<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16172
COMPUTONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2472952
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, GA 30005
-------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (770) 625 - 0000
1100 Northmeadow Parkway, Suite 150, Roswell, GA 30076
------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check mark whether the registrant has filed all documents and reports required
to be filed by Section 12, 13 or 15 (d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,403,606 shares of common stock
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of October 3, 1997
and April 4, 1997 3
Consolidated Statements of Operations for the three months
ended October 3, 1997 and October 4, 1996 4
Consolidated Statements of Operations for the six months
ended October 3, 1997 and October 4, 1996 5
Consolidated Statements of Cash Flows the six months
ended October 3, 1997 and October 4, 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis or Plan of Operations 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities 11
ITEM 3. Defaults Upon Senior Securities 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Computone Corporation
Consolidated Balance Sheets
(in thousands except par value and number of shares)
<TABLE>
<CAPTION>
October 3, 1997 April 4, 1997
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 329 $ 88
Receivables, net 2,846 1,896
Inventories, net 4,460 4,600
Prepaid expenses and other 359 170
-------- --------
Total current assets 7,994 6,754
Property, equipment and improvements, net 262 276
Intangible assets, net 640 655
Other 103 90
-------- --------
TOTAL ASSETS $ 8,999 $ 7,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,832 $ 2,647
Accrued liabilities:
Payroll 99 112
Prepaid sales 3 9
Professional fees 44 171
Other 393 439
Line of credit 733 - - -
Notes payable to stockholders 350 250
Current maturities of long term debt 129 603
-------- --------
Total current liabilities 3,583 4,231
Notes payable to stockholders 120 120
Long term debt, less current maturities 141 - - -
-------- --------
Total liabilities 3,844 4,351
Stockholders' Equity
Convertible redeemable preferred stock, $.01 par value;
10,000,000 shares authorized; 0 shares issued - - - - - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 7,024,370 and 6,712,074 shares outstanding 74 67
Additional paid in capital 44,365 43,031
Accumulated deficit (39,284) (39,674)
-------- --------
Total stockholders' equity 5,155 3,424
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,999 $ 7,775
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ITEM 1. Financial Statements (continued)
Computone Corporation
Interim Consolidated Statements of Operations
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 3, 1997 October 4, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales $3,511 $3,504
------ ------
Expenses:
Cost of products sold 2,110 2,058
Selling, general and administrative 1,079 930
Product development 292 265
------ ------
3,481 3,253
------ ------
Operating income 30 251
Other income (expense):
Other, net 298 3
Interest expense (48) (36)
------ ------
Income before income taxes 280 215
Provision for income taxes - - - -
------ ------
Net income $ 280 $ 215
====== ======
Earnings per common share and common share equivalents $ 0.04 $ 0.03
====== ======
Weighted average common shares and
common share equivalents outstanding 7,191 6,843
====== ======
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
ITEM 1. Financial Statements (continued)
Computone Corporation
Interim Consolidated Statements of Operations
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 3, 1997 October 4, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales $7,005 $6,529
Expenses:
Cost of products sold 4,231 3,910
Selling, general and administrative 2,038 1,734
Product development 568 539
------ ------
6,837 6,183
------ ------
Operating income 168 346
Other income (expense):
Other, net 296 3
Interest expense (74) (66)
------ ------
Income before income taxes 390 283
Provision for income taxes - - - -
------ ------
Net income $ 390 $ 283
====== ======
Earnings per common share and common share equivalents $ 0.06 $ 0.04
====== ======
Weighted average common shares and
common share equivalents outstanding 7,191 6,843
====== ======
See accompanying notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
Computone Corporation
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the six months ended
October 3, 1997 October 4, 1996
(unaudited) (unaudited)
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 390 $ 283
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) continuing operations:
Depreciation and amortization 224 340
Provision for possible losses (55) 78
Changes in current assets and current liabilities:
Accounts receivables (934) (747)
Inventories 179 (224)
Prepaid expenses and other (188) (26)
Accounts payable and accrued liabilities (1,007) (18)
------- -----
Net cash (used in) operating activities (1,391) (314)
------- -----
Cash flows from investing activities:
(Increase) decrease in other assets (11) (4)
Capitalization of software costs (143) (75)
Capital expenditures (54) (30)
------- -----
Net cash used in investing activities (208) (109)
------- -----
Cash flows from financing activities:
Repayment of debt - net (500) (115)
Net borrowings under lines of credit 733 150
Net borrowings under term loan 192
Net borrowings from affiliates 75 250
Issuance of common stock 1,320 - -
Exercise of common stock options and warrants 20 16
------- -----
Net cash provided by financing activities 1,840 301
------- -----
Net decrease in cash and cash equivalents 241 (122)
Cash and cash equivalents, beginning of period 88 143
------- -----
Cash and cash equivalents, end of period $ 329 $ 21
======= =====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 74 $ 66
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
COMPUTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The financial statements included in this Form 10-QSB have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed, or omitted,
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the financial statements and related notes included in
the Company's Fiscal 1997 Form 10-KSB.
The financial statements presented herein, as of October 3, 1997 reflect in
the opinion of management, all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
the results for the full year.
2. INVENTORIES
-----------
Inventories, net of a reserve for obsolete, excess and non-salable items,
consisted of the following at October 3, 1997 and April 4, 1997 (in thousands):
<TABLE>
<CAPTION>
October 3, 1997 April 4, 1997
--------------- -------------
<S> <C> <C>
Finished goods $1,373 $1,740
Work in progress 665 725
Raw materials 2,422 2,135
------ ------
$4,460 $4,600
====== ======
</TABLE>
3. INCOME PER SHARE
----------------
Income 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
share equivalents outstanding during each period.
4. 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.
5. DEBT
----
On June 20, 1997, the Company entered into a financing arrangement with
Heller Financial to provide a term loan in the amount of $254,000 which is
collateralized by the Company's inventory and a line of credit of up to
$2,500,000, based on the available borrowing base, collateralized by the
Company's accounts receivable. The term loan bears interest at a rate of prime
plus 1.50% and is payable in monthly installments of $4,233.00 plus accrued
interest for the first thirty-five months with a final monthly payment in the
amount of the entire then outstanding principal plus accrued interest. The line
of credit bears interest at a rate of prime plus 1.25%. At October 3, 1997, the
balance outstanding on the term loan was approximately $192,000 and the balance
under the terms of the line of credit was approximately $733,000. The available
borrowings under the line of credit at October 3, 1997 were $529,000. The
Company also paid in full, on June 20, 1997, its outstanding balance to
NationsBank in the amount of $447,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED OCTOBER 3, 1997.
RESULTS OF OPERATIONS
- ---------------------
For the Three Months Ended October 3, 1997
- ------------------------------------------
The Company reported operating income for the quarter ended October 3, 1997
of $30,000 compared to operating income of $251,000 for the comparable quarter
of the prior fiscal year. The decrease in income is due primarily to product
mix shortages resulting from delivery delays by one of the Company's major
outsourcing manufacturers. These delays were the result of the vendor's
inability to procure certain long lead time components in a timely enough manner
to provide the Company with sufficient products to meet its open orders.
In addition to the income from operations, the Company recorded $250,000 in
net non-operating income for the quarter ended October 3, 1997. This non-
operating income was the net of $313,000 in investment income resulting from the
Company's participation in an initial public offering, $48,000 in interest
expense and $15,000 in one-time late charges. This compares to $33,000 in net
non-operating expenses, predominately interest expense, during the same three-
month period of the prior fiscal year.
Product sales revenue from continuing operations for the quarter ended
October 3, 1997 totaled approximately $3,511,000 compared to $3,504,000 for the
comparable quarter of the prior fiscal year, an increase of less than 1%. This
minimal change in product sales revenue can be attributed to the Company's delay
in receiving products from its outsourcing vendors. Significant increases in
sales to North American Distributors, Major accounts and OEM's were offset by
decreases in VAR and international sales.
Cost of products sold for the quarter amounted to $2,110,000 or 60% of
product sales revenues versus $2,058,000 or 59% for the comparable quarter of
the prior year. The increase in cost of products sold can be attributed to the
increase in product sales revenue along with the Company's sales of remote
access products with a higher cost.
Selling, general and administrative expenses amounted to $1,079,000 or 31%
of product sales revenue for the three months ended October 3, 1997 versus
$930,000 or 27% of product sales revenue for the comparable three months of the
prior fiscal year. The increase in expenses during the quarter ended October 3,
1997 versus the same period of the prior fiscal year can be attributed to an
increase in headcount in the areas of sales and customer service. The Company
experienced an increase in selling related costs associated with the Company's
efforts to sell the remote access products that were sold to a major customer
during last fiscal year and returned to the Company during this fiscal period.
The impact on the Company's earnings for this period was minimal as no revenue
was recognized on the shipment of these products during the last fiscal year.
The Company has implemented additional sales promotions in an effort to sell the
remaining products associated with this transaction.
Product development expenses amounted to $292,000 or 8% of product sales
revenue for the three months ended October 3, 1997 versus $265,000 or 9% of
product sales revenue for the comparable three month period of the prior fiscal
year.
For the Six Months Ended October 3, 1997
- ----------------------------------------
The Company reported operating income for the six months ended October 3,
1997 of $168,000 compared to operating income of $346,000 for the comparable six
months of the prior fiscal year. The decrease in income is due primarily to
product mix shortages resulting from delivery delays by one of the Company's
major outsourcing manufacturers. These delays were the result of the vendor's
inability to procure certain long lead time components in a timely enough manner
to provide the Company with sufficient products to meet its open orders. At
October 3, 1997, the Company had open orders in excess of $225,000.
Product sales revenue from continuing operations for the six months ended
October 3, 1997 totaled approximately $7,005,000 compared to $6,529,000 for the
comparable six months of the prior fiscal year, an increase of
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED OCTOBER 3, 1997.
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
For the Six Months Ended October 3, 1997 (continued)
- ----------------------------------------------------
7%. This increase in product sales revenue can be attributed to the increase in
sales of remote access products. Significant increases in sales to Major
accounts and OEM's were offset by a decrease in international sales.
Cost of products sold for the six months amounted to $4,231,000 or 60% of
product sales revenues versus $3,910,000 or 60% for the comparable six months of
the prior year. The increase in cost of products sold can be attributed to the
increase in product sales revenue.
Selling, general and administrative expenses amounted to $2,038,000 or 29%
of product sales revenue for the six months ended October 3, 1997 versus
$1,734,000 or 27% of product sales revenue for the comparable six months of the
prior fiscal year. The increase in expenses during the six months ended October
3, 1997 versus the same period of the prior fiscal year can be attributed to an
increase in headcount in the areas of sales and customer service. The Company
experienced an increase in selling related costs associated with the Company's
efforts to sell the remote access products that were sold to a major customer
during last fiscal year and returned to the Company during this fiscal period.
The impact on the Company's earnings for this period was minimal as no revenue
was recognized on the shipment of these products during the last fiscal year.
Product development expenses amounted to $568,000 or 8% of product sales
revenue for the six months ended October 3, 1997 versus $539,000 or 8% of
product sales revenue for the comparable six month period of the prior fiscal
year.
LIQUIDITY
- ---------
In response to the Company's working capital needs, on June 20,1997, the
Company entered into a funding arrangement with Heller Financial to provide a
term loan in the amount of $254,000 which is collateralized by the Company's
inventory and a line of credit of up to $2,500,000, based on the available
borrowing base, collateralized by the Company's accounts receivable. As of
October 3, 1997, $529,000 was available for borrowing under the line of credit.
The Company believes that the working capital provided by Heller Financial,
together with anticipated funds expected to be generated by operating
activities, should be reasonably sufficient to cover operating expenses to be
incurred during fiscal 1998. Cash commitments for non-cancelable long-term
operating real and personal property leases during fiscal 1998 is approximately
$262,000. The Company has no plans for any major capital improvements.
Relationships with major vendors are satisfactory although the Company is on a
"Cash On Delivery" status with a significant number of raw materials vendors.
Cash used in continuing operations amounted to $1,391,000 for the six
months ended October 3, 1997 compared to cash used in continuing operations of
$314,000 for the comparable six months ended October 4, 1996. The increase in
cash used in continuing operations as compared to the prior year fiscal period
primarily reflects the decrease in accounts payable and accrued liabilities
resulting from the working capital which was made available by the line of
credit and private placement proceeds. Accounts receivable increased by
approximately $934,000 as a result of the increase in product sales.
Cash used in investing activities amounted to $208,000 for the three months
ended October 3, 1997 compared with $109,000 used in financing activities for
the comparable three months of the prior fiscal year. This increase from the
same period of the prior fiscal year can be attributable to the purchases fixed
assets to be used in the Company's new facility along with an increase in
capitalized software development costs.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED OCTOBER 3, 1997.
LIQUIDITY (CONTINUED)
- ---------------------
Cash provided by financing activities during the six months ended October
3, 1997 was $1,840,000 versus $301,000 of cash provided by financing activities
for the six months ended October 4, 1996. This change can be attributed to the
Company's aforementioned new financing arrangement with Heller Financial along
with the proceeds from the private placement.
Working capital amounted to $4,411,000 at October 3, 1997, an increase of
$1,888,000, since April 4, 1997. The ratio of current assets to current
liabilities at October 3, 1997 was 2.23 to 1.00 compared to 1.60 to 1.00 at
April 4, 1997.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998
- -----------------------------------------
SALES BY PRODUCT LINE
- ---------------------
The Company continues to experience growth in its sales of remote access
products following its decision to strategically aligned its sales focus towards
this marketplace versus sales of input\output devices. The sales information
for the second quarter of fiscal 1998 ended October 3, 1997 is listed below.
Management is fairly optimistic that the level of sales of remote access
products as a percentage of net revenue will continue to increase over the
remainder of the current fiscal year and should approach the level of 60% of net
revenues by the end of the fiscal year.
<TABLE>
<CAPTION>
Remote Access Servers Input\Output Devices Total
Sales $ (000's) % of Total Sales $ (000's) % of Total Sales $ (000's) % of Total
--------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Qtrly Info: 98 1,683 48% 1,828 52% 3,511 100%
97 1,033 30% 2,471 70% 3,504 100%
YTD Info: 98 3,012 43% 3,993 57% 7,005 100%
97 2,039 32% 4,490 68% 6,529 100%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the three months ended October 3, 1997, the Company initiated a
private placement of 500,000 shares of Common Stock. As of October 3, 1997, the
Company raised $934,400 and an additional $724,800 through October 16, 1997.
The proceeds from this private placement are to be used to fund new product
development and provide additional working capital. The proceeds from the
private placement along with the working capital provided by Heller Financial,
and the funds expected to be generated by operating activities, should be
reasonably sufficient to cover operating expenses to be incurred during fiscal
1998. Cash commitments for non-cancelable long-term operating real and personal
property leases during fiscal 1998 is approximately $262,000. The Company has no
plans for any major capital improvements. Relationships with major vendors are
satisfactory although the Company is on a "Cash On Delivery" status with a
significant number of raw materials vendors. Management believes that the
additional funding provided by both Heller and the private placement should
allow the Company to re-establish credit relationships with most of its smaller
vendors.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED OCTOBER 3, 1997.
RESULTS OF OPERATIONS
- ---------------------
The Company expects continued growth in the sales of its remote access
products. At October 3, 1997, the Company had open orders of approximately
$227,000. Management believes that the additional funding raised through the
private placement along with the funding available from the Heller Financial
relationship should provide the Company with the working capital required to
grow the Company through new product development and marketing activities.
On October 11, 1997, the Company completed the relocation to its new
headquarters in Alpharetta, Georgia. The new facility is located in a new
office park in the suburbs of Atlanta. The Company has a ten-year lease on
22,000 square feet of a new 40,000 square foot one-story brick building and
expects to save approximately $170,000 per year in total occupancy costs.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTONE CORPORATION
Date: November 10, 1997 By: /s/ Thomas J. Anderson
----------------------
President and Chief Executive Officer
(Principal Operating Officer)
By: /s/ Gregory A. Alba
------------------
Gregory A. Alba
Vice President of Finance & Administration
and Chief Financial Officer
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> APR-03-1998 APR-03-1998
<PERIOD-START> JUL-05-1997 APR-03-1997
<PERIOD-END> OCT-03-1997 OCT-03-1997
<CASH> 329 0
<SECURITIES> 0 0
<RECEIVABLES> 3,080 0
<ALLOWANCES> 234 0
<INVENTORY> 4,460 0
<CURRENT-ASSETS> 7,994 0
<PP&E> 3,883 0
<DEPRECIATION> 3,622 0
<TOTAL-ASSETS> 8,999 0
<CURRENT-LIABILITIES> 3,583 0
<BONDS> 0 0
0 0
0 0
<COMMON> 74 0
<OTHER-SE> 5,081 0
<TOTAL-LIABILITY-AND-EQUITY> 8,999 0
<SALES> 3,511 7,005
<TOTAL-REVENUES> 3,511 7,005
<CGS> 2,110 4,231
<TOTAL-COSTS> 3,481 6,837
<OTHER-EXPENSES> (298) (296)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 48 74
<INCOME-PRETAX> 280 390
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 280 390
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 280 390
<EPS-PRIMARY> .04 .06
<EPS-DILUTED> .04 .06
</TABLE>
