10KSB 1 form10ksb.txt DECEMBER 31, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______ to _______ Commission file number 000-14692 GLOBAL MAINTECH CORPORATION ------------------------------------------------------ Minnesota 41-1703940 ------------------------------------------------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 7836 Second Avenue South, Suite 1 Bloomington, MN 55420 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) Telephone Number: (952) 887-0092 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value 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 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 Check if disclosure of delinquent filers in response to Item 405 of Regulations S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. __ The Company's revenues for the Fiscal Year Ended December 31, 2002 totaled $1,984,745. The aggregate market value of voting common stock held by non-affiliates of the registrant as of March 25th, 2003 was approximately $1,261,158 based upon the closing bid price on the Over The Counter Bulletin Board ("OTCBB") on that date. The number of shares of the Company's no par value common stock outstanding as of March 25th, 2003 was 10,509,655. Documents incorporated by reference: None. Transitional Small Business Disclosure Format (Check One): Yes No [ X ] SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information, this document 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. We believe that 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 Company's history of operating losses and the uncertainty of the Company's ability to continue to operate profitably in the future; failure of the Company to meet its future additional capital requirements; failure of the Company to respond to evolving industry standards and technological changes; lack of market acceptance of the Company's products, including products under development; inability to successfully adjust the Company's product mix and product sales following divestiture of some businesses; loss of key personnel; failure of the Company to secure adequate protection for its intellectual property rights; and exposure to third party claims of intellectual property infringement by the Company. The forward-looking statements are qualified in their entirety by these factors and the cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary Statement," to this Annual Report on Form 10-KSB for the year ended December 31, 2002. Copies of the Company's Annual Reports on Form 10-KSB, as filed with the Securities and Exchange Commission, may be obtained free of charge from the Company. Such requests should be made in writing or by telephone and should be directed to Global MAINTECH Corporation, Attention: Sue Korsgarden, 7836 Second Avenue South, Suite 1, Bloomington, Minnesota 55420, telephone (952) 887-0092. 2 TABLE OF CONTENTS Page No. -------- PART I. Item 1. Description of Business 4 Item 2. Description of Property 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II. Item 5. Market for Common Equity and Related Stockholder Matters 8 Item 6. Management's Discussion and Analysis or Plan of Operation 8 Item 7. Financial Statements 13 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 14 PART III. Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 14 Item 10. Executive Compensation 15 Item 11. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters 16 Item 12. Certain Relationships and Related Transactions 17 Item 13. Exhibits, List and Reports on Form 8-K 18 Item 14. Controls and Procedures 20 Signatures Certifications 3 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Global MAINTECH Corporation, (the "Company"), supplies the Virtual Command Center, which is an enterprise wide system capable of consolidating all of a data center's platform consoles (including mainframes, midrange, client-server and other systems) into a single screen, control and automation tool for the entire enterprise, including disaster recovery. The Company's VCC customers are Fortune 500 companies with computing centers the size of football fields in several locations worldwide. The VCC is the only product in the world that provides this solution without the need for agent software for the associated distribution process. The Company's VCC customers include Acxiom Corporation, A.I.G. (American International Group), Alaska USA Federal Credit Union, Altell Information Services, Inc., American Home Products Corporation (Wyeth), Bank One Corporation, Bear Stearns & Co. Inc., Burlington Northern Santa Fe, Citicorp Global Technology, IBM Corporation, 3M (Minnesota Mining and Manufacturing Company), MetLife, Sempra Energy, Southern California Edison, and Wellpoint Health Networks Inc. The Company's products and services provide solutions that enhance the IT Framework solutions provided by these and other partner companies. The Company was incorporated under the laws of the State of Minnesota in 1985 under the name Computer Aided Time Share, Inc. There have been numerous name changes. Effective February 28, 2001, the Board of Directors of the Company approved the current name of Global MAINTECH Corporation. PRODUCTS AND SERVICES Virtual Command Center. The Virtual Command Center (VCC) is a computer system, consisting of software and an optional hardware device, that monitors and controls diverse computers in a data center (whether distributed or not) from a single, master console. A console is a computer terminal with access to the internal operation of other computers. The VCC can simultaneously manage servers, networks, mainframes and mid-range computers such as MVS, VM, ESA, OS/390, Z/OS, AS400, UNIX, Microsoft NT/W2K/XP, and Linux platforms. We believe the VCC is a platform which can support new products to meet other systems and network management needs not currently met by existing competitive products. We intend to continue to provide new products through our internal research and development efforts or through acquisitions to meet changes in customer needs. Functions and Features. Our VCC product is designed to perform four primary functions: o consolidate consoles into one monitor, known as a virtual console or single point of control; o monitor and control the computers connected to the virtual console; o automate most or all of the routine processes performed by computer operators in data centers; and o provide the ability to remotely reboot console attached devices. The VCC is an external system that monitors data center computers from a workstation-quality reduced instruction set, RISC-based UNIX/LINUX system computer. This system is usually housed separately from the computers it controls. The primary feature of this product is that it allows centralized management and automated operations of multiple hardware platforms and networks on a local and remote basis. Users of our VCC product can consolidate the management of entire data centers into a single workstation that provides the complete inter-connectivity and control over a network and the systems on that network. This can be accomplished regardless of whether the computing devices comprising the data center are located in one location or distributed across the world. The product's ability to consolidate operational computer consoles reduces the need for operational staff, technical support and software licenses. In addition, the VCC is an invaluable tool for disaster recovery procedures, since the product allows access to all of the equipment within a data center even if humans are not physically able to get to the equipment. Our VCC product is easy to install and use and is scalable to accommodate data center growth. 4 Other features include: o management of any task or computer console on local or remote basis; and o automated warnings of potential or actual system problems. Differentiation from Software-Only Products. The majority of systems and network management products are software-only products employing invasive software agents, known as active agents. Active agents are installed on each of the mission critical computing devices. Software agents can be either passive collectors of information or active searchers for information. Software that employs active agents is time consuming to install and by its nature activates the need for change control, which is one of the functions of systems and network management. Any new software must go through the change control process to determine compatibility with all other software deployed on the device. This process may be extensive depending on which systems and network management software is used. The VCC is not designed to compete with the active agent software now prevalent in the industry. It is an external system that accepts the signals and information output of each of the devices to which it is connected. Consequently, it can use the infrastructure provided by native and non-native operational software to control the enterprise computing operations. The greater the information issuing from these devices, the more useful the VCC becomes. Some of the other products we offer employ passive agents to collect information from host devices or networks before passing that information on to the VCC. Although the VCC can co-exist with today's agent software products, the VCC is capable of replacing many or all of the functions for which customers are using the agent software today. Given that what the agent software and the VCC provide are functionally equivalent, replacing the agent software with the VCC is usually a decision that is based on significant cost savings to the customer. Global Watch MVS. Our Global Watch MVS product manages the customer's networked environment for IBM's mainframe-based console message streams, and can operate on a stand-alone or fully integrated basis with the VCC. In addition, it reduces exposure to network outages, improves average repair times on network problems and provides many analytic problem-solving tools. When Global Watch MVS is combined with the VCC, the customer can take advantage of the MVS Logical Console. The Logical Console enables the customer to receive and respond to status messages, in real time, from all logical partitions (logical partitions divide a mainframe device into multiple internal devices). The Logical Console allows the user to look at all partitions without having to access each partition. The status messages from each partition are displayed in a single logical console alert window in the VCC. There is no need for any customization of the host computer's devices and messages can be collected from a nearly infinite number of central processing units and logical partitions. Professional Services. We offer system maintenance services that help our customers design and implement network and system management products to manage their information technology environment. We specialize in integrating multiple products into a complete enterprise-wide solution for corporate data centers. We support our VCC product as well as implement the industry's leading system and network management products, including Microsoft Operations Manager Software, Hewlett-Packard's OpenView, BMC Software's Patrol and IBM's Tivoli TME. Our capabilities include strategic planning and implementation, installation of enterprise system management tools, product training, product conversions, and consulting. SALES AND MARKETING We currently market and sell our products through our own sales force, and by various reseller arrangements. The direct sales team is supported by a dedicated telemarketing process and sales support in the form of written materials, CD-ROM presentations, VCR tape presentations, our web site and remote PC-based presentations available on the salespersons laptop computer. Our contracts for maintenance and professional services are sold directly to the customer. COMPETITION Our VCC product faces competition from internal monitoring software products, which monitor certain pieces of hardware and software applications in the computer in which such internal software is installed. Major competitive products and companies producing them in the system and network management industry are as follows: 5 Product Maker Base Platform ------- ----- ------------- CCS I/O Concepts Mainframe NetView IBM Mainframe TME IBM/Tivoli Mid-range server Unicenter Computer Associates Mainframe Command/Post BMC Mainframe Open View Hewlett-Packard Mid-range server The majority of the makers listed above are expanding their base focus to include other platforms through partnerships, acquisition or further internal development. In all cases these products use active agents and often take months or years to deploy throughout a company's computer network. The mainframe products of other makers can consolidate from 7 to 16 computer consoles. Their architecture, however, does not allow significant console consolidation into one monitor. We believe each of these products requires a significant number of people to install, maintain and to complete the installation due primarily to the invasive nature of the active software agents. Additionally, the ability of these other products to be expanded with the addition of new devices and data center sites adds to the complexity of the initial installation. The VCC and related products are all designed to be initially installed in hours or at most days and to automatically recognize the addition or removal of devices after installation. One VCC can consolidate from two to several hundred devices and our other software products such as Global Watch MVS can monitor from two to thousands of devices. We have positioned ourselves in the professional services marketplace as niche oriented. This has allowed us to build a reputation without competing with the large consulting services organizations such as IBM and EDS. RESEARCH AND DEVELOPMENT The systems and network management industry is characterized by rapid technological change, including changes in customer requirements, frequent new product introductions and enhancements, and evolving industry standards. We believe that continued research and development efforts are an important factor in our ability to maintain technological competitiveness. Our research and development activities have been substantial. Other than the VCC and the Global Watch MVS products, all of our products were developed in 1998. In addition, we introduced our new E-bus technology for the VCC in 1998. In 1999, we introduced single E-bus units that can be used to connect up to five devices per unit and allow remote access from a primary VCC unit via a customer's LAN or WAN. The single E-bus allows economic access of the VCC technology to any company with widely dispersed devices that tie into a central VCC in another location. Retail organizations with numerous devices dispersed across a wide geographic area and computer outsourcers can economically achieve full operational control over the dispersed devices and keep operating expertise centrally located. We are currently focusing our product development efforts on extending the application of our software products across multiple platforms, including the various versions of UNIX and Linux. We are currently working on the development of the next generation of the VCC, code-named Camelot. Camelot has two main components, the VCC engine (or middleware) and the human interface (GUI). The Camelot VCC engine will run on the Linux operating system and the Camelot GUI will run from a web browser. Porting the VCC engine to Linux will allow customers more freedom in choosing the hardware and operating system platform which they can run the VCC on. This will also allow the product to be scaled so that it has sufficient processing power to support expanding data centers. Running the Camelot GUI within a web browser will allow customers an "access from anywhere" interface into their data centers as well as provide new monitoring features for customers. The Camelot GUI will allow customers the ability to monitor multiple VCC complexes from a single monitor. This feature should prove significantly valuable to outsourcing facilities and customers who need to satisfy disaster recovery policies. The Camelot GUI provides the highest security features by utilizing Secured Sockets Layer (SSL). The Camelot GUI is developed by employing the latest proven technologies including java, xml, soap and SSL. Customer access to the customer's vital data center information can also be accessed from a hand-held device. This human interface frees the customer from having to be at a computer system since the hand-held devices are small enough to fit in a pocket. The first version of this interface runs on the WindowsCE operating system. Future versions may also support PalmPilot and/or web-enabled cellular phones. 6 The Company is also active in other venues of opportunity by forming partnerships with other Enterprise Management software vendors. Specifically, the company is an approved partner with Microsoft Corporation with respect to its integration products with the Microsoft Operations Manager product. We believe the VCC provides the world's only method for allowing Microsoft Operations Manager software, which monitors Microsoft servers, to be integrated with all other enterprise management platforms. The Company supports Microsoft in areas where the company has specific expertise in areas in which Microsoft does not. Currently, the company is providing an interface to MVS systems, AS400, and the VCC product itself. The Company upgrades and will continue to upgrade the Global Watch MVS, which was re-introduced in February of 2001 using the TCP/IP communications protocol and the ability to link management information from mainframes and UNIX workstations. This brings the functionality of Global Watch to additional platforms. Our research and development costs were approximately $250,000 in 2002 and $200,000 in 2001, which consisted of primarily employee salaries. PATENTS, TRADEMARKS AND COPYRIGHTS We have four patents issued for the VCC and related products. Our trademark is Global MAINTECH(TM). EMPLOYEES As of March 25, 2003, we had 8 employees, all of which are full-time employees. ITEM 2. DESCRIPTION OF PROPERTY. The Company's headquarters is located at 7836 Second Avenue South, Suite 1, Bloomington, Minnesota 55420. The sublease for this location, entered into on April 18, 2001, is for approximately 3,073 square feet and terminates on April 30, 2004. This property is used administratively as the Company's corporate headquarters, and is also used to house the Company's technical support department. The current monthly rent is $2,645. The Company is responsible for utilities, insurance, and other operating expenses at the Bloomington Corporate Office location. ITEM 3. LEGAL PROCEEDINGS. The Internal Revenue Service has a claim against the Company for $44,827.16 for payroll taxes which arose from a reporting error by the Company's payroll service in 2000. An IRS refund check was received by the Company for overpayment of taxes in the amount of $34,229.26. Subsequently, a correction was made by the payroll service in September of 2002 showing that taxes were owed by the Company. We are currently disputing the interest and penalties with the IRS of $10,597.90, but it appears that the principal amount of $34,229.26 is owed by the Company. The Company is named as a defendant in three judgments, totaling approximately $68,000, from 2001 as a result of discontinuing operations of the Singlepoint Systems and Global Maintech Inc. divisions. Due to the financial situation of the Company, no efforts have been made to settle or resolve these claims. Such amount has been recorded in the financial statements. ALLIANT PARTNERS LITIGATION: The Company was involved in the following litigation: Alliant Partners, a California corporation, vs. Singlepoint Systems, Inc., a Minnesota corporation also known as Global Maintech, Inc. Breece Hill, Inc., a Delaware corporation, MaxOptix Corporation, a Delaware corporation, Hambrecht & Quist Guaranty Finance, L.L.C., a California limited liability company a/k/a H& Q Guaranty Finance L.L.C. In February 2000, the Company entered into a stock purchase agreement to sell its subsidiary, Breece Hill Technologies, Inc. ("Breece Hill"). When the buyer terminated the stock purchase agreement, Hambrecht and Quist Guaranty Finance ("H&QGF"), as secured lender, foreclosed on the assets of Breece Hill to cover amounts owed to H&QGF by the Company. H&QGF entered into an agreement with Alliant Partners ("Alliant") pursuant to which Alliant agreed to find a buyer for the Breece Hill assets in exchange for a commission based on the proceeds of the sale. Once the Breece Hill assets were sold Alliant requested payment of the commission, but did not receive it. Alliant then commenced an action against H&QGF, the Company and the parties listed above on May 25, 2001 in the Superior 7 Court of the State of California, County of Santa Clara, alleging breach of contract, fraudulent conveyance of the Breece Hill assets and unjust enrichment on the part of H&QGF, seeking general damages of $487,281. Alliant subsequently entered into a tolling agreement with Singlepoint Systems, Inc. ("SSI"), GMI and Breece Hill pursuant to which Alliant has agreed to dismiss the civil action against these three parties without prejudice. The parties also agreed that any statute of limitations would be tolled as to the causes of action alleged in the complaint for a period of four years provided that SSI, GMI and Breece Hill cooperate with Alliant in providing documents and information with respect to the action against H&QGF and MaxOptix Corporation. The Company was notified on April 3, 2002 that the case was dismissed in November of 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the Company's shareholders during the quarter ended December 31, 2002. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is currently traded on the Over the Counter Bulletin Board ("OTCBB") under the symbol "GBMT." The following are the high and low bid quotations for the Company's common stock as reported on OTCBB (for the first quarter of 2001 and all four quarters of 2002) and the Pink Sheets (for the second, third and fourth quarters of 2001) during each quarter of the fiscal years ended December 31, 2002 and 2001. These quotations represent prices quoted between dealers, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Year Ended December 31, 2001 ------------------------------------------------ Quarter High Low ---------------------------- ------ ------ First $ .500 $ .200 Second .809 .260 Third 1.359 .059 Fourth 1.059 .309 Year Ended December 31, 2002 ----------------------------------------------- Quarter High Low --------------------------- ------- ------ First $1.140 $.560 Second .980 .350 Third .500 .270 Fourth .400 .120 Year Ended December 31, 2003 ----------------------------------------------- Quarter High Low --------------------------- ------- ------ First $.25 $.12 As of March 25, 2003, the Company had approximately 534 holders of record of its common stock. The Company has not paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere. The foregoing plan of operation contains forward-looking statements that are subject to risks and uncertainties, which could cause actual results to differ materially from those discussed in the forward-looking statements and from historical results of operations. Among the risks and uncertainties, which could cause such a difference, are those relating to our Company's dependence upon certain key personnel, our ability to manage our growth, our Company's success in implementing our business strategy, our success in arranging financing where required, and the risk of economic and market factors affecting our Company or our customers. Many of such risk factors are beyond the control of our Company and its management. 8 RESULTS OF OPERATIONS We supply world-class systems (device and system consolidation, systems and network management, professional services and storage products) and network management products primarily to computer data centers and provide professional services to help our customers implement enterprise system management solutions. These products and services provide solutions that enable companies to better use their IT management tools. Our main business produces the Global MAINTECH Virtual Command Center ("VCC"), a master console that provides simultaneous control, operation, monitoring, and console consolidation for mainframe, midrange, UNIX, Microsoft NT and networks. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Net sales from continuing operations for the year ended December 31, 2002 were $1,984,745 as compared to net sales of $4,133,780 for year ended December 31, 2001 Net sales consists of the following items: Hardware, Software , and Maintenance contracts. 1) Systems sales were $285,660 in 2002 compared to $1,609,188 in 2001. The decrease in systems sales in 2002 was due to a lack of new customers and decreased sales to existing customers of VCC systems. 2) For the year ended December 31, 2002, maintenance revenue was $1,292,742 as compared to $1,568,611 for the year ended December 31, 2002. The decrease in maintenance fees in 2002 is related to the loss of existing customer renewals on maintenance contracts. 3) Revenues from the sale of our Lavenir Technology products were $403,576 for the year ended December 31, 2002 as compared to $765,190 for the year ended December 31, 2001. The decrease in Lavenir's sales is attributable to the Company closing this division in June 2002. 4) Other revenues which include consulting fees, late fees collected and other items were $2,767 for the year ended December 31, 2002 as compared to $190,791. The decrease was attributable to closing the Lavenir division. Cost of sales as a percentage of sales increased to 20% for the year ended December 31, 2002 from 15% in the prior period. This percentage has increased due to the huge decrease in VCC system sales in 2002. Gross margin from continuing operations for the year ended December 31, 2002 was 80% compared to 85% for the year ended December 31, 2001. Payroll and related benefit costs for the year ended December 31, 2002 were $1,422,073 compared to $2,702,355 for the year ended December 31, 2001. The decrease of $1,280,282 is related primarily to decreases in personnel by closing the Lavenir division. For the year ended December 31, 2002 other selling, general and administrative expenses were $591,657 compared to $1,055,366 for the year ended December 31, 2001. The decrease of $463,709 was attributable to the following: The strict policies enforced on expenses and the closing of the California location. 1) For the year ended December 31, 2002, we incurred professional and technical expenses of $157,616 compared to $ 150,837 for the year ended December 31, 2001, an increase of $6,799 due to the addition of business consultants. 2) We reduced other costs and expenses due to cost cuttings measures, consolidated administrative functions, and eliminated the California division. Other expenses of $7,443 for the year ended December 31, 2002 consisted of interest and penalty expense compared to $15,742 in 2001. Interest and penalties expense decreased in 2002. For the year ended December 31, 2002, we had a gain from discontinued operations of $789,544 attributable to settlement of debt versus a gain of $975,798 in the year 2001. 9 On December 27, 1999, the Company approved a formal plan with regards to the disposal of its Breece Hill Technologies, Inc. subsidiary ("BHT"), which was acquired on April 14, 1999 and which formerly represented the Company's tape storage products business segment. As a result of the Company approving a formal plan with regards to the disposal of BHT on December 27, 1999, the Company reported BHT's financial position, results of operations and estimated loss on disposal as discontinued operations in 2001 and 2000. On December 22, 2000, the Company signed a foreclosure agreement with Hambrecht & Quist Guaranty Finance, LLC ("H&QGF"). In summary, the Company transferred all of the assets of BHT to the H&QGF in satisfaction of BHT's obligation to H&QGF in the amount of approximately $5,900,000. As of December 31, 1999, the Company had accrued estimated liabilities related to this discontinued operation of $4,300,000. As of June 2002, no demands for payment have been received by the Company. Additionally, there have been no claims made against the Company relating to this estimated liability. Accordingly, the Company reversed this estimated liability and recorded an extraordinary gain of $4,300,000. We reported net income for the year ended December 31, 2002 of $5,154,273 compared to net income for the year ended December 31, 2001 of $704,501. The income is due to gain on disposal of discontinued operations, a change in management estimate and forgiveness of debt. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets". Among other things, SFAS No. 144 provides guidance on the implementation of previous pronouncements related to when and how to measure impairment losses and how to account for discontinued operations. FAS No. 144 had no material impact on the Company's financial position, results of operations or cash flows. In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No.146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (" EITF") issue No. 94-3, " Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity". SFAS No. 146 requires that liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on its consolidated financial statements. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based employee compensation as prescribed in SFAS 123, "Accounting for Stock-Based Compensation." Additionally, SFAS 148 required more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of this Statement are effective for fiscal years ending after December 15, 2002, with early application permitted in certain circumstances. The Company has adopted the disclosure provisions in these consolidated financial statements. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently released by the SEC, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us. Use of estimates ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 10 Inventories ----------- Inventories are stated on a first in, first out (FIFO) basis at the lower of cost or market. Property and equipment ---------------------- Property and equipment is recorded at cost and is comprised primarily of computer and office equipment. The Company uses the straight-line method of depreciation. Depreciation is provided based upon useful lives of the respective assets, which generally have lives of three to five years. Maintenance and repairs are charged to expense as incurred. Revenue recognition ------------------- Revenue from product sales is recognized upon the later of shipment or final acceptance. Deferred revenue is recorded when the Company receives customer payments before shipment and/or acceptance or before maintenance and/or service revenues are earned. Under Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition" (as amended by SOP 98-4 and 98-9), the Company recognizes revenue from software sales when the software has been delivered (delivery is deemed to have occurred upon the later of shipment or final acceptance), if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable, and product returns are reasonably estimable. Maintenance and support fees related to software sales including product upgrade rights (when and if available) committed as part of new product licenses and maintenance resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period. Professional service revenue is recognized when services are performed. Revenues related to multiple element arrangements are allocated to each element of the arrangement based on the fair values of such elements. The determination of fair value is based on vendor specific objective evidence. If such evidence of fair value for each element (or the aggregate of the undelivered elements as allowed by SOP 98-9) does not exist, all revenue from the arrangement is deferred until such time that, for applicable elements of the arrangement, evidence of fair value does exist or until such elements are delivered Stock based compensation ------------------------ Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2002, we had negative working capital of $6,766,350 compared to negative working capital of $8,906,646 as of December 31, 2001. The decrease in negative working capital is related primarily to reversing accrued liabilities of $4,300,000 on the Breece Hill division, settlements on debt for the Singlepoint Systems division, and closing the location in California for the Lavenir division offset by accrued dividends of $1,852,479 and accrued penalties of $2,640,735 which we recognized when we defaulted on the preferred stock modification agreement. We have no material commitments for capital expenditures. Other than cash generated from our operations, we have no external sources of liquidity. Our future operations and growth are dependent on our ability to raise capital for expansion, seek additional revenue sources, and to seek additional opportunities. 11 Net cash provided by operating activities for the year ended December 31, 2002 was $55,406 compared to net cash of $18,415 used in such activities during the year ended December 31, 2001. The major adjustments to reconcile the 2002 loss from continuing operations of $425,271 to the net cash provided by operating activities were the net change in net liabilities from discontinued operations of $(4,718,158) and a decrease in net liabilities of approximately $(1,740,000) offset by a change in management estimate of $4,300,000, forgiveness of debt of $490,000, issued equity instruments for services of $63,171, a decrease in net assets of approximately $1,210,000 and depreciation expense of $44,837. Cash used by investing activities for the year ended December 31, 2002 was $18,167 from the purchase of property and equipment. Cash used by investing activities during the year ended December 31, 2001 was $34,365 and reflects purchases of property and equipment. Net cash used in financing activities for the year ended December 31, 2002 was $104,439. This reflects repayment of a loan from an officer. The environment in the past 24 months has been extremely difficult in the IT sales area. New sales of the VCC product for the Company have not met expectations. With the working capital slowly deteriorating, the Company is concerned with its ongoing operations. Additional financing has not been possible with the Company's obligation to its preferred shareholders. The Company entered into a modification agreement with the preferred shareholders on March 18, 2002 locking up all conversions by the preferred for a twelve month period. Expiration of this agreement reinstates the preferred full conversion rights and penalties and interest going back to the original contract dates. With this overhang of the preferred obligations, the Company sees some very difficult times ahead. We can provide no assurance as to our future profitability, access to capital markets, the completion of our projected asset and business sales, or successful re-negotiation of preferred debt. RECENT DEVELOPMENTS DEFAULT ON MODIFICATION AGREEMENT WITH PREFERRED HOLDERS. Effective March 18, 2002, the Company entered into a modification agreement and release (the "Modification Agreement") with the holders (the "Series D-G Holders") of its Series D, E, F and G convertible preferred stock (collectively, the "Series D-G Preferred Stock"), under which the preferred holders conditionally agreed to modify certain terms of the Preferred Documents relating to the Preferred Stock The provisions with respect to amendment of the Preferred Documents and all waivers of defaults and penalties are conditional upon the Company's compliance with the terms of the Modification Agreement and the Preferred Documents as modified by the Modification Agreement. This Agreement is null and void if the Company defaults under any of the terms and conditions of the Modification Agreement or of the Preferred Documents as modified by the Modification Agreement. As of March 2003, the Company is in default of this agreement. Accordingly dividends of approximately $1,420,000 and penalties of approximately $2,641,000 through December 31, 2002 have been recorded. 12 ITEM 7. FINANCIAL STATEMENTS GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2002 and 2001 CONTENTS Report of Independent Auditors..........................................F-1 Consolidated Financial Statements: Consolidated Balance Sheet...........................................F-2 Consolidated Statements of Operations................................F-3 Consolidated Statement of Changes in Stockholders' Deficit...........F-4 Consolidated Statements of Cash Flows................................F-5 Notes to Consolidated Financial Statements.........................F-6 - F-24 13 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Global Maintech Corporation Bloomington, MN We have audited the accompanying consolidated balance sheet of Global Maintech Corporation and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the years ended December 31, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Global Maintech Corporation and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and has a working capital deficiency and an accumulated deficit that raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Sherb & Co., LLP Certified Public Accountants March 27, 2003 New York, New York F-1 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2002 ASSETS CURRENT ASSETS: Cash $ 5,700 Accounts receivable 126,709 Inventories 32,625 ---------- Total current assets 165,034 ---------- Property and equipment, net 22,188 Intangibles assets, net 2,113 ---------- Total assets $ 189,335 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 26,000 Accrued liabilities, compensation and payroll taxes 60,852 Accrued expenses 908,370 Accrued dividends 1,852,479 Accrued penalties 2,640,735 Deferred revenue 375,219 Net liabilities of discontinued operation 1,067,729 ---------- Total current liabilities 6,931,384 STOCKHOLDERS' DEFICIT: Voting, convertible preferred stock - Series A, no par value; 887,980 shares authorized; 63,956 shares issued and outstanding; total liquidation preference of outstanding shares-$32,586 30,012 Voting, convertible preferred stock - Series B, no par value; 123,077 shares authorized; 51,023 shares issued and outstanding total liquidation preference of outstanding shares-$1,678,040 1,658,270 Convertible preferred stock - Series D, no par value; 2,775 shares authorized; 1,563 shares issued and outstanding total liquidation preference of outstanding shares-$1,563,000 1,080,252 Convertible preferred stock - Series E, no par value; 2,675 shares authorized; 1,702 shares issued and outstanding total liquidation preference of outstanding-$1,702,000 1,352,775 Convertible preferred stock - Series F, no par value; 2,000 shares authorized; 2,000 shares issued and outstanding total liquidation preference of outstanding-$2,000,000 1,373,475 Convertible preferred stock - Series G, no par value; 1,000 shares authorized; 600 shares issued and outstanding total liquidation preference of outstanding shares-$600,000 562,500 Common stock, no par value; 18,500,000 shares authorized; 10,509,655 shares issued and outstanding - Additional paid-in-capital 37,339,920 Accumulated deficit (50,139,253) ---------- Total stockholders' deficit (6,742,049) ---------- Total liabilities and stockholders' deficit $ 189,335 ========== See accompanying notes to consolidated financial statements. F-2 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, ------------------------ 2002 2001 ---------- ------------ Net sales $ 1,984,745 $ 4,133,780 Cost of sales 398,234 631,746 ---------- ---------- Gross profit 1,586,511 3,502,034 ---------- ---------- Operating expenses: Payroll and related benefits 1,422,073 2,702,355 Other selling, general and administrative 591,657 1,055,366 ---------- ---------- Total operating expenses 2,013,730 3,757,721 ---------- ---------- Loss from operations (427,219) (255,687) ---------- ---------- Other income (expense): Interest and penalty expense (7,443) (15,742) Interest income - 132 Other 4,799,391 - ---------- ---------- Total other income (expense), net 4,791,948 (15,610) ---------- ---------- Income (loss) from continuing operations 4,364,729 (271,297) Discontinued operations: Gain on disposal of discontinued operations; net of tax 789,544 975,798 ---------- ---------- Net income 5,154,273 704,501 Accrual of cumulative dividends on preferred stock (535,371) (607,929) ---------- ---------- Net income (loss) attributable to common stockholders $ 4,618,902 $ 96,572 ========== ========== Basic and diluted loss per common share: Income (loss) from continuing operations $ 0.36 $ (0.09) Income (loss) from discontinued operations 0.08 0.10 ---------- ---------- Net income (loss) per common share $ 0.44 $ 0.01 ========== ========== Shares used in calculations: Basic and diluted 10,451,113 10,052,155 ========== ========== See accompanying notes to consolidated financial statements. F-3 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002 AND 2001
Preferred Preferred Preferred Preferred Preferred Stock A Stock B Stock D Stock E Stock F Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------------------------- Balance at December 31, 2000 63,956 $30,012 51,023 $1,658,270 1,563 $1,080,252 1,702 $1,352,775 2,000 $1,373,475 Net income - - - - - - - - - - Accrual of dividends on preferred stock - - - - - - - - - - ------------------------------------------------------------------------------------------- Balance at December 31, 2001 63,956 30,012 51,023 1,658,270 1,563 1,080,252 1,702 1,352,775 2,000 1,373,475 Common stock issued for acquisition - - - - - - - - - - Comon stock issued for services - - - - - - - - - - Common stock issued for options exercised - - - - - - - - - - Net income - - - - - - - - - - Accrual of dividends on preferred stock - - - - - - - - - - Accrual of penalties on preferred stock - - - - - - - - - - Forgiveness of dividends on preferred stock - - - - - - - - - - ------------------------------------------------------------------------------------------- Balance at December 31, 2002 63,956 $30,012 51,023 $1,658,270 1,563 $1,080,252 1,702 $1,352,775 2,000 $1,373,475 =========================================================================================== Additional Preferred Common Paid- Stock G Stock in Accumulated Shares Amount Shares Amount Capital Deficit Total Balance at --------------------------------------------------------------------------------- December 31, 2000 600 $562,500 10,052,155 $ - $ 40,595,613 $ (55,566,108) $(8,913,211) Net income - - - - - 704,501 704,501 Accrual of dividends on preferred stock - - - - - (607,929) (607,929) --------------------------------------------------------------------------------- Balance at December 31, 2001 600 562,500 10,052,155 - 40,595,613 (55,469,536) (8,816,639) Common stock issued for acquisition - - 350,000 - 33,250 - 33,250 Comon stock issued for services - - 100,000 - 62,000 - 62,000 Common stock issued for - - 7,500 - 1,171 - 1,171 options exercised Net income - - - - - 5,154,273 5,154,273 Accrual of dividends on preferred stock - - - - (711,379) - (711,379) Accrual of penalties on preferred stock - - - - (2,640,735) - (2,640,735) Forgiveness of dividends on preferred stock - - - - - 176,008 176,008 --------------------------------------------------------------------------------- Balance at December 31, 2002 600 $ 562,500 10,509,655 $ - $ 37,339,920 $ (50,139,255) $(6,742,051) =================================================================================
See accompanying notes to consolidated financial statements. F-4 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002 2001 Cash flows from operating activities: ------------------------ Loss from continuing operations $ (425,271) $ (250,180) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Stock, options, and warrants issued for services and payment of interest 63,171 - Extraordinary gain on forgiveness of debt 490,000 - Gain from change in management estimate - accrued liabilities of discontinued perations 4,300,000 - Depreciation and amortization 44,837 158,668 Loss on disposal of property and equipment 40,793 - Write off of note receivable - 164,000 Changes in operating assets and liabilities: Accounts receivable 583,865 (263,321) Inventories 554,865 (223,622) Prepaid expenses and other 71,680 7,554 Accounts payable (417,982) 353,736 Accrued liabilities, compensation and payroll taxes (1,441,831) (209,163) Accrued expenses 485,817 30 Deferred revenue (365,924) 232,110 ----------- --------- Cash provided by (used in) continuing operating activities 3,984,020 (30,188) ----------- --------- Income from discontinued operations 789,544 975,798 Adjustments to reconcile income from discontinued operations to net cash provided by (used in) discontinued activities: Net decrease in net liabilities of discontinued operations (4,718,158) (964,025) ----------- --------- Cash provided by (used in) discontinued operating activities (3,928,614) 11,773 Cash provided by (used in) operating activities 55,406 (18,415) ----------- --------- Cash flows from investing activities: Purchase of property and equipment (18,167) (34,365) ----------- --------- Cash used by investing activities (18,167) (34,365) ----------- --------- Cash flows from financing activities: Proceeds from long-term debt - 95,000 Payments of long-term debt (104,439) (5,072) ----------- --------- Cash provided by financing activities (104,439) 89,928 ----------- --------- Net increase (decrease) in cash (67,200) 37,148 Cash and cash equivalents at beginning of period 72,900 35,752 ----------- --------- Cash and cash equivalents at end of period $ 5,700 $ 72,900 =========== ========= Supplemental disclosure of cash flow information: Cash paid for: Interest $ - $ - =========== ========= Income taxes $ - $ - =========== ========= NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock in connection with acquisition $ 33,250 $ - =========== ========= Accrual of dividends payable $ 711,379 $ 607,929 ========== ========= Forgiveness of cumulative dividends on preferred stock $ 176,008 $ - ========== ========= See accompanying notes to consolidated financial statements. F-5 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business Global Maintech Corporation and subsidiaries (the "Company")supply the Virtual Command Center world class systems and services to data centers; manufactures and sells event notification software and provides professional services to help customers implement enterprise management solutions. Principles of consolidation The consolidated financial statements include the accounts of Global Maintech Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Recent Pronouncements In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This statement amends SFAS No. 13, "Accounting for Leases," to eliminate inconsistencies between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Also, this statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Provisions of SFAS No. 145 related to the rescission of SFAS No. 4 were effective for the Company on November 1, 2002 and provisions affecting SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on our financial statements. In July 2002, the FASB issued Statement No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." This Standard supercedes the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" (including "Certain Costs Incurred in a Restructuring"). SFAS No. 146 requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating this Standard. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based employee compensation as prescribed in SFAS 123, "Accounting for Stock-Based Compensation." Additionally, SFAS 148 required more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of this Statement are effective for fiscal years ending after December 15, 2002, with early application permitted in certain circumstances. The Company has adopted the disclosure provisions in these consolidated financial statements as disclosed under Stock Based Compensation. In November 2002, the FASB Issued FASB interpretation (FIN) No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other." FIN No. 45 requires guarantor to recognize, at the inception of a qualified guarantee, a liability for the fair value of the obligation undertaken in issuing or modified after December 31, 2002. Management does not expect adoption of this Interpretation to have a material impact on the Company's financial condition or results of operations. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-6 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories Inventories are stated on a first in, first out (FIFO) basis at the lower of cost or market. Property and equipment Property and equipment is recorded at cost and is comprised primarily of computer and office equipment. The Company uses the straight-line method of depreciation. Depreciation is provided based upon useful lives of the respective assets, which generally have lives of three to five years. Maintenance and repairs are charged to expense as incurred. Revenue recognition Revenue from product sales is recognized upon the later of shipment or final acceptance. Deferred revenue is recorded when the Company receives customer payments before shipment and/or acceptance or before maintenance and/or service revenues are earned. Under Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition" (as amended by SOP 98-4 and 98-9), the Company recognizes revenue from software sales when the software has been delivered (delivery is deemed to have occurred upon the later of shipment or final acceptance), if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable, and product returns are reasonably estimable. Maintenance and support fees related to software sales including product upgrade rights (when and if available) committed as part of new product licenses and maintenance resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period. Professional service revenue is recognized when services are performed. Revenues related to multiple element arrangements are allocated to each element of the arrangement based on the fair values of such elements. The determination of fair value is based on vendor specific objective evidence. If such evidence of fair value for each element (or the aggregate of the undelivered elements as allowed by SOP 98-9) does not exist, all revenue from the arrangement is deferred until such time that, for applicable elements of the arrangement, evidence of fair value does exist or until such elements are delivered. Research and development Research and development costs are expensed as incurred. 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. F-7 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Capitalized software development costs (Continued) The Company regularly reviews the carrying value of software development assets and a loss is recognized when the unamortized costs are deemed unrecoverable based on the estimated cash flows to be generated from the applicable software. Purchased technology and other intangibles The Company 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 were amortized over their estimated economic lives of three to five years using the straight-line method. Recorded amounts for purchased technology are regularly reviewed and recoverability assessed. The review considers factors such as whether the amortization of these capitalized amounts can be recovered through forecasted undiscounted cash flows. During the year ended December 31, 2000, the Company determined that its purchased technologies were impaired and recorded a charge to operations amounting to $3,659,851. Additionally, in year 2000, the Company discontinued operations of substantially all of its subsidiaries and accordingly, wrote off all remaining purchased technology to discontinued operations. Patents are stated at cost and are amortized over three years or over the useful life using the straight-line method. Recorded amounts for patents 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. Stock Based Compensation Financial Accounting Statement No. 123, Accounting for Stock Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. Fair value of financial instruments All financial instruments are carried at amounts that approximate estimated fair values. Income/Loss per common share Basic income/loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The net income/loss attributable to common stockholders is determined by increasing net loss by the accrual of dividends on preferred stock for the respective period and by the value of any embedded beneficial conversion feature present in issuances of preferred stock attributable to the respective period. F-8 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income/Loss per common share (Continued) Diluted income/loss per common share is computed by dividing the net income/loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding plus shares derived from other potentially dilutive securities. For the Company, potentially dilutive securities include (a) "in-the-money" stock options and warrants, (b) the amount of weighted average common shares which would be added by the conversion of outstanding convertible preferred stock and convertible debt, (c) the number of weighted average common shares which would be added upon the satisfaction of certain conditions with respect to arrangements involving contingently issuable shares, and (d) the number of weighted average common shares that may be issued subject to contractual arrangements entered into by the Company that may be settled in common stock or in cash at the election of either the Company or the holder. During 2002 and 2001, potentially dilutive shares were excluded from the diluted income/loss per common share computation as their effect was antidilutive. Income taxes Deferred taxes are provided on an asset and liability method for temporary differences and operating loss and tax credit carryforwards. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Reclassifications Certain amounts previously reported in 2001 have been reclassified to conform to the 2002 presentation. Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Accounts Receivable Accounts receivable consist of normal trade receivables. The Company assesses the collectability of its accounts receivable regularly. Based on this assessment, an allowance for doubtful accounts is recorded, if considered necessary. At December 31, 2002 no accounts receivable were considered past due or delinquent so an allowance for doubtful accounts was deemed unnecessary. F-9 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2 - BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern. During the year ended December 31, 2002 and 2001, the Company incurred a net loss from operations of $425,271 and $271,297, respectively. At December 31, 2002, the Company had a working capital deficit of $3,923,248 and a stockholders' deficit of $3,898,947. The Company implemented additional budgetary controls and established performance criteria to monitor expenses and improve financial performance. In addition, the Company negotiated with vendors and settled overdue payables. These actions are significant and their impact on future results is uncertain as of the date of the consolidated financial statements. In addition, the ability of the Company to attract additional capital if events do not occur as expected by the Company is uncertain. While the Company believes in the viability of its strategy to improve operating margins and believes in its financial plan to improve the Company's working capital position, there can be no assurances to that effect. NOTE 3 - DISCONTINUED OPERATIONS Breece Hill Technologies, Inc. On December 27, 1999, the Company approved a formal plan with regards to the disposal of its Breece Hill Technologies, Inc. subsidiary ("BHT"), which was acquired on April 14, 1999 and which formerly represented the Company's tape storage products business segment. Accordingly, the loss from the disposal of this segment and the financial position, results of operations and cash flows of BHT have been separately presented as discontinued operations, and eliminated from the continuing operations amounts in the accompanying consolidated financial statements and notes thereto. As a result of the Company approving a formal plan with regards to the disposal of BHT on December 27, 1999, the Company reported BHT's financial position, results of operations and estimated loss on disposal as discontinued operations in 2002 and 2001. During the year ended December 31, 2000, the Company recorded a gain from discontinued operations related to this subsidiary amounting to approximately $1,000,000. On December 22, 2000, the Company signed a foreclosure agreement with Hambrecht & Quist Guaranty Finance, LLC ("H&QGF"). In summary, the Company transferred all of the assets of BHT to the H&QGF in satisfaction of BHT's obligation to H&QGF in the amount of approximately $5,900,000. Additionally, there have been no claims made against the Company relating to this estimated liability. Accordingly, the Company reversed this estimated liability and recorded an extraordinary gain of $4,300,000 during the year ended December 31, 2002. As of December 31, 2002 and 2001, the Company has liabilities related to this discontinued operation of $ 0 and $4,200,000, respectively. F-10 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 -DISCONTINUED OPERATIONS (Continued) Asset Sale to MT Acquiring Corp The Company, GMI, and Magnum Technologies, Inc., a wholly owned subsidiary of GMI ("Magnum"), sold all of the business and properties used by GMI in connection with its business conducted under the Magnum name pursuant to an Agreement of Purchase and Sale of Assets made as of January 26, 2000 by and among MT Acquiring Corp., Tim Hadden, Greg Crow, GMI, Magnum and the Company. In the sale, MT Acquiring Corp. received properties and three software products used to provide network monitoring and analysis services: CAP-TREND, Coordinator and Advantage. MT Acquiring Corp. and it principals, Tim Hadden and Greg Crow, also received a release from GMI, Magnum and the Company for all claims arising out of the association of MT Acquiring Corp.'s principals with GMI, Magnum and the Company. In exchange for the foregoing, MT Acquiring Corp. and its principals released all claims against the Company, GMI and Magnum relating to the parties' activities before January 26, 2000, assumed various obligations and contracts related to the business, and delivered a subordinated promissory note payable to the Company in the amount of $214,000. The note bears interest at six percent annually and provides for four semi-annual payments of principal and interest from the date of the note until its maturity date of December 30, 2001. As of December 31, 2000, the note receivable balance amounted to $164,000, the balance of which was written off in 2001. Singlepoint Limited On May 27, 1999, the Company, through Singlepoint Systems, Inc, (SSI), acquired all of the outstanding stock of Singlepoint Limited ("SSI Ltd"), a distributor of SSI products and services. In return for the SSI Ltd shares, the Company paid $80,000. On August 10, 2000, the Company entered into a cancellation agreement with SSI Ltd. The purpose of this agreement was to cancel the original Share Purchase agreement, whereby SSI will cancel the purchase of shares from SSI Ltd. Net gains from discontinued operations related to SSI Ltd. amounted to $216,977. Lavenir assets and liabilities On September 29, 1999, the Company, through its GMI subsidiary, purchased substantially all the assets and rights to certain hardware and software products, trademarks and copyrights of Lavenir Technology, Inc., a California corporation ("Lavenir"), pursuant to an Agreement and Plan of Reorganization (the "Lavenir Agreement") by and among the Company, GMI and Lavenir. Subject to the Lavenir Agreement, the Company also assumed certain liabilities of Lavenir, including Lavenir's outstanding debt, ongoing leases, and contract obligations. The assets and rights acquired relate primarily to a suite of CAD/CAM software and certain hardware products sold for use in the printed circuit board industry. Under the terms of the Lavenir Agreement, the total purchase price of $5,300,000 is comprised of the following: (a) 266,000 shares of the Company's common stock initially paid to Lavenir on the closing date, (b) $400,000 originally in the form of a note payable due on January 31, 2000, and (c) additional shares of the Company's common stock issuable as of March 31, 2000 sufficient to cause the aggregate value of the shares previously issued and the original $400,000 liability to total $5,300,000 as of March 31, 2000. Accordingly, during 2000, the Company issued 404,085 shares of common stock in connection with this acquisition. F-11 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 -DISCONTINUED OPERATIONS (Continued) Lavenir assets and liabilities (Continued) In November 1999 the Company renegotiated the $400,000 liability due on January 31, 2000 to a $100,000 amount due on January 31, 2000 in return for 100,000 shares of the Company's common stock to be issued in January 2000. In connection with issuance of the 100,000 shares of common stock in 2000, the Company recorded interest expense amounting to $387,500. On June 3, 2002, the Company's board of directors determined it necessary to discontinue all the operations of its Lavenir subsidiary due to continuing development problems with its technology and continuing operating losses. For the period ended December 31, 2002, the Company has recorded gains from discontinued operations of $72,012 due to the disposition of this subsidiary. The remaining assets of the Lavenir subsidiary were liquidated. The funds were used to pay its employees for unpaid wages and to partially pay a secured creditor on an outstanding loan. NOTE 4 -INVENTORY At December 31, 2002, inventory consists of the following: Raw materials $ 264,311 Reserve for obsolete inventory (231,686) ------------ Total $ 32,625 ============ NOTE 5 -CAPITAL ASSETS At December 31, 2002, the Company's capital assets are comprised of the following: Property and equipment Computers and office equipment $ 503,946 Accumulated depreciation (481,758) ------------ Property and equipment, net $ 22,188 ============ Intangible assets Patents $ 69,826 Accumulated amortization (67,713) ------------ Intangible assets, net $ 2,113 ============ NOTE 6 - ACQUISITIONS Acquisition of Global Watch Product: On November 20, 2000, the Company purchased the right to its "Global Watch" product. Under the terms of the Global Watch Agreement, the total purchase price of $1,350,000 is comprised of the following: F-12 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 6 - ACQUISITIONS (Continued) (a) $1,350,000 cash which shall be paid by the Company at a rate of five percent of gross monies collected on purchase orders on every Global Watch product sold by the Company, and (b) 350,000 shares of the Company's common stock issuable as of November 20, 2000. These shares were issued in January 2002. Accordingly, the Company has included in accrued expense the fair market value of common shares issuable under this agreement of $33,250. As of December 31, 2002, the Company has reflected accrued consideration due under this agreement of $883,370, which has been included in accrued liabilities. Additionally, in connection with this agreement, the Company was to pay a minimum licensing fee of $125,000 per year. This fee has been waived by the seller and accordingly the seller has retained a security interest in Global Watch, entitling the seller to regain possession and all rights, title and interest in Global Watch. NOTE 7 - NOTES PAYABLE In May 1999, the Company entered into a loan and security agreement and has since executed certain amendments (collectively, the "1999 Debt Agreement") that provided for (a) a senior revolving loan maturing in May 2000, (b) a convertible term loan, and (c) a term loan. Various amendments were made to the 1999 Debt Agreement throughout 2000. Borrowings under the 1999 Debt Agreement were secured by all of the assets of the Company, exclusive of those of its BHT subsidiary. As of December 31, 1999, the Company was not in compliance with the 1999 Debt Agreement and had entered into certain forbearance agreements with the lender. These agreements established a forbearance period through March 31, 2000 during which, among other things, collection of accounts receivable was made through a bank lockbox and these proceeds were immediately applied to outstanding borrowings. Interest rates on borrowings subject to the 1999 Debt Agreement were increased 3% per annum, certain modifications to the borrowing base formula were in effect, and 50% of proceeds from equity issuances and 75% of proceeds from other debt issuances were to be paid to the lender. The Company was unable to comply with all of the terms of the forbearance agreements. On December 22, 2000, the Company signed a foreclosure agreement with Hambrecht & Quist Guaranty Finance, LLC. In summary, the Company transferred all of the assets of BHT to H&QGF in satisfaction of BHT's obligation to H&QGF under the loan agreement and other loan documents as discussed above in the amount of approximately $5,890,000. In December 1999, the Company issued $300,000 in short-term promissory notes. As discussed in Note 8, these promissory notes were converted to shares of Series D Convertible Preferred stock of the Company in January 2000. As a result of the 1999 transaction with Lavenir (see Note 6), the Company assumed certain equipment loans and notes payable. These loans and notes payable were repaid in full during the period ended December 31, 2002. F-13 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT Common Stock Issued In January 2002, the Company issued 350,000 shares of its common stock in connection with a prior acquisition dated November 20, 2000 for its Global Watch product. The shares were valued at $0.095 per share, the fair market value at the date of issuance. During March 2002, pursuant to the Plan, the Company granted and immediately exercised stock options for 100,000 shares of common stock in consideration of legal services rendered in connection with the Agreement. The Company did not receive any cash for the exercise of these options, and according reduced an accounts payable in the amount of $62,000 based on the fair market value of the common shares issued. In July 2002, 7,500 options to purchase shares of the Company's stock were exercise at $0.156 per share aggregating proceeds of $1,171. Authorized Shares of Common Stock On April 5, 2000, the shareholders of the Company approved an increase in the number of authorized shares of common stock to 18,500,000. As of December 31, 2002, the Company does not have enough authorized common shares to cover conversion of all of the outstanding warrants, options and preferred stock. Preferred Stock Series B Convertible Preferred Stock issuance: From late August 1998 until December 31, 1998, the Company sold 67,192 units in a private placement of securities. Each unit consisted of one share of Series B Preferred Stock (the "Series B Stock") and one warrant to purchase shares of common stock. The purchase price per unit was $32.50. Each share of Series B Stock entitles the holder thereof to receive an annual dividend equal to 8% of the per share purchase price. Beginning in February 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 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 $12.50 nor less than $3.75. The beneficial conversion feature present in the issuance of the Series B Stock as determined on the date of issuance of the Series B Stock totaled $562,392 and was treated as a reduction in earnings available (increase in loss attributable) to common stockholders over the period from the date of issuance of the Series B Stock to the earliest date such shares may be converted. All outstanding shares of Series B Preferred Stock will be automatically converted into common stock on September 23, 2001. As of December 31, 2002, no conversion had occurred. Each warrant issued in connection with the Series B Stock is a five-year callable warrant to purchase common stock at $16.25 per share. The number of shares of common stock for which the warrant in each unit will be exercisable is equal to the number of shares of common stock into which the associated share of Series B Preferred Stock contained in the unit will have been converted. In connection with the offering of the Series B Stock, the Company agreed to use its best efforts to register the shares of common stock underlying the Series B Stock and associated warrants and to pay a penalty if such registration was not effective by February 28, 1999. As a result, the Company incurred a penalty owed to the investors in the F-14 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) offering who have not formally waived this penalty 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 had been declared effective. During 2000 and 1999, the Company has accrued approximately $490,000 in such penalties. During the year ended December 31, 2000, certain Series B stockholders converted 609 Series B shares into 4,327 shares of common stock. Series C Convertible Preferred Stock issuance: On March 25, 1999, the Company issued 1,600 shares of its Series C Convertible Preferred Stock (the "Series C Stock") to certain accredited investors in a private offering. Sixty days after the issuance of the Series C Stock, each share of Series C Stock is convertible into that number of shares of common stock equal to the stated value of each such share ($1,000) divided by the lesser of $12.50 or 80% of the average of the three lowest closing bid prices of the Common Stock during the 15 trading days immediately preceding the conversion date. The beneficial conversion feature present in the issuance of the Series C Stock as determined on the date of issuance of the Series C Stock totaled $522,972 and was treated as a reduction in earnings available (increase in loss attributable) to common stockholders over the period from the date of issuance of the Series C Stock to the earliest date such shares may be converted. Holders of Series C Stock were entitled to receive dividends at an annual rate of 8% of the per share purchase price payable in either cash or shares of common stock, at the option of the Company. The number of shares of common stock issuable as a dividend payment will equal the total dividend payment then due divided by the conversion price calculated as of the date that the dividend payment is due. In addition, in connection with the Series C Stock offering, the Company also issued warrants to the investors to purchase 20,000 shares of common stock at $8.28 per share. A portion of the aggregate proceeds from the Series C Stock offering equal to the $135,288 fair value of these warrants was allocated to additional paid in capital. This fair value was determined by use of a Black- Scholes valuation model, considering the following assumptions: expected dividend yield 0%, risk-free interest rate of 5.5%, volatility of 112%, and expected warrant lives of five years. Additionally, in 1999, the Company issued 75 shares of Series C Stock to the placement agent in return for capital raising services and incurred $96,000 in other capital raising cost with respect to this private offering. In connection with the offering of the Series C Stock, the Company agreed to use its best efforts to register the shares of common stock underlying the Series C Stock and associated warrants and to pay a penalty if such registration was not effective 30 days after their issuance. As a result, the Company incurring a penalty owed to the investors equal to 1% of the purchase price of the shares for the first 30-day periods following April 25, 1999 and 3% for every 30-day period thereafter until the registration statement was declared effective. During 1999, the Company incurred approximately $400,000 in such penalties. In January 2000, the Company exchanged all outstanding Series C Convertible Preferred Stock by issuing Series D Convertible Preferred Stock. In connection with this transfer, all warrants associated with Series C Convertible Preferred Stock were cancelled. In connection with the transfer of Series C Stock to Series D Stock, the Company issued 120,000 shares of common stock and Series C investors waived all claims they may have against the Company for failure to register the Series C stock. F-15 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) Issuance of Series D Convertible Preferred Stock: On January 19, 2000, the Company issued 2,725 shares of Series D Convertible Preferred Stock ("Series D Stock") in a private placement. The shares were issued as follows: (1) 700 shares to new investors for $700,000 in the aggregate; (2) 300 shares to certain investors upon conversion of $300,000 of promissory notes issued by the Company; (3) 1,600 shares to the holders of the Company's then outstanding Series C Convertible Preferred Stock in exchange for all of their Series C shares; and (4) 125 shares to the placement agent, of which 75 shares were issued in exchange for all of the Company's Series C Stock held by the placement agent and of which 50 shares were compensation for placement agent services. At any time after the issuance of the Series D Stock, each share of Series D Stock is convertible into the number of shares of common stock calculated by dividing the per share purchase price of $1,000 by the conversion price. The conversion price equals the lesser of 75% of the average of the three lowest closing bid prices of the common stock during the 15 trading days immediately before the conversion date or $5.4375. The beneficial conversion feature present in the issuance of the Series D Stock as determined on the date of issuance of the Series D Stock totaled $2,386,830 of which $1,863,858 was treated as a reduction in earnings available (increase in loss attributable) to common stockholders upon the date of issuance of the Series D Stock since such shares may be converted at any time following issuance. The other $522,972 was attributed to Series C Stock and was treated as a reduction in earnings available to common stockholders in the year ended December 31, 1999. Holders of Series D Stock are entitled to receive dividends at an annual rate of 8% of the per share purchase price. The dividends are payable, upon conversion of the Series D Stock, in either cash or shares of common stock, at the option of the Company. The number of shares of common stock issuable as a dividend payment will equal the total dividend payment then due divided by the conversion price calculated as of the date that the dividend payment is due. In addition, in connection with the Series D Stock offering the holders of warrants issued in the Series C offering were issued warrants to purchase 20,000 shares of the Company's common stock in exchange for the warrants issued to them in the Series C offering. Each new warrant issued entitles its holder to purchase the Company's Common Stock at $8.30 per share at any time before the fifth anniversary of the date of issuance of the warrant. In conjunction with the Series D Stock offering, the Company also issued 30,000 shares of common stock to the Placement Agent and new Series D holders and 120,000 shares of Common Stock to the holders of the Series C Stock. The Company agreed to use its best efforts to file a registration statement with regard to sales of the shares of common stock underlying the Series D Stock and the warrants and to pay a penalty if such registration statement is not effective by the 120th day after issuance of the Series D Stock. This penalty is equal to 2% of the purchase price of the Series D Stock for the first 30-day period following such 120-day period and 3% of such purchase price for every 30-day period thereafter until the registration statement has been declared effective. The registration statement was declared effective July 24, 2000. During the year ended December 31, 2000, certain Series D shareholders converted 1,162 shares of Series D Stock into 1,850,371 shares of common stock. (See Note 12-Subsequent Events related to Modification Agreement signed by Preferred Shareholders.) Series E Convertible Preferred Stock issuance: On December 30, 1999, the Company issued 2,650 shares of its Series E Convertible Preferred Stock (the "Series E Stock") to certain accredited investors in a private offering. At any time after the issuance of the Series E Stock, each share of Series E Stock is convertible into that number of shares of common stock equal to the stated value of each such share ($1,000) divided by the lesser of $5.125 or 75% of the average of the three lowest closing bid prices of the Common Stock during the 15 trading days immediately preceding the conversion date. The beneficial conversion feature present in the F-16 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) issuance of the Series E Stock as determined on the date of issuance of the Series E Stock totaled $1,683,453 and is treated as a reduction in earnings available (increase in loss attributable) to common stockholders upon the date of issuance of the Series E Stock since such shares may be converted at any time following issuance. In February 2000, as a result of the Series F Convertible Preferred offering (see below), the 75% conversion factor included in the formula described above was changed to 70%. Holders of Series E Stock are entitled to receive dividends at an annual rate of 8% of the per share purchase price. The dividends are payable in either cash or shares of common stock, at the option of the Company. The number of shares of common stock issuable as a dividend payment will equal the total dividend payment then due divided by the conversion price calculated as of the date that the dividend payment is due. During the year ended December 31, 2000, certain Series E shareholders converted 973 shares of Series E Stock into 1,703,876 shares of common stock. In addition, in connection with the Series E Stock offering, the Company also issued warrants to the investors to purchase 50,000 shares of common stock at $6.375 per share. A portion of the aggregate proceeds from the Series E Stock offering equal to the $260,370 fair value of these warrants was allocated to additional paid in capital. This fair value was determined by use of a Black-Scholes valuation model, considering the following assumptions: expected dividend yield 0%, risk-free interest rate of 5.5%, volatility of 112%, and expected warrant lives of five years. The Company issued 25 shares of Series E Stock to the placement agent in return for capital raising services and incurred approximately $292,000 in other capital raising cost with respect to this private offering. (See below regarding the Modification Agreement signed by Preferred Shareholders). Issuance of Series F Convertible Preferred Stock: On February 23, 2000, the Company issued 2,000 shares of its Series F Convertible Preferred Stock (the "Series F Stock") to certain accredited investors in a private offering. At any time after the issuance of the Series F Stock, each share of Series F Stock is convertible into that number of shares of common stock equal to the stated value of each such share ($1,000) divided by the lesser of $6.75 or 75% of the average of the three lowest closing bid prices of the Common Stock during the 15 trading days immediately preceding the conversion date. The beneficial conversion feature present in the issuance of the Series F Stock as determined on the date of issuance of the Series F Stock totaled $1,291,429 and is treated as a reduction in earnings available (increase in loss attributable) to common stockholders upon the date of issuance of the Series F Stock since such shares may be converted at any time following issuance. All outstanding shares of Series F Stock will be automatically converted into Common stock on February 23, 2002. The holders of Series F Stock are entitled to receive dividends at an annual rate of 8% of the stated value ($1,000) of the Series F Stock, subject to the prior declaration or payment of any dividend to which the holders of the Company's Series A Stock, Series B Stock, Series D Stock or Series E Stock are entitled. Dividends on shares of the Series F Stock are cumulative, payable in either cash or shares of common stock, at the option of the Company, and are payable only upon conversion of the Series F Stock. In connection with such offering, the Company also issued warrants to the investors to purchase 50,000 shares of common stock. Each warrant is a five-year callable warrant to purchase common stock at $11.00 per share. Due to certain provisions in effect with respect to the Series E Stock offering, as a result of the Series F Stock offering, the conversion formula with respect to the Series E Stock was modified. Based upon this modification, an additional beneficial conversion feature was created with respect to the Series E Stock. F-17 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) The value of this additional conversion benefit of $311,510 was treated as a reduction in earnings available (increase in loss attributable) to common stockholders in the first quarter of 2000. The Company agreed to use its best efforts to file a registration statement with regard to sales of the shares of common stock underlying the Series F Stock and the warrants and to pay a penalty if such registration statement is not effective by the 120th day after issuance of the Series F Stock. This penalty is equal to 2% of the purchase price of the Series F Stock for the first 30-day period following such 120-day period and 3% of such purchase price for every 30-day period thereafter until the registration statement has been declared effective. As of the date of this report, the Company had not registered these shares. As of December 31, 2000, the Series F stockholders have waived all penalties related to the non-registration of these shares. (See below regarding the Modification Agreement signed by Preferred Shareholders.) Issuance of Series G Convertible Preferred Stock: On August 31, 2000, the Company issued 600 shares of its Series G Convertible Preferred Stock (the "Series G Stock") to certain accredited investors in a private offering for proceeds of $600,000. At any time after the issuance of the Series G Stock, each share of Series G Stock is convertible into that number of shares of common stock equal to the stated value of each such share ($1,000) divided by the lesser of $1.62 or 75% of the average of the three lowest closing bid prices of the Common Stock during the 15 trading days immediately preceding the conversion date. The beneficial conversion feature present in the issuance of the Series G Stock as determined on the date of issuance of the Series G Stock totaled $309,092 and is treated as a reduction in earnings available (increase in loss attributable) to common stockholders upon the date of issuance of the Series G Stock since such shares may be converted at any time following issuance. All outstanding shares of Series G Stock will be automatically converted into Common stock on August 1, 2002. The holders of Series G stock are entitled to receive dividends at an annual rate of 8% of the stated value ($1,000) of the Series G stock, subject to the prior declaration or payment of any dividend to which the holders of the Company's Series A Stock, Series B Stock, Series D Stock, Series E Stock, and Series F stock are entitled. Dividends on shares of the Series G Stock are cumulative, payable in either cash or shares of common stock, at the option of the Company, and are payable only upon conversion of the Series G Stock. In connection with such offering, the Company also issued warrants to the investors to purchase 62,000 shares of common stock at $1.62 per share and expires on August 31, 2005. A portion of the aggregate proceeds from the Series G Stock offering equal to the $37,500 fair value of these warrants was allocated to additional paid in capital. This fair value was determined by use of a Black- Scholes valuation model, considering the following assumptions: expected dividend yield 0%, risk-free interest rate of 5.5%, volatility of 48%, and expected warrant lives of five years. The Company agreed to use its best efforts to file a registration statement with regard to sales of the shares of common stock underlying the Series G Stock and the warrants and to pay a penalty if such registration statement is not effective by the 120th day after issuance of the Series G Stock. This penalty is equal to 2% of the purchase price of the Series F Stock for the first 30-day period following such 120-day period and 3% of such purchase price for every 30-day period thereafter until the registration statement has been declared effective. As of the date of this report, the Company had not registered these shares. As of December 31, 2000, the Series G stockholders have waived all penalties related to the non-registration of these shares. (See below regarding the Modification Agreement signed by Preferred Shareholders). F-18 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) In March 2002, the Company signed a Modification Agreement (the "Agreement") with its preferred series stock holders (the "Holders"). At the time of entry into the Agreement, the Company was in default of the Preferred Documents (as defined in the Agreement) for certain series of Preferred Shares, which defaults include, but were not limited to, (i) the Company's failure to register some or all of the shares of common stock into which the Preferred Shares are convertible and its failure to maintain the effectiveness of its registration statement which was declared effective on July 24, 2000, (ii) the Company's failure to authorize 200% of the shares of common stock into which, from time to time, the Preferred Shares were convertible into based on the Company's common stock price and (iii) the Company's failure to honor all of the conversion notices delivered by the Holders pursuant to the Preferred Documents (collectively the "Defaults"). In consideration for the Company's release of any and all claims against the Holders, the Holders have agreed to (A) rescind outstanding redemption and conversion notices delivered with respect to the Preferred Shares, (B) waive the Company's defaults (arising prior to the date of the Agreement) under each and every Preferred Document applicable to each Holder and waive any penalties accruing in connection with any such default, (C) waive any penalties accrued under the Registration Rights Agreements (the "Registration Agreements") (whether or not related to a default) and (D) amend the Preferred Documents applicable to each Holder as set forth below. The amendment to the Preferred Documents as set forth below and all waivers of defaults and penalties are conditional on the Company's compliance with the terms of the Agreement and the Preferred Documents as modified, and shall be null and void if the Company defaults under any of the terms and conditions of the Preferred Documents as modified by the Agreement. 1) The parties to the Agreement have agreed that the requirement to maintain authorized shares pursuant to the Preferred Agreements shall be satisfied (and the Company's default for failure to maintain sufficient authorized shares shall be waived) if the Company notices a shareholders' meeting to increase its authorized common stock as required by the Preferred Agreements on or before 60 days from the effective date of the Agreement, and obtains approval for such authorization from its shareholders on or before 180 days from the effective date of the Agreement. The Company's failure to either call said shareholders' meeting or obtain necessary shareholder authorization within the time frame stated shall be deemed a default, absent waiver. 2) The Holders have agreed that (i) they shall suspend conversions of the Preferred Shares for a period of six months from the date of the Agreement, (ii) during the period from six months to nine months after the date of the Agreement each Holder shall not convert more than one-third (1/3) of the Preferred Shares initially held by such Holder, (iii) during the period from nine (9) months to twelve (12) months after the date of the Agreement each Holder shall not convert more than an additional one-third (1/3) of the Preferred Shares initially held by such Holder, and (iv) commencing twelve (12) months after the date of the Agreement, there shall be no further restrictions on any Holder's right to convert Preferred Shares. However, shares issuable and relating to accrued dividends due shall not be convertible for two years from the date of the Agreement unless the Company is sold to a third party in which case such dividends shall become due and payable immediately and any and all other time restrictions agreed to by any party to the Agreement shall cease to exist. F-19 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) 3) The Holders have agreed that notwithstanding anything to the contrary in the Preferred Documents, the conversion formula for the Preferred Shares shall be modified as follows (all prices referred to below are being based upon the formula set forth in each of the applicable Preferred Documents for determining the "current market price" of the stock on the date a conversion notice is delivered by a Holder to the Company and for such purposes the current market price is deemed to be a minimum of one dollar ($1.00)): If the current market price is from: $1.00 to $1.24 the conversion discount shall equal 5% $1.25 to $1.49 the conversion discount shall equal 10% $1.50 to $1.74 the conversion discount shall equal 15% $1.75 to $2.00 the conversion discount shall equal 20% $2.00 and up the conversion discount shall equal 25% 4) Each Holder (individually and not in the aggregate) must limit its daily sales of the Company's common shares as follows: If the previous day's closing price for the Company's common stock is from: $1.00 to $1.24, each Holder's sales shall not exceed 15% of the previous three trading days average daily volume $1.25 to $1.74, each Holder's sales shall not exceed 20% of the previous three trading days average daily volume $1.75 and up, each Holder's sales shall not exceed 25% of the previous three trading days average daily volume 5) The Holders agreed to waive the accrual of dividends on the Preferred Shares and penalties which accrue from and after June 15, 2001. In connection with the Agreement, the Company recorded net income attributable to common shareholders due to the forgiveness of cumulative dividends on preferred stock amounting to $178,720 and an extraordinary gain from the forgiveness of penalties and interest of $490,000. 6) The Company has the right to exercise its redemption rights at a price per preferred share equal to (i) 110%, multiplied by (ii) the stated value plus accrued dividends through June 15, 2001. Redemptions shall occur pro rata among the different classes of preferred shares and pro rata among different holders of the same class of preferred shares. Except for the price adjustment provided for in the Agreement, the terms and conditions of any redemption shall otherwise be subject to each of the terms and conditions contained in the Preferred Documents Currently, the Company is default of this Modification Agreement. Accordingly dividends of approximately $1,420,000 and penalties of approximately $2,641,000 through December 31, 2002 have been recorded. F-20 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) Common stock warrants: During 2000, the Company issued warrants to purchase 162,000 shares of its common stock for $1.62-$11.00 per share in connection with the issuance of preferred series D, F and G. The following table summarizes the Company's warrants outstanding at December 31, 2002. Range of Weighted average exercise price Number exercise price --------------- --------- ----------------- $ 1.80-4.00 68,279 $2.09 5.40-8.30 1,219,696 7.24 9.00-13.00 256,336 10.44 16.25-20.63 595,268 18.38 --------- ----------------- 2,139,579 $ 10.55 =========== ================== Common stock options: The Company's 1999 Stock Option Plan (the "Plan") provides for granting to the Company's employees, directors and consultants, qualified incentive and nonqualified options to purchase common shares of stock. The plan provides options exercisable for a maximum of 1,200,000 shares of common stock to be granted. Both incentive and nonqualified stock options may be granted under the Plan. The exercise price of options granted pursuant to this plan is determined by a committee but may not be less than 100% of the fair market value on the day of grant. The term of each option is fixed by the committee; provided, however, that the term of an Incentive Stock Option shall not exceed ten years from the grant date. For holders of 10% or more of the combined voting power of all classes of the Company's stock, options may not be granted at less than 110% of the fair value of the common stock at the date of grant and the option may not exceed 5 years from the date of grant. During 2001, the Company granted options to purchase 892,500 shares of common stock to certain employees of the Company. The options are exercisable at per share prices ranging from $.16 to $.80 per share, which was the fair market value of the common stock at the grant date. Accordingly, under APB 25, no compensation expense was recognized. These options vest 50% one year from the date of grant and 50% two years from the date of grant. During January 2002, the Company granted options to purchase 265,000 shares of common stock to certain of its employees. The options are exercisable at per share prices ranging from $.15 to $.62, which was the fair market value of the common stock at the grant date. Accordingly, under APB 25, no compensation expense was recognized. These options vest 50% one year from the date of grant and 50% two years from the date of grant. On April 25, 2002, the Company filed a Form S-8 Registration Statement with the SEC for its Broadly Based 2002 Non-Statutory Stock Option Plan (the "Plan") dated March 19, 2002. Pursuant to the Plan, the Company registered 1,500,000 shares of its common stock underlying the up to 1,500,000 options, which may be granted pursuant to the Plan. With respect to the term "Broadly Based" it was the intention of the Company that the Plan comply, in all respects, with what is referred to as a "Broadly Based Plan" in NASDAQ Marketplace Rule 4350(i)(1)(A) and such other sections in the NASDAQ Marketplace Rules as may be applicable to "Broadly Based Plans". In that respect, it is understood and agreed as follows: a. Less than fifty percent (50%) of all options issued under the Plan may be issued to officers and directors of the Company; "officers" and "directors" being defined in the same manner as defined in Section 16 of the Securities Exchange Act of 1934 and; F-21 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) b. "Broadly Based" as defined means that at the end of three (3) years from the date of the Plan as amended at least fifty one percent (51%) of all options granted there under shall have been granted to "rank and file" personnel of the Company (i.e., persons who are not officers and directors as defined in "a" above) and that at the anniversary date of each succeeding year no less than 51% of all options granted shall have been granted to the aforesaid "rank and file". During March 2002, pursuant to the Plan, the Company granted and immediately exercised stock options for 100,000 shares of common stock in consideration of legal services rendered in connection with the Agreement. The Company did not receive any cash for the exercise of these options, and according reduced an accounts payable in the amount of $62,000 based on the fair market value of the common shares issued. In July 2002, 7,500 options to purchase shares of the Company's stock were exercise at $0.156 per share aggregating proceeds of $1,171. During 2001, the Company granted options to purchase 140,000 shares of common stock to consultants of the Company. The options are exercisable at per share prices ranging from $.45 to $.50 per share, which was the fair market value of the common stock at the grant date. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of each individual issuance of options with the following assumptions used for grants during the year ended December 31, 2001 and 2000: Since no options vest in 2001, no compensation expense has been recorded. The per-share weighted average fair value of stock options granted during 2001 and 2000 was $0.35 and $0.25, respectively, on the date of grant using the Black-Scholes pricing model and the following assumptions: Years Ended December 31, 2002 2001 ------- ------ Expected dividend yield 0% 0% Risk-free interest rate 4.25% 5.0% Annualized volatility 97% 150% Expected life, in years 5 5 Stock option activity for the years ended December 31, 2001 and 2000 is summarized as follows: Number of Weighted average shares exercise price ---------- ---------------- Outstanding at December 31, 2000 2,466,150 0.82 Granted 892,500 0.35 Exercised (-) 0.00 Canceled (16,000) 2.50 ---------- ---------------- Outstanding at December 31, 2001 3,342,650 0.45 Granted 265,000 0.54 Exercised (115,000) 0.56 Canceled - - --------- ---------------- Outstanding at December 31, 2002 3,492,650 0.43 ========= ================ F-22 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - STOCKHOLDERS' DEFICIT (Continued) The following table summarizes the Company's stock options outstanding at December 31, 2002: Options outstanding Options exercisable --------------------------------- ------------------------- Weighted Weighted Weighted average average average Range of remaining exercise exercise exercise price Number life price Number price ---------------- --------- --------- -------- ---------- -------- $ 0.16-0.80 3,393,500 4.00 $ 0.20 2,901,250 $ 0.51 6.25-7.50 64,150 3.00 7.40 64,150 7.40 7.65-10.00 35,000 2.00 9.55 35,000 9.55 --------- ---------- 3,492,650 3,000,400 ========= ========== The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock options. As a result no compensation expense has been recognized for employee and director stock options. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss would have been reported as follows: Years Ended December 31, 2002 2001 --------------- --------------- Net Income: As reported $ 4,653,718 $ 704,501 Pro forma 4,593,718 704,501 Diluted income (loss) per common share: As reported $ .45 $ .01 Pro forma .44 .01 NOTE 9 - INCOME TAXES At December 31, 2001, the Company had a net operating loss carryforward of approximately $40 million. The net operating loss carryforward may be subject to an annual limitation as defined by Section 382 of the Internal Revenue Code. Current and future equity transactions could further limit the net operating losses available in any one year. The tax effects of temporary differences from continuing operations that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2001 are shown as follows: Deferred tax assets: Write-downs of intangible assets $ 1,900,000 Allowance for doubtful accounts 40,000 Net operating loss carryforward 8,970,000 ----------------- 10,910,000 Less valuation allowance (10,910,000) ----------------- $ -0- ================= The total deferred tax assets indicated above do not include approximately a $5 million deferred tax asset attributable to discontinued operations. F-23 GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9 - INCOME TAXES (Continued) Additionally, the valuation allowance indicated above does not include a valuation allowance of $5 million attributable to discontinued operations used to completely offset the deferred tax asset attributable to discontinued operations. A valuation allowance is required to reduce a potential deferred tax asset when it is likely that all or some portion of the potential deferred tax asset will not be realized due to the lack of sufficient taxable income. The Company has reviewed its taxable earnings history and projected future taxable income. Based on this assessment, the Company has provided a valuation allowance for the portion of the deferred tax assets that will likely not be realized due to lack of sufficient taxable income in the future. For the years ended December 31, 2002 and 2001, there was no income tax provision. The income tax expense (benefit) from continuing operations differed from the amounts computed by applying the U. S. federal income tax rate of 34% as a result of the following: Years Ended December 31, 2001 2000 ---------------- ---------------- Expense (benefit) at statutory rate $ (85,061) $ (3,405,148) State income tax expense (benefit), net of federal (10,007) (400,606) Change in valuation allowance 95,068 3,805,754 ---------------- ---------------- Actual tax expense (benefit) $ - $ - ================ ================ NOTE 10 - OPERATING LEASES The Company has one month-to-month operating lease for office space. The rental payments under this lease are charged to expense as incurred. This lease provides that the Company pay taxes, maintenance, insurance, and other operating expenses applicable to the lease. Lease expense in 2002 for the Bloomington, Minnesota headquarters office was $32,280 for the years ended December 31, 2002 and 2001, respectively. NOTE 11 - LITIGATION The Company was named as a defendant is various lawsuits due to non-payment of vendor invoices. The Company is currently trying to negotiate settlements with these vendors. F-24 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. The Company had a change in registrant's certifying accountant filed as an 8-K, on September 13, 2002 and incorporated herein by reference. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES The directors, executive officers and significant employees of the Company are as follows: NAME AGE POSITION ------------------------- --- ----------------------------------- Wild Cat Management, Inc., Chief Executive Officer, through Dale Ragan (1) 58 Chairman of the Board, and Director William A. Erhart 51 Director Sue Korsgarden 42 Chief Accounting Officer -------------------------- (1) Mr. Ragan serves pursuant to an agreement between the Company and Wild Cat Management, Inc., of which Mr. Ragan is President. The agreement provided that Mr. Ragan will act as the Company's Chief Executive Officer for a period of one year; this term expired in January of 2002, and as Chairman of the Board of Directors of the Company for a period of two years; this term expired in January of 2003. Negotiations for continuance of services remain an open issue. Mr. Ragan has been a long time investor in the Company and brings with him over 25 years of management experience in the private sector, as well as his experience as a venture capitalist specializing in small capitalization public companies. One of the companies he co-founded was listed in Inc. Magazine in 1988 as twenty-fifth out of the top 100 fastest growing privately owned companies in the United States. At that time, his company had grown over 6000% in five years. William A. Erhart. Mr. Erhart is a member of the law firm of Erhart & Associates, L.L.C. and has served as a director of the Company since January 2001. Mr. Erhart has broad experience in general business litigation, corporate, and general practice, and has litigated with the Federal Trade Commission and attorney general offices. He serves as general outside counsel for Alpine Industries, Inc., a Tennessee corporation, and as general counsel for the Company. Most recently, Mr. Erhart was appointed by Governor Jesse Ventura for a four-year term to the Metropolitan Airports Commission. Sue Korsgarden. Ms. Korsgarden has served as the Company's Chief Accounting Officer since March 2001. She has a background in Business Management, Accounting and Credit Management and previously worked for ten years in the management department of A.H. Bennett Company, a roofing distributor. Prior to February 19, 1999, the Board did not have any standing audit, compensation, stock option or nominating committees. On February 19, 1999, the Board established an Audit Committee and a Compensation Committee. The Company has since ceased using its Audit and Compensation Committees. The Company at present does not pay any director's fees. The Company may reimburse its outside directors for expenses actually incurred in attending meetings of the Board. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company's directors, certain officers, and persons who own more than 10% of a registered class of the Company's equity securities file reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with the Securities and Exchange Commission (the "SEC"). Such officers, directors and 10% shareholders are also required by the SEC's rules to furnish the Company with copies of all Section 16(a) reports filed by them. 14 Specific due dates for such reports have been established by the SEC and the Company is required to disclose in this annual report on Form 10-KSB any failure to file such reports on a timely basis. Based solely on its review of the copies of such reports received by it or by written representations from certain reporting persons, the Company believes that no Section 16(a) filing requirements applicable to its officers, directors and 10% shareholders were complied with during the fiscal year ended December 31, 2002. ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table provides the cash compensation awarded to or earned by the Chief Executive Officer of the Company. No other executive officer earned salary and bonus in excess of $100,000 during the fiscal year ended December 31, 2002. SUMMARY COMPENSATION TABLE Annual Compensation ------------------------- Name and Principal Position Year Salary ($) --------------------------- ---- ---------- Wild Cat Management, Inc., 2002 -0- through Dale Ragan 2001 $1 (2) Chief Executive Officer (1) 2000 -0- -------------------------------------- (1) Dale Ragan became the Company's Chief Executive Officer in January 2001 pursuant to an employment agreement dated December 20, 2000 between the Company and Wild Cat Management Inc. (Wild Cat), of which Mr. Ragan is President, under which Wild Cat agreed to provide the Company with the services of a chief executive officer. Pursuant to the employment agreement, all compensation for Mr. Ragan's services was paid to Wild Cat. See "Employment Agreements," below. (2) The agreement provided that Mr. Ragan would act as the Company's Chief Executive Officer for a period of one year, and as Chairman of the Board of Directors of the Company for a period of two years. Both terms have expired but Mr. Ragan continues to act in both capacities. The agreement provided for a salary of $1 over the term of the agreement, and provided that Wild Cat would receive, in lieu of salary and as compensation for services rendered since approximately November 1, 2000 and continuing into the future, stock options to purchase common stock at $0.16 per share, in the amount of 500,000 options upon signing, 750,000 on June 20, 2001, and 750,000 options on December 20, 2001. All options are five-year options. The agreement is discussed further in "Employment Agreements" and "Item 12. Certain Relationships and Related Transactions," below. STOCK OPTIONS The Company made no individual grants of stock options to any person named in the "Summary Compensation Table" above in the year ended December 31, 2002, and no stock appreciation rights were granted or exercised during that period. AGGREGATE OPTION EXERCISES IN FISCAL YEAR 2002 AND YEAR END OPTION VALUES There were no stock option exercises in fiscal year 2002 by any person listed in the "Summary Compensation Table" above. The following table summarizes the value of the options held as of December 31, 2002 by the individual listed in the Summary Compensation Table, above. Value of Shares Unexercised Unexercised Acquired Options at In-the-Money on Value December Options at Exercise Realized 31, 2002 December 31, Name (#) ($) (#) 2002 ($) ----------------------- -------- -------- ----------- ------------ Wild Cat Management - - 2,000,000 $40,000 (1) /Dale Ragan ------------------- (1) The strike price of the options is $0.16 per share. The value of $40,000 assumes a fair market value per share of the Company's common stock of $0.18, the closing price as reported by OTCBB on December 31, 2002. 15 EMPLOYMENT AGREEMENTS On November 8, 2000, the Company's Board of Directors approved the engagement of Wild Cat Management, Inc. ("Wild Cat") to advise the Board. On December 20, 2000, the Company entered into a Stock Option Agreement (the "Agreement") with Wild Cat wherein Wild Cat agreed to provide services to fulfill the functions of CEO and/or Chairman of the Board until the earlier of two years following the date of the Agreement or a change in control of the Company (as defined in the Agreement). In January 2001, the Board appointed Wild Cat to act, through its president Dale Ragan, as Chief Executive Officer of the Company. Wild Cat received $1 salary over the term of the Agreement. Additionally, as compensation for services rendered since approximately November 1, 2000 and continuing into the future, Wild Cat was granted an option to purchase 2,000,000 shares of common stock at $0.16 per share, vesting as follows: 500,000 upon signing, 750,000 on June 20, 2001, and 750,000 on December 20, 2001. All options are five-year options. The Agreement does not confer upon Wild Cat any right with respect to continued employment, nor does it interfere in any way with the right of the Company to terminate such employment at any time. Such agreement has expired. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The tables below set forth information regarding the beneficial ownership of the Company's capital stock, as of March 25, 2003, by (1) each person known to the Company to be the beneficial owner of 5% or more of any class of the Company's voting securities, (2) each of the Company's directors, (3) each of the Company's named executive officers and (4) the directors and executive officers of the Company as a group. Beneficial ownership is determined in accordance with the rules of the SEC, and includes generally the voting and investment power of the securities. Shares of common stock or preferred stock issuable upon exercise or conversion of options, warrants, or other securities currently exercisable or exercisable within 60 days of the date of determination are deemed outstanding for purposes of computing the percentage of shares beneficially owned by the person holding those options, warrants, or other securities, but are not deemed to be outstanding for purposes of computing the percentage for any other person. Each person identified below has sole voting and investment power of all shares of common stock and preferred stock shown as beneficially owned by that person. The following table provides information about the beneficial ownership of the Company's common stock as of March 25, 2003 by each director, each executive named in the Summary Compensation Table above, and by all directors and all executive officers as a group. The amounts set forth in the column entitled "Number of Shares Beneficially Owned" include shares set forth in the column entitled "Number of Shares Beneficially owned as a Result of Options Exercisable Within 60 Days of March 25, 2003." Number of Shares Beneficially Owned as Number of Percentage of a Result of Options Shares Shares Exercisable Within 60 Name and Address of Beneficially Beneficially Days of Beneficial Owner (1) Owned (2) Owned(3) March 25, 2003 ------------------------ ------------ -------------- --------------------- Wild Cat Management Inc. 2,000,000 16.1 2,000,000 William Erhart 125,000 1.2 125,000 All executive officers and directors as a group (3 persons) 2,125,000 17.0 2,125,000 ----------------- (1) Unless otherwise indicated, the address of each of the above is c/o 7836 Second Avenue South, Suite 1, Bloomington, Minnesota 55420. (2) The number of shares of the Company's no par value common stock outstanding as of March 25, 2003 was 10,509,655. (3) Shares not outstanding but deemed beneficially owned by virtue of the right of an individual to acquire them within 60 days of March 25, 2003 are treated as outstanding only when determining the amount and percent owned by such individual or group. 16 The following table provides information about the beneficial ownership of the Company's common stock as of March 25, 2003 by each shareholder known to the Company to own beneficially more than 5% of any class of the Company's voting securities. Convertible Preferred Stock Common Stock --------------------------- -------------------------- Number Percentage Percentage of Name and Address of of of Shares Number of Shares of Beneficial Owner (1) Series Shares of Series Shares Common Stock(2) - ---------------------- ------ ------ ---------- --------- --------------- Donald Fraser .......... A 26,670 41.7 26,670 (3) James Lehr ............. A 10,670 16.7 10,670 (3) Donald Hagen ........... A 5,335 8.3 5,335 (3) Henry Mlekoday ......... A 6,670 10.4 6,670 (3) Douglas Swanson ........ A 6,670 10.4 6,670 (3) Aaron Boxer Rev Trust u/a dtd 8/1/89 ....... B 3,446 6.8 311,097 (3) Industricorp & Co. ..... FBO 1561000091 ....... B 5,000 9.8 451,389 (3) John O. Hanson ......... B 6,150 12.1 555,208 5.02% Crow 1999 CRUT ......... B 3,385 6.6 305,590 (3) Amro International S.A. Ultra Finance (4) D 200 12.8 2,051,282 16.33% Esquire Trade & Finance Inc. ......... D 444 28.4 4,553,846 30.23% Austinvest Anstalt Balzers .............. D 444 28.4 4,553,846 30.23% Garros Ltd. ............ D 350 22.4 3,589,744 25.46% Intercoastal Financial Corp. ...... D 125 8.0 1,282,051 10.87% Greenfield Capital Partners ............... E 100 5.9 1,025,641 8.89% Nash, LLC .............. E 1,557 91.5 15,969,231 60.31% G 600 100.0 6,153,846 36.93% RBB Bank Aktiengeselischaft ... F 2,000 100.0 20,512,821 66.12% ------------ (1) Unless otherwise indicated, the address of each of the above is c/o 7836 Second Avenue South, Suite 1, Bloomington, Minnesota 55420. (2) Percent of class calculation is based on 10,509,655 shares of Common Stock outstanding as of March 25, 2003. UPDATE (3) Less than 5% (4) The address of Amro International S.A. Ultra Finance is Grossmuenster Platz #6, Zurich CHB022, Switzerland. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company signed an employment agreement with Wild Cat under which Wild Cat provided the services of a chief executive officer and president and has been granted, as compensation for such services and for other services rendered an option to purchase a total of 2,000,000 shares of the Company's common stock at a strike price of $0.16 per share. Wild Cat provided these services through its president, Dale Ragan, who is a director of the Company. Dale Ragan, through Wild Cat continues to serve beyond the time frame of this agreement and negotiations for compensation continue to be an open issue. William A. Erhart, a director of the Company, is a member of the law firm of Erhart & Associates, L.L.C., and the Company's corporate legal counsel. 17 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Index of Exhibits. Exhibit NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 2 Agreement and Plan of Merger dated March 5, 1999, among the Company, Global MAINTECH, Inc. ("GMI"), BHT Acquisition, Inc., and Breece Hill Technologies, Inc. (incorporated by reference to Exhibit 2.2 to the Company's Form 10-KSB for the year ended December 31, 1998). 3.1 Bylaws of the Company, as amended (incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-34894)). 3.2 Third Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 4.1 Form of Certificate of the Company Series A Convertible Preferred Stock (incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1994 (File No. 0-14692)). 4.2 Form of Certificate of the Company's Common Stock following change of corporate name (incorporated by reference to Exhibit 4.5 to the Company's Form 10-KSB for the year ended December 31, 1995 (File No. 0-14692)). 4.3 Form of Preferred Stock and Warrant Purchase Agreement, including Registration Rights exhibit thereto, relating to sale of Series B Convertible Preferred Stock and Callable Common Stock Warrants during the fourth quarter of 1998 (incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form SB-2 filed with the SEC on February 17, 1999 (File No. 333-72513)). 4.4 Common Stock and Series B Preferred Stock Purchase Agreement dated as of February 3, 2000 by and among the Company, GMI, Tandberg Date ASA, Hambrecht & Quist Guaranty Finance LLC, Greyrock Capital, and Cruttenden Roth (incorporated by reference to Annex C to the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on March 15, 2000). 4.5 Form of Certificate of the Company's Series B Convertible Preferred Stock (incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form SB-2 filed with the SEC on February 17, 1999 (File No. 333-2513)). 4.6 Form of Series D Convertible Preferred Stock Purchase Agreement, including Registration Rights Agreement and Common Stock Purchase Warrant attached as exhibits thereto (incorporated by reference to Exhibit 4.10 to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736)). 4.7 Form of Certificate of the Company's Series D Convertible Preferred Stock (incorporated by reference to Exhibit 4.11 to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736)). 4.8 Form of Securities Purchase Agreement for Series E Convertible Preferred Stock, including Registration Rights Agreement and Common Stock Purchase Warrant attached as exhibits thereto (incorporated by reference to Exhibit 4.12 to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736)). 4.9 Form of Certificate of the Company's Series E Convertible Preferred Stock (incorporated by reference to Exhibit 4.13 to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736)). 4.10 Form of Securities Purchase Agreement for Series F Convertible Preferred Stock, including Registration Rights Agreement and Common Stock Purchase Agreement (incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 18 4.11 Form of Certificate of the Company's Series F Convertible Preferred Stock (incorporated by reference to Exhibit 4.16 to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736)). 4.12 Form of Securities Purchase Agreement for Series G Convertible Preferred Stock, including Registration Rights Agreement and Common Stock Purchase Agreement (incorporated by reference to Exhibit 4.12 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 4.13 Form of Certificate of the Company's Series G convertible Preferred Stock (incorporated by reference to Exhibit 4.13 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 4.14 Modification Agreement and Release, dated March 18, 2002, by and among Nash, LLC, Greenfield Capital Partners, LLC, RBB Bank Aktiengeselischaft, Amro International, S.A., Austinvest Anstall Balzers, Esquire Trade & Finance, Inc., Garros, Ltd., Intercoastal Financial Services Corp. and the Company (incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001). 10.1 Global MAINTECH Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001). 10.2 Asset Purchase Agreement, dated November 1, 1998, by and among GMI, the Company, SinglePoint Systems, Inc. and Enterprise Solutions, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on December 23, 1998). 10.3 Sublease Agreement, dated April 18, 2001, by and between Global MAINTECH Corporation and Minnesota News Service, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.4 Extension of Lease, dated July 23, 1999, by and between Pleasant Hill Industrial Park Associates and Lavenir Technology, Inc. (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.5 Separation Agreement and General Release, dated August 4, 2000, by and between the Company and James Geiser (incorporated by reference to the Company's Registration Statement on Form SB-2 filed with the SEC on March 3, 2000 (File No. 333-31736). 10.6 Rescission and Settlement Agreement, dated December 20, 2000, by and among Singlepoint Systems Corporation (now Global MAINTECH Corporation), Global MAINTECH, Inc. (formerly a wholly-owned subsidiary of Singlepoint Systems Corporation), Singlepoint Systems, Inc. (formerly a wholly-owned subsidiary of Global MAINTECH, Inc.), Enterprise Solutions Inc., Stewart Trent Wong, and Desi Dos Santos (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.7 Stock Option Agreement with Wild Cat Management, Inc., dated December 20, 2000 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.8 Stock Option Agreement with William Erhart dated December 20, 2000 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10.9 Agreement for the Purchase and Sale of Global Watch dated as of November 20, 2000, by and between the Company and Dabew, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001) 10.10 Global MAINTECH Corporation 2002 Stock Option (incorporated by reference to Exhibit 4 to the Company's Form S-8 filed April 25, 2002) 99.1 Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley act of 2002. 99.2 Certification by Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley act of 2002. 19 (b) Reports on Form 8-K Form 8-K filed on September 13, 2002 pursuant to item 8 thereof. ITEM 14. CONTROLS AND PROCEDURES. Our Chief Executive Officer and Chief Accounting Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures for us. Based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing of this Annual Report, and subject to the limitations noted hereinafter, the Certifying Officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this Annual Report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure. The Certifying Officers have also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses. Our management, including each of the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and their can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Global MAINTECH Corporation Dated: May __, 2003 By: /s/ Dale Ragan ----------------------------------------- Wild Cat Management, Inc., by Dale Ragan, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Dale Ragan -------------------------- Chief Executive Officer, May __, 2003 Wild Cat Management, Inc., Director (principal by Dale Ragan executive officer) /s/ Sue Korsgarden -------------------------- Chief Accounting Officer May __, 2003 Sue Korsgarden (principal financial officer and principal accounting officer) /s/ William A. Erhart -------------------------- Director May __, 2003 William A. Erhart 21 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Global MAINTECH, Corporation on Form 10-KSB for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof, I, Dale Ragan, the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that: 1. I have reviewed this annual report on Form 10-KSB of Global MAINTECH, Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Dale Ragan ---------------------- Name: Dale Ragan Title: CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Global MAINTECH, Corporation on Form 10-KSB for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof, I, Sue Korsgarden, the Chief Accounting Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that: 1. I have reviewed this annual report on Form 10-KSB of Global MAINTECH, Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Sue Korsgarden ------------------ Name: Sue Korsgarden Title: Chief Accounting Officer