<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 5, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _________________
Commission file number 0-16172
COMPUTONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2472952
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Northmeadow Parkway, Suite 150, Roswell, Georgia 30076
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 475-2725
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
On July 5, 1996, the aggregate market value (based on the closing sales price on
that date) of the voting stock held by non-affiliates of the Registrant was
$6,946,510.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 6,357,184 shares of Common
Stock outstanding on July 5, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
COMPUTONE CORPORATION
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I.
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III.
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Related Transactions 24
</TABLE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
Signatures 31
2
<PAGE>
PART I
Item 1. Business.
- ------- --------
(a) General Development of Business.
-------------------------------
The Company was incorporated as a Delaware corporation in 1987 under the
name CPX, Inc. In August 1987, the Company acquired certain operating divisions
of Computone Systems Incorporated pursuant to an order of the United States
Bankruptcy Court for the Northern District of Georgia, and simultaneously
changed its name to Computone Systems Incorporated. In May 1988, the Company
changed its name to World-Wide Technology Inc. In May 1991, the Company changed
its name from World-Wide Technology Inc. to Computone Corporation.
During its fiscal year ended April 5, 1996, there were no material
developments in the Company's business. See, however, Part III hereof.
(b) Financial Information about Industry Segments.
---------------------------------------------
The Company is of the opinion that all of its operations are within one
industry segment and that no information as to industry segments is required
pursuant to Statement of Financial Accounting Standards No. 14 or Regulation
S-K.
(c) Narrative Description of Business.
---------------------------------
Current Business
The Company designs, manufactures and markets hardware and software
communications connectivity products for business and industrial systems using
personal computers, servers and workstations. During fiscal 1996, the Company
has introduced products that provide remote access communications to corporate
Local Area Networks ("LANs") and the Internet. These communication server
products address the fast growing Internet connectivity market as well as the
remote communications requirements of corporations with multiple offices, remote
and traveling personnel, and telecommuting. Other principal Company products are
multi-port communications adapters ("subsystems") that manage the flow of data
between serial devices (e.g., terminals, printers and modems) and the central
processing unit ("CPU") of a host computer.
Based on management's assessment of its current product line versus that
of its competition, the Company believes that it has consistently been among the
first to market with innovative technology and enhancements. The Company's
remote access and multi-user connectivity products are the result of a carefully
balanced approach to hardware and software development. High performance
hardware is enhanced by software that has been field proven for over 12 years.
The Company was recently awarded, in May 1996, Arthur Andersen's prestigious
"Fast Tech 50" award for the fourth consecutive year.
The remote access market is a dynamic segment of the networking industry
and is exploding with opportunity. Companies have realized that in order to
stay competitive in the global marketplace, they have either adopted or plan to
adopt a remote access solution. According to the 1995 InfoWorld Remote Access
study, 73% of employees conduct work from home after regular business hours, 48%
are business travelers, 42% are from the mobile workforce such as sales and
technical support personnel, 35% are telecommuters and 26% are employees in
small branch offices.
Universal remote access addressess the needs of both Internet and
intranet users. The Internet is the interconnected public global network of
separate networks that are capable of passing information via a common set of
internet protocols. An intranet is a private network based on these same
Internet protocols but is protected from the public internet by a firewall. The
firewall prevents any unwanted intrusion into the network by anyone outside the
firewall.
3
<PAGE>
The Internet has experienced explosive growth over the last several years
as indicated by the 25 fold growth in the past five years of Internet Hosts, or
connected computers. It is anticipated that this growth will continue at least
until the year 2000. The intranet server market is nearly twice as large as the
Internet server market. The anticipated growth in the Internet server market is
142% from 1996 to 1998 and 390% from 1998 to the year 2000 while the intranet
server market is anticipated to grow 122% from 1996 to 1998 and 404% from 1998
to the year 2000. This information was obtained from the Merrill Lynch
publication "I'Net Computing" dated July 17, 1996.
With the significant growth opportunities in the remote access area in
mind, the Company re-positioned itself from a sales perspective to take
advantage of these opportunities. These remote access products allowed the
company to compete for and obtain significant orders directly from Value Added
Re-sellers "VAR's" and large major corporations. This positioning required the
company to increase its direct domestic VAR sales channel from 1,280 at the
beginning of the fiscal year to 1,822 at the end of the fiscal year while its
number of domestic distributors decreased from 14 at the beginning of the fiscal
year to 6 at the end of the fiscal year. Management believes that the focus of
sales of remote access products towards VAR's and large major customers versus
distributors is necessary because of the requirement to provide technical
support for these products. While sales through the distribution are made at a
greater discount than through other channels, the level of support that needs to
be provided to the distribution channel would certainly be greater than to
other channels and therefore not as cost effective. Conversely, customers in
the VAR and major account channels are, in general, more technically competent
and require a lesser degree of technical assistance. Further, management
believes that margins tend to be higher with sales to VAR's than to
distributors as a result of the lesser degree of discounting. Additionally,
management believes that with 6 domestic distributors, it has the proper number
of distributors required to go forward with its sales objectives. With the
increased number of VAR's in its sales channel, management believes that the
greater number provides management with a better opportunity to also meet these
sales objectives. The mix of domestic distributors includes distributors that
operate on both national and regional levels. The additional costs of doing
business with distributors versus VAR's and major customers, such as techical
support, co-op advertising and pricing discounts, support management's decision
to maintain a domestic distribution customer base at its current level.
During the 1995 fiscal year, the Company had sales of approximately
$921,000 in rermote access products, or 6% of net revenues. During the 1996
fiscal year, sales of remote access products grew to approximately $1,936,000,
or 20% of net revenues. The Company estimates that during fiscal 1997, sales of
remote access products will grow to over $4,000,000.
Remote access markets are addressed by both the new communication server
products and traditional multi-port products of the Company. The new
communication server products, the IntelliServer family, provide a workstation
caliber hardware platform by incorporating a high performance RISC CPU, large
system memory and high speed serial communication devices. IntelliServer
software incorporates a UNIX-like operating system and LAN remote access and
network protocol support. The IntelliServer supports industry standard TCP/IP
network protocols.
The majority of the Company's multi-port systems are intelligent devices
that incorporate on-board processors, memory chips and related circuitry, which
allows the multi-port subsystem to manage efficiently the flow of data to and
from the host computer, relieving the host computer's CPU of most input/output
("I/O") functions and enhancing overall performance.
The Company's multi-port products are now available on today's most
popular computer platforms (new PCI compatible systems, ISA systems (IBM PC AT-
compatible), EISA-compatible and IBM Micro Channel-compatible systems) and a
large number of industry-standard operating systems (SCO UNIX, Unixware,
Solaris, UNIX derivatives, Xenix, Microsoft WindowsNT, IBM OS/2, DOS, and Multi-
User DOS and Novell Netware).
The Company currently offers four families of multi-port products with
widespread industry name recognition: ValuePort, IntelliPort II, IntelliPort II
EXpandable and IntelliCluster. These products, combined with the IntelliServer
communication server products, are currently marketed to distributors, systems
integrators, value-added resellers ("VARs") and large volume end-users.
Products are also sold and licensed to selected original equipment manufacturers
("OEMs").
4
<PAGE>
To serve these OEM customers, a company in this industry must:
(a) offer a wide range of products that meet the specific performance
and price requirements of individual customers;
(b) offer advanced technology and features that differentiate its
products from the competition;
(c) offer products that are compatible with industry-standard computer
systems, operating environments, communications protocol and
applications;
(d) provide low-defect, high quality products and timely product
updates; and
(e) offer high quality technical support on a fast-response basis.
The Company has also developed several products that address the needs of
users who need to connect to LANs and enterprise-wide area networks. This
product group now consists of a wide range of software-based data communications
solutions that give UNIX users access to IBM, SNA and worldwide X.25 networks.
Technology
Communication Servers
The IntelliServer product line provides remote communication to Local
Area Networks (known as "remote access") so that users of networks can access
services and computers on networks from anywhere in the world. Network users
can work anywhere and gain access to corporate networks for Internet access,
remote client access, multi-user host access and remote office access.
Standardized protocols are used so that the IntelliServer is independent of the
different operating systems used on networked computers. The IntelliServer
provides transparent remote access to Ethernet LAN's, provides easy access to
Internet services, and routes TCP/IP traffic using the industry standard PPP
protocol. For remote / branch offices, the IntelliServer is an easy to use
dial-up router for serial connection to a home office, Internet services, or
dial-in / dial-out modem accesses.
The IntelliServer products utilize workstation caliber hardware and a
sophisticated UNIX-like operating system and industry standard Ethernet TCP/IP
networking protocols. Ethernet TCP/IP networks are the standard for Unix and
Internet networking. Internet access, remote access, and network routing are
among the fasted growing network market segments. In addition to remote and
Internet access, the IntelliServer allows traditional serial devices, such as
those used with the Company's multi-port products, to interface and communicate
over Local Area Networks.
Both SlimLine and the new PowerRack models are available in the
IntelliServer product family. The PowerRack provides high performance with the
convenience of a rack mount/table top enclosure. Serial port bit rates up to
921,600 bits per second on all serial channels meet and exceed the most
demanding throughput requirements using V.34 modems and/or ISDN links. The
SlimLine offers an attractive table top or wall mount enclosure. Both models
are expandable from the initial 16 ports up to a total of 64 serial ports, can
be connected directly to a Ethernet TCP/IP LAN, or can be booted independently
and operated as a stand alone unit.
Asynchronous (Serial) Multi-Port I/O Subsystems
The Company's multi-port subsystems provide remote access and multi-
user/multi-port solutions. They allow multiple serial devices (terminals,
printers, plotters, modems, Point-of-Sale, data acquisition, bar code scanners,
etc.) to be connected to a PCI, PC AT ("ISA"), EISA, or Micro Channel "host"
computer. Multi-port subsystems can be either non-intelligent (placing the
burden of managing I/O functions on the host computer's CPU) or intelligent (off
loading the host computer of I/O-related tasks and increasing overall throughput
within the system).
5
<PAGE>
The Company's multi-port products currently consist of:
. ValuePort - economical 4-port solutions for ISA/EISA computers.
---------
. IntelliPort II - high-performance 4-port and 8-port solutions for
--------------
ISA, EISA, and Micro Channel computers.
. IntelliPort II EXpandable - scaleable high-performance 16 to 64 port
-------------------------
subsystems for PCI, ISA, EISA, and Micro Channel computers.
. IntelliCluster - scaleable long-distance 16 to 1,024 multi-port
--------------
subsystems for organizations with widely distributed workgroups for
PCI and ISA/EISA computer systems.
All of the Company's multi-port subsystems are intelligent devices, with
the exception of the ValuePort line. The ValuePort line is intended as an
economical solution for users who wish to connect a limited number of serial
devices to their system. ValuePort configurations are 4-port models for
ISA/EISA systems offering serial line speeds up to 460,000 bits per second with
an I/O mapped host interface using industry standard 16C550 and 16C650 UART
devices.
The Company's most popular multi-port families, the IntelliPort II and
IntelliPort II EXpandable, are high-performance subsystems that require no host
system memory space, eliminating traditional conflicts with other host devices.
The newest addition to the IntelliPort II EXpandable family is support for PCI
bus compatible systems. The Company believes it was the one of the first
companies to offer multi-port products for the new high performance PCI system
bus. In addition, the Company has added support for high speed RS-422
communications systems.
The IntelliPort II and IntelliPort II EXpandable products include several
features that are popular with users. These features include menu-driven
installation and configuration for UNIX systems; 200,000 bits per second
throughput; non-EXpandable 4-port and 8-port models; a modular 8 or 16-port
model that can be expanded up to 64-ports; support for PCI, ISA, EISA, and Micro
Channel compatible systems; downloadable "firmware" software for easy upgrades;
and software device drivers for a large number of different operating systems,
including:
. SCO UNIX and SCO Xenix
. UNIX System V.3.2 and derivatives (AT&T, Interactive, etc.)
. UNIX SVR4 and derivatives (AT&T, UnixWare, Solaris, etc.)
. DOS and Multi-User DOS variants (Concurrent Controls DOS, THEOS,
etc.)
. Microsoft WindowsNT
. IBM OS/2 and CITRIX
. Novell Netware
IntelliPort II and IntelliPort II EXpandable software drivers include the
following IntelliFeatures Productivity Suite:
IntelliView - allows a terminal with multi-page memory to display up to
eight different screens, letting users instantly toggle from one
screen to another. This feature gives users added flexibility and
increases overall productivity.
IntelliPrint - allows users to transparently route data to a printer
connected to a terminal's "AUX" (auxiliary) port. Printing does
not interfere with active host sessions on the terminal.
IntelliSet - allows users to select data rate, flow control, and similar
hardware related features that are not directly supported by the
operating system or device drivers. Users can "lock in" individual
parameters, or specify them as defaults that can subsequently be
changed.
IntelliTools - software enables users to monitor, diagnose and
administer a Computone multi-port installation from a remote
location, saving users time and money.
6
<PAGE>
The Company's newest multi-port product is the IntelliCluster, a family
of multi-port solutions which addresses the needs of large organizations with
distributed topologies (e.g., companies with workgroups or departments that are
distributed throughout one or more buildings or different areas within a large
building). The newest member of the IntelliCluster family is the PCI
IntelliCluster for new high performance PCI compatible computer systems.
Computone multi-port products are well-suited for Novell LANs that
require multiple modems for remote access and outbound services such as Bulletin
Boards (BBS). Computone products are compatible with popular communications
applications, including Funk Software (remote access software WanderLink),
NetWare CONNECT (certified by Novell Labs), Windows 95 (PPP) remote
applications, Cheyenne FAXServe (Cheyenne certified), Mustang Software (BBS),
Galacticom (BBS) and CITRIX multi-user products.
Synchronous and Multi-Protocol Hardware
The Company has developed several configurable communications adapters
for use by VARs and OEMs. These adapters are designed to support popular and
emerging asynchronous and synchronous data communications protocols such as
SDLC, HDLC and X.25.
The Company has developed:
. The AT6SE, a medium-speed adapter with two synchronous
---------
communications ports and four built-in asynchronous ports for
ISA systems.
. The MPA2, a high-speed, economical two-port adapter for ISA and
--------
MicroChannel systems with various plug-in "feature modules" that
support RS-232, RS-449, EIA-530, EIA-530-A, V.35 and V.36
communications.
Marketing
To accommodate the evolving computer systems marketplace, the Company has
established sales channels through distributors, VARs, ISP's (internet service
providers), dealers, computer systems integrators, sophisticated end users,
OEM's (original equipment manufacturers) and major government agencies. These
distribution channels make the Company's products available to the entire
computer marketplace.
Customers for the Company's products are located throughout the world.
During the Company's 1996 fiscal year, approximately 67% of the Company's
revenues from continuing operations were generated in the United States. Sales
in the United States represented 64% and 77% of revenues from continuing
operations for the Company's 1995 and 1994 fiscal years, respectively.
The development of product testing and customer services is an on-going
program for the Company. Through its product testing staff, the Company offers
product specification programs, compatibility testing with computers and other
peripherals, operating systems and applications software, beta testing and
competitive product testing. Through its customer service staff, the Company
continues to build its program which responds to customer needs with accurate
solutions in a timely manner. The customer may receive updates or revisions of
operating system device drivers from this department, may obtain them via modem
from the Company's 24-hour on-line Bulletin Board Service or from the companies
INTERNET ftp site.
Competition
The growing market for products of the type offered by the Company is
highly competitive. The Company believes its share of this market is currently
less than 10%. At least four other companies are manufacturing and selling
products which compete with the products sold by the Company in the multi-user
segment of the microcomputer industry, and approximately 25 additional companies
have the capacity to offer competitive products. Many of the Company's
competitors have greater financial resources than those of the Company. Digi
International, Specialix and Equinox frequently compete with the Company for the
same customers in the United States market. In the European market, Chase
Research Limited, Specialix, Cisco and Livingston are the Company's principal
competitors.
7
<PAGE>
The Company's competition comes from these types of firms: (i) other
manufacturers of remote access and communications servers, (ii) other
manufacturers of I/O subsystems and multi-port serial controllers and (iii) LAN
device manufacturers. The products manufactured by the Company and by each of
its competitors vary in capability, function and performance. Trends in new
microcomputer technology, especially with regard to a process known as memory
caching, a relatively inexpensive method of faster access to greater amounts of
internal computer memory, thus maximizing overall perfor mance, have rendered
many of the Company's (as well as its competitors') older products incompatible
with certain configurations of new computers coming into the market. In
response to the changing technology, the Company implemented a design and
production program addressing full compatibility with this new technology,
resulting in the production of its "I/O-mapped" architecture, ValuePort,
IntelliPort II, IntelliPort II EXpandable and IntelliCluster products. In
response to the current trend of telecommuting and having remote access to a
corporate network, the Company implemented the IntelliServer product line. The
latest addition to its line, the PowerRack version, meets and exceeds the
requirements for the latest remote access technology with serial port bit rates
up to 921.6 kbps on each of its 64 (PPP) lines.
The Company expects its competitors to continue to improve the design and
performance of their products. As is typical with the Company's competitors,
the Company does not hold any patents on its products and relies principally on
its ability to innovate to remain competitive. However, the Company has
embarked on an aggressive program to lower the cost of its products and prevent
unauthorized duplication by creating and integrating new application-specific
integrated circuit ("ASIC") high-density chips for use in current and future
products or will have sufficient working capital to do so. Although the Company
believes that it offers products with price and performance characteristics
competitive with, and in certain instances, superior to, those offered by its
competitors, there can be no assurance the Company will be able to develop
enhanced products or new technology to maintain its competitive position.
The trends in new microcomputer technology combined with the Company's
competitors continuing to improve the design and performance of their products
has caused the Company to continually review its reserve for obsolescence of
inventory components. While the Company experienced an increase in inventories
of approximately $500,000 during the course of the 1996 fiscal year, this
increase can be attributed to the receipt of planned-phase purchases and the
Company believes that its reserve for excess and obsolete inventory components
is adequate. The Company increased its inventory reserve by $178,000 to $381,000
at April 5, 1996.
Export Sales
The Company's net revenues from continuing operations include
approximately $3,170,000, $5,283,000 and $3,383,000 from customers located
outside the United States, primarily in Europe, Central and South America and
the Asia-Pacific region, for the years ended April 5, 1996, April 7, 1995 and
April 1, 1994, respectively. All of the Company's foreign transactions are
negotiated, invoiced and paid in US dollars.
Significant Customers
During the 1996 fiscal year, the Company's largest customer, Wal*Mart,
accounted for approximately $1,639,000 or 17% of product sales. During the 1995
fiscal year, Tech Data was the Company's largest customer and accounted for
approximately $2,200,000 or 15% of net product sales. During the 1994 fiscal
year, Tech Data was the Company's largest customer and accounted for
approximately $2,191,000 or 16% of net product sales.
Research and Development
During fiscal years 1996, 1995 and 1994, the Company's research and
development expenditures were $1,038,000, $966,000 and $1,293,000, respectively.
In addition, for fiscal years 1996, 1995 and 1994, the Company capitalized
$262,000, $322,000 and $453,000, respectively, of software development costs.
Trademarks and Licenses
Due to rapidly changing technology in the computer industry, the Company
believes its success depends primarily on the engineering, marketing and support
skills of its personnel rather than on patent protection. Although the Company
may seek patents where appropriate, at present, none of the Company's products
are patented. The Company relies primarily on the copyright, trademark and
trade secret laws to protect its proprietary rights in its products.
8
<PAGE>
The Company holds source code software licenses for both AT&T UNIX and
Microsoft XENIX multi-user operating systems. These licenses are valuable in
providing the software drivers that are required to interface with multi-user
operating systems which utilize the Company's intelligent controllers. In
addition, the Company is an SCO authorized developer, a Hewlett-Packard software
supplier, an authorized UNIVEL developer, an authorized Novell developer and a
participant in Sun Microsystem's "Catalyst" and Solaris development programs.
The Company also holds a source code license for CSI's Ac cess/SNA Nucleus II
and Access/SNA 3270. The licenses are non-exclusive and subject to renewal on a
periodic basis. While the continued availability of such licenses cannot be
assured, they are generally granted to manufacturers of computer peripheral
products and software developers.
Employees
At April 5, 1996, the Company had 56 full-time employees. None of the
Company's employees is represented by a labor union and the Company has never
experienced a work stoppage, slowdown or strike. The Company considers its
relations with its employees to be good.
Other
Compliance with federal, state or local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had any material effect upon capital
expenditures, earnings or the competitive position of the Company.
Item 2. Properties.
- ------- ----------
The Company's manufacturing and research and design facilities are
currently located in a 26,450 square foot building in Roswell, Georgia, which it
has occupied since April 1988. The principal lease for those facilities expires
November 30, 1997 and has an average annual rent expense of approximately
$240,000. The Company believes that its facilities and equipment are well
maintained, in good operating order and sufficient for its current needs. The
Company is currently reviewing options to re-locate to a smaller, more efficient
facility which management believes can reduce the Company's occupancy costs
based on preliminary proposals the Company has received from prospective
landlords. There are no assurances that the Company will be able to sign a new
lease agreement which will enable the Company to actually realize these savings.
Item 3. Legal Proceedings.
- ------- -----------------
The Company is not a defendant in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ------ -------------------------------------------------------------
Matters.
- -------
(a) Market Information.
------------------
The following table sets forth for each period indicated the high and low
closing sale prices for the Common Stock, as adjusted to reflect the reverse
stock split effected on November 30, 1993, as reported by the National
Association of Securities Dealers, Inc. (the "NASD").
<TABLE>
<CAPTION>
Year ended April 5, 1996 Year ended April 7, 1995
------------------------ -------------------------
<S> <C> <C> <C> <C>
High Low High Low
----- ---- ---- ----
1st Quarter $3.00 $2.00 $4.75 $3.00
2nd Quarter 2.38 1.41 3.38 2.50
3rd Quarter 2.56 1.13 4.12 3.12
4th Quarter 3.75 1.88 4.12 2.75
</TABLE>
Subsequent to the April 5, 1996 year end, the closing high and low stock
prices for the first quarter ended July 5, 1996 were $2.94 and $1.88,
respectively.
(b) Holders.
-------
As of April 5, 1996, the Company had approximately 1,400 holders of
record of the 6,357,184 shares of Common Stock then outstanding.
(c) Dividends.
---------
The Company has never declared or paid dividends on its Common Stock.
The Company has agreed to pay, in six equal monthly installments beginning June
30, 1996, all of the accrued but unpaid dividends on the Series D Convertible
Preferred Stock from the date of issuance thereof through the date of
conversion, December 20, 1995.
10
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------
April 5, April 7, April 1, April 2, April 3,
Statement of Operations 1996 1995 1994 1993 1992
-------------------------------------------------------
(in thousands, except per share data and number of employees)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 9,665 $ 14,550 $ 13,702 $ 13,454 $ 20,338
Royalties - - 882 2,156 1,608
---------- ---------- ---------- ---------- ----------
Net revenues 9,665 14,550 14,584 15,610 21,946
Costs and expenses:
Cost of products sold 6,640 8,816 8,024 10,226 11,852
Selling, general and administrative 3,934 4,555 3,909 8,633 10,613
Product development 1,294 1,098 1,034 1,488 870
Restructuring charge - - - 3,644 -
Interest and other expenses, net 104 (45) 92 786 597
---------- ---------- ---------- ---------- ----------
11,972 14,424 13,059 24,777 23,932
Income (loss) from continuing operations
before income taxes (2,307) 126 1,525 (9,167) (1,986)
Provision for income taxes - - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (2,307) 126 1,525 (9,167) (1,986)
Income (loss) from discontinued operations - 184 1,974 (4,865) (813)
Extraordinary item:
Repurchase of debt - - - - 1,100
Debt foregiveness - 242 - 881 -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (2,307) $ 552 $ 3,499 $(13,151) $ (1,699)
========== ========== ========== ========== ==========
Net income (loss) applicable to common stock $ (2,339) $ 552 $ 3,499 $(13,979) $ (2,803)
========== ========== ========== ========== ==========
Earnings (loss) per common share:
Income from continuing operations (0.36) 0.02 0.28 (4.38) (2.40)
Income from discontinued operations - 0.03 0.35 (2.10) (0.66)
Income from extraordinary item - 0.04 - 0.36 0.84
---------- ---------- ---------- ---------- ----------
$ (0.36) $ 0.09 $ 0.63 $ (6.12) $ (2.22)
========== ========== ========== ========== ==========
Weighted average shares outstanding 6,406 6,445 5,513 2,294 1,272
========== ========== ========== ========== ==========
Selected end of period data:
Working capital (deficiency) $ 693 $ 2,892 $ 2,025 $ (6,105) $ (1,641)
Total assets 5,763 7,723 8,147 6,746 14,269
Total long-term debt,
excluding current portion 67 584 606 2,368 1,518
Stockholders' equity, (net
capital deficiency) 1,884 4,197 3,777 (6,803) (19)
Number of employees 56 67 69 76 119
</TABLE>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ------------------------------------------------- -------------
Results of Operations.
---------------------
Introduction
- ------------
The comparative information contained herein includes results of
operations for the Company's continuing businesses. Certain previous components
of the Company are presented as discontinued operations in the accompanying
Consolidated Financial Statements.
Results of Operations
- ---------------------
Fiscal 1996 Compared to Fiscal 1995
- -----------------------------------
During fiscal 1996, the Company had a loss from continuing operations of
approximately $2,307,000 compared to income from continuing operations of
approximately $126,000 during fiscal 1995. This difference can be attributed to
a decrease in net revenues of approximately $4,900,000 and a decrease in
margins for certain products sold as a result of the Company's efforts to enter
the market for remote access products. With the significant growth
opportunities in the remote access area in mind, the Company re-positioned
itself from a sales perspective to take advantage of these opportunities. These
remote access products allowed the company to compete for and obtain significant
orders directly from VAR's and large major corporations. This positioning
required the Company to increase its direct domestic VAR sales channel from
1,280 at the beginning of the fiscal year to 1,822 at the end of the fiscal year
while its number of domestic distributors decreased from 14 at the beginning of
the fiscal year to 6 at the end of the fiscal year.
The remote access market is a dynamic segment of the networking industry
and is exploding with opportunity. Companies have realized that in order to
stay competitive in the global marketplace, they have either adopted or plan to
adopt a remote access solution. According to the 1995 InfoWorld Remote Access
study, 73% of employees conduct work from home after regular business hours, 48%
are business travelers, 42% are from the mobile workforce such as sales and
technical support personnel, 35% are telecommuters and 26% are employees in
small branch offices.
Universal remote access addressess the needs of both Internet and
intranet users. The Internet is the interconnected public global network of
separate networks that are capable of passing information via a common set of
internet protocols. An intranet is a private network based on these same
Internet protocols but is protected from the public internet by a firewall. The
firewall prevents any unwanted intrusion into the network by anyone outside the
firewall.
The Internet has experienced explosive growth over the last several years
as indicated by the 25 fold growth in the past five years of Internet Hosts, or
connected computers. It is anticipated that this growth will continue at least
until the year 2000. The intranet server market is nearly twice as large as the
Internet server market. The anticipated growth in the Internet server market is
142% from 1996 to 1998 and 390% from 1998 to the year 2000 while the intranet
server market is anticipated to grow 122% from 1996 to 1998 and 404% from 1998
to the year 2000. This information was obtained from the Merrill Lynch
publication "I'Net Computing" dated July 17, 1996.
12
<PAGE>
With the significant growth opportunities in the remote access area
in mind, the Company re-positioned itself from a sales perspective to take
advantage of these opportunities. These remote access products allowed the
company to compete for and obtain significant orders directly from Value Added
Re-sellers "VAR's" and large major corporations. This positioning required the
company to increase its direct domestic VAR sales channel from 1,280 at the
beginning of the fiscal year to 1,822 at the end of the fiscal year while its
number of domestic distributors decreased from 14 at the beginning of the fiscal
year to 6 at the end of the fiscal year. Management believes that the focus of
sales of remote access products towards VAR's and large major customers versus
distributors is necessary because of the requirement to provide technical
support for these products. While sales through the distribution are made at a
greater discount than through other channels, the level of support that needs to
be provided to the distribution channel would certainly be greater than to
other channels and therefore not as cost effective. Conversely, customers in
the VAR and major account channels are, in general, more technically competent
and require a lesser degree of technical assistance. Further, management
believes that margins tend to be higher with sales to VAR's than to
distributors as a result of the lesser degree of discounting. Additionally,
management believes that with 6 domestic distributors, it has the proper number
of distributors required to go forward with its sales objectives. With the
increased number of VAR's in its sales channel, management believes that the
greater number provides management with a better opportunity to also meet these
sales objectives. The mix of domestic distributors includes distributors that
operate on both national and regional levels. The additional costs of doing
business with distributors versus VAR's and major customers, such as techical
support, co-op advertising and pricing discounts, support management's decision
to maintain a domestic distribution customer base at its current level.
During the 1995 fiscal year, the Company had sales of approximately
$921,000 in rermote access products, or 6% of net revenues. During the 1996
fiscal year, sales of remote access products grew to approximately $1,936,000,
or 20% of net revenues. The Company estimates that during fiscal 1997, sales of
remote access products will grow to over $4,000,000.
As a result of these transitions, revenues from continuing operations for
fiscal 1996 totaled approximately $9,665,000 compared to $14,550,000 for fiscal
1995, a decrease of $4,885,000 or 34%. This decrease can be attributed to a
reduction in domestic and international distribution sales, domestic OEM sales
and one major international OEM. Domestic and international distribution net
sales decreased $3,800,000 and $800,000, respectively. Net sales to domestic
OEM's decreased $1,700,000 as a result of three government contracts being
completed during the 1995 fiscal year and not being replaced with new contracts.
Net sales to one major international OEM decreased by $1,300,000 when they
decided to cease business operations involving high end UNIX platforms. The
Company was able to increase net sales during fiscal 1996 to VAR's by
approximately $800,000 and to major accounts by almost $2,000,000 by increasing
the number of customers in the sales channel, providing sales discounts and
through the sale of the Company's remote access products, which increased from
approximately $900,000 in fiscal 1995 to over $1,900,000 in fiscal 1996.
Fiscal 1996 revenues were unfavorably affected in the amount of $333,000 by
sales which were ready for shipment but did not get shipped prior to the
Company's year end, due to the Good Friday holiday, and were shipped in the
first day of fiscal 1997.
Cost of products sold for the fiscal year 1996 totaled $6,640,000
compared to $8,816,000 for fiscal 1995 or 68.7% of product sales in 1996 versus
60.6% of product sales in fiscal 1995. This increase in cost of goods sold as a
percentage of net revenues can be attributed to a reduction of 5.86% in
unburdened margins fiscal 1996. These decreases can be attributed primarily to
shifts in product mix, reduced selling prices on certain of the Company's
products during its transition from selling through the distribution channels to
selling direct and, to a lesser extent, raw materials price increases. Also, the
Company was not able to reduce its fixed manufacturing costs during the 1996
fiscal year and as a result, when coupled with the significant decrease in
revenues, these costs increased from 7.25% of net revenues in fiscal 1995 to
8.61% (1.36%) in fiscal 1996. The Company has been able to continue to reduce
its direct labor costs through outsourcing, which is currently 70% of the
Company's production, and as a result, direct labor as a percentage of net
revenues decreased by .96% from fiscal 1995 to fiscal 1996. In reviewing the
components of its inventory with respect to future utilization, the Company
increased its allowance for excess and obsolete inventory in fiscal 1996 by
approximately $170,000, or 1.74% of net revenues, to a total of $381,000.
Selling, general and administrative ("S,G&A") expenses for fiscal 1996
totaled $3,934,000 compared to $4,555,000 for fiscal 1995, a decrease of
$617,000 or 13.5%. The S,G&A expenses increased to 40.4% of product sales
during fiscal 1996 from 31.3% in fiscal 1995 as a result of the decrease in net
revenues although during fiscal 1996 salaries and benefits decreased $455,000,
travel and entertainment decreased $135,000 and marketing expenses decreased
$131,000 from fiscal 1995.
13
<PAGE>
Product development costs charged to expense for fiscal 1996 totaled
$1,294,000 or 12.9% or product sales compared to $1,098,000 or 7.5% of product
sales for fiscal 1995, an increase of $196,000. This increase can be attributed
to a lesser amount of capitalized costs, $262,000 in fiscal 1996 versus $322,000
in fiscal 1995 and increases of $38,000 in costs related to prototype products
and $43,000 in personnel and recruiting costs during fiscal 1996.
Fiscal 1996 Fourth Quarter Adjustments:
During the fourth quarter of fiscal 1996, the Company made the following
adjustments which increased the loss from continuing operations by $1,297,126 to
$2,306,931, or $.20 per share. Of these adjustments, $987,000, or $.16 per
share, related to previously issued quarterly data for the first, second and
third quarters of fiscal 1996, which the Company is restating on Form 10-Q/A.
During the fourth quarter of fiscal 1996, sales in the amount of
$544,000, or $.085 per share, from the first quarter of fiscal 1996 and $59,000,
or $.009 per share, from the third quarter of fiscal 1996 were reversed in the
fourth quarter of fiscal 1996 as a result of the Company's inaccurate assessment
of certain contingencies associated with two purchase orders. With respect to
the $544,000 order that was a "Bill and Hold" order, at the time the sale was
recorded, the Company did not adequately identify certain contingencies
regarding the ultimate delivery of product. These contingencies related in part
to funding that was to be received by the customer from the federal government.
With respect to the second sale of $59,000 which was also a "Bill and Hold"
order, the Company did not adequately address the uncertainty of delivery of
the product by the customer. The Company no longer recognizes revenue on any
orders that involve a "Bill and Hold" arrangement.
In the fourth quarter of fiscal 1996, the Company processed $350,000, or
$.055 per share, in credit memos, for three customers, for products that had
been returned prior to the fourth quarter of fiscal 1996. The Company failed to
accurately identify and account for these returns on a timely basis. Management
has implemented procedures to ensure that credits for returned products are
processed during the period in which the return is received and tested to ensure
that what has been returned is what has been authorized and therefore ensure no
reoccurrence of this matter in fiscal 1997.
During the fourth quarter of fiscal 1996, the Company also adjusted
certain of its reserves and allowances. The inventory reserve for slow moving
and obsolete inventory was increased by $123,000, or $.019 per share, to account
for materials on hand that are used for certain I/O products; the accounts
receivable allowance for doubtful accounts was increased by $90,000, or $.014
per share, to account for possible write-offs of accounts the Company has been
unable to collect; and a $75,000, or $.012 per share, accrual for possible
returns by distributors. This amount was calculated based on the gross margin
associated with the accounts receivable balances for all distributors as of the
1996 fiscal year end.
The adjustments are reflected as follows:
<TABLE>
<CAPTION>
($000s except per share data) Quarter ended Quarter ended Quarter ended
July 7, 1995 October 6, 1995 January 5, 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) as previously reported ($ 641) $ 8 $ 199
Fourth quarter adjustments ( 612) ( 192) ( 183)
------- ------- ------
Net income (loss) ($ 1,253) ($ 184) $ 16
======= ======= ======
Per share of common stock:
Net income (loss) as previously reported ($ .10) $ .00 $ .03
Fourth quarter adjustments ( .10) ( .03) ( .03)
------- ------- ------
Net income (loss) ($ .20) ($ .03) $ .00
======= ======= ======
</TABLE>
14
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
- -----------------------------------
Revenues from continuing operations for fiscal 1995 totaled approximately
$14,550,000 compared to $14,584,000, including $882,000 of royalties, for
fiscal 1994. The $882,000 of royalties included in revenues for the 1994 fiscal
year related to an agreement entered into with one of the Company's customers to
sell certain products and technology in return for a lump sum cash payment in
lieu of future royalty payments. This agreement terminated on December 31, 1993.
The Company has subsequently replenished this revenue source by increasing sales
through the distribution channel and the introduction of new products.
Cost of products sold for the fiscal year 1995 totaled $8,816,193
compared to $8,024,387 for fiscal 1994 or 60.6% of product sales in fiscal 1995
versus 58.6% of product sales in fiscal 1994. The Company continues to focus on
reducing the cost of sales in an effort to increase its gross margin percentage.
Through the outsourcing of a major portion of its production, the Company
believes that it will be able to increase gross margin percentages by reducing
its fixed manufacturing overhead. However, some initial start-up costs
associated with this outsourcing nullified cost reductions achieved through the
reduction of direct labor and fixed manufacturing costs and actually increased
the cost of sales.
Selling, general and administrative ("SG&A") expenses for fiscal 1995
totaled $4,555,786 compared to $3,909,257 for fiscal 1994, an increase of
$646,529 or 16%. The SG&A increase to 31% of product sales in fiscal 1995 from
28% in fiscal 1994 can be attributed to the cost of legal representation
regarding the Dickens Data and United States Customs Service matters along with
increased expenditures associated with sales and marketing. During fiscal 1995,
the Company focused its marketing efforts on direct advertising placements and
trade show participation.
Product development costs charged to expense for fiscal 1995 totaled
$1,097,780 or 7% of product sales compared to $1,033,885 for fiscal 1994, also
7% of product sales.
Income from discontinued operations for fiscal 1995 was $184,383 which
was the result of the Company's efforts to resolve issues related to the
disposal of former divisions at amounts lesser than the amounts originally
reserved.
Extraordinary income was the result of the Company's ability to negotiate
debt forgiveness of $242,000 from the remaining debt of a former division.
Fiscal 1994 Compared to Fiscal 1993
- -----------------------------------
Revenues from continuing operations for fiscal 1994 totaled approximately
$14,584,000 including $882,000 of royalties compared to $15,610,000 including
$2,156,000 of royalties for fiscal 1993. The $882,000 of royalties included in
revenues for fiscal 1994 related to an agreement entered into with one of the
Company's customers to sell rights to certain products and technology in return
for a lump sum cash payment in lieu of future royalty payments. Management
believes these products and technology had a limited useful life and, therefore,
believes that the likely impact of the discontinuance of royalty income from
these products and technology on the Company's future revenues and gross profits
will be minimal. The Company expects that substantially all of its revenues
from continuing operations will be derived from the manufacture and sale of the
Company's intelligent controller products.
Cost of products sold for fiscal 1994 totaled $8,024,000 compared to
$10,226,000 for fiscal 1993. The gross margin on product sales (excluding
royalty revenues of $882,000) for fiscal 1994 was 41.4% versus 24.0% (excluding
royalty revenues of $2,156,000) for fiscal 1993. The acquisition price of
inventory components varies dramatically when the parts are acquired under
planned-phased purchase orders from the parts suppliers versus acquiring the
parts on an expedited basis from a parts broker. During fiscal 1994 compared to
fiscal 1993, the Company acquired the majority of its higher cost parts under
planned-phased purchase orders instead of on an expedited parts basis. The
Company expects this method of inventory purchasing to continue in future
periods. The Company continues to focus on reducing the cost of sales in an
effort to increase its gross margin percentage.
Selling, general and administrative ("SG&A") expenses for fiscal 1994
totaled $3,909,000 compared to $8,633,000 for fiscal 1993, a decrease of
$4,724,000. The SG&A decrease was primarily the result of changes made by new
management in the third quarter of fiscal 1993 as part of the Company's response
to its severe liquidity problems at that time.
15
<PAGE>
The major components of the decrease in SG&A expenses in fiscal 1994 compared to
fiscal 1993 consisted principally of the following:
(1) Administrative expenses, on an annual basis, decreased by $2,280,000
by: (a) terminating six former senior management personnel, which terminations
led to annual payroll cost savings, including fringe benefits, of $1,230,000,
the executives terminated were Thomas P. Tanis, Sr., Chairman of the Board
(annual salary $147,375), Thomas P. Tanis, Jr., President and Chief Executive
Officer (annual salary $169,804), Ronald W. Johnston, Executive Vice President
and Chief Financial Officer (annual salary $169,804), John F. McCarthy, III -
Vice President and General Counsel (annual salary $146,167), Bruce Chittenden -
Executive Vice President, Engineering (annual salary $136,114) and Edward T.
Lack, Vice Presi dent and Controller (annual salary $91,584); (b) closing the
Radnor offices saving $425,000; (c) implementing a "no first class air travel"
and "hotel economy" policy for all employees saving $255,000; (d) stopping the
usage of four leased cars for officers, saving $65,000; (e) canceling a
management consultant's contract of $275,000 and (f) canceling an apartment
lease in Atlanta for the former corporate officers, saving $30,000;
(2) Selling expenses, on an annual basis, decreased by $1,310,000 by
reducing the sales force by ten persons for annual payroll savings, including
fringe benefits, of $720,000, consolidating the European sales force for savings
of $325,000 and refocusing the advertising and marketing efforts saving
$265,000; and
(3) General expenses, on an annual basis, decreased by $1,134,000 by
reducing personnel by 12 persons with an annual payroll savings, including
fringe benefits, of $650,000, canceling an investment advisory contract, saving
fees of $120,000, reducing office support costs by $100,000, reducing the use of
temporary employees, saving $85,000 and implementing employee participation in
the payment of health insurance costs, saving $179,000.
As indicated, the principal reason for the reduction in SG&A expenses was
the severe liquidity problems the Company faced in the fall of 1992, when the
Company had a working capital deficit of $12,460,000. This lack of liquidity
required significant and immediate changes in the Company's business and forced
a new direction for the Company's business in order to conserve cash.
Product development costs charged to expense for fiscal 1994 totaled
$1,034,000 compared to $1,488,000 for fiscal 1993. The decrease in fiscal 1994
product development costs compared to fiscal 1993 reflected the termination of
all product development activity not associated with the Company's core product
lines.
Income from discontinued operations for fiscal 1994 was $1,974,000 of
which $1,921,000 was the result of the Company's determination that the loss on
disposal of former divisions would be less than originally provided because of
the settlement of litigation for less than had been anticipated. This reduction
compares to the original recording of the estimated disposal costs of $4,865,000
for fiscal 1993. See Note 4 of the Notes to Consolidated Financial Statements
included herein for additional information.
Liquidity and Capital Resources
- -------------------------------
Fiscal 1996 Compared to Fiscal 1995
The Company's substantial loss from continuing operations and
corresponding non-compliance with certain loan covenants has had a significant
unfavorable impact on the Company's liquidity and raises substantial doubt about
the ability of the Company to continue as a going concern. In response to the
Company's liquidity needs, the Company is attempting to raise between $1,000,000
and $1,500,000 by the end of September 1996 by offering for sale, to accredited
investors, up to 1,000,000 shares of the Company's common stock. The shares
will be offered only to a limited number of selected investors each of whom is
either an "accredited investor", as such term is defined in Regulation D
promulgated under the Securities Act of 1993 or is not a "US Person", as such
term is defined in Regulation S promulgated under the Securities Act. Further,
the Company is attempting to (i) restructure the payment terms of its line of
credit with its Lender which is currently in default and which matures in
August, 1996, to extend the maturity date and to reduce the amounts currently
due during fiscal 1997 and (ii) restructure the payment terms of its note
payable with the same Lender. The Company has classified all of its borrowings
under the line of credit and note payable, in the amounts of $599,000 and
$242,000, respectively, as current obligations pending the satisfactory
completion of the restructuring. As of July, 1996, the Company has borrowed the
full amount available under its line of credit.
Management believes that the cash provided from continuing operations
during fiscal 1997 should be reasonably sufficient to cover operating expenses
incurred during the fiscal year. Cash commitments for noncancelable long-term
operating real and personal property lease during 1997 is approximately
$300,000. The Company currently has no plans
16
<PAGE>
for any major capital improvements. Relationships with major vendors are
currently satifactory although the Company is on a "Cash On Delivery" status
with a significant number of raw materials vendors. If the Company is not able
to obtain additional funding from the offering, management will be required to
negotiate extended payment terms with certain vendors that have past due
accounts. The Company believes that working capital shortages as may occur from
time to time may be satisfied at least to some extent from funding to be
advanced to the Company under a verbal agreement made to the Company by its
major shareholder. At the end of the first quarter of the 1997 fiscal year, the
Company's working capital and current ratio have improved slightly.
The Company believes that, if the funding to be provided by the
offering is obtained in combination with cash provided by continuing operations
and the restructuring of the repayment of its line of credit, the Company will
be able to fund operations on both a short-term and long-term basis. There can
be no assurances that the offering will be successful or that the anticipated
amount of proceeds can be obtainable or that the Company will be able to
satisfactorily restructure the repayment terms of its line of credit and note
payable. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Cash used in operating activities amounted to $199,000 during fiscal
1996 compared to cash provided by operating activities of $1,108,000 during
fiscal 1995. The decrease in cash provided by operating activities in the
amount of $1,307,000 can be attributable primarily to the $2,275,000 loss from
continuing operations during 1996 compared to $126,000 income from continuing
operations during 1995 and was partially offset by favorable changes in working
capital items during 1996 compared to 1995. The 1996 changes in working capital
items include a reduction in accounts receivable of $1,403,000, while
inventories increased by $670,000.
Cash used in investing activities amounted to an outflow of $336,000
during fiscal 1996 compared with an outflow of $458,000 for fiscal 1995. The
reduced net cash outflow in fiscal 1996 compared to fiscal 1995 can be
attributed to a reduction in capitalized software costs during fiscal 1996 and
to a lesser amount of capital expenditures.
Cash provided by financing activities amounted to $381,000 during fiscal
1996 versus cash used in financing activities of $568,000 during fiscal 1995.
The Company borrowed against its line of credit during the fiscal year to fund
continuing operations. As noted above, the Company is not in compliance with
certain covenants of the line of credit and as a result, the lender could
accelerate payment of the entire balance of the line of credit.
Working capital amounted to $806,000 at April 5, 1996 compared to
$2,892,000 at April 7, 1995, a reduction of $2,086,000. The ratio of current
assets to current liabilities at April 5, 1996 was 1.22 to 1.00 compared to 1.98
to 1.00 at April 7, 1995. The reduction in working capital was attributable to
the loss from continuing operations.
Fiscal 1995 Compared to Fiscal 1994
Cash provided by income from continuing operations amounted to $337,000
during fiscal 1995 compared to cash provided by continuing operations of
$2,288,000 during fiscal 1994. The decrease in cash provided by continuing
operations can be primarily attributable to a decrease in income from continuing
operations of $1,399,000.
Cash used in investing activities amounted to an outflow of $347,000
during fiscal 1995 compared with an outflow of $1,024,000 for fiscal 1994. The
larger outflow in fiscal 1994 compared to fiscal 1995 resulted from greater
purchases of equipment in fiscal 1994 and a lesser capital expenditures budget
in fiscal 1995.
Cash provided by financing activities amounted to $92,000 during fiscal
1995 versus cash used in financing activities of $120,000 during fiscal 1994.
This difference can be attributed to the issuances of preferred and common stock
during fiscal 1994.
Working capital amounted to $2,878,000 at April 7, 1995, an improvement
of $853,000 since April 1, 1994. The ratio of current assets to current
liabilities at April 7, 1995 was 1.97 to 1.00 compared to 1.54 to 1.00 at April
1, 1994. The improve ment in working capital was primarily attributable to
income from continuing operations, settlements and payoffs of debt and the
reduction of costs related to discontinued operations.
17
<PAGE>
Fiscal 1994 Compared to Fiscal 1993
Cash provided by income from continuing operations amounted to $2,288,000
during fiscal 1994 compared to cash provided by continuing operations of
$2,062,000 during fiscal 1993. The cash provided from continuing operations
primarily reflects an agreement to sell certain rights to certain products and
technology as well as recurring continued operations.
Cash used in investing activities amounted to an outflow of $1,024,000
during fiscal 1994 compared with an outflow of $728,000 for fiscal 1993. The
increase in fiscal 1994 compared to fiscal 1993 resulted from greater purchases
of equipment in fiscal 1994.
Cash used in financing activities amounted to $120,000 during fiscal 1994
versus cash provided by financing activities of $4,098,000 during fiscal 1993.
The Company repaid approximately $1,600,000 of liabilities during fiscal 1994 as
well as the fiscal 1994 conversion of approximately $4,110,000 of borrowings and
obligations under debt restructuring agreements into equity compared to net
borrowing of approximately $2,600,000 in fiscal 1993 as well as a $1,315,000
private placement of stock for cash.
Working capital amounted to $2,025,000 at April 1, 1994, an improvement
of $8,130,000 since April 2, 1993. The ratio of current assets to current
liabilities at April 1, 1994 was 1.54 to 1.00 compared to .45 to 1.00 at April
2, 1993. The improvement in working capital was primarily attributable to
income from continuing operations, repayments of debt, the exchange of equity
for debt, the investment of additional equity in the Company and the reduction
of estimated disposal costs related to discontinued operations.
Capital Expenditures
- --------------------
The Company does not plan any major capital expenditures in the
foreseeable future.
Impact of Inflation
- --------------------
Management believes that inflation has not had a material effect on the
Company's operations.
Item 8. Financial Statements and Supplementary Data.
- ------- -------------------------------------------
The financial statements and supplementary data required by this Item are
set forth at the pages indicated in Part IV, Item 14(a), of this Form 10-K
Annual Report.
Item 9. Changes In and Disagreements With Accountants On Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
--------------------
On December 15, 1994, the Company received a letter dated December 15,
1994 from Ernst & Young LLP ("EY"), the Company's independent accountants,
confirming that the client-auditor relationship between Registrant and EY had
ceased.
EY's reports on the Company's consolidated financial statements for the
past two years (the fiscal years ended April 1, 1994 and April 2, 1993 did not
contain any adverse opinion or any disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and the subsequent interim period
preceding EY's resignation, there were no disagreements between the Company and
EY on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of EY, would have caused EY to make a reference to the subject
matter of such disagreement in connection with its reports.
On February 24, 1995, the Company filed Form 8-K indicating that BDO
Seidman had been engaged as the Company's new independent accountants to act as
principal accountants to audit its financial statements.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The following information regarding Company's directors is based, in
part, on information furnished by these individuals.
(a) Identification of Directors.
---------------------------
<TABLE>
<CAPTION>
Director
Name Age Position With Company Since
- ----- ----- ---------------------- -----
<S> <C> <C> <C>
Richard A. Hansen 55 Chairman of the Board 1992
Thomas J. Anderson 50 President and Chief Operating Officer since
November 3, 1992 and President and
Chief Executive Officer since April 25,
and a Director 1993
William C. Lovely 41 Director 1993
John D. Freitag 67 Director, Chairman of the Board and Chief
Executive Officer until April 25, 1996 1992
</TABLE>
The Board of Directors currently does not have an Executive Committee, an
Audit Committee, a Nominating Committee or a Compensation Committee, but intends
to create such committees and appoint members thereof following the election of
directors at the Company's 1996 annual meeting of stockholders.
The directors of the Company do not receive any compensation for serving
in such capacity. Following the Company's 1996 Annual Meeting of Stockholders,
the Company intends to follow the practice of annually granting each director an
option to purchase shares of the Company's Common Stock. Each such option would
be exercisable for a period of ten years at the market price of the Company's
Common Stock on the date of the grant.
Information regarding the principal occupations of each director of the
Company during the past five years follows. Each director holds office until the
next annual meeting of stockholders and until his successor is elected.
Pursuant to a December 20, 1995 agreement among the Company, Mr. Hansen, Mr.
Anderson, Mr. Lovely and Mr. Freitag, among others, three of the directors to be
elected at the Company's 1996 annual meeting of stockholders will be designated
by Mr. Hansen, three will be designated by Mr. Anderson, one will be a person
mutually acceptable to the three Hansen designees and the three Anderson
designees and Mr. Freitag will not stand for reelection.
Mr. Hansen was elected Chairman of the Board on April 25, 1996 and has
been an executive officer, director and princi pal stockholder of Pennsylvania
Merchant Group, Ltd., an investment banking firm, since November 1986. Mr.
Hansen is also a director of UltraLife Batteries, Inc., a manufacturer of
lithium batteries, and of a number of private companies.
Mr. Anderson has been Chief Executive Officer since April 25, 1996 and
will continue to serve as President of the Company, a position he has held
since November 3, 1992. From November 1990 to November 3, 1992, Mr. Anderson
was Managing Director of CYMA Systems, Inc.
Mr. Lovely, a private investor, was Chief Financial Officer of Leopard
Industries, Inc. from September 1993 until April 1996. From December 1990 to
December 1993, Mr. Lovely was principally occupied as Chief Financial Officer of
Gyrofalcon Group, Inc., a private investment management corporation.
Mr. Freitag, a private investor, was Chairman of the Board and Chief
Executive Officer of the Company from November, 1992 until April 25, 1996 and is
Chairman of the Board of Leopard Industries, Inc., a private investment
management corporation.
19
<PAGE>
(b) Identification of Executive Officers.
------------------------------------
The following are the executive officers of the Company, exclusive of
those for whom information is provided in the previous section of this Item 10,
as of July 5, 1996:
<TABLE>
<CAPTION>
Position
Officer Age Position With Company Since
- ------- ---- ------------------------------------------- ----------
<S> <C> <C> <C>
Erik R. Myrmo 46 Vice President, Engineering 1992
Gregory A. Alba 36 Vice President, Finance and Administration
and Chief Financial Officer 1996
Duncan E. Hume 35 Vice President, International Sales 1994
Brian Kretschman 45 Vice President, North American Sales 1996
</TABLE>
Information regarding the principal occupations of each executive officer
of the Company during the past five years follows. All executive officers serve
at the discretion of the Board of Directors.
Mr. Myrmo has served as Vice President, Engineering since November 1992.
Mr. Myrmo has worked for the Company since 1990 in various engineering
positions. For eight years prior thereto, Mr. Myrmo was Vice President and
Chief Operating Officer of Metacomp, Inc.
Mr. Alba has served as Vice President, Finance and Administration and
Chief Financial Officer since April 1996. For the prior twenty months, Mr. Alba
served as Controller of the Company. Prior to joining the Company, Mr. Alba was
the Chief Financial Officer for twenty-one months of American Medcare
Corporation, a developer of medical and dental practice management software.
From December 1989 to October 1992, Mr. Alba was a financial analyst with Dun &
Bradstreet Software.
Mr. Hume has served as Vice President, International Sales since October
1994. For the fifteen months prior thereto, Mr. Hume had worked with the
Company as the Director of International Sales. From 1987 to July 1993, Mr. Hume
was Director of International Sales for Top Log-UK, a distributor of Unix-based
hardware and software products.
Mr. Kretschman has served as Vice President, North American Sales since
April 1996. For the prior three years, Mr. Kretschman worked with the Company
as manager of VAR Sales from February 1993 to February 1995, Director of Major
Accounts from February 1995 to November 1995 and the Director of North American
Sales from November 1995 to April 1996. Prior to joining the Company, Mr.
Kretschman worked from January 1992 to February 1993 as a Senior Account
Executive for CYMA Systems, Inc., a manufacturer and distributor of financial
applications software. From March 1989 to January 1992, Mr. Kretschman worked
as a Senior Sales Representative with Prime Computer Systems.
(c) Compliance with Section 16(a) of the Exchange Act.
-------------------------------------------------
Section 16 of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires that the officers, directors and persons who own more than 10% of
a class of equity securities of a corporation, such as the Company, which has a
class of equity securities registered under Section 12 of the 1934 Act file
reports of their ownership of such securities, as well as monthly statements of
changes in such ownership, with the corporation, the Securities and Exchange
Commission ("SEC") and the NASD. Based upon written representations received by
the Company from its officers, directors and more than 10% stockholders (the
"Reporting Persons"), and the Company's review of the monthly statements of
ownership changes filed with the Company by its Reporting Persons during the
fiscal year ended April 5, 1996, the Company believes that all such filings by
its Reporting Persons required during such fiscal year were made on a timely
basis.
20
<PAGE>
Item 11. Executive Compensation
The following table sets forth the compensation paid by the Company during each
of the three fiscal years ended April 5, 1996, April 7, 1995 and April 1, 1994
for services rendered in all capacities to the Company's Chief Executive Officer
and its four other most highly compensated executive officers whose compensation
exceeded $100,000 in the fiscal year ended April 5, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
- ---------------------------------------------------------------------------------------------------------------------
Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards(s) ($) SARS (#) sation ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John D. Freitag FY96 $ - $ - $ - $ - - $ -
Chairman of the FY95 - - - - - -
Board and Chief FY94 - - - - - -
Executive Officer (1)
Thomas J. Anderson, FY96 $122,500 $ 13,350 $ - $ - 100,000 $ -
President and Chief FY95 140,887 50,000 - - 50,000 -
Executive Officer (2) FY94 133,250 - - - - -
Erik R. Myrmo, FY96 $118,000 $ - $ - $ - - $ -
Vice President - FY95 108,000 - - - - -
Engineering FY94 113,510 - 14,988 - 75,000 -
Gregory A. Alba FY96 $ - $ - $ - $ - 15,000 $ -
Vice President - FY95 - - - - 3,277 -
Finance & Administration FY94 - - - - - -
Duncan E. Hume, FY96 $101,750 $ - $ - $ - - $ -
Vice President - FY95 101,817 - - - - -
International Sales FY94 - - - - 37,500 -
(1) Mr. Freitag resigned from these positions on April 25, 1996.
(2) Mr. Anderson became the Company's Chief Executive Officer on April 25, 1996.
</TABLE>
21
<PAGE>
Option Grants in Last Fiscal Year
---------------------------------
<TABLE>
<CAPTION>
Value at Assumed
Prices
Rates of Stock
Price
Individual Grants Option Term Appreciation for
- ----------------------------------------------------- ------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($ /share) Date 5% ($) 10% ($)
---- ----------- ------------ ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Alba 15,000 26.32% $1.13 12/6/99 $14,550 $16,050
Brian D. Kretschman 22,000 38.60% $1.13 12/6/99 $21,340 $23,541
</TABLE>
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
and Fiscal Year End Option Values
---------------------------------
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
Shares End (#) End ($)
Acquired on Value Exercisable / Exercisable * /
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Thomas J. Anderson - - 150,000 / - 168,000 / 0
Erik R. Myrmo - - 59,375 / 15,626 6,500 / 17,500
Gregory A. Alba - - 1,092 / 17,185 1,233 / 19,247
Duncan E. Hume - - 28,125 / 9,375 31,500 / 10,500
Brian D. Kretschman - - 5,938 / 23,562 6,651 / 26,389
* Market price at April 5, 1996 was $2.25 per share.
</TABLE>
22
<PAGE>
Item 12 Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The following table sets forth as of July 5, 1996 the amount and
percentage of the Company's outstanding Common Stock beneficially owned by (i)
each person who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director, (iii) each executive officer and (iv) all
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Shares Percent of
Name of Individual Beneficially Outstanding
or Identity of Group Owned(1)(2) Common Stock(2)
- -------------------- -------------- ---------------
Direct
-----
<S> <C> <C>
5% Holders (exclusive of Directors):
None
Directors:
- ----------
William C. Lovely..................... 300,000(3) 4.72%
Herndon, Virginia
Richard A. Hansen.................... 1,742,929(4) 27.42%
Radnor, Pennsylvania
Thomas J. Anderson................... 1,016,000(5) 15.98%
Roswell, Georgia
Executive Officers:
- -------------------
Erik R. Myrmo....................... 75,000(6) 1.18%
Roswell, Georgia
Gregory A. Alba..................... 18,277(7) .29%
Roswell, Georgia
Duncan E. Hume...................... 37,500(8) .59%
Roswell, Georgia
Brian D. Kretschman................. 29,500(9) .46%
Roswell, Georgia
All directors and executive officers
as a group (7 persons).............. 3,294,206(10) 51.8%
</TABLE>
(1) Information furnished by each individual named. This table includes shares
that are owned jointly, in whole or in part, with the person's spouse, or
individually by his spouse.
(2) Under the rules of the Securities and Exchange Commission (the "SEC"), a
person is deemed to be the beneficial owner of securities if he has, or
shares, "voting power" (which includes the power to vote, or to direct the
voting of, such securities) or "investment power" (which includes the power
to dispose, or to direct the disposition, of such securities). Under these
rules, more than one person may be deemed the beneficial owner of the same
securities. The percentage of outstanding Common Stock is less than 1%
unless otherwise indicated.
(3) As a director, Mr. Lovely may be deemed the direct beneficial owner of
75,000 shares of Common Stock, the direct beneficial owner of warrants to
purchase 25,000 shares of Common Stock and the direct beneficial owner of
200,000 shares of the Company's Common Stock, or approximately 4.72% of the
Company's outstanding Common Stock. See Item 10 hereof.
23
<PAGE>
(4) Mr. Hansen is the Chairman of the Board, a director and a principal
stockholder of PMG, which owns all of the outstanding capital stock of
PMGI, and an executive officer and a director of PMGI. Mr. Hansen
disclaims beneficial ownership of the 275,598 shares of the Company's
Common Stock owned by PMG and PMGI. Mr. Hansen owns 1,742,929 shares of
the Company's Common Stock directly or approximately 27.42% of the
Company's outstanding Common Stock. See Item 10 hereof.
(5) Mr. Anderson is the President and Chief Executive Officer and the direct
beneficial owner of 1,016,000 shares of the Company's Common Stock, to
include 150,000 shares at an exercise price of $1.13, or approximately
15.98% of the Company's outstanding Common Stock. See Item 10 hereof.
(6) Mr. Myrmo previously held options granted in May 1993 to purchase 16,667
shares of the Company's Common Stock at $3.00 per share and options
granted in January 1994 to purchase 83,333 shares of the Company's Common
Stock at $3.22 per share. In December 1995, these options were reduced by
25% and their exercise price was reduced to $1.13. Mr. Myrmo now holds
75,000 options, of which 59,375 shares are currently exercisable.
(7) Mr. Hume previously held options granted in January 1994 to purchase 50,000
shares of the Company's Common Stock at $3.22 per share. In December 1995,
these options were reduced by 25% and their exercise price was reduced to
$1.13. Mr. Hume now holds 37,500 options, of which 28,125 shares are
currently exercisable.
(8) Mr. Kretschman previously held options granted in May 1993 to purchase
1,667 shares of the Company's Common Stock at $3.00 per share and options
granted in January 1994 to purchase 8,334 shares at $3.22 per share. In
December 1995, these options were reduced by 25% and their exercise price
was reduced to $1.13. In December 1995, Mr. Kretschman was also granted
options to purchase 22,000 shares at $1.13 per share. Mr. Kretschman now
holds 29,500 options, of which 5,938 shares are currently exercis able.
(9) Mr. Alba previously held options granted in January 1995 to purchase 3,277
shares of the Company's Common Stock at $3.22 per share. In December 1995,
these options were reduced by 25% and their exercise price was reduced to
$1.13. In December 1995, Mr. Alba was also granted options to purchase
15,000 shares at $1.13 per share. Mr. Alba now holds 18,277 options, of
which 1,092 shares are currently exercisable.
(10) This total excludes 275,598 shares of the Company's Common Stock
beneficially owned by PMG and PMGI of which Mr. Hansen, a director of the
Company, is an executive officer, a director and a stockholder.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
On September 10, 1993, Jaguar, Inc. a Delaware corporation ("Jaguar"),
the majority of which is owned by John D. Freitag and the remainder of which is
owned by William C. Lovely, Thomas J. Anderson, John J. Murphy and Mark L.
Wetzel, consummated an agreement with Abdulmohsin A. Al-Sheikh, the then record
owner of all of the Brisco Investments Limited, an Isle of Man corporation
("Brisco") outstanding capital stock, to purchase all of such outstanding
capital stock for a purchase price of $14,100,000, payable $3,000,000 on March
31, 1996, $3,300,000 on March 31, 1997, $3,800,000 on March 31, 1988 and
$4,000,000 on March 31, 1999 in accordance with the terms of a note (the "Jaguar
Note") delivered by Jaguar to Mr. Al-Sheikh. The agreement between Jaguar and
Mr. Al-Sheikh provides that specified portions of the proceeds received by
Jaguar from any sales of the Company's Common Stock held by Brisco are to be
used to prepay any unpaid portion of the purchase price due Mr. Al-Sheikh. Each
of the stockholders of Jaguar has agreed with Jaguar to assume and pay that
percentage of the principal amount of the Jaguar Note as equals his percentage
ownership of Jaguar (50.1% in the case of Mr. Freitag, 21.9% in the case of Mr.
Lovely, 19% in the case of Mr. Anderson, 6% in the case of Mr. Murphy and 3% in
the case of Mr. Wetzel) at the same time as Jaguar is required to make payments
under the Jaguar Note; and has pledged to Jaguar his shares of Jaguar to secure
his obligation to pay his respective portion of the Jaguar Note, under and
subject to the pledge agreement referred to in the next paragraph hereof.
24
<PAGE>
To secure Jaguar's indebtedness under the Jaguar Note, Jaguar entered
into a pledge agreement with the holder (the "Holder") of the Jaguar Note
granting the Holder a purchase money security interest in the capital stock of
Brisco purchased by Jaguar, and Brisco entered into a separate pledge agreement
with the Holder covering the Common Stock of the Company owned by Brisco. The
pledge agreements contain standard provisions with respect to default, which
could result in the transfer of the beneficial ownership interest in the shares
of the Company owned by Brisco to the Holder (Mr. Al-Sheikh) or any assignee of
Mr. Al-Sheikh. Unless and until a default occurs under either of the pledge
agreements and the Holder gives certain notices as required by the pledge
agreements, Jaguar has the power to direct the vote and the disposition of the
shares of the Company owned by Brisco.
Based on the transactions described herein, Richard A. Hansen and Thomas
J. Anderson have acquired control of the Company by reason of their ownership of
voting securities of the Company, Jaguar ceased to be the direct beneficial
owner of more than 5% of the Common Stock of the Company and Brisco Investments
Limited, an Isle of Man corporation ("Brisco") ceased to be the direct
beneficial owner of more than 5% of the Common Stock of the Company.
On December 27, 1995, Jaguar Inc., a Delaware corporation ("Jaguar"),
pursuant to an Agreement to Release Pledged Collateral dated as of December 20,
1995 among Primary Holdings Limited, a Bermuda corporation ("PHL"), which had
become the holder of a promissory note (the "Jaguar Note") issued by Jaguar on
September 10, 1993 secured by all of the common stock of Brisco Investments
Limited, an Isle of Man corporation ("Brisco") and 2,619,266 shares of the
Registrant's Common Stock, Jaguar and Richard A. Hansen, acting on behalf of
himself (a director of the Registrant), Thomas J. Anderson (the President, Chief
Operating Officer and a director of the Registrant), William C. Lovely (a
director of the Registrant) and certain other investors pursuant to a December
20, 1995 agreement among the Registrant, Jaguar, Richard A. Hansen, William C.
Lovely, Thomas J. Anderson and John D. Freitag, sold 2,619,266 shares of Common
Stock of the Registrant and two shares of common stock of Brisco in
consideration of a prepayment of $750,000 in cash on the Jaguar Note. Each of
the purchasers paid cash, the source of which was his or her personal funds,
with the exception of Thomas J. Anderson and William C. Lovely. Mr. Anderson
and Mr. Lovely each borrowed the full amount used to purchase the shares he
purchased from Richard A. Hansen and delivered a promissory note to Mr. Hansen
payable on demand after June 30, 1996 as well as a pledge agreement pledging the
shares purchased by each as security for payment of his promissory note and
pledge agreement.
On December 29, 1995, PMG Investors, Inc. ("PMGI"), a Pennsylvania
corporation that is a wholly owned subsidiary of Pennsylvania Merchant Group
Ltd, a Delaware corporation that is a registered broker-dealer and of which
Richard A. Hansen is President, sold 1,041,829 shares of Common Stock of the
Company for $302,130 in cash the source of which was his personal funds.
25
<PAGE>
As a result of these transactions, the aggregate number of shares of
Common Stock of the Company and the percentage of the outstanding Common Stock
of the Company as of the date of January 11, 1996 beneficially owned by each of
the persons who acquired control of the Company, by the other members of the
Company Board of Directors and by any person who, together with either Mr.
Hansen or Mr. Anderson, might be deemed to comprise a group within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, was as follows:
<TABLE>
<CAPTION>
Percentage
of
Number of Shares Outstanding
Name Beneficially Owned Common Stock
- ---- ------------------ -------------
<S> <C> <C>
Jaguar Inc. 66,932 1.10%
Brisco Investments 0 0.00
John D. Freitag 383,854 6.06
William C. Lovely 300,000 4.80
Richard A. Hansen 1,721,263 27.70
Thomas J. Anderson 1,016,000 16.00
Pennsylvania Merchant Group Ltd 112,095 1.80
David S. Allsopp 200,000 3.20
Frank J. Campbell, III and Richard A. Hansen,
Trustees of Trust U/W of Jane D. Campbell 150,000 2.40
Judith W. Campbell 150,000 2.40
Peter S. Rawlings 100,000 1.60
Sarah P. Rawlings 100,000 1.60
Joseph T. Simon and Linda D. Simon JTWROS 100,000 1.60
William M. Simon 100,000 1.60
</TABLE>
Pursuant to the December 20, 1995 agreement among the Registrant, Jaguar,
Richard A. Hansen, William C. Lovely, Thomas J. Anderson and John D. Freitag,
the following are the contracts, agreements, understandings and relationships
among the Company, Richard A. Hansen, William C. Lovely, Thomas J. Anderson and
John D. Freitag with respect to the election of directors of the Registrant and
other matters:
(a) the purchase by Richard A. Hansen and his designees of 2,619,266
shares of the Company's Common Stock for $750,000 in cash of which the right to
purchase 866,000 shares would be assigned to Thomas J. Anderson and the right to
purchase 200,000 shares would be assigned to William C. Lovely;
(b) the delivery of notes by Thomas J. Anderson and William C. Lovely to
evidence their obligation to repay to Richard A. Hansen the funds he loaned to
them in respect of their purchase of the Regi-strant's shares, which notes would
be secured by a pledge of the Company's shares purchased;
(c) an acknowledgement that Jaguar would continue to be the owner of
66,932 shares of the Company's Common Stock;
(d) the conversion by John D. Freitag and William C. Lovely of all of
their shares of the Company's Series D Convertible Preferred Stock and the
Registrant's agreement to pay, not later than June 30, 1996, all of the accrued
but unpaid dividends on the Series D Convertible Preferred Stock from the date
of issuance thereof through the date of conversion;
(e) the holding of an annual meeting of the stockholders of the Company
during 1996 for the purpose of electing directors of the Company of whom three
shall be designated by Thomas J. Anderson, of whom three shall be designated by
Richard A. Hansen and of whom one shall be a person mutually acceptable to the
three Anderson designees and the three Hansen designees;
26
<PAGE>
(f) the Company's agreement to use its best efforts to cause the release
of John D. Freitag as guarantor of any loan or credit arrangements between the
Company and NationsBank, including the termination of any pledges by Mr. Freitag
securing such guarantee.
In July 1996, the parties to the December 20, 1995 letter agreement
amended the agreement to (a) rescind, as of December 20, 1995 the provision
granting to John D. freitag an option to purchase 100,000 shares of the
Company's Common Stock and in lieu thereof granted Mr. Freitag options to
purchase 100,000 shares at $1.18 per share of which options to purchase 20,000
shares will become exercisable on each of December 20, 1996, 1997, 1998, 1999
and 2000; (b) amend the provision providing for the payment to John D. Freitag
and William C. Lovely of accrued but unpaid dividends on their Series D
Preferred Stock on June 30, 1996 such that the payment will be made in six equal
monthly installments commencing on June 30, 1996 and (c) amend the provision
containing a best efforts obligation on the part of Richard A. Hansen, Thomas J.
Anderson and William C. Lovely to secure the release of John D. Freitag from his
$440,000 guarantee of the Company's borrowings from NationsBank to make such
obligation absolute as to the Company.
In March 1995, the Company entered into an agreement with CYMA Systems,
Inc. which made CYMA a distributor of the Company's products. CYMA is a
distributor of financial applications software and is 40% owned by a director
of the Company. The Company has made one sale to CYMA in the amount of $206,000
during fiscal 1995.
The Company utilizes the services of Alexis Travel, a full service travel
agency, for its corporate travel needs. Alexis is 20% owned by a director of the
Company. During the 1996 and 1995 fiscal years, the Company made purchases of
$67,000 and $19,000 respectively, at rates not in excess of those charged to
other persons in arms' length transactions.
PART IV
Item 14. Exhibits, Financial Statement Schedule
- ------- --------------------------------------
<TABLE>
<CAPTION>
<S> <C>
(a) The following documents are filed as part of this Form 10-K Report:
Page
----
(1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants 32
Report of Independent Auditors 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Cash Flows 36
Consolidated Statements of Stockholders' Equity 37
Notes to Consolidated Financial Statements 38
Report of Independent Certified Public Accountants in
Financial Schedule II 55
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 57
</TABLE>
27
<PAGE>
(c) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1(I) * Certificate of Amendment of Registrant's Certificate of Incorporation
and amendments thereto
3.1(ii) * By-laws of Registrant, as amended
4.3 * Certificate of Designation for Registrant's Series D Preferred Stock
10.45 * Agreement dated as of November 3, 1992 among Registrant, Brisco
Investments Limited, Pennsyl vania Merchant Group Ltd. and PMG
Investors, Inc.
10.46 * Factoring Agreement dated as of February 8, 1993 between Registrant
and Brisco Investments Limited
10.47 * Memorandum of Agreement dated as of February 8, 1993 among
Registrant, Princeton Graphic Systems, Inc., Brisco Investments
Limited, Flextronics Asia U.S.A., Inc. and Flextronics Singapore Pte.
Ltd.
10.48 * Agreement dated as of March 31, 1993 among Registrant, Pennsylvania
Merchant Group Ltd., PMG Investors, Inc. and Brisco Investors Limited
10.49 * $2,000,000 of financing related to potential litigation issues and
working capital shortfalls during Commitment letter dated July 13,
1993 from Pennsylvania Merchant Group Ltd. to provide up to fiscal
1994
10.50 * $5,000,000 of financing related to potential litigation issues and
working capital shortfalls during Commitment letter dated July 13,
1993 from Brisco Investments Limited to provide up to fiscal 1994
10.51 * Stock Purchase Agreement between Jaguar, Inc. and Brisco Investments
Limited dated September 10, 1993
10.52 * Promissory Note of Jaguar, Inc. dated September 10, 1993
10.53 * Pledge Agreement made by Jaguar, Inc. and Brisco Investments Limited
dated September 10, 1993
10.54 * Pledge Agreement made by Jaguar, Inc. to the Holder thereof dated
September 10, 1993
10.55 * Form of Stockholders Agreement among Jaguar, Inc., John D. Freitag,
John J. Murphy, William C. Lovely, Thomas J. Anderson and Mark L.
Wetzel dated September 10, 1993
10.56 * Form of Amended and Restated Stockholders Agreement among Jaguar,
Inc., John D. Freitag, John J. Murphy, William C. Lovely, Thomas J.
Anderson and Mark L. Wetzel dated as of October 1, 1993
10.57 * Agreement dated as of October 1, 1993 among Registrant, Pennsylvania
Merchant Group Ltd., PMG Investors, Inc. and Brisco Investments
Limited
28
<PAGE>
10.58 * Agreement dated as of October 1, 1993 between Registrant and Brisco
Investments Limited
10.59 * Agreement dated as of October 1, 1993 between Registrant and Brisco
Investments Limited
10.60 * Agreement dated as of October 1, 1993 between Registrant and John D.
Freitag
10.61 * Agreement dated as of October 1, 1993 among Registrant, Pennsylvania
Merchant Group Ltd. and PMG Investors, Inc.
10.62 * Agreement dated as of October 1, 1993 among Registrant, Pennsylvania
Merchant Group Ltd. and PMG Investors, Inc.
10.63 * Commitment letter dated December 20, 1993 from Pennsylvania Merchant
Group Ltd. to provide up to $800,000 of financing related to potential
litigation issues and working capital shortfalls during fiscal
1994/fiscal 1995
10.64 * Commitment letter dated December 20, 1993 from Jaguar, Inc. to provide
up to $800,000 of financing related to potential litigation issues and
working capital shortfalls during fiscal 1994/fiscal 1995
10.65 * Series D Convertible Preferred Stock and Warrant Purchase Agreement
among John D. Freitag, William C. Lovely and Registrant
10.66 * Form of Warrant to Purchase Common Stock of Registrant
10.67 * Agreement dated as of February 15, 1994 among Registrant, John D.
Freitag and Richard A. Hansen
10.68 * Agreement dated as of April 1, 1994 among Registrant, Pennsylvania
Merchant Group Ltd., PMG Investors, Inc. and Brisco Investments Limited
10.69 * Commitment letter dated June 23, 1994 from Leopard Industries, Inc. to
provide up to $600,000 of financing related to potential litigation
settlements and working capital shortfalls
10.70 * Fourth Amendment to Lease dated January 30, 1993, between Northmeadow
Associates and Registrant for certain premises located at 1100
Northmeadow Parkway, Roswell, Georgia
10.71 * Registrant's Amended and Restated Equity Incentive Plan
10.72 * Registrant's Amended and Restated Directors' Equity Incentive Plan
10.73 Agreement to Release Pledged Collateraldated as of December 20, 1995
among Jaguar Inc., Richard A. Hansen and Primary Holdings Limited
10.74 Agreement dated as of December 20, 1995 among Jaguar Inc., Computone
Corporation, John D. Freitag, Thomas J. Anderson, William C. Lovely and
Richard A. Hansen
10.75 Promissory Note dated as of December 20, 1995 of Thomas J. Anderson
payable to Richard A. Hansen
10.76 Pledge Agreement dated as of December 20, 1995 of Thomas J. Anderson in
favor of Richard A. Hansen
29
<PAGE>
10.77 Promissory Note dated as of December 20, 1995 of William C. Lovely
payable to Richard A. Hansen
10.78 Pledge Agreement dated as of December 20, 1995 of William C. Lovely in
favor of Richard A. Hansen
10.79 Stock Purchase Agreement dated as of December 21, 1995 between PMG
Investors, Inc. and Richard A. Hansen
10.80 Promissory Note dated as of December 21, 1995 of Richard A. Hansen
payable to PMG Investors, Inc.
21 Subsidiary of Registrant
23 * Consent of Independent Auditors with respect to the Company's Stock
Option Plan
* Certain of the exhibits to this report, indicated by an asterisk, are
incorporated by reference to other documents on file with the Securities
and Exchange Commission with which they physically filed to be part
thereof as their respective dates.
30
<PAGE>
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.
COMPUTONE CORPORATION
By: /s/ Thomas J. Anderson
------------------------------------
Thomas J. Anderson, President,
Chief Executive Officer & a Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
/s/ Richard A. Hansen Chairman of the Board August 21, 1996
- --------------------------
Richard A. Hansen
/s/ Thomas J. Anderson President, Chief Executive
- -------------------------- Officer and a Director August 21, 1996
Thomas J. Anderson (principal executive officer)
/s/ Gregory A. Alba Vice President, Finance and August 21, 1996
- -------------------------- Administration and
Gregory A. Alba Chief Financial Officer
(principal financial and
accounting officer)
/s/ William C. Lovely Director August 21, 1996
- --------------------------
William C. Lovely
Director August , 1996
- --------------------------
John D. Freitag
31
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-45878) pertaining to Computone Corporation's Director's Equity
Incentive Plan, Equity Incentive Plan and Employee and Consultant Warrants and
Non-Equity Incentive Plan Options of our report dated June 29, 1995, with
respect to the consolidated financial statements and schedule of Computone
Corporation in the Annual Report (Form 10-K) for the year ended April 5, 1996.
BDO SEIDMAN, LLP
Atlanta, Georgia
August, 19, 1996
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Computone Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity (net capital deficiency) and cash flows of Computone
Corporation for the year ended April 1, 1994. Our audit also included the
financial statement schedule listed in the accompanying index to financial
statements (Item 14(a)) for the year ended April 1, 1994. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the consolidated results of operations and cash flows of
Computone Corporation for the year ended April 1, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended April 1, 1994, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 9 to the financial statements, in 1994 the company changed
its method of accounting for income taxes.
/s/ Ernst & Young LLP
- ----------------------
Atlanta, Georgia
May 24, 1994
33
<PAGE>
Computone Corporation
Consolidated Balance Sheets
(in thousands except par value and number of shares)
<TABLE>
<CAPTION>
April 5, 1996 April 7, 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 143 $ 297
Receivables, net 1,564 3,253
Inventories, net 2,715 2,174
Prepaid expenses and other 83 110
-------------- --------------
Total current assets 4,505 5,834
Property, equipment and improvements, net 523 897
Intangible assets, net 636 891
Other 99 101
-------------- --------------
Total assets $ 5,763 $ 7,723
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,848 $ 1,797
Accrued liabilities:
Payroll 113 164
Disputed matter - 230
Prepaid sales 214 -
Professional fees 69 96
Other 465 425
Line of credit 599 -
Current maturities of long term debt 504 230
-------------- --------------
Total current liabilities 3,812 2,942
Notes payable to stockholders 20 270
Long term debt, less current maturities 47 314
-------------- --------------
Total liabilities 3,879 3,526
Stockholders' Equity
Convertible redeemable preferred stock, $.01 par value;
10,000,000 shares authorized; 0 shares issued - 2
Common stock, $.01 par value; 50,000,000 shares
authorized; 6,357,184 and 6,207,184 shares outstanding 64 62
Additional paid in capital 41,543 41,517
Accumulated deficit (39,723) (37,384)
-------------- --------------
Total stockholders' equity 1,884 4,197
-------------- --------------
Total liabilities and stockholders' equity $ 5,763 $ 7,723
============== ==============
See accompanying notes to the consolidated financial statements.
</TABLE>
34
<PAGE>
Computone Corporation
Consolidated Statements of Operations
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
April 5, 1996 April 7, 1995 April 1, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Product sales $ 9,665 $ 14,550 $ 13,702
Royalties - - 882
----------- ----------- -----------
Net revenues 9,665 14,550 14,584
Expenses:
Cost of products sold 6,640 8,816 8,024
Selling, general and administrative 3,934 4,555 3,909
Product development 1,294 1,098 1,034
----------- ----------- -----------
11,868 14,469 12,967
----------- ----------- -----------
Operating income (loss) from continuing operations (2,203) 81 1,617
Other income (expense):
Other, net 8 102 19
Interest expense - affiliates (20) (19) (103)
Interest expense - other (92) (38) (8)
----------- ----------- -----------
Income (loss) from continuing operations (2,307) 126 1,525
Discontinued operations:
Income on discontinued operations - - 53
Income (loss) on disposal - 184 1,921
----------- ----------- -----------
Income (loss) from discontinued operations 0 184 1,974
----------- ----------- -----------
Income (loss) before extraordinary item (2,307) 310 3,499
Extraordinary item:
Debt foregiveness - 242 -
----------- ----------- -----------
Net income (loss) (2,307) 552 3,499
Preferred stock dividends (32) - -
----------- ----------- -----------
Net income (loss) applicable to common stock $ (2,339) $ 552 $ 3,499
=========== =========== ===========
Earnings (loss) per common share and common equivalents
Income (loss) from continuing operations $ (0.36) $ 0.02 $ 0.28
Income (loss) from discontinued operations - 0.03 0.35
Income from extraordinary item - 0.04 -
----------- ----------- -----------
Earnings (loss) per common share and common equivalents $ (0.36) $ 0.09 $ 0.63
=========== =========== ===========
Weighted average common shares and
common equivalents outstanding 6,406 6,445 5,513
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
35
<PAGE>
Computone Corporation
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------------
April 5, 1996 April 7, 1995 April 1, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (2,307) $ 126 $ 1,525
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) continuing operations:
Depreciation and amortization 968 927 530
Provision for uncollectible accounts 205 198 643
Provision for inventory reserve 178 6 -
Changes in current assets and current liabilities:
Accounts receivables 1,485 (547) (733)
Inventories (720) 442 (510)
Prepaid expenses and other 27 (209) (124)
Accounts payable and accrued liabilities (35) 212 957
---------- ---------- ----------
Net cash provided by (used in) continuing operations (199) 1,155 2,288
---------- ---------- ----------
Income (loss) from discontinued operations - 184 1,974
Adjustments to reconcile income from discontinued operations
to net cash used in discontinued operations:
(Income) loss on disposal - (184) (1,921)
Change in net assets of discontinued operations - (47) (1,086)
---------- ---------- ----------
Net cash used in discontinued operations - (47) (1,033)
---------- ---------- ----------
Net cash provided by (used in) operating activities (199) 1,108 1,255
---------- ---------- ----------
Cash flows from investing activities:
(Increase) decrease in other assets 2 66 (7)
Capitalization of software costs (262) (322) (453)
Capital expenditures (76) (202) (564)
---------- ---------- ----------
Net cash used in investing activities (336) (458) (1,024)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings - affiliates - - 250
Repayment of debt - net (243) (583) (1,606)
Net borrowings under lines of credit - others 599 - -
Exercise of common stock options and warrants - 15 86
Contribution of capital 25 - -
Issuance of common stock 2 - 750
Conversion of preferred stock (2) - -
Issuance of preferred stock - - 400
---------- ---------- ----------
Net cash (used in) provided by financing activities 381 (568) (120)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (154) 82 111
Cash and cash equivalents, beginning of period 297 215 104
---------- ---------- ----------
Cash and cash equivalents, end of period $ 143 $ 297 $ 215
========== ========== ==========
Supplemental schedule for non-cash investing and
financing activities:
Conversion of debt to common stock $ - $ - $ 5,531
Accrued interest waived on conversion of debt to common stock - - 119
Contribution of fixed assets for common stock - - 71
Conversion/settlement of preferred stock to common stock 150 - 124
Recognition of costs related to issuance of common stock - 147 -
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 92 $ 32 $ 8
See accompanying notes to the consolidated financial statements.
</TABLE>
36
<PAGE>
Computone Corporation
Consolidated Statements of Stockholders' Equity (Net Captial Deficiency)
(in thousands, except share amount)
<TABLE>
<CAPTION>
Stockholders'
Treasury Equity
Preferred Stock Common Stock Additional Accumulated Stock, (Net Capital
---------- ----- ------------ -----
Shares Amount Shares AmountPaid-In Capital Deficit At Cost Deficiency)
------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 1993 - $ - 5,041,920 $ 50 $ 34,838 $ (41,435) $ (256) $(6,803)
Exercise of common stock options - - 28,917 - 86 - - 86
Exercise of common stock warrants - - - - - - - -
Conversion of debt to common stock - - 220,630 2 1,648 - - 1,650
Issuance of common stock - - 51,623 1 349 - - 350
Conversion of debt to common stock - - 407,011 5 2,553 - - 2,558
Accrued interest waived on conversion
of debt to common stock - - - - 119 - - 119
Contribution of assets for common stock - - 16,786 - 71 - - 71
Issuance of Series D preferred stock 200,000 2 - - 398 - - 400
Issuance of common stock - - 128,000 1 399 - - 400
Conversion of debt to common stock - - 43,638 - 180 - - 180
Issuance of common stock related to
Series B preferred stock settlement - - 30,000 - 124 - - 124
Conversion of debt to common stock - - 342,924 3 1,140 - - 1,143
Retirement of treasury stock - - (109,566) - (256) - 256 -
Net Income - - - - - 3,499 - 3,499
---------- ----- ------------ ----- ------------ ---------- -------- -----------
Balance, April 1, 1994 200,000 2 6,201,883 62 41,649 (37,936) 0 3,777
Exercise of common stock options - - 5,301 - 15 - - 15
Costs related to issuance of
common stock - - - - (147) - - (147)
Net Income - - - - - 552 - 552
---------- ----- ------------ ----- ------------ ---------- -------- -----------
Balance, April 7, 1995 200,000 2 6,207,184 62 41,517 (37,384) 0 4,197
Conversion of preferred stock to
common stock (200,000) (2) 150,000 2 0 - - 0
Legal fee payments made by directors - - - - 26 - - 26
Net loss - - - - - (2,339) - (2,339)
---------- ----- ------------ ----- ------------ ---------- -------- -----------
Balance, April 5, 1996 0 $ 6,357,184 $64 $ 41,543 $(39,723) $ 0 $ 1,884
========== ==== =========== ==== =========== ========= ======= ==========
See accompanying notes to the consolidated financial statements.
</TABLE>
37
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Computone Corporation ("the Company") has continuing operations in the
field of computer communications, including the manufacture and sale of
intelligent computer add-on printed circuit boards and the development and sale
of multi-user operating software. The Company produces communications
subsystems under the Computone name and markets its products to a broad range of
worldwide distributors, systems integrators, value added re-sellers and original
equipment manufacturers.
Certain of the Company's operations have been treated as discontinued
operations, see Note 3.
FISCAL YEAR END
The Company's fiscal year ends on the first Friday in April. The fiscal
year ended April 5, 1996 had 52 weeks, the fiscal year ended April 7, 1995 had
53 weeks and the fiscal year ended April 1, 1994 had 52 weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances have been eliminated
in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Product sales are recognized, net of an allowance for estimated returns,
when the related products are shipped to cus tomers since the Company does not
have any vendor or post-shipment support obligations with respect to its
products, and collection of the resulting receivables is deemed probable by
management at the shipment date. The Company has established, during fiscal
1996, a reserve of 50% of the gross margin applicable to the outstanding
accounts receivable balances of its distribution customers to allow for the
potential return and/or rotation of stock on hand at the distributor.
Royalties principally represent income earned from the licensing of
product technology which is recognized when the Company is notified that the
related products have been shipped to customers. During the 1996, 1995 and 1994
fiscal years, the Company recorded royalty income in the amounts of $0, $0 and
$882,000 respectively. As of the end of the 1994 fiscal year, the Company no
longer had any royalty agreements. Costs related to royalties have in many
cases been incurred over a number of years and substantial portions thereof are
indistinguishable and not susceptible to segregation from other costs and
expenses in curred by the Company.
A warranty reserve of less than one percent of sales, to cover the
estimated costs of correcting product defects, is accrued at the date of
shipment. The Company generally provides a warranty of five years on all of its
products sold. Historically, the Company's actual warranty expenses have
approximated actual warranty costs.
38
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined on the first-in, first-out method.
Raw materials which have no planned production life or exceed 18 months
of anticipated supply are deemed excess and are fully reserved. Reserves are
also established as management deems appropriate for obsolete, excess and non-
salable invento ries, including finished goods inventories.
Inventories are net of a reserve for obsolete, excess and non-salable
items of $381,000 and $203,000 at April 5, 1996 and April 7, 1995, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and
amortization are provided by charges to operations using the straight-line
method based on estimated useful lives (shorter of asset life or lease term for
leasehold improvements). Expenditures for maintenance and repairs are charged
to operations as incurred, while renewals and betterments are capitalized.
Depreciation and amortization charged to continuing operations for the years
ended April 5, 1996, April 7, 1995 and April 1, 1994 amounted to $450,000,
$473,000 and $336,000, respectively.
Effective April 3, 1993, the Company revised the estimated useful lives
related to certain property and equipment to re flect more closely the current
remaining useful lives of such assets. The effect of this change in accounting
estimate for the year ended April 1, 1994 was to increase the Company's income
from continuing operations, net income and net income applicable to common stock
by approximately $232,000 ($.04 per share).
SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized upon establishing the
respective technological feasibility of a product and are amortized on a
product-by-product basis beginning on the date the particular product is
available for general release to customers based on the estimated revenues to be
realized from the related products or on a straight-line basis over the
estimated product lives. The amortization of such costs is included in the
Company's cost of products sold.
Such amortization expense during the years ended April 5, 1996, April 7,
1995 and April 1, 1994 totaled $518,000, $454,000 and $194,000, respectively;
software development costs totaling $262,000, $322,000 and $453,000,
respectively, were capitalized during such years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred. Research and
development amounted to $1,294,000, $1,098,000 and $1,034,000 during the years
ended April 5, 1996, April 7, 1995 and April 1, 1994, respectively.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No.109 (SFAS 109), "Accounting for
Income Taxes". Management provides a valuation allowance against its deferred
tax assets to the extent that management concludes that it is more likely than
not that the Company will not benefit from the utilization of such deferred tax
assets.
39
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per common share is computed by dividing net income applicable
to common stock by the weighted average number of shares of common stock and
common stock equivalents outstanding during each period.
On November 30, 1993, the Company effected a one-for-six reverse stock
split of the Company's Common Stock effective as of that date. Accordingly, the
weighted average number of shares outstanding and per share amounts in the
accompanying consolidated financial statements have been restated for all
periods.
As required by APB Opinion No. 15, supplementary earnings per share data
is presented below for the year ended April 5, 1996. For the computation of
supplementary earnings per share, shares issued for the conversion of debt are
included in the weighted average shares outstanding from the beginning of the
year. Supplementary earnings per share is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ----- -----
Earnings per share of common stock:
<S> <C> <C> <C>
Income (loss) from continuing operations $( .36) $ .02 $ .28
Income from discontinued operations - - .03 .35
Income from extraordinary items - - .04 - -
------ ----- -----
Earnings (loss) per share $( .36) $ .09 $ .63
====== ===== =====
</TABLE>
In October 1995, The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which the Company is required to
adopt in 1996. SFAS No. 123 requires companies to estimate the value of all
stock-based compensation using a recognized pricing model. Companies have the
option of recognizing this value as an expense or disclosing its effects on net
income. The Company's management has not yet determined its method of adoption
or the financial statement impact of adopting SFAS No. 123.
RECLASSIFICATION
Certain amounts have been reclassified in the 1995 consolidated
balance sheet to conform to the 1996 presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could be different from these estimates. Certain
estimates used by management are particularly susceptible to significant changes
in the economic environment. These include estimates of inventory obsolescence,
provisions for sales returns and allowances and deferred tax assets. Each of
these estimates, as well as the related amounts reported in the financial
statements, are sensitive to near term changes in the factors used to determine
them. A significant change in any one of those factors could result in the
determination of amounts different than those reported in the financial
statements. Management believes that as of April 5, 1996, the estimates used in
the financial statements are adequate based on the information currently
available.
2. FUTURE PROSPECTS
During the year ended April 5, 1996, the Company incurred a loss of
$2,275,000 from continuing operations. The Company is also in violation of
certain loan convenants with respect to its line of credit, which matures in
August, 1996 and which the Company has borrowed the full amount available under
the line of credit. These matters raise
40
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
2. FUTURE PROSPECTS (CONTINUED)
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are discused below.
The Company is attempting to raise between $1,000,000 and $1,500,000
in operating capital through a private placement offering for its Common Stock.
The Company is cautiously optimistic that it will be able to raise the required
capital. It is anticipated that the funds would be available by the end of
September 1996. The Company is also in negotiations with its lender to
restructure the repayment terms of its line of credit to extend the maturity
date and to reduce the amounts due during fiscal 1997 as well as to restructure
the payment terms of its note payable with the same lender.
Management believes that the cash provided from continuing operations
during fiscal 1997 should be reasonably sufficient to cover operating expenses
incurred during the fiscal year. Cash commitments for noncancelable long-term
operating real and personal property lease during 1997 is approximately
$300,000. The Company currently has no plans for any major capital
improvements. Relationships with major vendors are currently satifactory
although the Company is on a "Cash On Delivery" status with a significant number
of raw materials vendors. If the Company is not able to obtain additional
funding from the offering, management will be required to negotiate extended
payment terms with certain vendors that have past due accounts. The Company
believes that working capital shortages as may occur from time to time may be
satisfied at least to some extent from funding to be advanced to the Company
under a verbal agreement made to the Company by its major shareholder. At the
end of the first quarter of the 1997 fiscal year, the Company's working capital
and current ratio have improved slightly.
The Company believes that, if the funding to be provided by the
offering is obtained in combination with cash provided by continuing operations
and the restructuring of the repayment of its line of credit, the Company will
be able to fund operations on both a short-term and long-term basis. There can
be no assurances that the offering will be successful or that the anticipated
amount of proceeds can be obtainable or that the Company will be able to
satisfactorily restructure the repayment terms of its line of credit and note
payable. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. RESTRUCTURING
During the year ended April 2, 1993, restructuring charges were
recorded to cover costs related to downsizing the Company's operating capacity
due to the Company's working capital deficit. Severance and related benefits
costs totaling $810,000 were recorded to cover the employment terminations of
all of the then executive officers as well as over 30 employees from the
production, engineering, sales and marketing departments. In addition, the
Company's executive offices in Radnor, Pennsylvania were closed, resulting in
buyout termination payments for the office lease, telephone lease, photocopiers
and fax machines and the shipment of the Company's corporate records to Roswell,
Georgia.
The Company reviewed all capitalized software development costs and
determined that the additional costs necessary to continue the development of
the Lynxware and MPA960 products lines required expenditures of working capital
the Company did not have. Accordingly, the Company included the write-off of
the capitalized software cost of $472,000 for Lynxware and $324,000 for MPA960
in the restructuring charges. These write-offs were directly attributable to
the business changes initiated by new management, who assumed control of the
Company in November 1992, and were not attributable to events and/or condi
tions in prior fiscal quarters and/or years. During the first and second
quarters of fiscal 1993, the Company conducted a review of the gross margin
contribution of all individual products in its product lines so that the
Company's scarce working capital resources could be allocated to those products
which would maximize the Company's cash position. The initial review was
conducted by prior management for the first quarter of fiscal 1993, and resulted
in a restructuring charge of $175,000. When new management of the Company took
over in November 1992, an additional detailed review was conducted. Based on new
management's review, the Company discontinued 19 products that displayed low
gross margin contributions which, in the opinion of new management, would not
generate sufficient working capital in the future to justify their continued
existence given the Company's severe working capital constraints.
41
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
3. RESTRUCTURING (CONTINUED)
Accordingly, a reserve of $1,318,000 was established for all raw materials,
work-in-process and finished goods inventories associated with the above 19
products during the second quarter of fiscal 1993.
New management also reviewed the net book value related to costs in
excess of fair values of the net assets acquired and determined that no current
value existed given the Company's new direction, and therefore a write-off of
$322,000 was re corded as part of the restructuring charges. New management
also included in the restructuring charges $139,000 for professional fees
related to the restructuring to cover legal and advisory fees.
On a retrospective basis, when considering the Company's operating
philosophies under prior management, new man agement does not believe that any
material portion of the above charges should have been recorded in prior-period
financial statements and, on a prospective basis, all required reserves have
been properly accrued under Statement of Financial Accounting Standards No.5 and
Accounting Principles Board Opinion No. 30.
4. DISCONTINUED OPERATIONS
PRINCETON, NEW PRINCETON AND DENISON
During the second quarter of the year ended April 2, 1993, as a result
of unsuccessful attempts to sell New Princeton, a subsidiary of the Company, the
Company decided to shut down New Princeton. As a result of this decision, New
Princeton's primary vendors made claims against the Company which were more
significant than expected. New management recorded a reserve of $4,105,000, in
excess of prior reserves established during the six months ended October 2,
1992. This reserve included an accrual for a United States Customs Service
matter involving the determination of the appropriate amount of customs payable
on certain monitors imported by Princeton, a discontinued operation of the
Company.
In December 1992, the Company entered into an agreement to satisfy its
existing guarantee of $1,700,000 of New Princeton's obligations to its primary
vendor. Under the terms of the agreement, the Company was to pay the vendor
$1,300,000 and issue 44,445 shares of its Common Stock in full satisfaction of
its obligation under the guarantee. The guarantee was secured by substantially
all of the Company's assets. As of April 1, 1994, the Company had issued the
44,445 shares as well as an additional 40,000 shares of Common Stock in lieu of
$120,000 of cash payments and had paid $1,180,000, under this agreement.
PRINCETON, NEW PRINCETON AND DENISON
Also in December 1992, the Company paid $630,000 to a former vendor of
Princeton in full satisfaction of a jury verdict against the Company. With
regards to a lawsuit filed against the Company in April 1992 demanding payment
of approxi mately $2,100,000, the Company entered into an agreement in December
1992 with this vendor under which $689,000 of the claim representing trade
accounts payable was to be satisfied via payments totaling $517,000 and the
issuance of 8,209 shares of the Company's Common Stock. As of April 1, 1994,
the Company had paid in full the $517,000 and issued the shares in accordance
with the terms of this agreement. In August 1993, the Company entered into an
agreement with this vendor to pay $600,000 and issue 73,137 shares of Common
Stock in full satisfaction of a claim for residual inventories. As of April 5,
1996, the Company had complied in full with the terms of the agreement.
DENISON
During the second quarter of the year ended April 2, 1993, new
management of the Company analyzed the reserve related to the outstanding
litigation against the Company's former Defense Product Group ("Denison") and
recorded an addition al reserve of $760,000.
42
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
4. DISCONTINUED OPERATIONS (CONTINUED)
DENISON (CONTINUED)
During the fourth quarter of the year ended April 2, 1993, the Company
entered into two agreements with former Denison shareholders that required
issuance of 111,451 shares of the Company's Common Stock and cash payments of
$212,000. On April 1, 1994, an additional 30,000 shares were issued as agreed
upon. As of April 1, 1994, the Company had paid all but $24,000 under this
agreement. In relation to the two agreements, the former Denison shareholders
also surrendered all of the Company's Series B preferred stock. At April 5,
1996, the Company had complied in full with the terms of the agreements.
During the year ended April 1, 1994, based on the settlement of the
majority of the litigation related to the Company's discontinued Princeton and
Denison operations, it was determined that the loss on the disposal would be
less than originally provided for as of April 2, 1993. Therefore, the estimated
disposal costs were reduced by approximately $1,921,000 during the year ended
April 1, 1994.
During the year ended April 5, 1996, the Company recognized income of
$184,000 related to a reduction in the expected disposal costs of its
discontinued operation.
Management believes no additional reserve for the loss on disposal of
Princeton and Denison is required at April 5, 1996.
5. ADVANCES FROM AFFILIATE
In February 1993, the Company entered into a factoring agreement
whereby it borrowed $1,000,000 from an affiliate secured by an assignment of
$1,000,000 in accounts receivable. On October 1, 1993, the Company and the
affiliate entered into an agreement whereby the factoring agreement was
terminated and the $1,000,000 owed to the affiliate was converted to equity of
the Company (Note 12). The interest payable to the affiliate was waived and the
Company recorded the interest expense as additional paid-in capital.
<TABLE>
<CAPTION>
6. OTHER BALANCE SHEET INFORMATION (IN THOUSANDS)
APRIL 5, APRIL 7,
1996 1995
------------------------------
<S> <C> <C>
Inventories:
Finished goods 830 $ 544
Work in process 516 584
Raw materials 1,319 1,046
------ ------
$2,665 $2,174
====== ======
Property and equipment:
Equipment 3,046 $2,839
Furniture & fixtures 395 526
Leasehold Improvements 222 222
------ ------
3,587 3,653
Less accumulated depreciation
and amortization 3,140 2,690
------ ------
$ 523 $ 897
====== ======
Intangible assets:
Software costs $2,097 $1,835
Less accumulated amortization 1,461 944
------ ------
$ 636 891
====== ======
</TABLE>
43
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
7. LONG-TERM DEBT AND LINE OF CREDIT
(a) Long-term debt consists of the following: (in thousands)
<TABLE>
<CAPTION>
APRIL 5, APRIL 7,
1996 1995
-----------------------
<S> <C> <C>
Prime plus two percent note payable
to bank, principal of $13,427, plus
interest, due monthly through September
1997, collateralized by accounts
receivable, inventory and equipment and
guaranteed by a former director of the
Company (see note 7(b) ) 242 $ 403
7% note payable to a major
stockholder due December 1996 250 250
7% note payable to a major
stockholder due December 1999 20 20
Other, principally extended vendor
payment plans 59 414
------ ------
571 814
Less current maturities 504 230
------ ------
$ 67 $ 584
====== ======
</TABLE>
The above liabilities are presented in the accompanying
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
April 5, April 7,
1996 1995
-------------------------
<S> <C> <C>
Notes payable to stockholder $ 20 $270
Long-term debt 47 314
----- ----
Total $ 67 $584
===== ====
</TABLE>
Future maturities of long-term debt are as follows (in thousands):
1997 $ 504
1998 47
1999 - -
2000 20
2001 - -
Thereafter - -
-------
$571
====
The note payable to bank has certain financial covenants, including
minimum requirements relating to working capital and tangible net worth. The
Company was not compliance with all of the covenants at April 5, 1996 as
discussed below.
44
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
7. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
(b) The Company has a line of credit facility with a bank which
provides for $750,000 in advances at a rate of prime plus 1% and matures in
August 1996.
The Company has been engaged in discussions with its lender with
respect to its note payable to bank (Note 7 (a)) and its line of credit to (i)
extend the maturity date of the line of credit, (ii) restructure the payment
terms of both the note payable and line of credit and (iii) obtain waivers with
respect to the loan covenant violations. The Company has classified all
borrowings due to this lender as current obligations, pending the satisfactory
resolution of these matters. However, there can be no assurances that the
Company will be able to satisfactorily resolve these matters. See Note 2.
8. COMMITMENTS
Rent payable under noncancelable long-term operating leases for real
and personal property relating to continuing operations is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $300
1998 213
1999 19
2000 16
2001 - -
----
$ 548
=====
</TABLE>
Rent expense relating to continuing operations amounted to $288,000,
$305,000 and $312,000 for the years ended April 5, 1996, April 7, 1995 and
April 1, 1994, respectively.
9. INCOME TAXES
The Company has available net operating and capital loss
carryforwards, including preacquisition operating loss carryforwards which
relate to a predecessor company, which expire through the year 2011. As a
result of several ownership changes which have occurred since the losses started
to accumulate, statutory provisions will substantially limit the Company's
future use of the loss carryforwards. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used for income tax
purposes.
The components of deferred tax liabilities and deferred tax assets
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ---------
Deferred tax liabilities:
<S> <C> <C>
Software costs $ 221 $ 39
Depreciation 40 19
--------- --------
Total deferred tax liabilities 261 58
========= ========
Deferred tax assets:
Allowance for doubtful accounts 112 75
Inventory reserves 32 73
Other accrued expenses 227 132
Net operating loss carryforwards 10,053 9,222
Tax Credits - - 46
Valuation allowance ( 10,163) ( 9,190)
--------- --------
Total deferred tax assets 261 358
========= ========
</TABLE>
45
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
9. INCOME TAXES (CONTINUED)
The valuation allowance increased by $973,000 during the year ended
April 5, 1996. During the years ended April 7, 1995 and April 1, 1994, the
valuation allowance decreased by $908,000 and $1,325,000, respectively.
As a result of the existing net operating loss carryforwards, no
current provision for income taxes was required for the years ended April 5,
1996, April 7, 1995 and April 1, 1994.
The statutory federal income tax rate differed from the effective
income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate 34% 34% 34%
State tax rate, net of federal tax benefit 4 4 --
Effect of nonutilization of net operating losses -- -- (34)
Decrease in deferred tax asset valuation allowance (38) (38) - -
---- ---- ----
--% --% --%
==== ==== ====
</TABLE>
10. PREFERRED STOCK
In January 1994, the Company's former Chairman and another member of
the Board of Directors contributed a total of $400,000 in cash and were issued a
total of 200,000 shares of Series D Preferred Stock and warrants to purchase
50,000 shares of Common Stock at an exercise price of $2.75 per share. The
shares of Series D Preferred Stock are convertible, at the option of the holder
thereof, at any time, into Common Stock at $2.75 per share subject to adjustment
for certain changes in the Compa ny's capitalization, including stock splits,
stock dividends, consolidations, mergers and combinations, or upon certain
dilutive issuances of shares of Common Stock or securities convertible or
exchangeable or exercisable for shares of Common Stock, di rectly or
indirectly.
The holders of Series D Preferred Stock were entitled to vote on all
matters on which stockholders may vote, including the election of directors, and
are entitled to a number of votes equal to the number of shares of Common Stock
into which the shares of Series D Preferred Stock they hold are convertible.
The Series D Preferred Stock votes together with the Common Stock as one class
except when class voting is required by law and except that, without the
approval of the holders of at least 60% of the outstanding shares of Series D
Preferred Stock, voting as a separate class, the Company may not amend the terms
of the Series D Preferred Stock or sell all or substantially all of its assets
or liquidate the Company.
The holders of shares of Series D Preferred Stock were entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends at a rate of $.08 per share per annum.
Such dividends would, if declared, have been payable quarterly in arrears on
April 1, July 1, October 1 and January 1, commencing October 1, 1994.
If all accrued dividends have not been paid or set apart for payment,
no dividends or other distributions may be declared or made with respect to the
Common Stock or any other securities of the Company. The Series D Preferred
Stock will be redeemable, in whole or in part, at the option of the Company
after March 1, 1997 at a price per share of $2.00 plus an amount equal to all
accrued but unpaid dividends to the date fixed for redemption.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, holders of Series D Preferred Stock are entitled to be paid
out of the assets of the Company available for distribution to its stockholders
an amount in cash equal to $2.00 per share plus all accrued but unpaid dividends
to the date fixed for such liquidation, dissolution or winding up, before any
payment is made to the holders of the Common Stock.
46
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
10. PREFERRED STOCK (CONTINUED)
On December 20, 1995, the Company's former Chairman and a member of
the Board of Directors exercised their right to convert the Preferred Stock into
150,000 shares of Common Stock. The Company has agreed to pay, in six equal
monthly installments beginning June 30, 1996, all of the accrued but unpaid
dividends on the Series D Convertible Preferred Stock from the date of issuance
thereof to the date of conversion.
11. STOCK OPTIONS AND WARRANTS
The Company has equity incentive plans for employees and directors
which provide for the granting of non-qualified stock options, stock
appreciation rights and restricted stock awards to key employees, officers and
directors of the Company. All option and warrant data have been adjusted for
all periods prior to the reverse stock split (Note 1).
A summary of option transactions is as follows:
<TABLE>
<CAPTION>
Shares Price Per Share
-------- ------------------------
<S> <C> <C> <C>
Balance, April 2, 1993 58,820 $3.00 to $24.90
Options granted 369,168 3.00 to 3.22
Options exercised (28,917) 3.00
Options canceled (13,113) 3.00 to 8.28
-------
Balance, April 1, 1994 385,958 3.00 to 19.80
Options granted 101,559 3.00 to 3.25
Options exercised (5,302) 3.00
Options canceled (53,336) 3.00 to 19.80
-------
Balance, April 7, 1995 428,879 3.00 to 3.25
Options granted 157,000 1.13
Options exercised - - - - - -
Options canceled (192,493) 3.00 to 3.25
---------
Balance, April 5, 1996 393,386
=======
</TABLE>
At April 5, 1996, options to purchase 288,532 shares were exercisable.
The Company has reserved 500,000 shares of common stock for its Equity Incentive
Plans.
The Company has granted certain directors, officers, stockholders,
customers, lenders and employees warrants that entitle the holders to purchase
shares of the Company's Common Stock. The warrants, are exercisable from the
date of grant for periods which vary from three to five years. Expiration dates
extend through April 2003.
47
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the warrant transactions is as follows:
<TABLE>
<CAPTION>
Shares Price Per Share
-------- ----------------
<S> <C> <C> <C>
Balance, April 2, 1993 158,053 $3.00 to $29.28
Warrants granted 50,000 2.75
Warrants exercised ---
Warrants canceled (19,637) 3.00 to 24.00
-------
Balance, April 1, 1994 188,416 2.75 to 29.28
Warrants granted ---
Warrants exercised ---
Warrants canceled (31,745) 3.00 to 29.28
-------
Balance, April 7, 1995 156,671 2.75 to 10.50
Warrants granted 24,243 3.50
Warrants exercised ---
Warrants canceled 20,834 3.00
--------
Balance, April 5, 1996 160,080
=======
</TABLE>
At April 5, 1996, all warrants outstanding are exercisable.
12 EQUITY TRANSACTIONS
YEAR ENDED APRIL 1, 1994
- ------------------------
In August 1993, the Company issued 73,137 shares of Common Stock in
satisfaction of $650,000 of obligations, under a December 1992 debt
restructuring agreement, to a major creditor of the Company's discontinued
Princeton division.
On October 1, 1993, the Company issued Common Stock in the following
transactions, all at a conversion price of $6.78 per share:
The Company's largest stockholder converted $1,000,000 previously
advanced to the Company in February 1993 under a factoring agreement (Note 5)
into 147,493 shares of Common Stock;
The Company's largest stockholder contributed $350,000 in cash and
was issued 51,623 shares of Common Stock;
The Company's largest stockholder converted $400,000 of a $500,000
outstanding note payable into 58,997 shares of Common Stock;
48
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
12. EQUITY TRANSACTIONS
YEAR ENDED APRIL 1, 1994 (CONTINUED)
- ------------------------------------
The Company's largest stockholder converted $717,687, in advances made
to the Company during 1993, into 105,854 shares of Common Stock;
The Company's then current Chairman converted $141,846, owed to him by
the Company as a result of the termination of his employment with the Company in
September 1990, into 20,992 shares of Common Stock;
The Company's second largest stockholder converted $400,000 of a
$500,000 outstanding notes payable into 58,997 shares of Common Stock;
The Company's second largest stockholder converted $630,000 of
outstanding notes payable into 92,921 shares of Common Stock; and
The Company's second largest stockholder converted $130,000, in fees
owed to it by the Company, into 19,174 shares of Common Stock.
On December 6, 1993, a stockholder contributed fixed assets of $71,340
to the Company, and in return the Company issued 16,786 shares of Common Stock.
On January 4, 1994, a stockholder made a cash contribution via a line
of credit draw-down previously issued on behalf of the Company of $137,900 and
in return the Company issued 50,146 shares of Common Stock.
In February 1994, the Company's Chairman and another Board Member
advanced the Company $300,000 and $100,000, respectively, converting the
advances into 96,000 shares and 32,000 shares, respectively, of the Company's
Common Stock.
In March 1994, the Company agreed to issue 342,924 shares of the
Company's Common Stock in discharge of liabilities amounting to $1,143,000 owed
by the Company under the December 1992 debt restructuring agreements. Included
in these amounts were 58,183 shares valued at $193,641 related to discontinued
operations.
On April 1, 1994, the Company's two largest stockholders each
converted $90,000 of long-term debt of the Company into 21,819 shares of the
Company's Common Stock.
On April 1, 1994, the Company issued 30,000 shares of the Company's
Common Stock related to the settlement agreement reached regarding the Company's
Series B Preferred Stock.
During the year ended April 1, 1994, the Company retired 109,566
treasury shares.
YEAR ENDED APRIL 7, 1995
- ------------------------
None applicable.
YEAR ENDED APRIL 5, 1996
- ------------------------
On December 20, 1995, the Company's former Chairman and another Board
member elected to convert their 200,000 shares of Series D Convertible Preferred
Stock into 150,000 shares of Common Stock.
49
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
13. OTHER RELATED PARTY TRANSACTIONS
During the seven months ended October 30, 1992, the Company paid a
former director and officer of the Company $76,000 for consulting services.
During the year ended April 2, 1993, the Company paid a director
consulting fees of $117,000 in connection with services related to operations
and disposition of Princeton. The director served as President and Chief
Operating Officer of the Company during the period September 1, 1992 through
October 30, 1992. During December 1992, the Company granted the di rector a
warrant to purchase 16,667 shares of the Company's Common Stock at a price of
$10.50 per share through December 1997.
Effective March 31, 1993, the major stockholder waived accrued
financial advisory fees totaling approximately $124,000.
The Company incurred interest expense totaling $19,000, $103,000 and
$636,000 during the fiscal years ended April 5, 1996, April 1, 1994 and April 2,
1993, respectively, on obligations due to stockholders.
During the seven months ended October 30, 1992, the Company loaned
First Philadelphia Corporation ("FPC") $305,000. In November 1992, the Company
renegotiated its receivable from FPC into a note receivable of $451,000,
representing the $305,000 loan during 1993 plus a previously loaned amount of
$146,000, bearing interest at 8% and payable on demand after March 20, 1993. In
March 1993, FPC paid $2,000 and claimed that the remaining balance was
eliminated in accordance with the note's provisions. During the year ended
April 1, 1994, the Company netted the note against a $449,000 reserve previously
recorded during the year ended April 2, 1993.
The Company's major stockholder advanced $630,000 in the form of a
long-term obligation to the Company during the year ended April 2, 1993. This
amount was subsequently used to settle a previously issued jury verdict against
the Company for $630,000. During October 1993, the stockholder converted the
$630,000 into Common Stock of the Company (see Note 12).
In March 1995, the Company entered into an agreement with CYMA Systems,
Inc. which made CYMA a distributor of the Company's products. CYMA is a
distributor of financial applications software and is 40% owned by a director
of the Company. The Company has made one sale to CYMA in the amount of $206,000
during fiscal 1995.
The Company utilizes the services of Alexis Travel, a full service travel
agency, for its corporate travel needs. Alexis is 20% owned by a director of
the Company. During the 1996 and 1995 fiscal years, the Company made purchases
of $67,000 and $19,000 respectively.
14. FOREIGN SALES AND MAJOR CUSTOMERS
The Company's revenues from continuing operations include
approximately $3,170,000, $5,283,000 and $3,383,000 from foreign customers
(principally in Europe, the Asia-Pacific region and Central and South America)
for the years ended April 5, 1996, April 7, 1995 and April 1, 1994,
respectively.
One customer accounted for 17% of the Company's net revenues from
continuing operations for the year ended April 5, 1996. During the fiscal years
ended April 7, 1995 and April 1, 1994, one customer accounted for 15% and 16%
of net revenues, respectively.
50
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
15. EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code (the "Code"), whereby eligible employees may
contribute up to 20% of their earnings, not to exceed amounts allowed under the
Code. In addition, the Company may make contributions at the discretion of the
Board of Directors. During 1996, 1995 and 1994, the Company made no such
contributions to the plan.
16. LITIGATION
In May 1993, the Company entered into an agreement with one of its
major customers (the "Customer") to sell rights to certain products and
technology in return for a cash payment of $1,300,000. Under the agreement, if
certain conditions occurred, the Company would be obligated to refund up to
$300,000 on January 31, 1994. The Company and the Customer also engaged in
ongoing discussions as to whether the payment of $1,300,000 included $389,000
previously owed to the Company by the Customer. On January 31, 1994, the
Company was notified by the Customer that, according to the Customer's review of
the conditions surrounding the refund, the Customer was entitled to a $300,000
refund. The Customer commenced litigation in February 1994 to recover this
claimed refund. The Company filed an answer to the complaint as well as a
counterclaim against the Customer. In December 1995, the Company reached a
settlement agreement in the amount of $231,000. The consolidated financial
statements at April 7, 1995 included deferred revenue amounting to $231,000 and
a reserve of $389,000 as a result of the pendency of this litigation. There was
no impact on the fiscal 1996 statement of operations with respect to settlement
of this litigation.
Other than the matter discussed above, the Company is not a defendant
in any material pending proceedings or complaints. In the opinion of
management, all pending legal proceedings will not have an adversely material
impact, individually or in the aggregate, on the Company's consolidated
financial position and results of operations.
17. FUNDING COMMITMENT FROM STOCKHOLDER
In anticipation of future financing needs, the Company has received a
verbal commitment from its largest stockholder that, in the event of working
capital shortages or a need for funds to settle litigation, the stockholder will
advance the necessary funds. Such advances would be in the form of binding long-
term convertible loans and/or equity financing to the Company.
18. FOURTH QUARTER ADJUSTMENTS
Fiscal 1996 - During the fourth quarter of fiscal 1996, the Company
made the following adjustments which increased the loss from continuing
operations by $1,297,126 to $2,306,931, or $.20 per share. Of these adjustments,
$987,000, or $.16 per share, related to previously issued quarterly data for the
first, second and third quarters of fiscal 1996, which the Company is restating
on Form 10-Q/A.
During the fourth quarter of fiscal 1996, sales in the amount of
$544,000, or $.085 per share, from the first quarter of fiscal 1996 and $59,000,
or $.009 per share, from the third quarter of fiscal 1996 were reversed in the
fourth quarter of fiscal 1996 as a result of the Company's inaccurate assessment
of certain contingencies associated with two purchase orders. With respect to
the $544,000 order that was a "Bill and Hold" order, at the time the sale was
recorded, the Company did not adequately identify certain contingencies
regarding the ultimate delivery of product. These contingencies related in part
to funding that was to be received by the customer from the federal government.
With respect to the second sale of $59,000 which was also a "Bill and Hold"
order, the Company did not adequately address the uncertainty of delivery of
the product by the customer. The Company no longer recognizes revenue on any
orders that involve a "Bill and Hold" arrangement.
51
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
18. FOURTH QUARTER ADJUSTMENTS (CONTINUED)
In the fourth quarter of fiscal 1996, the Company processed $350,000, or
$.055 per share, in credit memos, for three customers, for products that had
been returned prior to the fourth quarter of fiscal 1996. The Company failed to
accurately identify and account for these returns on a timely basis. Management
has implemented procedures to ensure that credits for returned products are
processed during the period in which the return is received and tested to ensure
that what has been returned is what has been authorized and therefore ensure no
reoccurrence of this matter in fiscal 1997.
During the fourth quarter of fiscal 1996, the Company also adjusted
certain of its reserves and allowances. The inventory reserve for slow moving
and obsolete inventory was increased by $123,000, or $.019 per share, to account
for materials on hand that are used for certain I/O products; the accounts
receivable allowance for doubtful accounts was increased by $90,000, or $.014
per share, to account for possible write-offs of accounts the Company has been
unable to collect; and a $75,000, or $.012 per share, accrual for possible
returns by distributors. This amount was calculated based on the gross margin
associated with the accounts receivable balances for all distributors as of the
1996 fiscal year end.
During the fourth quarter, the Company made the following adjustments to
its reserves and allowances. The inventory reserve for slow moving and obsolete
inventory was increased by $123,000 to $381,000, or $.019 per share, to account
for materials on hand that are used for certain I/O products; the accounts
receivable allowance for doubtful accounts was increased by $90,000 to $285,000,
or $.014 per share, to account for possible write-offs of accounts the Company
has been unable to collect; a $75,000, or $.012 per share accrual for possible
returns by distributors. This amount was calculated based on the gross margin
associated with the accounts receivable balances for all distributors as of the
fiscal year end.
The Company intends to amend its prior filings on Form 10-Q for the
periods ended July 7, 1995, October 6, 1995 and January 5, 1996 to reflect these
adjustments as follows:
<TABLE>
<CAPTION>
($000s except per share data) Quarter ended Quarter ended Quarter ended
July 7, 1995 October 6, 1995 January 5, 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) as previously reported ($ 641) $ 8 $ 199
Fourth quarter adjustments ( 612) ( 192) ( 183)
------- ------- ------
Net income (loss) ($1,253) ($184) $ 16
======= ======= ======
Per share of common stock:
Net income (loss) as previously reported ($ .10) $ .00 $ .03
Fourth quarter adjustments ( .10) ( .03) ( .03)
------- ------- ------
Net income (loss) ($ .20) ($ .03) $ .00
======= ======= ======
</TABLE>
Fiscal 1995 - The Company recorded a fourth quarter adjustment
relating to a write-down in inventory amounting to $613,000. This adjustment
was the result of the Company reporting cost of goods sold based on the gross
margin method during its interim periods. Following the Company's year end
physical inventory, cost of goods sold was adjusted to the appropriate amount.
The adjustment decreased earnings by $.10 per share. The Company
amended its prior filings on Form 10-Q for the periods ended July 1, 1994,
October 7, 1994 and January 7, 1995 to reflect the proper amount of cost of
goods sold for those periods.
52
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Computone Corporation
We have audited the accompanying consolidated balance sheets of Computone
Corporation as of April 5, 1996 and April 7, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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
Computone Corporation at April 5, 1996 and April 7, 1995, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company incurred a
substantial loss during fiscal year 1996 and is not in compliance with certain
loan covenants. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Atlanta, Georgia
August 19, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-45878) pertaining to Computone Corporation's Director's Equity
Incentive Plan, Equity Incentive Plan and Employee and Consultant Warrants and
Non-Equity Incentive Plan Options of our report dated May 19, 1994, with respect
to the consolidated financial statements and schedule of Computone Corporation
in the Annual Report (Form 10-K) for the year ended April 5, 1996.
/s/ Ernst & Young LLP
- ----------------------
Atlanta, Georgia
August 19, 1996
54
<PAGE>
Computone Corporation
Schedule II - Valuation and Qualifying Accounts
Years ended April 5, 1996, April 7, 1995 and April 1, 1994
<TABLE>
<CAPTION>
Additions
Balance, Charged
Beginning to Costs Balance,
Description of Year and Expenses Deductions End of Year
- ----------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
( in thousands)
Allowance for uncollectible accounts:
Year ended April 5, 1996 $ 736 $205 $ 465 $ 476
Year ended April 7, 1995 953 $198 $ 415 $ 736
Year ended April 1, 1994 761 643 451 953
Allowance for slow-moving and
obsolete inventory:
Year ended April 5, 1996 203 178 --- 381
Year ended April 7, 1995 653 6 456 203
Year ended April 1, 1994 1,129 --- 476 653
Reserves related to discontinued operations:
Year ended April 5, 1996 --- --- --- ---
Year ended April 7, 1995 473 --- 473 ---
Year ended April 1, 1994 5,201 --- 4,728(a) 473
Valuation allowance for deferred tax assets:
Year ended April 5, 1996 9,190 973 ---- 10,163
Year ended April 7, 1995 10,098 --- 908 9,190
Year ended April 1, 1994 11,423 --- 1,325 10,098
</TABLE>
(a) See Note 5 of the Notes to Consolidated Financial Statements included
herein.
55
<PAGE>
SUBSIDIARIES OF REGISTRANT
Subsidiary State of Incorporation
- ---------- ----------------------
Princeton Graphic Systems, Inc. Delaware
56
