<PAGE>
(..continued)
Page 1 of 44 pages
Exhibit Index page24
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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 4, 1997
[_] 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
---------------------
(Name of small business issuer in its charter)
Delaware 23-2472952
- ------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1100 Northmeadow Parkway, Suite 150, Roswell, Georgia 30076
- ----------------------------------------------------- -------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (770) 475-2725
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: Common Stock, $.01 par
----------------------
value
- -----
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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 [_]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended April 4, 1997 were $12,897,872.
On June 19, 1997, 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
$13,443,940.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,712,074 shares of Common
Stock outstanding on June 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
<PAGE>
COMPUTONE CORPORATION
INDEX TO FORM 10-KSB
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 9
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters. 10
Item 6. Management's Discussion and Analysis or Plan of Operation. 10
Item 7. Financial Statements. 15
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 15
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act. 16
Item 10. Executive Compensation. 18
Item 11. Security Ownership of Certain Beneficial Owners and Management. 20
Item 12. Certain Relationships and Related Transactions. 21
Item 13. Exhibits and Reports on Form 8-K. 24
Signatures 27
</TABLE>
2
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PART I
Item 1. Description of 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 the fiscal year ended April 4, 1997, there were no material
developments in the Company's business.
(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-
B.
(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 1997, the Company
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
balanced approach to hardware and software development. High performance
hardware is enhanced by software that has been field proven for over 12 years.
The remote access market is a dynamic segment of the expanding
networking industry. Companies have realized that in order to stay competitive
in the global marketplace, they must adopt 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 addresses 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 significant 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.
3
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With the significant growth opportunities in the remote access area in
mind, the Company re-positioned itself during fiscal 1996 from a sales
perspective to address 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 1996 fiscal year to 1,822 at the end of the 1996
fiscal year while its number of domestic distributors decreased from 14 at the
beginning of the 1996 fiscal year to 6 at the end of the 1996 fiscal year.
Management believes that the focus of sales of remote access products towards
VAR's and major customers versus distributors is necessary because of the
requirement to provide technical support for these products. While sales through
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 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 technical 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 remote 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. Sales of remote access products grew to approximately
$4,394,000, or 34% of net revenues during the 1997 fiscal year. The Company
estimates that during fiscal 1998, sales of remote access products will increase
significantly.
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 and includes Radius, the de facto security utility.
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 and Linux).
The Company currently offers five families of multi-port products with
widespread industry name recognition: ValuePort, IntelliPort II, IntelliPort II
EXpandable, IntelliCluster and the new high speed PowerRack Port solution. 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").
To serve these OEM customers, a company in the connectivity 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;
4
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(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 faster 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. The recent introduction of automated set up has
resulted in a significant increase in the use of the IntelliServer product among
the Internet Service Provider community.
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).
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
--------------
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
forPCI and ISA/EISA computer systems.
5
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. IntelliPort III - PowerRack Port - scaleable rack mounted 16 to
---------------
64 port subsystem providing one of the industry's highest
throughput speeds of up 921 Kbps on all 64 ports.
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 route data transparently 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.
The new IntelliPort III PowerRack port includes all features included
with the IntelliPort II family plus the option of a rack mountable chassis and
increased throughput speeds of 921 Kbps on all 64 ports. Drivers that are
currently used with the IntelliPort II products can be used with the IntelliPort
III products
6
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The new PowerSurfer is believed to be the world's fastest ISDN modem
on the market today. Using integral compression, the ISDN BRI modem can support
data rates up to 512 Kbps. Correspondingly, the serial interface supports bit
rates up to 921.6 Kbps, to ensure the asynchronous serial line does not slow the
ISDN link. When used with the Computone IntelliServer PowerRack, which also
supports 921 Kbps, the full ISDN bandwidth can be utilized. The PowerSurfer will
maximize the use of ISDN BRI links, by providing the latest in ISDN and serial
technology. This product is optimum for corporate networks and Internet Service
providers who now demand the fastest internet access for their dial-in users.
The new PowerGate is a low-cost, high speed serial card which
management believes will be introduced in conjunction with the release of the
PowerSurfer. When installed in remote P.C's, this single and two port serial
card will allow remote users a connection of up to 921 Kbps to an ISDN BRI line
via a Computone PowerSurfer while avoiding the potential bottleneck that may
occur with a slower serial interface on a P.C. A complete Computone solution of
a PowerGate serial card connected to a PowerSurfer across a BRI ISDN line to a
Computone PowerRack provides one of the industry's fastest remote access
connections currently available today.
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 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 1997 fiscal year, approximately 70% of the Company's
revenues from continuing operations were generated in the United States. Sales
in the United States represented 67% of revenues from continuing operations for
the Company's 1996 fiscal years.
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.
7
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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.
The Company's competition comes from: (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 performance, 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. 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 review continually its reserve for obsolescence of
inventory components. While the Company experienced an increase in inventories
of approximately $1,955,000 during the 1997 fiscal year, this increase can be
attributed to the receipt of planned-phase purchases pertaining to the
anticipated receipt of a substantial purchase order from a major customer and
recurring monthly orders from a major OEM. The Company increased its inventory
reserve by $19,000 to $400,000 at April 4, 1997 and believes that its reserve
for excess and obsolete inventory components is adequate.
Export Sales
The Company's net revenues include approximately $3,836,000 and
$3,170,000 from customers located outside the United States, primarily in
Europe, Central and South America and the Asia-Pacific region, for the years
ended April 4, 1997 and April 5, 1996 . All of the Company's foreign
transactions are negotiated, invoiced and paid in US dollars.
Significant Customers
During the 1997 and 1996 fiscal years, the Company's largest customer
was Wal*Mart with product sales of approximately $844,000 or 7% of product sales
and approximately $1,639,000 or 17% of product sales, respectively.
Research and Development
During fiscal years 1997 and 1996, the Company's research and
development expenditures were $1,020,000 and $1,038,000. In addition, for fiscal
years 1997 and 1996, the Company capitalized $215,000 and $262,000 of software
development costs.
8
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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.
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 Access/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 4, 1997, the Company had 70 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. Description of 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 signed a 10-year lease for a new 22,400 square foot, more efficiently
designed facility, near to its current facility, which management believes can
reduce the Company's overall occupancy costs. The relocation will occur in
October of 1997. The average annual rent expense for this new facility will be
approximately $178,000.
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
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PART II
Item 5. Market for 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 reported by the National
Association of Securities Dealers, Inc. (the "NASD").
<TABLE>
<CAPTION>
Year ended April 4, 1997 Year ended April 5, 1996
------------------------ -------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $3.06 $1.88 $3.00 $2.00
2nd Quarter 6.25 1.38 2.38 1.41
3rd Quarter 9.63 4.75 2.56 1.13
4th Quarter 7.75 4.00 3.75 1.88
</TABLE>
(b) Holders.
-------
As of April 4, 1997, the Company had approximately 1,400 holders of record
of the 6,712,074 shares of Common Stock then outstanding.
(c) Dividends.
---------
The Company has never declared or paid dividends on its Common Stock. The
Company has recorded a liability in the amount of approximately $29,000 for 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.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------- -----------------------------------------------------------
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 1997 Compared to Fiscal 1996
- -----------------------------------
During the 1997 fiscal year, the Company had net income of approximately
$49,000 compared to a net loss of approximately $2,307,000 during fiscal 1996
as discussed more fully below. This difference can be attributed primarily to
the $3,233,000 million, or 33%, increase in revenues during fiscal 1997. The
Company has successfully made the transition of its sales focus towards the
higher growth opportunities in the Internet and Intranet marketplace and as a
result, was able to secure a number of significant orders directly from VAR's
and major corporations. During the 1997 fiscal year, the Company has been able
to add to its direct domestic VAR sales channel and has maintained the same
number of domestic distributors (6) as in the prior year.
The Company still believes that there are significant growth opportunities
in the remote access area and because of the requirement to provide a greater
level of support for these products, sales of these products should be primarily
directed towards VAR's and large major customers, most of which have an in-house
technical support staff. While sales through the distribution channels are made
at a greater discount than through other channels, the level of support required
would be greater and ultimately not as cost-effective.
During the 1997 fiscal year, the Company had sales in remote access
products of approximately $4,393,000, or 34% of net revenues, compared to sales
during fiscal 1996 of approximately $1,936,000, or 20% of net revenues.
10
<PAGE>
Revenues for fiscal 1997 totaled approximately $12,898,000 compared to
$9,665,000 for fiscal 1995, an increase of $3,233,000, or 33%. This increase
can be attributed primarily to the $2,457,000, or 127%, increase in sales of
remote access products. Sales of other products increased during fiscal 1997
by $776,000, or 10%, compared to fiscal 1996. Net sales to domestic
distributors increased approximately $869,000, or 62%, from $1,407,000 in
fiscal 1996 to $2,276,000 in fiscal 1997. This increase can be attributed to
the Company's efforts to monitor more closely the inventory levels at domestic
distributors and to keep them closer in line with what their monthly point of
sale ("POS") totals averaged. As a result, returns from domestic distributors
decreased by $1,109,000 during fiscal 1997 from $1,511,000 in fiscal 1996 to
$402,000 in fiscal 1997. Net sales to VAR's were approximately $4,724,000
during fiscal 1997 compared to $2,091,000 during fiscal 1996, an increase of
$2,633,000, or 126%. This increase can be attributed to the Company's sales
strategy, initiated during fiscal 1996, which focused on increasing direct
sales versus sales through distribution. Net sales in the Asia Pacific region
were approximately $927,000 during fiscal 1997 compared to $198,000 in fiscal
1996, an increase of $729,000, or 368%. This increase can be attributed to an
increase in sales of synchronous communications products and remote access
products. Net sales to international distributors were $2,912,000 in fiscal
1996 compared to $2,909,000 in fiscal 1997. Net sales to OEM's and major
accounts were down from $2,855,000 in fiscal 1996 to $1,480,000 in fiscal 1997,
a decrease of $1,375,000, or 48%. This decrease can be attributed to the
installation delay within a division of a major customer along with the delay
in the installations being scheduled for a major customer of an OEM. The
Company currently has available stock in its inventory to meet the demand of
this major account and OEM upon the receipt of the purchase orders from these
customers.
In addition, during fiscal 1997, the Company announced a new distribution
relationship with Capella Worldwide Networking, a leading independent supplier
of remote access products and services to the Internet Service provider (ISP)
market. This new revenue source provided sales of approximately $580,000 during
fiscal 1997. The Company also shipped, during the fourth quarter, approximately
$1,287,000 to Capella per the terms of a non-cancelable, non-returnable purchase
order received on January 7, 1997. The revenue and costs associated with these
shipments were not recognized during the fiscal year because as of June 19,
1997, Capella had not yet paid for, or sold through, the products received
during the fourth quarter of fiscal 1997. The Company will recognize revenue on
these fourth quarter shipments as Capella pays for the products that they sell.
The Company and Capella are continuing to monitor the best methods possible for
the sale and "pull through" of the inventory that Capella has on hand.
Cost of products sold for fiscal 1997 totaled $7,484,000 compared to
$6,640,000 for fiscal 1996 or 58% of product sales (42% gross margin) in fiscal
1997 versus 69% of product sales (31% gross margin) in fiscal 1996. This
decrease in cost of goods sold as a percentage of product sales can be
attributed primarily to a reduction in raw materials costs resulting from the
Company's continuing efforts to outsource the majority of its production. Raw
material costs as a percentage of net revenues decreased from 57% in fiscal 1996
to 49% in fiscal 1997 as the Company was able to negotiate cost reductions from
major suppliers while placing orders for increased quantities of goods. The
remaining increase in margin can be attributed to a reduction in fixed
manufacturing overhead expenses. Management believes that the gross margin
attained in fiscal 1997 is more closely in line with what the Company typically
expects to generate.
Selling, general and administrative ("S,G & A") expenses for fiscal 1997
totaled approximately $4,215,000 compared to $3,934,000 for fiscal 1996. This
was an increase of $281,000 or 7% from the prior fiscal year but as a percentage
of revenues, S,G&A expenses decrease from 41% of revenues in fiscal 1996 to 33%
of revenues in fiscal 1997. This decrease as a percentage of revenues can be
attributed to the Company's continuing efforts to reduce operating costs along
with its ability to increase the productivity of the infrastructure in place.
Product development costs charged to expense for fiscal 1997 totaled
approximately $1,065,000, or 8%, of product sales compared to approximately
$1,294,000, or 13%, of product sales for fiscal 1996. This decrease of
$229,000 can be attributed primarily to the accelerated amortization, during
fiscal 1996, of capitalized development costs that were incurred prior to
fiscal 1994.
11
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
- -----------------------------------
During fiscal 1996, the Company had a net loss 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
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.
Companies have realized that in order to stay competitive in the global
marketplace, they must either adopt 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.
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
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 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 technical 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 remote 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.
As a result of these transitions, revenues 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 on the first day of fiscal 1997.
12
<PAGE>
Cost of products sold for fiscal 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 in 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% 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.
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 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.
Liquidity and Capital Resources
- -------------------------------
During fiscal 1997 and fiscal 1996, the Company's primary source of cash
has been funds provided by the Company's financing activities. The Company's
results of operations improved significantly during fiscal 1997 compared to
fiscal 1996, however, increases primarily in inventory levels during fiscal
1997, discussed below, resulted in cash being absorbed by operating activities
in the amount of $914,000 during fiscal 1997.
In response to the Company's liquidity needs, the Company entered into a
financing arrangement with Heller Financial, in June 1997, 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
June 20, 1997, $1,400,000 was available for borrowing under the term loan and
line of credit, of which, $400,000 was used to payoff the then remaining balance
on the existing note payable to bank with the remaining $1,000,000 available to
the Company for the working capital purposes. 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 had 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.
The Company is attempting to raise between $1,000,000 and $1,500,000 in
additional operating capital through a private placement offering for its common
stock. The net proceeds from the private placement are expected to be used
primarily to fund the Company's anticipated growth over the next 24 to 36
months. The Company is cautiously optimistic
13
<PAGE>
that it will be able to raise these funds, however, there can be no assurance
that the private placement offering will be successful or that the anticipated
amount of proceeds will be obtained. Should the Company be unable to raise the
additional capital, the Company will be limited in its ability to achieve its
operating objectives over the next 24 to 36 months.
Fiscal 1997 Compared to Fiscal 1996
Cash used in operating activities amounted to $914,000 during fiscal 1997
compared to cash used in operating activities of $199,000 during fiscal 1996.
The increase in cash used in operating activities in the amount of $715,000 can
be attributable primarily to the $1,904,000 increase in inventories during 1997.
This $1,904,000 increase in inventory can be attributed to $650,000 of inventory
shipped to a customer during the fourth quarter for which revenue recognition
has been deferred, pending payment and sell-through of this inventory by the
customer, as well as approximately $700,000 of purchases of materials required
to complete the deliveries during the first half of fiscal 1998 associated with
the non-cancelable, non-returnable purchase order received in January 1997 along
with the acquisition of approximately $600,000 in components required for the
anticipated purchase order from one of the Company's largest customers. This
purchase order was not received until June 1997. The 1997 changes in working
capital items include an increase in accounts receivable of $(1,094,000) and an
increase in prepaid expenses of $88,000. The foregoing uses of cash during the
fiscal year were partially offset by the cash provided from the $(669,000)
increase in payables and accrued liabilities.
Cash used in investing activities amounted to an outflow of $437,000 during
fiscal 1997 compared with an outflow of $336,000 for fiscal 1996. The increase
in net cash outflow in fiscal 1997 compared to fiscal 1996 can be attributed to
the increase in capital expenditures during fiscal 1997.
Cash provided by financing activities amounted to $1,296,000 during fiscal
1997 versus cash provided by financing activities of $381,000 during fiscal
1996. The Company raised approximately $1,400,000 through a private placement
and an additional $250,000 through a shareholder loan. The Company repaid
approximately $547,000 in debt during the fiscal year.
Working capital amounted to $2,523,000 at April 4, 1997 compared to $806,000
at April 5, 1996, an increase of $1,717,000. The ratio of current assets to
current liabilities at April 4, 1997 was 1.60 to 1.00 compared to 1.18 to 1.00
at April 5, 1996. The increase in working capital was attributable to the
increase in receivables and inventories.
Fiscal 1996 Compared to Fiscal 1995
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 in 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.
Capital Expenditures
- --------------------
The Company does not plan any major capital expenditures in the foreseeable
future.
14
<PAGE>
Impact of Inflation
- --------------------
Management believes that inflation has not had a material effect on the
Company's operations.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets being disposed of." which provides
guidance on how long and when impairment losses are recognized on certain long-
lived assets. The statement requires that long-lived assets and certain
identifiable intangibles and goodwill be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable, and that the asset be reported at the lower or carrying
amount, or the fair market less cost to sell. This statement, which was adopted
by the Company for its fiscal year commencing on April 6, 1996, did not have a
material impact on operating results.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation." for which the Company adopted the reporting requirement during
its fiscal year commencing on April 6, 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 and earnings per share in the notes to
their financial statements. The Company has recognized this value by disclosing
its effects in the notes to the financial statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Standard provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Standard
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. The adoption of this Standard
is not expected to impact the Company's consolidated financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." The new
Standard simplifies the standards for computing earnings per share and requires
presentation of two new amounts, basic and diluted earnings per share. The
Company will be required to retroactively adopt this standard when it reports
its results during the second-half of fiscal 1998. The Company does not expect
that the adoption of this Standard will have a material effect on the
presentation of its earnings (loss) per share.
Securities Litigation Reform Act
- --------------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Except for the historical information contained herein, the matters
discussed in this Form 10-KSB are forward-looking statements that involve risk
and uncertainties, including but not limited to (I) economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and (ii) other factors discussed in the
Company's filings with the Securities and Exchange Commission.
Item 7. Financial Statements.
- ------- ---------------------
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-KSB
Annual Report.
Item 8. Changes In and Disagreements With Accountants On Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
--------------------
None
15
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ------ --------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act.
--------------------------------------------------
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 56 Chairman of the Board and a Director 1992
Thomas J. Anderson 51 President and Chief Operating Officer since
November 3, 1992 and President and
Chief Executive Officer since April 25,
1996 and a Director 1993
William C. Lovely 42 Director 1993
John D. Freitag 68 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, 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 1997 annual meeting of stockholders. An audit committee
consisting of Mr. Hansen and Mr. Lovely was created during the 1997 fiscal year.
The directors of the Company do not receive any compensation for serving in
such capacity. Following the Company's 1997 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 1997 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 principal 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 has
been President of the Company 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.
16
<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
June 17, 1997:
<TABLE>
<CAPTION>
Position
Officer Age Position With Company Since
- ------- --- ------------------------------------------ ---------
<S> <C> <C> <C>
Gregory A. Alba 37 Vice President, Finance and Administration
and Chief Financial Officer 1996
Duncan E. Hume 37 Vice President, International Sales 1994
Brian D. Kretschman 46 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. 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 4, 1997, the Company believes that all such filings by
its Reporting Persons required during such fiscal year were made on a timely
basis.
17
<PAGE>
Item 10. Executive Compensation
- -------------------------------
The following table sets forth the compensation paid by the Company during each
of the three fiscal years ended April 4, 1997, April 5, 1996 and April 7, 1995
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 $100,000 in the fiscal year ended April 4, 1997.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards(s) ($) SARS (#) sation ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Hansen FY97 $ - $ - $ - $ - - $ -
Chairman of the FY96 - - - - - -
Board FY95 - - - - - -
Thomas J. Anderson, FY97 $ 130,000 $ 36,157 $ - $ - - $ -
President and Chief FY96 122,500 13,350 - - 100,000 -
Executive Officer FY95 140,887 50,000 - - 50,000 -
Duncan E. Hume, FY97 $ 106,082 $ - $ - $ - - $ -
Vice President - FY96 101,750 - - - - -
International Sales FY95 101,817 - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Option Grants in Last Fiscal Year
---------------------------------
<TABLE>
<CAPTION>
Individual Grants Option Term
- --------------------------------------------------------- --------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($ /share) Date
---- ----------- ------------ --------- ----
<S> <C> <C> <C> <C>
None
</TABLE>
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
and Fiscal Year End Option Values
---------------------------------
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities Underlying In-the-Money
Unexercised Options/ Options/SARs at
SARs at Fiscal Year Fiscal Year
End (#) End ($)
Shares ------- -------
Acquired on Value Exercisable / Exercisable * /
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ----------- ----------- --------------------- ----------------
<S> <C> <C> <C> <C>
Thomas J. Anderson - - 150,000 / - 168,000 / 0
Gregory A. Alba - - 7,184 / 11,093 8,082 / 12,480
Duncan E. Hume 5,000 25,850 32,000 / - 36,000 / 0
Brian D. Kretschman - - 8,167 / 14,667 9,229 / 16,500
</TABLE>
* Market price at April 4, 1997 was $5.13 per share.
19
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
The following table sets forth as of June 17, 1997 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..................... 235,000(3) 3.50%
Sterling, Virginia
Richard A. Hansen.................... 1,742,929(4) 25.97%
West Conshohocken, Pennsylvania
Thomas J. Anderson................... 1,016,000(5) 15.14%
Roswell, Georgia
John D. Freitag....................... 250,922(6) 3.74%
Potomac, Maryland
Executive Officers:
- -------------------
Gregory A. Alba..................... 18,277(7) .27%
Roswell, Georgia
Duncan E. Hume...................... 32,500(8) .48%
Roswell, Georgia
Brian D. Kretschman................. 29,500(9) .44%
Roswell, Georgia
All directors and executive officers
as a group (7 persons)............... 3,325,128(10) 49.54%
</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 "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) Mr. Lovely may be deemed the direct beneficial owner of 10,000
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 3.50% of the Company's outstanding Common Stock.
(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 25.97% of the Company's outstanding
Common Stock.
20
<PAGE>
(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, which include an option to purchase 150,000
shares at an exercise price of $1.13, or approximately 15.14%
of the Company's outstanding Common Stock.
(6) Mr. Freitag may be deemed the direct beneficial owner of 250,922
shares of Common Stock, which includes options to purchase
100,000 shares at an exercise price of $2.00 per share and the
direct beneficial owner of warrants to purchase 25,000 shares of
Common Stock, or approximately 3.74% of the Company's outstanding
Common Stock.
(7) 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 options to purchase 18,277 shares,
of which 7,184 shares are currently exercisable.
(8) 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
options to purchase 32,500 shares, of which 32,500 shares are
currently exercisable.
(9) 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 options to purchase 29,500 shares, of which 14,833 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 12. 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. Ander son, 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") out standing 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.
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
21
<PAGE>
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.
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>
22
<PAGE>
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 Registrant's shares, which notes would
be secured by a pledge of the Company's shares purchased;
(c) an acknowledgment 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;
(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 $2.00 per share of which options to purchase 20,000 shares will become
exercisable immediately, (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.
The Company utilizes the services of Alexis Travel, a full service travel
agency, for its corporate travel needs. Alexis is 40% owned by two directors of
the Company. During the 1997 and 1996 fiscal years, the Company made purchases
of $111,000 and $67,000 at rates not in excess of those charged to other
persons in arms' length transactions.
23
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following documents are filed as part of this Form 10-KSB Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants 28
Consolidated Balance Sheets 29
Consolidated Statements of Operations 30
Consolidated Statements of Cash Flows 31
Consolidated Statements of Stockholders' Equity 32
Notes to Consolidated Financial Statements 33
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 42
</TABLE>
(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, Pennsylvania 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 * Commitment letter dated July 13, 1993 from Pennsylvania Merchant
Group Ltd to provide up to $2,000,000 of financing related to
potential litigation issues and working capital shortfalls during
fiscal 1994
10.50 * Commitment letter dated July 13, 1993 from Brisco Investments
Limited to provide up to $5,000,000 of financing related to
potential litigation issues and working capital shortfalls during
fiscal 1994
24
<PAGE>
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
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
25
<PAGE>
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 Collateral dated 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
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 Certified Public Accountants 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.
26
<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.
<TABLE>
<CAPTION>
Signatures Capacity Date
---------- -------- ----
<S> <C> <C>
/s/ Richard A. Hansen Chairman of the Board July 1, 1997
- ---------------------
Richard A. Hansen
/s/ Thomas J. Anderson President, Chief Executive Officer July 1, 1997
- ----------------------
and a Director
Thomas J. Anderson (principal executive officer)
/s/ Gregory A. Alba Vice President, Finance and July 1, 1997
- -------------------
Administration and
Gregory A. Alba Chief Financial Officer
(principal financial and accounting
officer)
/s/ William C. Lovely Director July 1, 1997
- ---------------------
William C. Lovely
/s/ John D. Freitag Director July 1, 1997
- -------------------
John D. Freitag
</TABLE>
27
<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 4, 1997 and April 5, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. We have also audited the accompanying schedule of valuation and
qualifying accounts. These financial statements and schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. 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 4, 1997 and April 5, 1996, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Atlanta, Georgia
June 6, 1997, except for Notes 2 and 4(b)
as to which the date is June 20, 1997.
28
<PAGE>
Computone Corporation
Consolidated Balance Sheets
(in thousands except par value and number of shares)
<TABLE>
<CAPTION>
April 4, 1997 April 5, 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 88 $ 143
Receivables, net 1,896 1,564
Inventories, net 4,600 2,715
Prepaid expenses and other 170 83
--------------- ---------------
Total current assets 6,754 4,505
Property, equipment and improvements,
net 276 523
Intangible assets, net 655 636
Other 90 99
--------------- ---------------
TOTAL ASSETS $ 7,775 $ 5,763
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,647 $ 1,848
Accrued liabilities:
Payroll 112 113
Prepaid sales 9 214
Professional fees 171 69
Other 439 465
Line of credit - - - 599
Notes payable to stockholders 250 - - -
Current maturities of long term debt 603 504
--------------- ---------------
Total current liabilities 4,231 3,812
Notes payable to stockholders 120 20
Long term debt, less current maturities - - - 47
--------------- ---------------
Total liabilities 4,351 3,879
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;
6,712,074 and 6,354,911
shares outstanding 67 64
Additional paid in capital 43,031 41,543
Accumulated deficit (39,674) (39,723)
--------------- ---------------
Total stockholders' equity 3,424 1,884
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 7,775 $ 5,763
EQUITY
=============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE>
Computone Corporation
Consolidated Statements of Operations
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended
----------------------------------
April 4, 1997 April 5, 1996
--------------- ---------------
<S> <C> <C>
Revenues:
Product sales $ 12,898 $ 9,665
Expenses:
Cost of products sold 7,484 6,640
Selling, general and administrative 4,215 3,934
Product development 1,065 1,294
--------------- ---------------
12,764 11,868
--------------- ---------------
Operating income (loss) 134 (2,203)
Other income (expense):
Other, net 31 8
Interest expense - affiliates (38) (20)
Interest expense - other (78) (92)
--------------- ---------------
Income (loss) before income taxes 49 (2,307)
Provision for income taxes - - - - - -
--------------- ---------------
Net income (loss) 49 (2,307)
Preferred stock dividends - - - (32)
--------------- ---------------
Net income (loss) applicable to common stock $ 49 $ (2,339)
=============== ===============
Earnings (loss) per common share and common equivalents $ 0.01 $ (0.36)
=============== ===============
Weighted average common shares and
common equivalents outstanding 7,018 6,406
=============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
Computone Corporation
Consolidated Statements of Cash Flows
(in thousands)
Year ended
----------------------------------
April 4, 1997 April 5, 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from operations $ 49 $ (2,307)
Adjustments to reconcile income
(loss) from operations
to net cash provided by (used in)
operations:
Depreciation and amortization 673 968
Provision for uncollectible
accounts 762 205
Provision for inventory reserve 19 178
Changes in current assets and
current liabilities:
Accounts receivable (1,094) 1,485
Inventories (1,904) (720)
Prepaid expenses and other (88) 27
Accounts payable and accrued
liabilities 669 (35)
--------------- ---------------
Net cash provided by (used in)
operations (914) (199)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets 9 2
Capitalization of software costs (279) (262)
Capital expenditures (167) (76)
--------------- ---------------
Net cash used in investing activities (437) (336)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates 250 - - -
Repayment to affiliates (50) - - -
Repayment of debt - net (545) (243)
Net borrowings under lines of credit
- others 150 599
Exercise of common stock options and
warrants 73 - - -
Contribution of capital - - - 25
Issuance of common stock 1,418 2
Conversion of preferred stock - - - (2)
--------------- ---------------
Net cash provided by financing
activities 1,296 381
--------------- ---------------
Net increase (decrease) in cash and
cash equivalents (55) (154)
Cash and cash equivalents, beginning of
period 143 297
--------------- ---------------
Cash and cash equivalents, end of period $ 88 $ 143
=============== ===============
SUPPLEMENTAL SCHEDULE FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion/settlement of preferred
stock to common stock $ - - - $ 150
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 116 $ 92
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE>
Computone Corporation
Consolidated Statements of Stockholders' Equity
(in thousands, except share amount)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumulated Stockholders'
---------------- ----------------
Shares Amount Shares Amount Paid-In Capital Deficit Equity
------ ------ ------ ------ --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 7, 1995 200,000 2 6,207,184 62 41,517 (37,384) 4,197
Conversion of preferred stock to common stock (200,000) (2) 147,727 2 0 - - 0
Legal fee payments made by directors - - - - - - - - 26 - - 26
Net loss - - - - - - - - - - (2,339) (2,339)
--------- ------ ---------- ------ --------- ---------- ----------
Balance, April 5, 1996 0 0 6,354,911 64 41,543 (39,723) 1,884
Exercise of common stock options - - - - 57,163 0 73 - - 73
Issuance of common stock - - - - 300,000 3 1,415 - - 1,418
Net income - - - - - - - - - - 49 49
---------- ------ ---------- ------ ----------- ---------- ----------
Balance, April 4, 1997 0 $ 0 6,712,074 $ 67 $ 43,031 $ (39,674) $ 3,424
========== ====== ========== ====== =========== ============ ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<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.
FISCAL YEAR END
The Company's fiscal year ends on the first Friday in April. The fiscal
year ended April 4, 1997 had 52 weeks and the fiscal year ended April 5, 1996
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 generally recognized, net of an allowance for estimated
returns, when the related products are shipped to customers 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.
With respect to sales made to distributors, revenue recognition is deferred
in instances in which product in the distribution channel exceeds a reasonable
level as determined by management, which generally approximates a three month
supply of product.
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.
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
inventories, including finished goods inventories.
Inventories are net of a reserve for obsolete, excess and non-salable items
of $400,000 and $381,000 at April 4, 1997 and April 5, 1996.
33
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 operations for the years ended April 4,
1997 and April 5, 1996 amounted to $415,000 and $450,000.
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 4, 1997 and April 5,
1996 were $258,000 and $518,000; software development costs totaling $215,000
and $262,000 were capitalized during such years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred. Research and
development amounted to $1,065,000 and $1,294,000 during the years ended April
4, 1997 and April 5, 1996.
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.
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.
RECLASSIFICATION
Certain amounts have been reclassified in the prior year's financial
statements to conform with the current year.
SIGNIFICANT RISKS AND UNCERTAINTIES & USE OF ESTIMATES
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
34
<PAGE>
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
Computone Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT RISKS AND UNCERTAINTIES & USE OF ESTIMATES (CONTINUED)
different from those reported in the consolidated financial statements and the
effect of such differences could be material. Management believes that as of
April 4, 1997, the estimates used in the consolidated financial statements are
adequate based on the information currently available.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the estimated fair values of its financial
instruments approximates the carrying values of such financial instruments in
all material respects. The fair value of cash and cash equivalents, receivables
and short term borrowings approximate their carrying value due to their short
term maturities. The fair value of long term debt approximates carrying value
based on the current rates offered to the Company for similar debt.
2. FUTURE PROSPECTS
The Company's results of operations improved significantly during fiscal
1997 compared to fiscal 1996.
On June 20, 1997, subsequent to the Company's fiscal year end, the Company
consummated a financing arrangement which provided for a term loan in the amount
of $254,000, at a rate of prime plus 1.50%, 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, at rate of prime plus 1.25% which is collateralized by
the Company's accounts receivable. As of June 20, 1997, $1,400,000 was available
for borrowing under the term loan and line of credit, of which, $400,000 was
used to payoff the then remaining balance on the existing note payable to bank.
The remaining $1,000,000 is available to the Company for working capital
purposes. The Company believes that the working capital provided by Heller
Financial 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 had no
plans for any major capital improvements. Relationships with major vendors were
satisfactory although the Company is on a "Cash On Delivery" status with a
significant number of raw materials vendors.
The Company is attempting to raise between $1,000,000 and $1,500,000 in
additional operating capital through a private placement offering for its common
stock. The net proceeds from the private placement are expected to be used
primarily to fund the Company's anticipated growth over the next 24 to 36
months. The Company is cautiously optimistic that it will be able to raise these
funds, however, there can be no assurance that the private placement offering
will be successful or that the anticipated amount of proceeds will be obtained.
Should the Company be unable to raise the additional capital, the Company will
be limited in its ability to achieve its operating objectives over the next 24
to 36 months.
35
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
3. OTHER BALANCE SHEET INFORMATION (IN THOUSANDS)
APRIL 4, APRIL 5,
1997 1996
---- ----
<S> <C> <C>
Inventories:
Finished goods 1,740 $ 880
Work in process 725 516
Raw materials 2,135 1,319
------ ------
$4,600 $2,715
====== ======
Property and equipment:
Equipment 3,211 $3,046
Furniture & fixtures 396 395
Leasehold improvements 222 222
------ ------
3,829 3,653
Less accumulated depreciation
and amortization 3,553 3,140
------ ------
$ 276 $ 523
====== ======
Intangible assets:
Software costs 2,376 $2,097
Less accumulated amortization 1,721 1,461
------ ------
$ 655 $ 636
======= ======
</TABLE>
4. LONG-TERM DEBT AND LINE OF CREDIT
(a) Long-term debt consists of the following: (in thousands)
<TABLE>
<CAPTION>
APRIL 4, APRIL 5,
1997 1996
------ ------
<S> <C> <C>
Prime plus two percent note payable to bank, principal of $13,427,
plus interest, due monthly through October 1996, collateralized by
accounts receivable, inventory and equipment and guaranteed by a director
of the Company. In October 1996, this note was converted into a six month,
interest only term loan. $- - - $ 242
Prime plus one percent note payable to bank, interest only payments
due monthly through April 1997 and principal due on May 12, 1997,
collateralized by accounts receivable, inventory and equipment and
guaranteed by a director of the Company. (See Note 4b) 500 - - -
10% note payable to a major stockholder due July 1997 250 - - -
7% note payable to a major stockholder due December 1998 200 250
7% notes payable to two major
stockholders due December 1999 20 20
Other, principally extended vendor 3 59
payment plans 973 571
------ ------
Less current maturities 853 504
------ ------
$ 120 $ 67
====== ======
</TABLE>
36
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
4. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Future maturities of long-term debt are as follows (See Note 4b) (in
thousands):
<TABLE>
<S> <C>
1998 $853
1999 100
2000 20
2001 - -
2002 - -
Thereafter - -
-------
$ 973
=======
</TABLE>
(b) On June 20, 1997, subsequent to the Company's fiscal year end, the
Company consummated a financing arrangement which provided for a term loan in
the amount of $254,000, at a rate of prime plus 1.50%, 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, at rate of prime plus 1.25% which is
collateralized by the Company's accounts receivable. As of June 20, 1997,
$1,400,000 was available for borrowing under the term loan and line of credit,
of which, $400,000 was used to payoff the then remaining balance on the existing
note payable to bank. The remaining $1,000,000 is available to the Company for
working capital purposes.
5. COMMITMENTS
Rent payable under noncancelable long-term operating leases for real and
personal property relating to continuing operations is as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 262
1999 199
2000 200
2001 189
2002 194
Thereafter 1,035
------
$2,079
======
</TABLE>
Rent expense relating to continuing operations amounted to $238,000 and
$288,000 for the years ended April 4, 1997 and April 5, 1996.
6. 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.
37
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
6. INCOME TAXES (CONTINUED)
The components of deferred tax liabilities and deferred tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Software costs $ 213 $ 221
Depreciation - - 40
-------- ---------
Total deferred tax liabilities 213 261
======== =========
Deferred tax assets:
Allowance for doubtful accounts 97 112
Depreciation 7
Inventory reserves 21 32
Other accrued expenses 134 227
Net operating loss carryforwards 9,885 10,053
Valuation allowance ( 9,931) ( 10,163)
-------- ---------
Total deferred tax assets 213 261
======== =========
</TABLE>
As a result of the existing net operating loss carryforwards, no current
provision for income taxes was required for the year ended April 4, 1997.
The statutory federal income tax rate differed from the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Statutory tax rate 34 % ( 34 ) %
State tax rate, net of federal tax benefit 4 ( 4 )
Effect of utilization of net operating losses
and in deferred tax asset valuation allowance (38) 38
--------- --------
- - % - - %
========= ========
</TABLE>
7. 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 Company'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, directly or indirectly.
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 accrued but not paid $29,000
of the total dividends on the Series D Convertible Preferred Stock from the date
of issuance thereof to the date of conversion.
38
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
8. STOCK OPTIONS AND WARRANTS
The Company has a non-qualified equity incentive plan, under which a
committee of the Board of Directors is authorized to grant key employees,
including officers and directors options to purchase the Company's Common Stock.
Options are exercisable at a price ranging from $1.13 to $2.00 per share. The
options generally become exercisable 33 1/3% per year over a three year period
from the date of the grant and the options generally expire five years from the
date of the grant. Five hundred thousand shares of Common Stock have been
reserved for issuance under the equity incentive plan.
The following tables summarize activity on stock options and warrants:
<TABLE>
<CAPTION>
Stock Options Warrants
------------- --------
Number of Weighted average Number of Weighted average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at April 7, 1995 428,879 $3.00 to 53.25 156,671 $2.75 to $10.50
Granted 157,000 1.13 24,243 3.50
Exercised --- --- --- ---
Forfeited or canceled (192,493) 3.00 to 3.25 ( 20,834) 3.00
--------- --------
Outstanding at April 5, 1996 393,386 160,080
Granted 100,000 2.00 228,600 2.00 to 7.00
Exercised ( 57,163) 1.13 --- ---
Forfeited or canceled ( 6,435) 1.13 --- ---
--------- ---------
Outstanding at April 4, 1997 429,788 388,680
========= =========
Options and warrants exercisable at:
April 5, 1996 288,532 $1.13 385,080 $2.75 to $10.50
April 4, 1997 384,358 $1.13 to $2.00 388,680 $2.00 to $10.50
</TABLE>
The weighted average remaining life of options outstanding at April 4,
1997 was 3.5 years. The range of exercise prices was $1.13 to $2.00 per share.
Computone has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but, applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. Compensation expense was immaterial for fiscal years 1997 and
1996. If Computone had elected to recognize compensation cost based on the fair
value at the grant dates for options issued under the plans described above,
consistent with the method prescribed by SFAS No. 123, net income applicable to
common shareholders and earnings per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
(in thousands, except per share data) April 4, 1997 April 5, 1996
------------- -------------
<S> <C> <C> <C>
Net income applicable to common shareholders: as reported $ 49 $(2,307)
pro forma (478) (2,369)
Earnings per share: as reported $ .01 $ .36)
pro forma ( .07) ( .37)
</TABLE>
39
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The fair value of stock options used to compute pro forma net income
applicable to common shareholders and earnings per share disclosures is the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions for fiscal 1997 and 1996;
Dividend yield was excluded from the computation for both years; expected
volatility of 67.5% for fiscal 1997 and 64% for fiscal 1996; a risk free
interest rate of 6.64% for fiscal 1997 and 5.49% for fiscal 1996; and an
expected option life of 5.0 years for both fiscal 1997 and 1996.
9. EQUITY TRANSACTIONS
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.
YEAR ENDED APRIL 4, 1997
- ------------------------
On October 9 and October 11, 1996, the Company raised a total of
approximately $1,418,000, net of cash offering costs of $157,000, through a
private placement. A total of 300,000 shares were sold at an offering price of
$5.25 per share.
10. OTHER RELATED PARTY TRANSACTIONS
The Company incurred interest expense totaling $38,000 and $19,000 during
the fiscal years ended April 4, 1997 and April 5, 1996 on obligations due to
stockholders.
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 1997 and 1996 fiscal years, the Company made purchases
of 111,000 and $67,000 respectively.
11. FOREIGN SALES AND MAJOR CUSTOMERS
The Company's revenues from continuing operations include approximately
$3,836,000 and $3,170,000 from foreign customers (principally in Europe, the
Asia-Pacific region, South Africa and Central and South America) for the years
ended April 4, 1997 and April 5, 1996.
For fiscal 1997, no individual customer accounted for more than 10% of net
revenues. One customer accounted for 7% of the Company's net revenues from
continuing operations for the year ended April 4, 1997. During the fiscal year
ended April 5, 1996, one customer accounted for 17% of net revenues.
12. 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 the 1997 and 1996 fiscal years, the Company made no
such contributions to the plan.
13. LITIGATION
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.
40
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
14. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1996, 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.
41
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Years ended April 4, 1997 and April 5, 1996
<TABLE>
<CAPTION>
Additions
Balance, Charged
Beginning to Costs Balance,
Description of Year and Expenses Deductions End of Year
--------- ------------ ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for uncollectible accounts:
Year ended April 4, 1997 $ 476 $ 762 $ 778 $ 531
Year ended April 5, 1996 $ 736 $ 205 $ 465 $ 476
Allowance for slow-moving and
obsolete inventory:
Year ended April 4, 1997 381 19 - - - 400
Year ended April 5, 1996 203 178 - - - 381
Valuation allowance for deferred tax assets:
Year ended April 4, 1997 10,163 - - - 232 9,931
Year ended April 5, 1996 9,190 973 ----- 10,163
</TABLE>
42
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Subsidiary State of Incorporation
- ---------- ----------------------
Princeton Graphic Systems, Inc. Delaware
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 6, 1997, except for
Notes 2 and 4(b) as to which the date is June 20, 1997, with respect to the
consolidated financial statements and schedule of Computone Corporation in the
Annual Report (Form 10-KSB) for the year ended April 4, 1997.
BDO SEIDMAN, LLP
Atlanta, Georgia
July 1, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> APR-04-1997 APR-05-1996
<PERIOD-START> APR-06-1996 APR-08-1995
<PERIOD-END> APR-04-1997 APR-05-1996
<CASH> 88 143
<SECURITIES> 0 0
<RECEIVABLES> 2,165 1,932
<ALLOWANCES> 269 285
<INVENTORY> 4,600 2,715
<CURRENT-ASSETS> 6,754 4,505
<PP&E> 3,829 3,663
<DEPRECIATION> 3,553 3,140
<TOTAL-ASSETS> 7,775 5,763
<CURRENT-LIABILITIES> 4,231 3,812
<BONDS> 0 0
0 0
0 0
<COMMON> 67 64
<OTHER-SE> 3,357 1,820
<TOTAL-LIABILITY-AND-EQUITY> 7,775 5,763
<SALES> 12,898 9,665
<TOTAL-REVENUES> 12,898 9,665
<CGS> 7,484 6,640
<TOTAL-COSTS> 12,764 11,868
<OTHER-EXPENSES> (31) (8)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 116 112
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 49 (2,307)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (32)
<NET-INCOME> 49 (2,339)
<EPS-PRIMARY> .01 (.36)
<EPS-DILUTED> .01 (.36)
</TABLE>