ 9,132,931 =========== =========== The accompanying notes are an integral part of these consolidated statements. 3 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, ---------------------------- 1999 1998 ------------ ------------ Net sales Systems $ 1,516,590 $ 1,322,292 Maintenance, consulting and other 1,063,626 474,108 ------------ ------------ Total net sales 2,580,216 1,796,399 Cost of sales Systems 201,285 483,299 Maintenance, consulting and other 549,296 201,171 ------------ ------------ Total cost of sales 750,581 684,471 ------------ ------------ Gross profit 1,829,635 1,111,929 Operating expenses Selling, general and administrative 1,536,463 756,170 Research and development 349,379 147,322 ------------ ------------ Income (loss) from operations (56,207) 208,437 Other income (expense): Interest expense (78,507) (74,098) Interest income 1,527 113,870 Other (141,002) (11,074) ------------ ------------ Total other income (expense), net (217,982) 28,698 ------------ ------------ Income (loss) from continuing operations before income taxes (274,189) 237,135 ------------ ------------ Income (loss) before cumulative effect of change in accounting principle (274,189) 237,135 ------------ ------------ Cumulative effect of change to straight-line depreciation 99,607 -- ------------ ------------ Net income (loss) $ (174,582) $ 237,135 ============ ============ Accrual of cumulative dividends on Series B convertible preferred stock (43,675) -- ------------ ------------ Net income (loss) attributable to common stockholders $ (218,257) 237,135 ============ ============ Basic earnings per common share: Net income (loss) before cumulative effect of change in accounting principle $ (0.014) $ 0.014 Cumulative effect of change in accounting principle 0.005 -- Net income (loss) $ (0.011) $ 0.014 ============ ============ Diluted income (loss) per common share: Net income (loss) before cumulative effect of change in accounting principle $ (0.014) $ 0.012 Cumulative effect of change in accounting principle 0.005 -- Net income (loss) $ (0.011) $ 0.012 ============ ============ Shares used in calculations: Basic 19,026,839 16,625,070 Diluted 19,026,839 19,784,645
The accompanying notes are an integral part of these consolidated statements. 4 GLOBAL MAINTECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (174,582) $ 237,136 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 684,109 283,888 Changes in operating assets and liabilities: Accounts receivable (716,612) (896,806) Other receivables (85,710) (713,974) Inventories (151,291) (243,403) Prepaid expenses and other (120,807) (30,371) Accounts payable 318,940 78,079 Accrued liabilities (7,220) 66,506 Deferred revenue 233,989 12,684 ----------- ----------- Cash used by operating activities (19,184) (1,206,264) ----------- ----------- Cash flows from investing activities: Sale of investment in sales-type leases -- 712,332 Purchase of property and equipment (142,062) (59,613) Investment in software development costs (865,107) (1,139,428) Investment in other assets (1,975) (291) Receipt of payment on note receivable -- 75,000 ----------- ----------- Cash used by investing activities (1,009,144) (412,000) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of preferred stock 1,504,000 -- Proceeds from issuance of common stock 563,875 487,591 Proceeds of short-term notes payable 606,768 -- Payments of long-term notes payable (50,000) -- ----------- ----------- Cash provided by financing activities 2,624,643 487,592 ----------- ----------- Net increase (decrease) in cash 1,596,315 (1,130,672) Cash and cash equivalents at beginning of period 664,066 1,726,889 ----------- ----------- Cash and cash equivalents at end of period $ 2,260,381 $ 596,217 =========== ===========
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 subsidiaries, Global MAINTECH, Inc. ("GMI") and SinglePoint Systems, Inc. ("SSI"), 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. Beginning in 1999, the Company began selling some of its products as stand-alone software products without the hardware delivery features also embodied in the the VCC. In 1995, the Company installed it 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 twenty-one VCC Units to a total of eight customers. As of March 31, 1999, the Company had sold or leased a cumulative total of 41 VCC Units to a total of 16 customers. 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., Frontier Information Technologies, Inc., Merrill Lynch & Co. Inc., Southern California Gas Company, Alltel Information Services, Minnesota Mining and Manufacturing Company, Bear Stearns and Comdisco. The Company's existing customers are not required to buy additional hardware products or to renew their software license and maintenance agreements with us when such licenses and agreements expire. Therefore, a significant portion of the Company's revenue is derived from non-recurring revenue sources. In an effort to enhance its revenue base, the Company purchased two new product lines during 1998. Effective November 1, 1998, the Company purchased substantially all of the assets of Enterprise Solutions, Inc., an Ohio corporation ("ESI"). As a result of this acquisition, the Company obtained software products that notify the proper person(s) by telephone, pager or the internet of critical data center events-event notification software and a consulting business that focuses on solving systems management problems in data centers. On February 28, 1998, the Company licensed certain software and purchased certain assets relating to the system software business of Infinite Graphics Incorporated, a Minnesota corporation ("IGI"). The Company uses such software and assets to design, assemble and market computer-aided design and manufacturing software systems that operate on a variety of mid-range and personal computer platforms. Systems Management Software The VCC competes with internal monitoring software, which monitors certain pieces of hardware and software applications in the computer in which such internal software is installed, sold by other companies. Annual sales of systems-management software were estimated to be $6.8 billion as of November 1996. It is believed this market will grow to almost $10 billion by 2000, which would represent a compound annual growth rate of approximately 30%. The Company believes the VCC also is well suited for use in enterprise computing applications. Enterprise computing is the term associated with the hardware and software which enables computers that contain different processors to be linked together. The VCC has its own proprietary software and hardware which allow it to form an enterprise computing management system. The VCC can be used to monitor and control desktop servers, mid-range servers and mainframes. Sales of all UNIX-based enterprise computing applications in 1997 were approximately $33 billion. Sales of VCC Units generated all of the Company's revenue in 1996 and 1997, and the majority of revenue for the year ended December 31, 1998. 6 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company was incorporated under the laws of the State of Minnesota in 1985 under the name Computer Aided Time Share, Inc. In 1995, the Company changed its name to Global MAINTECH Corporation. 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, 1998. Earnings (Loss) Per Share Basic and diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. During 1999, dilutive shares were excluded from the net loss per share computation as their effect is antidilutive. The weighted average shares and total dilutive shares used in the calculation of basic and diluted earnings per share are as follows: Three Months Ended March 31, 1999 1998 ------------------------------- Basic Earnings Per Share Weighted average shares 19,026,839 16,625,070 Diluted Earnings Per Share Weighted average shares 19,026,839 16,625,070 Stock options and Warrants - 2,926,134 Conversion of preferred stock - 233,441 ------------------------------- Total dilutive shares 19,026,839 19,784,645 =============================== Capitalized Software Development Costs Under the criteria set forth in SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of software development costs begins upon the establishment of technological feasibility of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life, and changes in software and hardware technology. Capitalized software development costs are amortized utilizing the straight-line method over the estimated economic life of the software not to exceed three years. The carrying value of a software development asset is regularly reviewed by the Company and a loss is recognized when the unamortized costs are not recoverable based on the estimated cash flows to be generated from the applicable software. 7 GLOBAL MAINTECH CORPORATION FOOTNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Purchased technology and other Intangibles The Company has recorded the excess of purchase price over net tangible assets as purchased technology and customer lists based on the fair value of these intangibles at the date of purchase. These assets are amortized over their estimated economic lives of five years using the straight-line method. Recorded amounts for purchased technology are regularly reviewed and recoverability assessed. The review considers factors such as whether the amortization of these capitalized amounts can be recovered through forecasted undiscounted cash flows. Deferred Debt Issue Costs The deferred debt issue costs include a valuation for the issuance of warrants to purchase 400,000 shares of common stock attached to a subordinated short-term promissory note issued in February 1999. Common Stock Issuance In March 1999 the Company began a private placement of 1,325,000 shares of common stock at a purchase price of $1.125 per share and had issued 444,000 of such shares as of March 31, 1999. The Company completed this private placement on May 12, 1999. A total of 1,325,000 shares were sold for total gross proceeds of $1,490,625. Aethlon Capital acted as the placement agent. The Company will pay the placement agent a cash commission equal to 10% of gross proceeds and will reimburse the agent for out-of-pocket expenses incurred in connection with the offering. The Company also will issue to the agent a warrant to purchase up to 10% of the the number of shares of the common stock sold in the offering, which warrant will have an exercise price of $1.125 per share. The shares of common stock issued pursuant to this offering were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. Change in depreciation method Effective January 1, 1999, the Company adopted the straight-line method of depreciation for its property and equipment. Previously the Company used the double declining balance method. The Company changed its method based on an evaluation by management which indicated that the property and equipment does not depreciate on an accelerated basis during its early years, is not subject to significant additional maintenance in the later years of the assigned useful life and that the new method results in a better matching of revenues and expenses. The cumulative effect of this accounting change was to decrease the net loss by $99,607 ($0.005 per share) in the first quarter ended March 31, 1999. The following shows the pro forma amounts of income assuming the effect of the change in accounting principle is applied retroactively: 1998 -------- Income before cumulative change in accounting principle $237,136 Basic earnings per share $ 0.014 Diluted earnings per share $ 0.012 Net income $261,622 Basic earnings per share $ 0.060 Diluted earnings per share $ 0.013 Reclassifications Certain amounts previously reported in 1998 have been reclassified to conform to the 1999 presentation. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The consolidated financial statements that accompany this discussion show the operating results of the Company for the quarter ended March 31, 1999 and 1998. These results include the operations of GMI and SSI. Net sales for the first quarter of 1999 were approximately $2,580,000 compared to net sales for the first quarter of 1998 of approximately $1,796,000. The $784,000 increase is primarily related to an increase of software sales of the Company's event notification and computer aided design products and consulting fees. Cost of sales increased in the first quarter of 1999 by $66,000, however the percentage of cost of sales decreased to 29% in the first quarter of 1999 from 38% in 1998. This $66,000 increase is primarily related to increased amounts of software amortization which increase was offset by decreases in parts cost and distribution costs. Software amortization increased in the first quarter of 1999 as a result of increases in capitalized software development costs and purchased technology. Parts costs decreased following an upgrade in the prior year of computer parts. Distribution costs decreased in the first quarter of 1999 due to increases in direct sales. Lastly, software sales, which increased in the first quarter of 1999 have a low cost of sale component. As a result, the gross margin in the first quarter of 1999 was 71% compared to 62% in the first quarter of 1998. Selling, general and administrative costs in the first quarter of 1999 were approximately $1,536,000 compared to $756,000 in the first quarter of 1998. The increase of $780,000 is primarily due to an increase in salaries of $422,000. The salary increase is substantially due to an increase in the number of employees due to the acquisition of additional businesses and products. As of March 31, 1999 the Company had 42 employees included in selling, general and administrative compared to 17 such employees one year ago. The remaining portion of the increase, $358,000, is primarily due to increases in travel and related costs of approximately $72,000, marketing and advertising costs of approximately $68,000, depreciation and office rent of approximately $199,000. The increased sales activity is reflected in the increases in travel and entertainment costs, and marketing and advertising cost increases reflects the effort by the Company to facilitate sales. The increase in depreciation expense is the result of increased purchases of furniture and equipment and assets from the newly acquired businesses and the increase in office rent reflects the increased square footage required to accomodate the increase in employees. There was an increase of $19,000 in utility costs due to the additional office space and employee count. Research and development costs in the first quarter of 1999 were approximately $349,000 compared to $147,000 in the first quarter of 1998. The increase of $202,000 is primarily due to increases in salaries paid for product research and development. The were 52 employees included in research and development at March 31, 1999 compared to 22 in the prior year. Non-operating expenses consisted of interest expense, amortization of debt issue costs and interest income. The increase in amortization is due to the addition of deferred debt costs from the issuance of warrants attached to $500,000 of subordinated short-term debt issued in February 1999. The increase in interest expense is related to an increase in debt which increase occurred in the latter portion of the first quarter of 1999. Interest income decreased primarily due to the one-time sale in March 1998 of certain sales-type leases held by the Company. Liquidity and Capital Resources As of March 31, 1999, the Company had positive working capital of approximately $4,037,000 compared to approximately $2,068,000 as of December 31, 1998. The increase in positive working capital as of March 31, 1999 is primarily due to the issuance of $1,504,000 of Series C convertible preferred stock and approximately $500,000 of common stock which was partially offset by investments in long-term assets. Net cash used in operating activities for the first quarter of 1999 was approximately $19,000 compared to a use of cash of approximately $1,206,000 for such activities in the first quarter of 1998. During the first quarter of 1999 operating funds of approximately $510,000 were provided by the net loss prior to depreciation/amortization. Operating funds were also provided by increases in accounts payable and deferred revenue in the approximate amount of $553,000. Operating funds were used by increases in current assets of approximately $1,074,000 which includes an increase in accounts receivable of approximately $717,000. 9 Cash used by investing activities in the first quarter of 1999 was approximately $1,009,000 reflects investments of $865,000 in capitalized computer software development costs, which represent costs incurred after technological feasibility has been established in connection with the development of enhancements to one or more particular software programs. The Company also purchased approximately $142,000 of additions to machinery and equipment during the first quarter of 1999. In the first quarter of 1998, cash used in investing activities totaled $412,000, which included investments in software development costs of $439,000 and an investment in purchased technology of approximately $700,000 and purchases of property and equipment of approximately $60,000, which was offset by the sale of sales-type leases in the amount of $712,000 and receipt of payment on a note receivable. Net cash of approximately $2,625,000 was provided by financing activities in the first quarter of 1999. This is primarily the result of net proceeds from the issuance of $1,504,000 of Series C convertible preferred stock at a per share price of $1,000 and $500,000 from the issuance of approximately 444,000 shares of common stock at a per share price of $1.125. In addition, proceeds were received from the issuance of short-term debt in the amount of $607,000, which was offset by payments of long-term debt in the amount of $50,000. In the first quarter of 1998, the Company raised $488,000 from the issuance of approximately 280,000 shares of common stock at a per share price of $1.90 in connection with a private offering of such securities. Presently, the Company believes it has sufficient working capital to pay its current liabilities. In addition to the proceeds received from the issuance of debt and equity discussed above, the Company believes its working capital will improve as the Company's profitability improves. This depends on the Company's ability to collect its accounts receivable and to make sales sufficient to realize the full value of its current inventory. Since the Company has recently achieved gross margins of approximately 71% on its sales, management believes the Company's financial health will improve as additional sales are realized. To that end, the Company has continued to purchase additional inventory in anticipation of additional sales. Nevertheless, the Company can provide no assurance as to its future profitability and access to the capital markets. During the three months ended March 31, 1999, the Company's liquidity was increased through the issuance of debt and equity. For the last six months the Company has been negotiating with Mezzanine Capital to allow availability of a working capital line of credit of approximately $1,000,000 as permitted by the loan and security agreement dated June 19, 1997, which was executed in connection with the issuance of $2,000,000 of subordinated debt to Mezzanine Capital. Although these negotiations have been unsuccessful, the Company has received a commitment for $3,000,000 of long-term debt which is subordinate to Mezzanine Capital's debt and a proposal to use a portion of the $3,000,000 to prepay the Mezzanine Capital debt. A working capital line secured by accounts receivable is expected to be established after the occurrence of such prepayment. The Company's operating plan for the year ending December 31, 1999 anticipates a substantial increase in sales over the year ended December 31, 1998 with a commensurate increase in earnings. The projected increase in sales is based on an increase in sales of the Company's traditional products and an increase in sales resulting from the Company's acquisitions during 1998. As a result this operating plan projects an increase in liquidity from sales and earnings and from access to capital markets to exceed the Company's anticipated investment in long-term assets. While the Company believes in the viability of its operating plan and currently anticipates that it will continue to have access to capital markets, there can be no assurances to that effect. 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 10 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 1999. 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 March 31, 1999. 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 the 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. Recent Developments Acquisition of Breece Hill Technologies, Inc. On April 14, 1999, the Company acquired all of the issued and outstanding common stock and Series A Convertible Preferred Stock (the "Outstanding Shares") of Breece Hill Technologies, Inc. ("BHT") in connection with the merger of BHT Acquisition, Inc., a wholly owned subsidiary of GMI, with and into BHT. BHT was the surviving corporation and is now a wholly owned subsidiary of GMI. In exchange for the cancellation of their Outstanding Shares, holders of such shares received rights to proportionate interests in the merger consideration, which consisted of warrants to purchase a total of 4,500,000 11 shares of the Company's common stock and the right to receive an earn out payment based in part on the sales of BHT immediately following the merger. This earn out payment will be made, if at all, in the form of the Company's common stock and cash. BHT is a supplier of automated tape libraries used to backup, restore and archive information stored in networks on servers, PCs and workstations, and stored via on-line data storage subsystems. BHT had a net loss of approximately $8,000,000 on sales of approximately $35,000,000 in the year 1998 and a net profit of approximately $135,000 on sales of approximately $9,200,000 for the quarter ended March 31, 1999. Issuance of Convertible Note On May 7, 1999, the Company issued convertible notes payable to two accredited investors in the aggregate principal amount of $167,372. The notes are convertible into common stock at $1.25 per share and bear interest at the rate of 6% per annum. The notes are subordinate to current and future debt issued by the Company. The notes are due on November 7, 1999. 12 - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 2. CHANGES IN SECURITIES In March 1999, the Company began a private placement of 1,325,000 shares of common stock at a purchase price of $1.125 per share and had issued 444,000 of such shares as of March 31, 1999. The Company completed this private placement on May 12, 1999. A total of 1,325,000 shares were sold for total gross proceeds of $1,490,625. Aethlon Capital acted as the placement agent. The Company will pay the placement agent a cash commission equal to 10% of the gross proceeds and will reimburse the agent for out-of-pocket expenses incurred in connection with the offering. The Company also will issue to the agent a warrant to purchase up to 10% of the number of shares of the common stock sold in the offering, which warrant will have an exercise price of $1.125 per share. The shares of common stock issued pursuant to this offering were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. As of March 31, 1999, the Company had issued 444,000 of such shares for total gross proceeds of $499,500. The commission payable to the placement agent with respect to shares sold in the first quarter of 1999 totaled $49,950. The placement agent also was entitled to receive a warrant to purchase 44,400 shares of common stock at an exercise price of $1.125 per share in connection with the shares sold in such quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 18--Preferability Letter 27--Financial Data Schedule 99--Cautionary Statement (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K relating to the acquisition of Breece Hill Technologies, Inc. by a subsidiary of the Company. The report was filed on April 29, 1999. No financial statements were filed with such report; however, pro forma financial statements relating to the acquisition will be filed as an amendment to such report on or before June 28, 1999. 13 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLOBAL MAINTECH CORPORATION May 17, 1999 By: /s/ James Geiser ------------------------------------ James Geiser Chief Financial and Chief Accounting Officer In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. May 17, 1999 By: /s/ David McCaffrey ------------------------------------ David McCaffrey Chief Executive Officer 14 EX-18 2 PREFERABILITY LETTER Exhibit 18 May 17, 1999 Global MAINTECH Corporation Minneapolis, Minnesota Ladies and Gentlemen: We have been furnished with a copy of Form 10-Q of Global MAINTECH Corporation for the three months ended March 31, 1999, and have read the Company's statements contained in the footnotes to the condensed financial statements included therein. As stated in the footnotes, the Company changed its method of accounting for depreciation and states that the newly adopted accounting principle is preferable in the circumstances because the Company believes that the straight-line method more appropriately measures the timing of the economic benefits to be received from the underlying assets than accelerated methods. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. We have not audited any financial statements of Global MAINTECH Corporation as of any date or for any period subsequent to December 31, 1998, nor have we audited the information set forth in the aforementioned footnotes to the condensed financial statements; accordingly, we do not express an opinion concerning the factual information contained therein. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of Global MAINTECH Corporation's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. Very truly yours, /s/ KPMG Peat Marwick LLP EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 2,260 664 0 0 3,000 2,149 0 0 1,013 996 7,248 4,057 1,086 80 0 0 12,777 9,133 3,211 1,990 1,625 1,700 0 0 3,748 2,244 8,281 7,068 (4,088) (3,869) 12,777 9,133 2,580 1,796 2,580 1,796 751 684 1,886 903 138 (102) 0 0 79 74 (274) 237 0 0 (274) 237 0 0 0 0 100 0 (174) 237 (0.011) 0.014 (0.011) 0.012
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: Competition Our industry is characterized by rapidly evolving technology and intense competition. We know of several other competitors that have much greater resources and experience in research and development and marketing than we do. These companies may represent significant competition for us. However, none of these companies produces as complete an enterprise computing system as we do, but rather they only produce components that could be combined to form such a system. We believe that we have a competitive advantage because we can produce an integrated system. Nevertheless, we cannot predict whether our competitors will develop or market technologies and products that are more effective than ours or that would make our technology and products obsolete or noncompetitive. New Product with Uncertain Demand Recently the Company revised aspects of the external control and monitoring systems to enhance its remote capabilities. Our VCC product provides customers with an economically feasible method of controlling and monitoring geographically dispersed computers and systems, particularly for systems that consist of many different locations with as few as one server per location, such as a retail organization. In such organizations, the local servers often upload data regarding product sales and inventory levels to a centralized data center. Our product allows the centralized data center to control these local servers (shutting down, starting-up, etc.) and operating systems for a price per server ranging from $3,000 to $8,000. The concept of an external monitor and control system for computer hardware is relatively new, and we do not yet know what the continued demand for the product will be. It is difficult to project the overall size of the future market for this product. We estimate that the current market size for internal systems is several billion dollars per year. We believe the market for external control systems could expand because external control systems could soon be used to solve networking problems with enterprise computing. Based on recent feedback we have received from current and potential customers, we believe the demand for the VCC is significant. However, to date, we have sold the VCC to only 16 customers and we cannot assure you that additional customers will buy our products. Dependence on Limited Product Offerings and Customer Base We currently offer a limited number of products, primarily consisting of a base VCC unit and related software and accessories. Our existing customers are not required to buy additional hardware products or to renew their software license and maintenance agreements with us when such license and agreements expire. Therefore, a significant portion of our revenue is derived from non-recurring revenue sources. To succeed, we will need to develop a sustained demand for our current products and to develop and sell additional products. We cannot assure you that we will be successful in developing and maintaining demand or in developing and selling additional products. Product Under Development We are currently developing a set of software products that monitors networking and communication devices primarily for networks, Microsoft NT, midrange and mainframes. These products will perform capacity tests to measure systems activity and hardware utilization and will correlate measured trends with specific events or expected benchmarks. Although preliminary tests indicate that these products will perform as intended and can be integrated with the VCC, we cannot assure you that they will do so or, even if they do, that the market will demand such products. Newly Acquired Businesses; Integration of Operations We purchased three new product lines during 1998 and one new product line in 1999. Effective November 1, 1998, we purchased substantially all of the assets of Enterprise Solutions, Inc., an Ohio corporation ("ESI"). As a result of this acquisition, we obtained substantially all of the assets and assumed certain liabilities of ESI, including a suite of software products that notify the proper person(s) by telephone, pager or the Internet of critical data center events. In addition, we obtained ESI's short-term consulting business, which assists companies to optimize their existing systems management and network management tools. Effective October 1, 1998, we purchased substantialy all of the assets of Asset Sentinel, Inc., a Minnesota Corporation ("ASI"). The primary assets acquired were a suite of software products that provide updated mapping of network, cable and telephone lines in buildings and computer centers. On February 27, 1998, we licensed certain software and purchased certain assets relating to the system software business of Infinite Graphics Incorporated, a Minnesota corporation ("IGI"). We will use such software and assets to design, assemble and market computer-aided design and manufacturing software systems that operate on a variety of mid-range and personal computer platforms. Effective April 1, 1999, we purchased all the oustanding stock of Bruce Hill Technologies, Inc., a Delaware corporation ("BHT"). As a result of this acquisition, we obtained all the assets and all the liabilities of BHT. BHT is a supplier of automated tape libraries used to backup, restore and archive information stored in networks on servers, PC's and workstations, and stored via on-line data storage subsystems. Although we believe we will be able to successfully integrate the employees we hired from BHT, IGI, ASI and ESI into our own workforce and that we will be able to market and sell the product lines purchased from ESI, ASI and IGI on a profitable basis for the next several years, we cannot assure you that this will happen. Fluctuations in Operating Results Our future operating results may vary substantially from quarter to quarter. At our current stage of operations, the timing of the development and market acceptance of our products may materially affect our quarterly revenues and results of operations. Generally, our operating expenses are higher when we are developing and marketing a product. For these reasons, the market price of our stock may be highly volatile. The price of our stock may also be affected by: the general state of the country's economy the conditions in the stock market the development of new products by us and our competitors public announcements by us or our competitors Future Capital Requirements; No Assurance Future Capital Will Be Available We expect that the proceeds of our recent equity and debt offerings will be enough to fund our operations through at least June 1999. Within the next 60 days, we expect to obtain an asset-based line of credit to finance our growth in receivables and to meet short-term working capital requirements. Thereafter, we may need additional funds to continue the marketing of our products and to meet our long-term growth needs. To meet our needs, we may have to obtain additional funding through public or private financings, including equity and debt financings. Any additional equity financings may be dilutive to our shareholders, and debt financing, if available, may have restrictive covenants. We are uncertain as to whether we will be able to obtain financing and, if we do, whether the financing will be available at reasonable rates and terms. Our business could be adversely affected if we do not secure such additional financing. Reliance on Key Personnel We rely heavily on three technicians, Jeff Jensen, Steve Vranyes and Norm Freedman, to further develop the VCC. In addition, we rely heavily on Trent Wong and Desmond DosSantos for technical or business development for products of Singlepoint Systems, Inc. and Jim Watson and Robert Schaefer of Bruce Hill Technologies, Inc. Even though these seven employees have incentive stock options and are subject to standard rules of confidentiality, we cannot guarantee that they will stay with the Company. If any of these individuals leave the Company, we would need to hire a comparable employee. We cannot assure you that we would be able to hire someone quickly and at an affordable salary. Intellectual Property We protect our intellectual property rights through a combination of statutory and common law patent, copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party non-disclosure agreements and other methods. Although we do not own any patents, we believe the VCC will be protected by two patents that are being reviewed by the U.S. Patent and Trademark Office and by a patent for hardware that Circle Corporation, a Japanese corporation, applied for on December 28, 1993. We license the hardware from Circle Corporation and use it in the VCC. Under our license, we can distribute the hardware worldwide, except in Japan. The initial term of this license expires on December 20, 2004. Although we have taken these precautions to protect our intellectual property rights, a third party may copy or otherwise obtain or use our products or technology without our authorization, or develop similar products or technology independently. Our business would be adversely affected if someone used or copied our products to any substantial degree. We cannot assure you that the protection for our intellectual property rights is adequate or that our competitors will not independently develop similar products. We require our consultants and developers to assign to us their rights in any materials they provide to or make for us. We also ask their assurance that if we use any of their materials in our products we will not violate the rights of third parties. Based on these assurances and our relationships with our consultants and developers, we have no reason to believe that our products infringe on the proprietary rights of third parties. However, we have not commissioned an independent investigation to reaffirm the basis for our belief, and we cannot guarantee that our current or future products will infringe on their rights. We believe that developers of control systems increasingly may be subject to such claims as the number of products and competitors in the industry grows and the functionality of such products in the industry overlaps. Any such claim, with or without merit, could result in expensive litigation and could have a material adverse effect on our business. Lack of Product Liability Insurance We may be liable for product liability claims if someone claims that our products injured a person or business. We do not have product liability insurance. We cannot assure you we could obtain insurance on commercially reasonable terms, or at all, or that even if we obtained insurance it would adequately cover a product liability claim. We are not aware of any pending or threatened product liability or other legal claim against us. Our business could be adversely affected if someone brings a product liability or other legal claim against us. Year 2000 Issue 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 economies generally. Based on our assessments to date, we believe we will not experience any material disruption as a result of year 2000 problems with respect to our products and the third-party systems we use for our internal functions, and, in any event, we do not anticipate the year 2000 issues we will encounter will be significantly different than those encountered by other computer hardware and software manufacturers, including our 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 our 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, we believe that we will be able to manage our total year 2000 transition without any material effect on our results of operations or financial condition. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000 Issue." -----END PRIVACY-ENHANCED MESSAGE-----