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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 3, 1998
[ ] 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
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(Name of small business issuer in its charter)
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Delaware 23-2472952
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, Georgia 30005
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (770) 625-0000
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: Common Stock, $.01 par value
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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 3, 1998 were $11,894,000.
On September 1, 1998, 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 $17,337,434.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 7,553,777 shares of Common
Stock outstanding on September 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
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COMPUTONE CORPORATION
INDEX TO FORM 10-KSB
Page
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PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 10
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
PART II.
Item 5. Market for Common Equity and Related Stockholder
Matters. 12
Item 6. Management's Discussion and Analysis or Plan of
Operation. 12
Item 7. Financial Statements. 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 18
PART III.
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With
Section 16(a) of the Exchange Act. 19
Item 10. Executive Compensation. 20
Item 11. Security Ownership of Certain Beneficial Owners and
Management. 22
Item 12. Certain Relationships and Related Transactions. 23
Item 13. Exhibits and Reports on Form 8-K. 24
Signatures 27
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PART I
Item 1. Description of Business.
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(a) General Development of Business.
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Computone Corporation (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.
Since March 1996, the Company has been the subject of an investigation
by the SEC (Commission) and, on November 21, 1996, the SEC issued a Formal Order
of Private Investigation relating to the Company. Since that date, certain
former and current officers of the Company have testified in the investigation.
On June 22, 1998, the Company was advised by the Staff of the Commission's
Atlanta District Office of the Staff's intention to recommend an enforcement
action against the Company for alleged violations of the federal securities
laws. Specifically, the Staff intends to recommend the filing of a complaint in
federal court, seeking a permanent injunction against the Company for violating
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)
(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10(b)-5,
12(b)-20, 13(a)-1, 13(a)-13 and 13(b)2-1 thereunder. The alleged violations
arise from the Company's reporting of certain revenues in violation of generally
accepted accounting principles in periodic filings made by the Company for the
following fiscal periods: Form 10-KSB Annual Reports for the fiscal years
ended April 1, 1994, April 7, 1995, April 5, 1996, and April 4, 1997 and Form
10-QSB Quarterly Reports for the fiscal quarters ended October 1, 1993, January
7, 1994, July 1, 1994, October 7, 1994, January 6, 1995, July 7, 1995, October
6, 1995, January 5, 1996, January 3, 1997, and October 3, 1997. As a result of
the foregoing, the Company will be required, among other things, to restate
certain previously issued financial information (See Item 6. below). The
Company has advised the Staff of the Company's intention to negotiate a mutually
acceptable settlement of this matter.
On June 5, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Ladia Communications Technologies, Inc.,
a newly-formed subsidiary of the Company ("LCTI"), New Computone Corporation, a
newly formed subsidiary of the Company ("Newco"), Ladia, L.L.C., a Massachusetts
limited liability company and heretofore an unrelated third party ("Ladia") and
the members of Ladia. A copy of the Agreement is included as Exhibit 10.81 to
this Form 10-KSB Annual Report and reference is made to such exhibit for a full
statement of the terms and conditions of the transactions contemplated by the
Agreement. In summary, the Agreement provides that the current holders of the
Company's Common Stock and the current members of Ladia will become stockholders
of LCTI and Registrant and Ladia will be subsidiaries of LCTI. The Agreement
provides that the current members of Ladia and the holders of approximately $
250,000 of debt owed by Ladia would initially receive approximately 430,000
shares of LCTI Common Stock and, subject to the satisfaction of certain
specified criteria relating to Ladia financial performance through April 30,
1999, could receive up to 8.1 million additional shares of LCTI Common Stock.
Should Ladia meet all of the performance criteria set forth in the Agreement,
Ladia would obtain a controlling interest in LCTI.
A copy of the Company's June 9, 1998 press release relating to execution of
the Agreement is included as Exhibit 10.82 to this Form 10-KSB Annual Report.
The Company and Ladia are currently renegotiating certain terms of the
Agreement. The Company cannot predict if or when the renegotiated Agreement
will be completed and there can be no assurances given at this time that the
transactions contemplated by the Agreement will be consummated.
(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.
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(c) Narrative Description of Business.
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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. The Company is involved in an
industry that is characterized by rapid technological advances and evolving
industry standards. Industry participants can affect the market through new
product introductions and marketing activities. The Company competes against
other companies with many of the same product types while customers base their
purchasing decisions on product performance, support, quality, reliability price
and availability. Many of these competitors have greater financial,
technological, manufacturing, marketing and personnel resources than the
Company.
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. Neither product area is date sensitive and will not require
adaptation to comply with Year 2000 requirements.
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.
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 re-positioning
required the Company to increase its direct domestic VAR sales channel from
1,280 at the beginning of the 1996 fiscal year to 1,400 at the end of the 1998
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 1998 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 is
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
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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
suport, 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. During the 1998
fiscal year, sales of remote access products continued to grow to approximately
$6,172,000, or 50% of net revenues. The Company is cautiously optimistic that
sales of remote access products will continue to increase significantly during
fiscal 1999.
Both the new communication server products and traditional multi-port
products of the Company address remote access markets. 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 high speed PowerRack Port solution. These
products, combined with the IntelliServer communication server products, are
currently marketed to distributors, systems integrators, 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;
(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.
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Manufacturing
The Company subcontracts with independent contract manufacturers that
specialize in product manufacturing to procure most parts and services involved
in the production of a majority of its products. The Company believes that this
approach to manufacturing is advantageous because of the reduced capital
requirements, production flexibility, reduced equipment and facilities needs and
reduced headcount requirements.
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 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 ISA,
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EISA and Micro Channel computers.
. IntelliPort II EXpandable - scaleable high-performance 16 to 64 port
-------------------------
subsystems for PCI, ISA, EISA and Micro Channel computers.
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. IntelliCluster - scaleable long-distance 16 to 1,024 multi-port
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subsystems for organizations with widely distributed workgroups for
PCI and ISA/EISA computer systems.
. 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.
Management believes that the PowerSurfer is 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
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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 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
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.
The new TotalAccess DCS-5000 is a high performance Ethernet Digital remote
access server providing Wide Area Network (WAN) interfaces for multiple PRI or
T1/E1 links. Both digital and analog calls are supported within the PRI/T1/E1
links, such as calls made with 33.6 kbps and 56 kbps analog modems and ISDN BRI
terminal adapters. The DCS-5000 supports dual redundant, hot swap power supply
modules. All cable connections are made from the front of the chassis, which is
tabletop or rack mountable.
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 1998 fiscal year, approximately 82% of the Company's
revenues were generated in the United States. Sales in the United States
represented 70% of revenues for the Company's 1997 fiscal year.
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 Company's
INTERNET ftp site.
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Competition
The growing market for products of the type offered by the Company is
highly competitive. The Company is involved in an industry that is characterized
by rapid technological advances and evolving industry standards. Industry
participants can affect the market through new product introductions and
marketing activities. The Company competes against other companies with many of
the same product types while customers base their purchasing decisions on
product performance, support, quality, reliability price and availability. Many
of these competitors have greater financial, technological, manufacturing,
marketing and personnel resources than the Company.
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. 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 a decrease in inventories
of approximately $1,218,000 during the 1998 fiscal year, this decrease included
the sell through of approximately $700,000 of inventory that was on consignment
at the end of the prior fiscal year. As a result of the Company's flat year to
year sales, its focus more toward remote access type solutions and the creation
of a reserve for its warranty and repair inventory, the Company increased its
inventory reserve by $451,000 to $851,000 during the year ended April 3, 1998.
The Company believes that its reserve for excess and obsolete inventory
components is adequate.
Export Sales
The Company's sales from customers located outside the United States,
primarily in Europe, Central and South America and the Asia-Pacific region,
include approximately $2,115,000, or 18% of net revenues, and $3,780,000, or 30%
of net revenues, for the years ended April 3, 1998 and April 4, 1997,
respectively. All of the Company's foreign transactions are negotiated,
invoiced and paid in US dollars.
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Significant Customers
During the 1998 and 1997 fiscal years, the Company's largest customer was
Wal*Mart with product sales of approximately $2,925,000 or 25% of product sales
in fiscal 1998 and approximately $844,000 or 7% of product sales in fiscal 1997.
Research and Development
During fiscal years 1998 and 1997, the Company's research and development
expenditures were $1,288,000 and $1,065,000, respectively. In addition, for
fiscal years 1998 and 1997, the Company capitalized $168,000 and $279,000 of
software development costs.
Trademarks and Licenses
Due to rapidly changing technology in the computer industry, the Company
believes its success depends primarily on the engineering, marketing and support
skills of its personnel rather than on patent protection. Although the Company
may seek patents where appropriate, at present, none of the Company's products
are patented. The Company relies primarily on the copyright, trademark and
trade secret laws to protect its proprietary rights in its products.
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 that 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 3, 1998, the Company had 66 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.
Backlog
The Company's VAR customers typically place orders on an as needed basis
while certain major customers and OEMs place orders with delivery dates of up to
three months in the future. Therefore, the Company does not believe that its
backlog is a good indicator of future sales. At April 3, 1998, the Company's
backlog was approximately $1,263,000. The Company anticipates that
substantially all of its backlog will be shipped during the first half of the
1999 fiscal year.
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 Property.
- ------- -----------------------
The Company's production and research and design facilities are currently
located in a 22,400 square foot building in Alpharetta, Georgia, which it has
occupied since October 1997. The principal lease for those facilities expires
September 30, 2007 and has an average annual rent expense of approximately
$178,000. The Company believes that its facilities and equipment are well
maintained, in good operating order and sufficient for its current needs.
10
<PAGE>
Item 3. Legal Proceedings.
- ------- -----------------
Since March 1996, the Company has been the subject of an investigation by
the SEC and, on November 21, 1996, the Commission issued a Formal Order of
Private Investigation relating to the Company. Since that date, certain former
and current officers of the Company have testified in the investigation. On
June 22, 1998, the Company was advised by the Staff of the SEC's Atlanta
District Office of the Staff's intention to recommend an enforcement action
against the Company for alleged violations of the federal securities laws.
Specifically, the Staff intends to recommend the filing of a complaint in
federal court, seeking a permanent injunction against the Company for violating
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a),
13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10(b)-
5, 12(b)-20, 13(a)-1, 13(a)-13 and 13(b)2-1 thereunder. The alleged violations
arise from the Company's reporting of certain revenues in violation of generally
accepted accounting principles in periodic filings made by the Company for the
following fiscal periods: Form 10-KSB Annual Reports for the fiscal years
ended April 1, 1994, April 7, 1995, April 5, 1996 and April 4, 1997 and Form 10-
QSB Quarterly Reports for the fiscal quarters ended October 1, 1993, January 7,
1994, July 1, 1994, October 7, 1994, January 6, 1995, July 7, 1995, October 6,
1995, January 5, 1996, January 3, 1997 and October 3, 1997. As a result of the
foregoing, the Company will be required, among other things, to restate certain
previously issued financial information (See Item 6. below). The Company has
advised the Staff of the Company's intention to negotiate a mutually acceptable
settlement of this matter.
On July 13, 1998, the Company was served with a Complaint filed in the
U.S. District Court for the Central District of California by Marshall
Industries ("Marshall"). Marshall seeks approximately $ 1.02 million dollars
from the Company alleging breach of contract in connection with manufacture of
certain supplies for the Company. Of the total damages sought, approximately $
368,000 relate to product shipped to the Company and the remaining damages
allegedly arise from the Company's failure to order further product from
Marshall. The Company intends to vigorously defend this suit as the contract
specifically provides for a limitation of the amount of product to be purchased
by the Company to a 60 day supply. The Company currently has insufficient
information to make a determination as to whether the outcome of this litigation
would result in a material adverse change in the business or prospects of the
Company.
On or about June 3, 1998, the Company was served with a Complaint in the
Bankruptcy Court of the Central District of California arising out of the
bankruptcy of Capella Worldwide Networking, Inc. ("Capella"). The debtor in
possession has asserted a preference action pursuant to Section 547 of the
Bankruptcy Code based upon the return to the Company of approximately $ 1.3
million worth of goods that were sold to Capella pursuant to a noncancellable,
nonreturnable purchase order. The suit also seeks recovery for breach of
contract relating to an alleged receivable owed by the Company of approximately
$ 167,000. The Company disputes the value of the returned goods and intends to
defend against the preference action alleging that it was fraudulently induced
to provide product to Capella. In the alternative, the Company will also serve
a counterclaim alleging a breach of contract claim against Capella seeking
approximately $2.7 million in damages for Capella's breach. The Company has
also been advised by Comerica Bank of Comerica's alleged security interest in
the product returned to the Company. If necessary, the Company will also
vigorously defend this action. The Company currently has insufficient
information to make a determination as to whether the outcome of this or the
threatened litigation would result in a material adverse change in the business
or prospects of the Company.
On June 30, 1997, Edward T. Lack, Jr. ("Lack") a former employee of the
Company, filed a complaint in the Superior Court of Fulton County, Georgia
alleging breach of his employment contract with the Company. Lack seeks
$189,421.94, plus interest costs and expenses of litigation, including
attorney's fees. The Company intends to defend this action vigorously, which
will be scheduled for trial this fall.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
Not applicable.
11
<PAGE>
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 Company's Common Stock, as reported by the National
Association of Securities Dealers, Inc. (the "NASD").
Year ended April 3, 1998 Year ended April 4, 1997
------------------------ -------------------------
High Low High Low
---- --- ---- ---
1st Quarter $5.63 $3.13 $3.06 $1.88
2nd Quarter 5.50 3.13 6.25 1.38
3rd Quarter 6.50 3.00 9.63 4.75
4th Quarter 6.75 3.00 7.75 4.00
As of September 1, 1998, the closing price for the Company's common stock was
$3.06 per share.
On July 22, 1998, the Company was notified by the NASDAQ Stock Market,
Inc. that effective July 29, 1998 the Company's Common Stock would be delisted
from the NASDAQ SmallCap Market because of the Company's failure to make a
timely filing of the Company's Form 10-KSB Annual Report for Registrant's fiscal
year ended April 3, 1998. On July 27, 1998, the Company filed an appeal with
the NASDAQ Stock Market, Inc. which is currently pending. The Company has now
filed its Form 10-KSB for the Company's fiscal year ended April 3, 1998.
(b) Holders.
-------
As of April 3, 1998, the Company had approximately 1,700 holders of record
of the 7,382,622 shares of Common Stock then outstanding.
(c) Dividends.
---------
The Company has never declared or paid dividends on its Common Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------- ----------------------------------------------------------
Recent Developments
- -------------------
On November 21, 1996, the Commission issued a Formal Order of Private
Investigation relating to the Company. Since that date, certain former and
current officers of the Company have testified in the investigation. On June
22, 1998, the Company was advised by the Staff of the Commission's Atlanta
District Office of the Staff's intention to recommend an enforcement action
against the Company for alleged violations of the federal securities laws.
Specifically, the Staff intends to recommend the filing of a complaint in
federal court, seeking a permanent injunction against the Company for violating
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)
(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10(b)-5,
12(b)-20, 13(a)-1, 13(a)-13 and 13(b)2-1 thereunder. The alleged violations
arise from the Company's reporting of certain revenues in violation of generally
accepted accounting principles in periodic filings made by the Company for the
following fiscal periods: Form 10-KSB Annual Reports for the fiscal years
ended April 1, 1994, April 7, 1995, April 5, 1996 and April 4, 1997 and Form 10-
QSB Quarterly Reports for the fiscal quarters ended October 1, 1993, January 7,
1994, July 1, 1994, October 7, 1994, January 6, 1995, July 7, 1995, October 6,
1995, January 5, 1996, January 3, 1997 and October 3, 1997. As a result of the
foregoing, the Company will be required, among other things, to restate certain
previously issued financial information (discussed below). The Company has
advised the Staff of the Company's intention to negotiate a mutually acceptable
settlement of this matter.
12
<PAGE>
In response to the foregoing, the Company has taken a number of steps
including (a) changing the application of its revenue recognition policy,
effective with the fourth quarter of the fiscal year ended April 3, 1998 to
defer recognition of revenue to customers who are not the end users of the
Company's products until such time as the product has been sold through to the
end user, (b) improving its quarterly and fiscal year end cut-off procedures,
(c) accepting the resignation of the Company's President and Chief Executive
Officer subsequent to April 3, 1998 and (d) accepting the resignation of the
Company's Chief Financial Officer subsequent to year end. The Company believes
that these steps will provide reasonable assurances that the aforementioned
accounting errors do not recur.
Results of Operations
- ---------------------
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
During fiscal 1998, the Company incurred a loss of $3,466,000 on revenues
of $11,894,000 as compared to a loss in fiscal 1997 of $71,000 on revenues of
$12,638,000. The operating results during fiscal 1998 were unfavorably affected
by depressed sales volume, reduced margins on sales and increased general and
administrative expenses. Sales volume during the year was unfavorably affected
by internal delays in releasing new product into the market, external delays in
receiving product delivery from suppliers due to the Company's cash shortages,
loss of a large customer due to bankruptcy, as well as the effects on revenues
of the accounting change adopted in the fourth quarter of fiscal 1998 to defer
the recognition of revenue on sales made to distributors until such time as the
product has been sold through to the end user. Margins were unfavorably
affected by sales made to the Company's largest customer (representing 25% of
aggregate revenues) at reduced margins, a change in sales mix reflecting an
increase in low margin sales of third party products that were bundled with the
Company's remote access products, and increases to the Company's inventory
reserves in response to the foregoing matters. General and administrative
expenses were unfavorably affected by the Company's cost to relocate its
corporate offices, higher compensation costs and higher legal costs. These
matters are discussed more fully below.
With respect to the 1998 operating results, during the first six months of
fiscal 1998 the Company generated net income of $391,000 (as originally
reported) as compared to the second half of fiscal 1998 in which the Company
incurred a net loss of $3,857,000. This variance in operating results between
these two six month periods, in the amount of $4,248,000, results from a number
of factors including a change in sales mix during the second half of fiscal 1998
from the higher margin I/O products towards sales of third party products that
were bundled with the Company's remote access products ($1,000.000); the effects
of sales recorded incorrectly in the second quarter in advance of completion of
the earnings process which were ultimately reversed or credited in the second
half of fiscal 1998 ($750,000); increases to the inventory reserve for slow
moving inventory in the second half of fiscal 1998 ($550,000); the effects of
changing the Company's revenue recognition policies in the fourth quarter to
defer revenue recognition on sales made to distributors ($300,000) and increases
in general and administrative expenses ($900,000) discussed below. The Company
will be amending certain of its periodic filings on Form 10-QSB to take into
account certain of the matters discussed above.
The following discussion provides additional information with respect to
the fiscal 1998 results of operations.
The Company experienced disappointing sales volume in fiscal 1998. Many
companies in the greater Atlanta metropolitan area have greater financial,
technological, manufacturing, marketing and personnel resources than the
Company. As a result, the Company has experienced difficulty in recruiting the
appropriate personnel required to ensure the timely release of its scheduled new
products. These delays in the release of new product during fiscal 1998 had an
unfavorable effect on operating results. Also, during the summer of 1997, as a
result of working capital shortages, the Company was placed on credit hold with
one its former outsource manufacturers. During the time that the payment issues
were being resolved, the Company's outstanding purchase orders with this vendor
were removed from the vendor's build schedule. After these payment issues were
resolved, the Company was notified by this vendor that as a result of the
Company's orders being removed from their system, they had not yet procured
certain long lead time components necessary to fulfill the Company's orders and
would therefore not be able to make deliveries by the requested delivery dates.
The Company did not receive many of the orders with delivery dates during the
Company's third fiscal period, which ended on January 2, 1998, until the end of
the fiscal period. Many of the Company's customers purchase products on an as
needed basis. To the extent that the Company's products are not available when
the customer needs them, the customer will often purchase a competitor's product
and the likelihood of future purchases of the Company's products by that
customer is jeopardized.
13
<PAGE>
As a result of the new product delivery delays, along with the delivery
delays from the contract manufacturers, the Company experienced significant
decreases in its net sales through both its domestic and international sales
channels. During fiscal 1998 compared to fiscal 1997, net sales through the
domestic distribution channel decreased by approximately $1,762,000, or 64%,
sales through the international distribution channel decreased approximately
$815,000, or 28%, and sales in the Asia Pacific territory decreased by
approximately $849,000, or 98%. Net VAR sales decreased by approximately
$79,000, or 2%, during fiscal 1998 compared to fiscal 1997.
The Company has made the transition of its sales focus toward 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. Sales of remote access products during the 1998 fiscal year
increased to approximately $5,907,000, or 50% of net revenues, from $4,393,000,
or 35%, of net revenues during fiscal 1997. During the 1998 fiscal year, as a
result of the delivery delays of the PowerSurfer and PowerGate products, the
Company bundled sales of its remote access products with products manufactured
by third parties in an effort to provide customers with a complete solution.
Margins associated with the sale of third party products are considerably less
than those margins attainable through sales of the Company's products. During
the 1998 fiscal year, the Company sold approximately $758,000, or 6% of net
revenues, of third party remote access products at an approximate gross margin
of 21%, compared to fiscal 1997 sales of third party products of approximately
$350,000, or 3% of net revenues, at an approximate gross margin of 33%.
Management believes that the release of the Company's TotalAccess DCS-5000
will have a major impact on the Company's sales growth. This product combines
the features of a high performance Ethernet digital remote access server with up
to 10 DSP 24-channel modem cards. It is intended for use by Internet Service
Providers (ISPs) and medium to large companies that require high-density
connectivity, allowing remote users and locations access to the Internet and
corporate intranets. The TotalAccess DCS-5000 will eliminate the Company's
dependence on third party products and management believes that it can be sold
at a considerable margin. Management anticipates that the DSC 5000 will be
available for delivery by the end of the Company's 1999 fiscal third quarter.
During fiscal 1998, net sales to major accounts increased by approximately
$2,362,000, or 273%, to $3,226,000 from $864,000 in fiscal 1997. This increase
is attributable to sales of approximately $2,925,000, or 25% of net revenue to
the Company's largest customer, Wal*Mart. Sales to OEM accounts increased
during fiscal 1998 to approximately $903,000 from approximately $616,000 during
fiscal 1997, an increase of $287,000, or 47%. Management believes that sales to
major accounts and OEMs will continue to be a significant part of the Company's
sales mix.
Cost of products sold for fiscal 1998 totaled $9,240,000 or 78% of product
sales (22% gross margin) in fiscal 1998 compared to $7,344,000 or 58% of product
sales (42% gross margin) for fiscal 1997. This increase in cost of goods sold as
a percentage of product sales can be attributed primarily to the increase in
reduced margin sales of third party products along with the significant amount
of sales, as a percentage of net revenues, to one major customer. Gross margins
were negatively impacted by the dollar volume increase, approximately $408,000,
in sales of third party products. These sales are made at considerably lower
margins than the Company's other products. Margins associated with these sales
of third party products averaged approximately 21%. The remaining decrease in
margin can be attributed to the Company's net increase in its reserves for
excess and obsolete inventory of approximately $451,000 from $400,000 to
$851,000. Management believes that the Company's gross margins will continue to
be negatively impacted until it is no longer dependent upon the products of
third party vendors and the overall net revenue mix is not as heavily dependent
upon sales to one major customer.
Selling, general and administrative ("S, G & A") expenses for fiscal 1998
totaled approximately $4,914,000 compared to approximately $4,215,000 for fiscal
1997, an increase of $699,000 or 17% from the prior fiscal year. This increase
can be attributed to an increase in salaries and benefits of approximately
$230,000, an increase of approximately $74,000 in legal expenses, an increase of
approximately $20,000 in marketing/trade show expenses, an increase of $165,000
pertaining to the Company's relocation, a $228,000 increase in bad debt expenses
and $47,000 in public company expenses.
Product development costs charged to expense for fiscal 1998 totaled
approximately $1,288,000, or 11% of product sales, is compared to approximately
$1,065,000, or 8%, of product sales for fiscal 1997. This fiscal 1998 increase
of $223,000, or 21%, is attributed primarily to a $189,000 reduction of
capitalized development costs, a $54,000 increase in the amortization of
capitalized development costs, a $42,000 increase in computer leases and
supplies along with a $62,000 decrease in salaries and benefits attributable
primarily to the March 1997 resignation of the Company's Vice President of
Engineering.
14
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
- -----------------------------------
During its 1997 fiscal year, the Company had a net loss of approximately
$71,000 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 $2,973,000 million, or 31%, increase in revenues during fiscal 1997. The
Company 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 was 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.
During the 1997 fiscal year, the Company had sales of remote access
products of approximately $4,393,000, or 35% of net revenues, compared to sales
during fiscal 1996 of approximately $1,936,000, or 20% of net revenues.
Revenues for fiscal 1997 totaled approximately $12,638,000 compared to
$9,665,000 for fiscal 1996, an increase of $2,973,000, or 31%. This increase
can be attributed primarily to the $2,264,000, or 120%, 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 to their monthly point of sale ("POS") average. 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.
Cost of products sold for fiscal 1997 totaled $7,344,000 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.
S, G & A expenses for fiscal 1997 totaled approximately $4,215,000 compared
to $3,934,000 for fiscal 1996, an increase of $281,000 or 7% from the prior
fiscal year but as a percentage of revenues, S, G&A expenses decreased 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 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.
Restatement of 1997 financial data
- ----------------------------------
The Company has restated its financial statements for the fiscal year ended
April 4, 1997 (as presented herein). The restatement of the fiscal 1997
financial statements result from the improper recognition of revenue on certain
sales, which had the effect of overstating sales by $260,000 and overstating
operating income and net loss by $120,000 or $0.02 per share as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended April 4, 1997
--------------------------------
As Reported As Restated
----------- -----------
(In Thousands, except per share amounts)
<S> <C> <C>
Revenues $ 12,898 $ 12,638
Operating Income $ 134 $ 14
Net Income <loss> $ 49 $ (71)
Basic and Diluted Earnings (Loss)Per Share $ 0.01 $ ( 0.01)
Accumulated Deficit $(39,674) $(39,794)
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. During the year ended April 3,
1998, the Company incurred a net loss of approximately $3.5 million and, as of
April 3, 1998, is in violation of certain financial covenants under its
revolving loan and security agreement. These matters raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to these matters are discussed below. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
The Company's operating results for the year ended April 3, 1998 were
unfavorably affected by depressed sales volume, reduced margins on sales and
increased general and administrative expenses. Sales volume during the year was
unfavorably affected by internal delays in releasing new products into the
market, external delays in receiving product delivery from suppliers due to the
Company's cash shortages, as well as, the effects on revenues of the accounting
change adopted in the fourth quarter of fiscal 1998 to defer the recognition of
revenue on sales made to distributors until such time as the product has been
sold through to the end user. Margins were unfavorably affected by sales made
to the Company's largest customer at reduced margins, a change in sales mix
reflecting an increase in low margin sales of third party products that were
bundled with the Company's remote access products, and increases to the
Company's inventory reserves. General and administrative expenses were
unfavorably affected by the Company's cost to relocate its corporate offices,
higher compensation costs, bad debts, and legal costs.
The Company's operating results for the first quarter ended July 3, 1998
(Q1 of fiscal 1999) show a loss and the Company expects that such losses will
continue at least through the second quarter of fiscal 1999.
The Company has taken steps in response to the unfavorable fiscal 1998
results of operations including, among others, making changes in certain
executive officers and members of the Board of Directors, and, refocusing its
efforts in product development. Management estimates that new products will be
introduced into the market place by the end of the Company's fiscal third
quarter which management estimates will have a significant favorable effect on
the Company's sales growth and operating results.
In order to meet the Company's liquidity needs arising from the operating
losses, the Company is endeavoring to raise between $2 million and $5 million
during the summer and fall of 1998 by offering for sale, to accredited
investors, up to 1,000,000 shares of the Company's common stock under Regulation
D of the Securities Act of 1993. Management believes that these funds together
with the financing provided under the Company's revolving line of credit
agreement will be sufficient to fund the Company's operations during fiscal
1999. However, no assurances can be given that the Company will be successful
in raising additional capital or that funds under the Company's revolving line
of credit, for which the Company is currently in default, will continue to be
available to the Company. Further, there can be no assurance, assuming the
Company successfully raises additional funds and maintains its revolving line of
credit facility, that the Company will achieve profitability or positive cash
flow.
The Company's primary cash commitments in fiscal 1999 include payments
under non-cancelable operating leases ($308,000), current maturities of long-
term debt ($536,000) and investments in research and development ($1,288,000 in
fiscal 1998). With respect to current maturities of long-term debt,
approximately $495,000 of the $536,000 is due to related parties, the payment
terms of which the Company believes can be extended as needed. With respect to
research and
16
<PAGE>
development, the Company believes that its investments in fiscal 1999 will not
be materially different than the investments made in recent years including
fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Cash used in operating activities amounted to $2,096,000 during fiscal 1998
compared to cash used in operating activities of $914,000 during fiscal 1997.
The increase in cash used in operating activities in the amount of $1,182,000
can be attributable primarily to the loss from operations of $3,466,000 in
fiscal 1998 compared to a $71,000 loss in fiscal 1997. The 1998 changes in
working capital items compared to 1997 include an increase in cash used to fund
changes in accounts receivable of $1,060,000 and a decrease in cash used to
fund changes in inventories of $2,711,000.
Cash used in investing activities amounted to an outflow of $607,000 during
fiscal 1998 compared with an outflow of $437,000 for fiscal 1997. The decrease
in net cash outflow in fiscal 1998 compared to fiscal 1997 resulted from a
decrease of $111,000 in capitalized software costs that was offset by an
increase in capitalized expenditures of $335,000.
Cash provided by financing activities amounted to $2,761,000 during fiscal
1998 versus cash provided by financing activities of $1,296,000 during fiscal
1997. The Company had net borrowings of approximately $1,252,000 against its
line of credit. The Company raised approximately $1,775,000 through private
placements and an additional $100,000 through a shareholder loan. The Company
repaid approximately $578,000 in debt during the fiscal year.
Working capital amounted to $875,000 at April 3, 1998 compared to
$2,403,000 at April 4, 1997, a decrease of $1,528,000. The ratio of current
assets to current liabilities at April 3, 1998 was 1.15 to 1.00 compared to 1.57
to 1.00 at April 4, 1997. The decrease in working capital was attributable to
the loss from operations.
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 $2,185,000 increase in inventories during 1997.
This $2,185,000 increase in inventory can be attributed to $650,000 of
inventory shipped to a customer during the fourth quarter for which revenue
recognition had 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 a 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
$188,000 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
$668,000 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 $296,000 in debt during the fiscal year.
Working capital amounted to $2,403,000 at April 4, 1997 compared to
$693,000 at April 5, 1996, an increase of $1,710,000. The ratio of current
assets to current liabilities at April 4, 1997 was 1.57 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.
Capital Expenditures
- --------------------
The Company does not plan any major capital expenditures in the foreseeable
future.
17
<PAGE>
Impact of Inflation
- -------------------
Management believes that inflation has not had a material effect on the
Company's operations.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
intends to adopt SFAS No. 130 in fiscal year 1999. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. It also requires related disclosures about
products, geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company intends to adopt
SFAS No. 131 in fiscal 1999. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirements Benefits". SFAS 132 revised employers'
disclosures about pension and other postretirement benefits plans but does not
change measurement or recognition of those plans. Also, SFAS 132 requires
additional information on changes in the benefit obligations and fair values of
plan assets. Presently, the Company does not offer postretirement benefits.
Adoption of SFAS 132 will not have an effect on reported financial and operating
results.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain of loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that adoption
of FASB 133 will have no impact on its financial position or results of
operations.
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 SEC, including the pending SEC investigation, the
outcome of pending litigation, and the Company's ability to obtain adequate
working capital.
Year 2000 Risks
- ---------------
The year 2000 issue relates to computer programs and systems which
recognize dates using two digit year data rather than four digit year data. As
a result, such programs and systems may fail or provide incorrect information
when using dates after December 31, 1999.
The company has conducted a review of its internal computer programs and
operating systems to assess the impact of the year 2000 issue. The Company
believes that its internal computer programs and systems are capable of
addressing the year 2000 issue, and that no remediation or specific
expenditures are required in this regard. The Company is in the process
18
<PAGE>
of assessing year 2000 compliance with its key vendors and other companies doing
business with it. Although the Company is optimistic that it will able to
timely address any year 2000 problems that it identifies, the failure of the
Company's or third parties' systems to be year 2000 compliant could have
material adverse effect on the Company's business, financial condition or
results of operations. During fiscal year 1998 the Company established a Y2K
task force consisting of 3 internal engineers. The company is cautiously
optimistic that this task force will address all of its year 2000 concerns.
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 13(a), of this Form 10-KSB
Annual Report.
Item 8. Changes In and Disagreements With Accountants On Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
--------------------
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ------ -------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act.
--------------------------------------------------
(a) Identification of Directors.
---------------------------
The following information regarding the Company's directors is based, in
part, on information furnished by these individuals.
<TABLE>
<CAPTION>
Name Age Position With Company Since
- ---- --- --------------------- -----
<S> <C> <C> <C>
Richard A. Hansen 57 Chairman of the Board and a Director 1992
John D. Freitag 69 Acting President and Chief Executive Officer from
April 30, 1998 to July 31, 1998. Director, Chairman
of the Board and Chief Executive Officer October 31,
1992 until April 25, 1996 1992
Joel Weber 47 Director 1998
Perry J. Pickerign 35 President, Chief Executive Officer and a Director 1998
</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 1998 annual meeting of stockholders. Effective August 1, 1998,
the Audit Committee of the Company's Board of Directors consists of Joel Weber,
John D. Freitag, and Richard Hansen, a director of the Company since 1992 and
Chairman of the Company's Board of Directors since April 25, 1996.
The directors of the Company do not receive any compensation for serving in
such capacity. Following the Company's 1998 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.
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, 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.
Thomas J. Anderson resigned as President and Chief Executive Officer
of the Company effective April 30, 1998. He had been Chief Executive Officer
since April 25, 1996 and had been President of the Company since November 3,
1992. Reference is made to the Separation Agreement dated as of April 30,
1998 between the Company and Mr. Anderson filed as Exhibit 10.83 to this Form
10-KSB Annual Report.
19
<PAGE>
Mr. Freitag served as the Acting President and Chief Executive Officer
from April 30, 1998 through July 31, 1998. From November 1992 until April 25,
1996 he was Chairman of the Board and Chief Executive Officer of the Company. He
is Chairman of the Board of Leopard Industries, Inc., a private investment
management corporation.
Gregory A. Alba resigned as Vice President, Finance and Administration and
Chief Financial Officer of the Company effective July 27, 1998 and had served in
that position 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. Reference is made
to the Separation Agreement dated as of July 27, 1998 between the Company and
Mr. Alba filed as Exhibit 10.84 to this Form 10-KSB Annual Report.
(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 9,
as of July 31, 1998:
<TABLE>
<CAPTION>
Officer
Officer Age Position With Company Since
- ------- --- ------------------------------------ -------
<S> <C> <C> <C>
Greg B. Roseberry 36 Acting Chief Financial Officer 1998
Duncan E. Hume 38 Vice President, International Sales 1994
Brian D. Kretschman 47 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. 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.
On July 27, 1998, the Company appointed Greg Roseberry, the Controller
of the Registrant since April 1998, Acting Chief Financial Officer of the
Company pending the retention of a permanent new Chief Financial Officer.
On July 30, 1998, the Company appointed Perry J. Pickerign as
President, Chief Executive Officer and a director of the Company effective as of
August 1, 1998. Mr. Pickerign has been a self-employed high technology
consultant since September 1997, was Director of Marketing for Comtrol
Corporation from June 1993 to September 1997, was a strategic planning and
marketing consultant from March 1991 to June 1993 and previously held management
positions with ITT Financial Services and 3M Company. Reference is made to the
Employment Agreement dated as of July 31, 1998 between the Company and Mr.
Pickerign filed as Exhibit 10.85 to this Form 10-KSB Annual Report.
(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 10% or
more 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 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 3,
1998, the Company believes that all such filings by its Reporting Persons
required during such fiscal year were made on a timely basis.
20
<PAGE>
Item 10. Executive Compensation
- ---------------------------------
The following table sets forth the compensation paid by the Company during each
of the three fiscal years ended April 3, 1998, April 4, 1997 and April 5, 1996
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 $100,000 in the fiscal year ended April 3, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
- ---------------------------------------------------------------------------------------------------------------
Long Term Compensation
- ---------------------------------------------------------------------- ---------------------------- -----------
Annual Compensation Awards
- ---------------------------------------------------------------------- ---------------------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards(s) ($) SARS (#) sation ($)
- ---------------------------------------------------------------------- ---------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Anderson, FY98 $130,000 $30,102 $ - $ - - $ -
President and Chief FY97 130,000 36,157 - - - -
Executive Officer (1) FY96 122,500 13,350 - - 100,000 -
Brian D. Kretschman, FY98 $100,999 $ - $ - $ - 10,000 $ -
Vice President - FY97 - - - - 22,000 -
North American Sales FY96 - - - - - -
Duncan E. Hume, FY98 $107,900 $ - $ - $ - - $ -
Vice President - FY97 106,082 - - - - -
International Sales FY96 101,750 - - - - -
(1) Mr. Anderson resigned on April 30, 1998.
(2) Mr. Perry J. Pickerign was appointed as the Company's Chief Executive Officer effective August 1, 1998.
Mr. Pinkerign's annual salary is $ 150,000 and the Company has granted him 350,000 non-qualified stock
options.
- ---------------------------------------------------------------------------------------------------------------
21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
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>
Brian D. Kretschman 10,000 19.87% $4.63 11/25/02
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
-----------------------------------------------
Value of
Number of Unexercised
Securities Underlying In-the-Money
Unexercised Options/ Options/SARs at
SARs at Fiscal Year Fiscal Year
Shares End (#) End ($)
Acquired on Value Exercisable / Exercisable* /
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ --------------------- ----------------
<S> <C> <C> <C> <C>
Gregory A. Alba - - 13,277 / 5,000 64,725 / 24,375
Duncan E. Hume - - 32,500 / - 158,438 / 0
Brian D. Kretschman - - 22,166 / 14,666 108,059 / 71,477
- ----------
* Market price at April 3, 1998 was $6.00 per share.
22
</TABLE>
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
The following table sets forth as of July 10, 1998 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)
- ---------------------------------------- -------------- ---------------------
<S> <C> <C>
Direct
------
5% Holders (exclusive of Directors):
- -----------------------------------
Thomas J. Anderson.................... 877,000(4) 11.88%
Roswell, Georgia
Directors:
- ---------
Richard A. Hansen..................... 1,695,095(3) 22.96%
West Conshohocken, Pennsylvania
John D. Freitag....................... 317,854(5) 4.31%
Potomac, Maryland
Executive Officers:
- ------------------
Gregory A. Alba....................... 18,277(6) .25%
Alpharetta, Georgia
Duncan E. Hume...................... 32,500(7) .44%
Alpharetta, Georgia
Brian D. Kretschman................. 39,500(8) .54%
Alpharetta, Georgia
All directors and executive officers
as a group (5 persons).............. 2,103,226(9) 28.49%
</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. 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 1,695,095 shares
of the Company's Common Stock directly or approximately 22.96% of the
Company's outstanding Common Stock.
(4) Mr. Anderson was the President and Chief Executive Officer of the
Company until April 30, 1998 and is the direct beneficial owner of
877,000 shares of the Company's Common Stock, which includes an
option to purchase 150,000 shares of the Company's Common Stock at an
exercise price of $1.13, totaling approximately 11.88% of the
Company's outstanding Common Stock.
(5) Mr. Freitag may be deemed the direct beneficial owner of 317,854
shares of Common Stock, which includes options to purchase 100,000
shares at an exercise price of $2.00 per share and the direct
23
<PAGE>
beneficial owner of warrants to purchase 25,000 shares of Common
Stock, totaling approximately 4.31% of the Company's outstanding
Common Stock.
(6) Mr. Alba, who resigned as an officer of the Company effective July
27, 1998, 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 13,277
shares are currently exercisable.
(7) Mr. Hume previously held options granted in January 1994 to purchase
50,000 shares of the Company's Common Stock at $3.22 per share. In
December 1995, these options were reduced by 25% and their exercise
price was reduced to $1.13. Mr. Hume now holds options to purchase
32,500 shares, of which 32,500 shares are currently exercisable.
(8) Mr. Kretschman previously held options granted in May 1993 to
purchase 1,667 shares of the Company's Common Stock at $3.00 per
share and options granted in January 1994 to purchase 8,334 shares at
$3.22 per share. In December 1995, these options were reduced by 25%
and their exercise price was reduced to $1.13. In December 1995, Mr.
Kretschman was also granted options to purchase 22,000 shares at
$1.13 per share. In November 1997, Mr. Kretschman was also granted
options to purchase 10,000 shares at $4.63 per share. Mr. Kretschman
now holds options to purchase 39,500 shares, of which 21,166 shares
are currently exercisable.
(9) 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.
- ------- ----------------------------------------------
The Company utilizes the services of Alexis Travel, a full service travel
agency, for its corporate travel needs. Alexis Travel is 20% owned by a director
of the Company. During the 1998 and 1997 fiscal years, the Company made
purchases of $87,000 and $111,000, respectively, at rates not in excess of those
charged to other persons in arms' length transactions.
24
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following documents are filed as part of this Form 10-KSB Report:
Page
--------------
(1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants 29
Consolidated Balance Sheets 30
Consolidated Statements of Operations 31
Consolidated Statements of Cash Flows 32
Consolidated Statements of Stockholders' Equity 33
Notes to Consolidated Financial Statements 34
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 46
(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
10.51 * Stock Purchase Agreement between Jaguar, Inc. and Brisco Investments
Limited dated September 10, 1993
25
<PAGE>
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
10.71 * Registrant's Amended and Restated Equity Incentive Plan
10.72 * Registrant's Amended and Restated Directors' Equity Incentive Plan
26
<PAGE>
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.
10.81 Agreement and Plan of Reorganization dated as of June 5, 1998 by and
among Computone Corporation, Ladia Communications Technology, New
Computone Corporation, Ladia, L.L.C. and the members of Ladia,
L.L.C.
10.82 June 9, 1998 press release issued by Computone Corporation
10.83 Separation Agreement dated as of April 30, 1998 between the Company and
Thomas J. Anderson
10.84 Separation Agreement dated as of July 27, 1998 between the Company and
Gregory A. Alba
10.85 Employment Agreement dated as of July 31, 1998 between the Company and
Perry J. Pickerign
10.86 Lease dated March 28,1997 between MacDonald Development and the Company
for certain premises located at 1060 Windward Ridge Parkway,
Alpharetta, Georgia
10.87 The Company's 1997 Equity Incentive Plan
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.
27
<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/ Richard A. Hansen
----------------------------------
Richard A. Hansen
Chairman of the Board
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 September 3, 1998
- ------------------------
Richard A. Hansen
/s/ John D. Freitag Acting President, Chief Executive Officer and a Director September 3, 1998
- ------------------------ (principal executive officer)
John D. Freitag
/s/ Perry J. Pickerign President and Chief Executive Officer and a Director September 3, 1998
- ------------------------ (principal executive officer)
Perry J. Pickerign
/s/ Greg B. Roseberry Acting Vice President, Finance and Administration and September 3, 1998
- ------------------------ Chief Financial Officer
Greg B. Roseberry (principal financial and accounting officer)
</TABLE>
28
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Computone Corporation
We have audited the accompanying balance sheets of Computone Corporation (the
Company) as of April 3, 1998 and April 4, 1997, and the related 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 and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting 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 financial statements referred to above present fairly, in
all material respects, the financial position of Computone Corporation at April
3, 1998 and April 4, 1997, and the 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.
The accompanying financial statements and schedule have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred a significant net loss in fiscal 1998
and is in violation of certain covenants under its revolving loan and security
agreement. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Atlanta, Georgia
August 6, 1998
29
<PAGE>
<TABLE>
<CAPTION>
COMPUTONE CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
April 3, 1998 April 4, 1997
------------- -------------
As Restated
(Note 3)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 146 $ 88
Receivables, net of allowance for doubtful accounts
of $668 at April 3, 1998 and $531 at April 4, 1997 2,540 1,636
Inventories, net 3,752 4,740
Prepaid expenses and other 102 170
--------- ---------
Total current assets 6,540 6,634
Property, equipment and improvements, net 594 276
Intangible assets, net 506 655
Other 27 90
--------- ---------
TOTAL ASSETS $ 7,667 $ 7,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,600 $ 2,647
Accrued liabilities:
Payroll 97 112
Prepaid sales 523 9
Professional fees 153 171
Other 504 439
Line of credit 1,252 - - -
Notes payable to stockholders 460 250
Current maturities of long term debt 76 603
--------- ---------
Total current liabilities 5,665 4,231
Notes payable to stockholders 10 120
Long term debt, less current maturities 116 - - -
--------- ---------
Total liabilities 5,791 4,351
Stockholders' Equity
Convertible redeemable preferred stock, $.01 par value;
10,000,000 shares authorized; no shares issued - - - - - -
Common stock, $.01 par value; 25,000,000 shares
authorized; 7,382,622 and 6,712,074 shares outstanding 74 67
Additional paid in capital 45,062 43,031
Accumulated deficit (43,260) (39,794)
--------- ---------
Total stockholders' equity 1,876 3,304
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,667 $ 7,655
========= =========
See accompanying notes to the financial statements.
30
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTONE CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended
--------------------------------------------
April 3, 1998 April 4, 1997
------------------- -------------------
As Restated
(Note 3)
<S> <C> <C>
Revenues:
Product sales $11,894 $12,638
------- -------
Expenses:
Cost of products sold 9,240 7,344
Selling, general and administrative 4,914 4,215
Product development 1,288 1,065
------- -------
15,442 12,624
------- -------
Operating income (loss) (3,548) 14
Other income (expense):
Other income (expense) 240 31
Interest expense - affiliates (50) (38)
Interest expense - other (108) (78)
------- -------
Loss before income taxes (3,466) (71)
Provision for income taxes - - - -
------- -------
Net loss $(3,466) $ (71)
======= =======
Loss per common share:
Basic $ (0.49) $ (0.01)
======= =======
Diluted $ (0.49) $ (0.01)
======= =======
See accompanying notes to the financial statements.
31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTONE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended
--------------------------------
April 3, 1998 April 4, 1997
------------- -------------
As Restated
(Note 3)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,466) $ (71)
Adjustments to reconcile income (loss) from operations
to net cash used in operations:
Depreciation and amortization 501 674
Provision for uncollectible accounts 344 116
Provision for inventory reserve 462 160
Changes in current assets and current liabilities:
Accounts receivable (1,248) (188)
Inventories 526 (2,185)
Prepaid expenses and other 68 (88)
Accounts payable and accrued liabilities 717 668
------- -------
Net cash used in operations (2,096) (914)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets 63 9
Capitalized software development costs (168) (279)
Capital expenditures (502) (167)
------- -------
Net cash used in investing activities (607) (437)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates 100 250
Repayment to affiliates (75) (50)
Incurrence of debt 167 500
Repayment of debt (503) (296)
Net borrowings (repayments) under lines of credit 1,252 (599)
Exercise of common stock options and warrants 45 73
Issuance of common stock 1,775 1,418
------- -------
Net cash provided by financing activities 2,761 1,296
------- -------
Net increase (decrease) in cash and cash equivalents 58 (55)
Cash and cash equivalents, beginning of period 88 143
------- -------
Cash and cash equivalents, end of period $ 146 $ 88
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 142 $ 116
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Conversion of debt to equity $ 218 $ 0
======= =======
See accompanying notes to the financial statements.
32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTONE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 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 loss - As Restated (Note 3) - - - - - - - - - - (71) (71)
---- ----- --------- ----- ------- -------- -------
Balance, April 4, 1997 - As Restated
(Note 3) 0 0 6,712,074 67 43,031 (39,794) 3,304
Exercise of common stock options - - - - 41,495 0 45 - - 45
Issuance of common stock - - - - 574,055 7 1,768 - - 1,775
Conversion of debt to common stock - - - - 55,000 0 218 - - 218
Cancellation of common stock - - - - (2) 0 0 - - 0
Net loss - - - - - - - - - - (3,466) (3,466)
---- ----- --------- ----- ------- -------- -------
Balance, April 3, 1998 0 $ 0 7,382,622 $ 74 $45,062 $(43,260) $ 1,876
==== ===== ========= ===== ======= ======== =======
See accompanying notes to the financial statements.
33
</TABLE>
<PAGE>
Computone Corporation
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Computone Corporation ("the Company") conducts its 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 3, 1998 had 52 weeks and the fiscal year ended April 4,
1997 had 52 weeks.
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 sales returns and allowances, when the related products are shipped.
Beginning with the fourth quarter of the fiscal year ended April 3, 1998, the
Company modified the application of its revenue recognition policy to defer
recognition of revenue on sales to customers who are not end users of the
Company's products until such time as the product has been sold through to the
end user. The change is being implemented in response to management's
determination that the estimated returns and allowances attributable to such
sales cannot be accurately quantified and is considered a change in estimate
under APB Opinion No. 20 Accounting Changes. The effect on the Company's fiscal
1998 financial statements of adopting this change was to reduce revenue by
approximately $720,000 and reduce income by approximately $300,000 ($.04 per
share).
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 that 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 $851,000 and $400,000 at April 3, 1998 and April 4, 1997, respectively.
34
<PAGE>
Computone Corporation
Notes to 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 3,
1998 and April 4, 1997 amounted to $188,000 and $415,000, respectively.
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.
Amortization expense during the years ended April 3, 1998 and April 4,
1997 was $313,000 and $259,000, respectively; software development costs
totaling $168,000 and $279,000, respectively, were capitalized during such
years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred. Research
and development amounted to $1,288,000 and $1,065,000 during the years ended
April 3, 1998 and April 4, 1997, respectively.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No.109 (SFAS 109), "Accounting for
Income Taxes". Management provides a valuation allowance against its deferred
tax assets to the extent that management concludes that it is more likely than
not that the Company will benefit from the utilization of such deferred tax
assets.
NET LOSS PER SHARE
Net loss per share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SIGNIFICANT RISKS UNCERTAINTIES AND 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.
35
<PAGE>
Computone Corporation
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT RISKS AND UNCERTAINTIES & USE OF ESTIMATES (CONTINUED)
Certain estimates used by management are particularly susceptible to significant
changes in the economic environment. These include estimates of inventory
obsolescence, provisions for sales returns and allowances, allowance for
uncollectible accounts, and deferred tax assets. Each of these estimates, as
well as the related amounts reported in the financial statements, are sensitive
to near term changes in the factors used to determine them. A significant
change in any one of those factors could result in the determination of amounts
different from those reported in the consolidated financial statements and the
effect of such differences could be material. Management believes that, as of
April 3, 1998, 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.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the statement of operations as a component of
selling, general and administrative expenses. During fiscal 1998 and 1997, the
Company incurred advertising expenses of $ 204,000 and $ 189,000 respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
intends to adopt SFAS No. 130 in fiscal year 1999. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way
management organizes and evaluates financial information internally for making
decisions and assessing performance. It also requires related disclosures about
products, geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company intends to adopt
SFAS No. 131 in fiscal 1999. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirements Benefits". SFAS 132 revised employers'
disclosures about pension and other postretirement benefits plans but does not
change measurement or recognition of those plans. Also, SFAS 132 requires
additional information on changes in the benefit obligations and fair values of
plan assets. Presently, the Company does not offer postretirement benefits.
Adoption of SFAS 132 will not have an effect on reported financial and operating
results.
36
<PAGE>
Computone Corporation
Notes to Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain of loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or a investments. Accordingly, the Company believes that adoption of
FASB 133 will have no impact on its financial position or results of
operations.
RECLASSIFICATION
Certain amounts have been reclassified in the prior year's financial
statements to conform to the current year.
2. GOING CONCERN UNCERTAINTY AND FUTURE OPERATIONS
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. During the year ended April 3,
1998, the Company incurred a net loss of approximately $3.5 million and, as of
April 3, 1998, is in violation of certain financial covenants under its
revolving loan and security agreement (see Note 5). These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are discussed below.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company's operating results for the year ended April 3, 1998 were
unfavorably affected by depressed sales volume, reduced margins on sales and
increased general and administrative expenses. Sales volume during the year was
unfavorably affected by internal delays in releasing new products into the
market, external delays in receiving product delivery from suppliers due to the
Company's cash shortages, as well as the effects on revenues of the accounting
change adopted in the fourth quarter of fiscal 1998 to defer the recognition of
revenue on sales made to distributors until such time as the product has been
sold through to the end user (see Notes 1 and 3). Margins were unfavorably
affected by sales made to the Company's largest customer at reduced margins, a
change in sales mix reflecting an increase in low margin sales of third party
products that were bundled with the Company's remote access products, and
increases to the Company's inventory reserves. General and administrative
expenses were unfavorably affected by the Company's cost to relocate its
corporate offices, higher compensation costs and legal costs (see Note 3).
The Company's operating results for the quarter ended July 3, 1998 (the
first quarter of fiscal 1999) show a loss and the Company expects that such
losses will continue at least through the second quarter of fiscal 1999.
The Company has taken steps in response to the unfavorable fiscal 1998
results of operations including, among others, making changes in certain
executive officers and members of the Board of Directors, and, refocusing its
efforts in product development. Management estimates that new products will be
introduced into the market place by the end of the Company's fiscal third
quarter which management estimates will have a significant favorable effect on
the Company's sales growth and operating results.
In order to meet the Company's liquidity needs arising from the operating
losses, the Company is endeavoring to raise between $2 million and $5 million
during the summer and fall of 1998 by offering for sale, to accredited
investors, up to 1,000,000 shares of the Company's common stock under Regulation
D of the Securities Act of 1993. Management believes that these funds together
with the financing provided under the Company's revolving line of credit
agreement will be sufficient to fund the Company's operations during fiscal
1999. However, no assurances can be given that the Company will be successful
in raising additional capital or that funds under the Company's revolving line
of credit, under which the
37
<PAGE>
Computone Corporation
Notes to Financial Statements
2. GOING CONCERN UNCERTAINTY AND FUTURE OPERATIONS (CONTINUED)
Company is currently in default, will continue to be available to the Company.
Further, there can be no assurance, assuming the Company successfully raises
additional funds and maintains its revolving line of credit facility, that the
Company will achieve profitability, or positive cash flow.
3. RESTATEMENT OF FINANCIAL DATA
The Company has restated its financial statements for the fiscal year
ended April 4, 1997 (as presented herein) as a result of an ongoing
investigation by the Securities and Exchange Commission ("Commission") into
matters focused principally on the Company's revenue recognition policies and
internal accounting controls. Since March 1996, the Company has been subject to
an investigation by the Commission pursuant to a Formal Order of Private
Investigation. Since that date, certain current and former officers and
directors of the Company have testified in the investigation. On June 22, 1998,
the Company was advised by the Staff of the Commission of the Staff's intention
to recommend an enforcement action against the Company for alleged violations
of the federal securities laws and to recommend the filing of a complaint in
federal court seeking a permanent injunction against the Company for violations
arising from the Company's reporting of certain revenues in violation of
generally accepted accounting principles in periodic filings made during certain
of the quarterly and annual filings by the Company in the five year period
ending April 3, 1998. As a result of the foregoing, the Company will be
required to restate certain financial information previously filed with the
Commission. The Company has advised the Staff of the Company's intention to
negotiate a mutually acceptable settlement of this matter.
In response to the foregoing, the Company has taken a number of steps
including (a) changing the application of its revenue recognition policy,
effective with the fourth quarter of the fiscal year ended April 3, 1998, to
defer recognition of revenue to customers who are not the end users of the
Company's product until such time as the product has been sold through to the
end user, (b) improving it's quarterly and fiscal year end cut-off procedures;
(c) accepting the resignation of the Company's president and chief executive
officer subsequent to April 3, 1998; and (d) accepting the resignation of the
Company's chief financial officer subsequent to year end. The Company believes
that these steps will provide reasonable assurance that the aforementioned
accounting errors do not recur.
The restatement of the fiscal 1997 financial statements included herein
results from the improper recognition of revenue on certain sales, which had the
effect of overstating sales by $260,000 and overstating operating income and net
income by $120,000 or $0.02 per share as follows.
<TABLE>
<CAPTION>
Year Ended April 4, 1997
-------------------------------
As Reported As Restated
----------- -----------
<S> <C> <C>
(In Thousands)
Revenues $ 12,898 $ 12,638
Operating Income $ 134 $ 14
Net Income <loss> $ 49 $ (71)
Basic and Diluted Earnings Per Share $ 0.01 $ ( 0.01)
Accumulated Deficit $(39,674) $(39,794)
</TABLE>
38
<PAGE>
Computone Corporation
Notes to Financial Statements
4. OTHER BALANCE SHEET INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 3, APRIL 4,
1998 1997
---------- ---------
(As Restated)
<S> <C> <C>
Inventories:
Finished goods 1,414 $1,880
Work in process 533 725
Raw materials 1,805 2,135
------ ------
3,752 $4,740
====== ======
Property and equipment:
Equipment 3,356 $3,211
Furniture & fixtures 487 396
Leasehold improvements 229 222
------ ------
4,072 3,829
Less accumulated depreciation
and amortization 3,478 3,553
------ ------
594 $ 276
====== ======
Intangible assets:
Software costs 2,543 $2,376
Less accumulated amortization 2,037 1,721
------ ------
$ 506 $ 655
====== ======
</TABLE>
5. LONG-TERM DEBT AND LINE OF CREDIT
(a) Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 3, APRIL 4,
1998 1997
---------- ---------
<S> <C> <C>
Prime plus one percent note payable to bank, interest only payments
due monthly through April 1997 collateralized by accounts receivable,
inventory and equipment and guaranteed by a director of the Company
and repaid in June 1997. $ - - $ 500
Prime plus one and one-half percent note payable to lender, payable in
thirty-six monthly payments of principal plus interest, commencing
on July 1, 1997, collateralized by accounts receivable, inventory
and equipment (See Note 5b) 167 - -
10% note payable to a major stockholder due on demand 350 250
7% note payable to a major stockholder due December 1998 125 200
7% notes payable to two major stockholders, $10,000 due April 2, 1999,
$10,000 due December 31, 1999 20 20
Other, principally extended vendor payment plans, repaid in fiscal 1998 - - 3
---- -----
662 973
Less current maturities 536 853
------ ------
$ 126 $ 120
====== ======
</TABLE>
39
<PAGE>
Computone Corporation
Notes to Financial Statements
5. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Future maturities of long-term debt are as follows (See Note 5b) (in
thousands):
1999 $536
2000 61
2001 65
2002 - -
2003 - -
Thereafter - -
----
$662
====
(b) On June 20, 1997, the Company entered into a financing arrangement with
a lender which provided for a term loan in the amount of $254,000
($167,000 outstanding at April 3, 1998), at a rate of prime plus 1.50%,
which is collateralized by the Company's inventory and is payable at
$4,233 per month through June 2000. Additionally a line of credit
agreement exists with the lender for up to $2,500,000 ($1,252,000
outstanding at April 3, 1998) and is based on the available borrowing
base, at a rate of prime plus 1.25% which is collateralized by the
Company's accounts receivable. This agreement expires June 20, 2000
unless terminated by the lender with 60 days written notice. Upon
termination, all outstanding borrowings are due and payable. At April 3,
1998, approximately $83,000 was available under the line of credit.
The financing arrangement contains various affirmative and negative
covenants and, as of April 3, 1998, the Company was in violation of the
minimum net worth covenant. The lender has not exercised its remedies
under the financing agreement at this time, however, the lender at its
sole discretion can demand repayment of outstanding borrowings under the
line of credit at any time. Should the lender demand repayment, this
would have a materially unfavorable effect on the Company's operations.
Refer to Note 2.
6. COMMITMENTS
Rent payable under noncancelable long-term operating leases for real and
personal property relating to continuing operations is as follows (in
thousands):
1999 $ 308
2000 310
2001 288
2002 238
2003 210
Thereafter 854
------
$2,208
======
Rent expense relating to continuing operations amounted to $276,000 and
$238,000 for the years ended April 3, 1998 and April 4, 1997, respectively.
7. INCOME TAXES
The Company has available net operating and capital loss carryforwards
amounting to approximately $53 million, including preacquisition operating loss
carryforwards which relate to a predecessor company, which expire in 2013. 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.
40
<PAGE>
Computone Corporation
Notes to Financial Statements
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The components of deferred tax liabilities and deferred tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Software costs $ 141 $ 213
-------- --------
Total deferred tax liabilities $ 141 $ 213
======== ========
Deferred tax assets:
Allowance for doubtful accounts $ 152 $ 97
Depreciation 44 7
Inventory reserves 324 21
Other accrued expenses 407 134
Net operating loss carryforwards 10,590 9,885
Valuation allowance (11,376) ( 9,931)
-------- --------
Total deferred tax assets $ 141 $ 213
======== ========
</TABLE>
The statutory federal income tax rate differed from the effective income tax
rate as follows:
<TABLE>
1998 1997
-------- --------
<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>
8. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 requires the dual presentation of basic and diluted EPS on
the face of the statement of operations. Basic EPS excludes dilution and is
computed by dividing income(loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS No. 128 during fiscal 1998 and has restated all
prior period EPS data. For purposes of computing basic and diluted EPS, the net
loss for each period presented (the numerator) ($3,466,000 for fiscal 1998 and
$71,000 for fiscal 1997) is divided by the weighted average number of common
shares outstanding (the denominator) (7,088,000 in fiscal 1998 and 6,529,000 in
fiscal 1997) resulting in basic and diluted EPS of ($0.49) for fiscal 1998 and
($0.01) for fiscal 1997. For purposes of computing diluted EPS, the Company
excluded the effects of outstanding common stock options and warrants because
they were anti-dilutive.
41
<PAGE>
Computone Corporation
Notes to Financial Statements
9. 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 prices ranging from $1.13 to $6.00 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. 500,000 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 5, 1996 393,386 $ 1.23 160,080 $ 3.97
Granted 100,000 $ 2.00 228,600 $ 2.08
Exercised (57,163) 1.83 - - - - - -
Forfeited or canceled (6,435) 1.13 - - - - - -
------- -------
Outstanding at April 4, 1997 429,788 388,680
Granted 50,333 $ 3.64 - - - - - -
Exercised (41,495) 1.13 - - - - - -
Forfeited or canceled (1,748) 1.13 (16,667) $10.50
------- -------
Outstanding at April 3, 1998 436,878 372,013
======= =======
Options and warrants exercisable at:
April 4, 1997 429,788 $ 1.33 388,680 $ 2.86
April 3, 1998 436,878 $ 1.62 372,013 $ 2.58
Weighted average remaining fair value of options granted during the year ended:
April 4, 1997 $ 478,000
April 3, 1998 $ 142,000
</TABLE>
The weighted average remaining life of options outstanding at April 3,
1998 was 2.7 years.
The Company 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 1998 and
1997. If the Company 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 loss
applicable to common shareholders and loss per share would have been changed to
the pro forma amounts indicated below:
42
<PAGE>
Computone Corporation
Notes to Financial Statements
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
Year ended Year ended
(in thousands, except per share data) April 3, 1998 April 4, 1997
------------- -------------
(As Restated)
<S> <C> <C>
Net loss applicable to common
shareholders: as reported $(3,466) $ (71)
pro forma (3,662) (233)
Loss per common share, basic
and diluted: as reported $ (0.49) $(0.01)
pro forma (0.52) (0.04)
</TABLE>
The fair value of stock options used to compute pro forma net income
applicable to common shareholders and loss 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 1998 and 1997;
Dividend yield was excluded from the computation for both years; expected
volatility of 80.6% for fiscal 1998 and 67.5% for fiscal 1997; a risk free
interest rate of 5.75% for fiscal 1998 and 6.64% for fiscal 1997 and an expected
option life of 5.0 years for both fiscal 1998 and 1997.
10. 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.
YEAR ENDED APRIL 3, 1998
- ------------------------
On May 2, 1997, the Company made a direct sale of 55,555 shares of common
stock at a price of $4.50 per share. On July 4, 1997, the Company exchanged
55,000 shares of its common stock for the forgiveness of $218,000 of debt.
During the period of August 28 through October 16, 1997, the Company raised a
total of approximately $1,523,000, net of cash offering costs of $93,600
through a private placement. A total of 518,500 shares were sold at an offering
price of $3.12 per share.
11. OTHER RELATED PARTY TRANSACTIONS
The Company incurred interest expense totaling $50,280 and $38,000 during
the fiscal years ended April 3, 1998 and April 4, 1997 on obligations due to
stockholders.
The Company utilizes the services of Alexis Travel, a full service travel
agency, for its corporate travel needs. Alexis Travel is 20% owned by a former
director of the Company. During the 1998 and 1997 fiscal years, the Company
made purchases of $87,000 and $111,000, respectively, at rates not in excess
of those charged to other persons in arms' length transactions.
43
<PAGE>
Computone Corporation
Notes to Financial Statements
12. FOREIGN SALES AND MAJOR CUSTOMERS
The Company's revenues from continuing operations include approximately
$2,115,000 and $3,780,000 from foreign customers (principally in Europe, the
Asia-Pacific region, South Africa and Central and South America) for the years
ended April 3, 1998 and April 4, 1997, respectively.
During the fiscal year ended April 3, 1998, one customer accounted for 25%
of net revenues. One customer accounted for 7% of the Company's net revenues
for the year ended April 4, 1997.
13. 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 1998 and 1997 fiscal years, the Company made no
such contributions to the plan.
14. LITIGATION
Since March 1996, the Company has been the subject of an investigation by
the SEC (Commission) and, on November 21, 1996, the Commission issued a Formal
Order of Private Investigation relating to the Company. Since that date,
certain former and current officers of the Company have testified in the
investigation. On June 22, 1998, the Company was advised by the staff of the
Commission's Atlanta District Office (the "Staff") of the Staff's intention to
recommend an enforcement action against the Company for alleged violations of
the federal securities laws. Specifically, the Staff intends to recommend the
filing of a complaint in federal court, seeking a permanent injunction against
the Company for violating Section 17(a) of the Securities Exchange Act of 1933
and Sections 10(b), 13(a), 13(b) 2B and 13(b)(5) of the Securities Exchange Act
of 1934 and Rules 10(b)-5, 12(b)-20, 13(a)-1, 13(a)-13 and 13(b)2-1 thereunder.
The alleged violations arise from the Company's reporting of certain revenues in
violation of generally accepted accounting principles in periodic filings made
by the Company for the following fiscal periods: Form 10-KSB Annual Reports
for the fiscal years ended April 1, 1994, April 7, 1995, April 5, 1996, and
April 4, 1997 and Form 10-QSB Quarterly Reports for the fiscal quarters ended
October 1, 1993, January 7, 1994, July 1, 1994, October 7, 1994, January 6,
1995, July 7, 1995, October 6, 1995, January 5, 1996, January 3, 1997, and
October 3, 1997. As a result of the foregoing, the Company will be required,
among other things, to restate certain previously issued financial information.
The Company has advised the Staff of the Company's intention to negotiate a
mutually acceptable settlement of this matter.
On July 13, 1998, the Company was served with a Compliant filed in the
U.S. District Court for the Central District of California by Marshall
Industries ("Marshall"). Marshall seeks approximately $ 1.02 million dollars
from the Company alleging breach of contract in connection with manufacture of
certain supplies for the Company. Of the total damages sought, approximately $
368,000 relate to product shipped to the Company and the remaining damages
allegedly arise from the Company's failure to order further product from
Marshall. The Company intends to vigorously defend this suit as the contract
specifically provides for a limitation of the amount of product to be purchased
by the Company to a 60 day supply. The Company currently has insufficient
information to make a determination as to whether the outcome of this litigation
would result in a material adverse change in the business or prospects of the
Company.
On or about June 3, 1998, the Company was served with a Complaint in the
Bankruptcy Court of the Central District of California arising out of the
bankruptcy of Capella Worldwide Networking, Inc. ("Capella"). The debtor in
possession has asserted a preference action pursuant to Section 547 of the
Bankruptcy Code based upon the return to the Company of approximately $ 1.3
million dollars worth of goods that were sold to Capella pursuant to the
noncancellable, nonreturnable purchase order. The suit also seeks recovery for
breach of contract relating to an alleged receivable owed by the Company of
approximately $ 167,000. The Company disputes the value of the returned goods
and intends to defend against the preference action alleging that it was
fraudulently induced to provide product to Capella. In the alternative, the
Company will also serve a counterclaim alleging a breach of contract claim
against Capella seeking approximately $2.7 million dollars in damages for
Capella's breach. The company has also been advised by Comerica Bank of
Comerica's alleging security
44
<PAGE>
Computone Corporation
Notes to Financial Statements
14. LITIGATION (CONTINUED)
interest in the product returned to the Company. If necessary, the Company will
also vigorously defend this action. The Company currently has insufficient
information to make a determination as to whether the outcome of this or the
threatened litigation would result in a material adverse change in the business
or prospects of the Company.
On June 30, 1997, Edward T. Lack, Jr. ("Lack") a former employee of the
Company, filed a complaint alleging breach of his employment contract with the
Company in the Superior Court of Fulton County, Georgia. Lack seeks $189,421.94,
plus interest costs and expenses of litigation, including attorney's fees. The
Company intends to defend this action vigorously, which will be scheduled for
trial this fall.
Other than the matters discussed above, the Company is not a defendant in
any material pending proceedings or complaints. In the opinion of management,
all pending legal proceedings will not have an adversely material impact,
individually or in the aggregate, on the Company's consolidated financial
position and results of operations.
15. CHANGES IN ACCOUNTING ESTIMATES
During the fourth quarter of fiscal 1998, the Company made certain changes
in accounting estimates which increased the net loss by approximately $ 880,000
($ 0.12 per share) due to events in fiscal 1998 and new information becoming
available. The changes in accounting estimates included deferring revenue on
sales made to distributors (discussed in Note 3) by $ 300,000 ($0.04 per share),
increasing the provision for excess and obsolete inventory by $ 390,000 ($0.055
per share) and increasing the provision for uncollectible accounts by $ 190,000
($0.025 per share).
16. SUBSEQUENT EVENTS
On June 5, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Ladia Communications Technologies, Inc.,
a newly formed subsidiary of the Company ("LCTI"), New Computone Corporation, a
newly formed subsidiary of the Company ("Newco"), Ladia, L.L.C., a Massachusetts
limited liability company and heretofore an unrelated third party ("Ladia") and
the member of Ladia. A copy of the Agreement is included as Exhibit 10.81 to
this Form 10-KSB Annual Report and reference is made to such exhibit for a full
statement of the terms and conditions of the transactions contemplated by the
Agreement. In summary, the Agreement provides that the current holders the
Company's Common Stock and the current members of Ladia will become stockholders
of LCTI and Registrant and Ladia will be subsidiaries of LCTI. The Agreement
provides that the current members of Ladia and the holders of approximately $
250,000 of debt owed by Ladia would initially receive approximately 430,000
shares of LCTI Common Stock and, subject to the satisfaction of certain
specified criteria relating to Ladia financial performance through April 30,
1999, could receive up to 8.1 million additional shares of LCTI Common Stock.
Should Ladia meet all of the performance criteria set forth in the Agreement,
Ladia would obtain a controlling interest in LCTI.
The Company and Ladia are currently renegotiating certain terms of the
Agreement. The Company cannot predict if or when the renegotiated Agreement
will be completed and there can be no assurances given at this time that the
transactions contemplated by the Agreement will be consummated.
45
<PAGE>
Computone Corporation
Notes to Financial Statements
Schedule II - Valuation and Qualifying Accounts
Years ended April 3, 1998 and April 4, 1997
<TABLE>
<CAPTION>
Additions
Balance Charged
Beginning to Costs Balance,
of Year and Expenses Deductions End of Year
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
( in thousands)
Allowance for uncollectible accounts:
Year ended April 3, 1998 $ 531 $ 344 $207 $ 668
Year ended April 4, 1997 $ 476 $ 116 $ 61 $ 531
Allowance for slow-moving and
obsolete inventory:
Year ended April 3, 1998 400 462 11 851
Year ended April 4, 1997 381 160 141 400
Valuation allowance for deferred tax assets:
Year ended April 3, 1998 9,931 1,445 - - - 11,376
Year ended April 4, 1997 10,163 - - - 232 9,931
</TABLE>
46
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
COMPUTONE CORPORATION,
LADIA COMMUNICATIONS TECHNOLOGIES, INC.,
NEW COMPUTONE CORPORATION, LADIA, L.L.C.
AND THE MEMBERS OF LADIA L.L.C.
June 5, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
AGREEMENT AND PLAN OF REORGANIZATION..................................... -1-
RECITALS................................................................. -1-
ARTICLE I THE EXCHANGE.................................................. -1-
Section 1.1 Exchange of Interests.................................. -1-
---------------------
Section 1.2 Debt Conversion........................................ -2-
---------------
Section 1.3 Management Incentive Plan.............................. -2-
-------------------------
Section 1.4 Preliminary Exchange Closing........................... -2-
----------------------------
Section 1.5 Contingent Shares...................................... -3-
-----------------
Section 1.6 Managers............................................... -4-
--------
Section 1.7 Tax-Free Treatment..................................... -4-
------------------
Section 1.8 Accounting Treatment................................... -4-
--------------------
ARTICLE II THE MERGER................................................... -4-
Section 2.1 Effective Time of the Merger........................... -4-
----------------------------
Section 2.2 Closing................................................ -5-
-------
Section 2.3 Effects of the Merger.................................. -5-
---------------------
Section 2.4 Certificate of Incorporation........................... -5-
----------------------------
Section 2.5 Bylaws................................................. -5-
------
Section 2.6 Directors and Officers................................. -5-
----------------------
Section 2.7 Tax-Free Treatment..................................... -6-
------------------
Section 2.8 Accounting Treatment................................... -6-
--------------------
Section 2.9 Affiliate Restrictions................................. -6-
----------------------
ARTICLE III CONVERSION OF SECURITIES IN MERGER......................... -6-
Section 3.1 Conversion of Shares................................... -6-
--------------------
Section 3.2 Exchange of Certificates............................... -7-
------------------------
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF LADIA AND PRINCIPAL
MEMBERS...................................................... -8-
Section 4.1 Existence. Good Standing. Compliance with Law.......... -8-
---------------------------------------------
Section 4.2 Capitalization of Ladia................................ -9-
-----------------------
Section 4.3 Authority.............................................. -9-
---------
Section 4.4 Consents and Approvals; No Violations.................. -9-
-------------------------------------
Section 4.5 Ladia Financial Statements............................. -10-
--------------------------
Section 4.6 Undisclosed Liabilities................................ -10-
-----------------------
Section 4.7 Absence of Certain Changes or Events................... -10-
------------------------------------
Section 4.8 Certain Agreements..................................... -11-
------------------
Section 4.9 Taxes.................................................. -12-
-----
i
<PAGE>
Section 4.10 Title to Assets....................................... -13-
---------------
Section 4.11 Condition of Personal Property........................ -13-
------------------------------
Section 4.12 List of Contracts and Other Data...................... -13-
--------------------------------
Section 4.13 Business Property Rights.............................. -14-
------------------------
Section 4.14 Compliance with Applicable Law........................ -14-
------------------------------
Section 4.15 No Breach or Default.................................. -14-
--------------------
Section 4.16 Labor Controversies................................... -15-
-------------------
Section 4.17 Litigation............................................ -15-
----------
Section 4.18 Transactions with Affiliates.......................... -15-
----------------------------
Section 4.19 Environmental Matters................................. -15-
---------------------
Section 4.20 ERISA Plans........................................... -16-
-----------
Section 4.21 No Brokers............................................ -16-
----------
Section 4.22 Pooling Matters....................................... -17-
---------------
Section 4.23 Information Supplied.................................. -17-
--------------------
Section 4.24 No Misrepresentation or Omission...................... -17-
--------------------------------
ARTICLE IVA REPRESENTATIONS AND WARRANTIES OF MEMBERS.................. -17-
Section 4A.1 Capitalization of Ladia.......................... -17-
-----------------------
Section 4A.2 Authority........................................ -17-
---------
Section 4A.3 Consent and Approvals; No Violations............. -18-
------------------------------------
Section 4A.4 No Brokers....................................... -18-
----------
Section 4A.5 Ownership of Interest............................ -18-
---------------------
Section 4A.6 Information Supplied............................. -18-
--------------------
Section 4A.7 No Misrepresentations or Omission................ -19-
---------------------------------
ARTICLE V REPRESENTATIONS AND WARRANTIES OF COMPUTONE.................. -19-
Section 5.1 Existence. Good Standing. Compliance with Law.......... -19-
---------------------------------------------
Section 5.2 Capitalization of Computone............................ -19-
---------------------------
Section 5.3 Authority.............................................. -20-
---------
Section 5.4 Consents and Approvals; No Violations.................. -21-
-------------------------------------
Section 5.5 Computone SEC Documents................................ -21-
-----------------------
Section 5.6 Undisclosed Liabilities................................ -22-
-----------------------
Section 5.7 Absence of Certain Changes or Events................... -22-
------------------------------------
Section 5.8 Information Supplied.................................... -23-
--------------------
Section 5.9 Certain Agreements..................................... -24-
------------------
Section 5.10 Taxes.................................................. -24-
-----
Section 5.11 Title to Assets....................................... -25-
---------------
Section 5.12 Condition of Personal Property........................ -25-
------------------------------
Section 5.13 List of Contracts and Other Data...................... -25-
--------------------------------
Section 5.14 Business Property Rights.............................. -26-
------------------------
Section 5.15 Compliance with Applicable Law........................ -26-
------------------------------
Section 5.16 No Breach or Default.................................. -27-
--------------------
Section 5.17 Labor Controversies................................... -27-
-------------------
ii
<PAGE>
Section 5.18 Litigation............................................ -27-
----------
Section 5.19 Transactions with Affiliates.......................... -28-
----------------------------
Section 5.20 Environmental Matters................................. -28-
---------------------
Section 5.21 ERISA Plans........................................... -28-
-----------
Section 5.22 No Brokers............................................ -29-
----------
Section 5.23 Pooling Matters....................................... -29-
---------------
Section 5.24 No Misrepresentation or Omission...................... -29-
--------------------------------
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF HC AND NEWCO............. -30-
Section 6.1 Existence. Good Standing. Compliance with Law......... -30-
---------------------------------------------
Section 6.2 Capitalization of HC.................................. -30-
--------------------
Section 6.3 Capitalization of Newco............................... -30-
-----------------------
Section 6.4 Authority............................................. -31-
---------
Section 6.5 Consents and Approvals; No Violations................. -31-
-------------------------------------
Section 6.6 Undisclosed Liabilities............................... -32-
-----------------------
Section 6.7 Absence of Certain Changes or Events.................. -32-
------------------------------------
Section 6.8 Information Supplied.................................. -33-
--------------------
Section 6.9 Certain Agreements.................................... -33-
------------------
Section 6.10 Taxes................................................ -33-
-----
Section 6.11 Title to Assets...................................... -34-
---------------
Section 6.12 Condition of Personal Property....................... -34-
------------------------------
Section 6.13 List of Contracts and Other Data..................... -34-
--------------------------------
Section 6.14 Business Property Rights............................. -35-
------------------------
Section 6.15 Compliance with Applicable Law....................... -35-
------------------------------
Section 6.16 No Breach or Default................................. -35-
--------------------
Section 6.17 Labor Controversies.................................. -36-
-------------------
Section 6.18 Litigation........................................... -36-
----------
Section 6.19 Transactions with Affiliates......................... -36-
----------------------------
Section 6.20 Environmental Matters................................ -36-
---------------------
Section 6.21 ERISA Plans.......................................... -37-
-----------
Section 6.22 No Brokers........................................... -37-
----------
Section 6.23 Pooling Matters...................................... -37-
---------------
Section 6.24 No Misrepresentation or Omission..................... -37-
--------------------------------
ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS....................... -37-
Section 7.1 Conduct of Computone, HC, Newco and Ladia Prior to the
------------------------------------------------------
Preliminary Exchange Closing and the Merger Closing... -37-
---------------------------------------------------
Section 7.2 HC Governance......................................... -39-
-------------
Section 7.3 Stockholder Meeting................................... -39-
-------------------
Section 7.4 Legal Conditions to the Merger or Exchange............ -39-
------------------------------------------
Section 7.5 Cooperation........................................... -39-
-----------
Section 7.6 Satisfactory Affiliate Agreements..................... -40-
---------------------------------
Section 7.7 Expenses.............................................. -40-
--------
iii
<PAGE>
Section 7.8 Public Announcements................................... -40-
--------------------
Section 7.9 Issuance of HC Common Stock and Ladia Options.......... -41-
---------------------------------------------
Section 7.10 Consents.............................................. -41-
--------
Section 7.11 Stockholders' Agreement............................... -41-
-----------------------
Section 7.12 Accountants' Letters.................................. -42-
--------------------
Section 7.13 Actions by Ladia...................................... -42-
----------------
Section 7.14 Role of HC and Computone.............................. -43-
------------------------
Section 7.15 Limitations on Certain Transactions................... -43-
-----------------------------------
Section 7.16 Commission Filings.................................... -43-
------------------
Section 7.17 Equity Financing...................................... -43-
----------------
ARTICLE VIII CONDITIONS TO THE PRELIMINARY EXCHANGE CLOSING............ -44-
Section 8.1 Conditions to Closing of HC............................ -44-
---------------------------
Section 8.2 Conditions to Closing of Ladia and the Members......... -45-
----------------------------------------------
Section 8.3 Conditions to Closing of HC, Ladia and the Members..... -46-
--------------------------------------------------
ARTICLE IX CONDITIONS TO THE MERGER CLOSING............................. -47-
Section 9.1 Conditions to Closing of Computone..................... -47-
----------------------------------
Section 9.2 Conditions to Closing of HC and Newco.................. -48-
-------------------------------------
Section 9.3 Conditions to Closing of HC, Newco and Computone....... -49-
------------------------------------------------
ARTICLE X COMPUTONE OPTIONS AND WARRANTS............................... -50-
Section 10.1 Computone's Stock Options and Warrants................ -50-
--------------------------------------
ARTICLE XI TERMINATION................................................. -50-
Section 11.1 Mutual Consent........................................ -50-
--------------
Section 11.2 By Any Party.......................................... -50-
------------
Section 11.3 By Computone.......................................... -51-
------------
Section 11.4 By Ladia.............................................. -51-
--------
Section 11.5 By HC................................................. -51-
-----
ARTICLE XII MISCELLANEOUS.............................................. -52-
Section 12.1 Notice................................................ -52-
------
Section 12.2 Binding Effect; Benefits.............................. -53-
------------------------
Section 12.3 Entire Agreement...................................... -53-
----------------
Section 12.4 Governing Law......................................... -53-
-------------
Section 12.5 Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements............................................ -53-
----------
Section 12.6 Counterparts.......................................... -53-
------------
Section 12.7 Headings.............................................. -54-
--------
Section 12.8 Waivers............................................... -54-
-------
Section 12.9 Merger of Documents................................... -54-
-------------------
Section 12.10 Incorporation of Schedules........................... -54-
--------------------------
Section 12.11 Assignability........................................ -54-
-------------
Section 12.12 Severability......................................... -54-
------------
iv
<PAGE>
EXHIBIT A Certificate of Merger........................................ -65-
---------------------
EXHIBIT B Merger Agreement............................................. -66-
----------------
EXHIBIT C Form of Affiliates Agreement................................. -67-
----------------------------
EXHIBIT D Form of Stockholders Agreement............................... -68-
------------------------------
v
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this "Agreement"), dated as of
the 5th day of June, 1998, is entered into by and among Computone Corporation, a
Delaware corporation ("Computone"), Ladia Communications Technologies, Inc., a
Delaware corporation ("HC"), New Computone Corporation, a Delaware corporation
("Newco"), Ladia, L.L.C., a Massachusetts limited liability company ("Ladia")
and the members of Ladia listed on Schedule A attached hereto (individually, a
----------
"Member" and collectively, the "Members").
RECITALS
--------
WHEREAS, the Board of Directors of HC and the Members deem it advisable and
in the best interests of HC, Ladia, the Members and the stockholders of HC for
the Members to exchange their Membership Interests (as hereinafter defined) in
Ladia for shares of common stock of HC, with the result that HC shall become a
member of Ladia (the "Exchange") and shall designate a second member of Ladia in
order to satisfy the requirements of the Massachusetts Limited Liability Company
Act; and
WHEREAS, the Board of Directors of Computone, HC and Newco deem it
advisable and in the best interests of their respective corporations and
stockholders for Newco to merge with and into Computone, with the separate
corporate existence of Newco ceasing and Computone being the surviving
corporation (the "Surviving Corporation") as a wholly-owned subsidiary of HC
(the "Merger"); and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), that the Exchange shall qualify as a tax-
free transfer under Section 351 of the Code and that this Agreement is intended
to be and is adopted as a plan of reorganization; and
WHEREAS, for accounting purposes, it is intended that both the Exchange and
the Merger shall be accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the premises, the provisions and the
respective agreements set forth in this Agreement, and in order to set forth the
terms and conditions of the Exchange and the Merger and the mode of carrying the
same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE EXCHANGE
Section I.1 Exchange of Interests. Upon and subject to the terms and
---------------------
conditions hereof, at the Preliminary Exchange Closing (as defined in Section
1.5 hereof), (a) each Member shall transfer
<PAGE>
all of such Member's interest in Ladia (individually, a "Membership Interest"
and collectively, the "Membership Interests") to HC and (b) in exchange for the
transfer of each Member's Membership Interest, HC shall issue and deliver to the
transferring Member (i) the number of shares (the "Initial Member Shares") of
the common stock, $0.01 par value, of HC (the "HC Common Stock") equal to such
Member's Membership Interest (as a percentage of all Membership Interests
outstanding at the Preliminary Exchange Closing Date) multiplied by 408,851,
subject to the adjustment contemplated by Section 7.17 hereof and (ii) the
contingent right to receive a pro rata share of certain additional shares of the
HC Common Stock pursuant to Section 1.5 hereof.
Section I.2 Debt Conversion. Upon and subject to the terms and conditions
---------------
hereof including the adjustment contemplated by Section 7.17 hereof, at the
Preliminary Exchange Closing, $250,000 of the original principal amount of the
debt evidenced by the demand note, dated October 22, 1997, issued by Ladia to
Coutts (Jersey) Limited in the original principal amount of $500,000 shall be
converted into (i) 21,518 shares of the HC Common Stock (the "1997 Note Shares")
and (ii) the contingent right to receive a pro rata share of certain additional
shares of the HC Common Stock pursuant to Section 1.5 hereof.
Section I.3 Management Incentive Plan. Prior to the Preliminary Exchange
-------------------------
Closing, HC will establish a management incentive plan for key employees of
Ladia (the "HC Ladia Incentive Plan") pursuant to which an aggregate of
1,661,465 shares of HC Common Stock will be reserved for issuance upon the
exercise of option granted thereunder. As of such Preliminary Exchange Closing,
Ladia and the Compensation Committee of HC's Board of Directors shall agree upon
the Ladia employees who shall be granted options (the "Ladia Options") under the
HC Ladia Incentive Plan and the number of shares of HC Common Stock which such
employees shall be entitled to purchase (the "Ladia Option Shares"). The Ladia
Options shall have an exercise price of $7.00 per Ladia Option Share, shall have
a term of ten years, shall be incentive options to the greatest extent possible
and shall contain such other terms and conditions as shall be approved by the
Compensation Committee of HC's Board of Directors after consideration of the
recommendations of Frances Lynch.
Section I.4 Preliminary Exchange Closing. A preliminary closing of the
----------------------------
Exchange (the "Preliminary Exchange Closing") will take place at 10:00 a.m. on a
date to be specified by the parties, which shall be no later than the earlier to
occur of September 30, 1998 or the second business day after satisfaction or
waiver of the conditions set forth in Article VIII hereof (the "Preliminary
Exchange Closing Date") at the offices of Duane, Morris & Heckscher LLP, One
Liberty Place, Philadelphia, Pennsylvania 19103, unless another place or time is
agreed to in writing by the parties hereto. The Preliminary Exchange Closing
shall take place simultaneously with the Merger Closing (as defined in Section
2.2 hereof), and the Preliminary Exchange Closing Date shall be the same date as
the Effective Date (as defined in Section 2.1) of the Merger.
2
<PAGE>
Section I.5 Contingent Shares.
-----------------
(a) If, during the period commencing May 1, 1998 and expiring April
30, 1999 (the "Revenues Measurement Period"), Ladia has at least $10,000,000 in
Cumulative Gross Revenues and maintains a Cumulative Gross Margin of not less
than 4%, the Members and the holder(s) of the 1997 Note Shares, as holders of
shares of the HC Common Stock, shall be entitled to receive at the Final
Exchange Closing (as hereinafter defined) the number of additional shares of the
HC Common Stock (the "Additional Shares") set forth below, subject to adjustment
as set forth in Section 7.17 hereof:
<TABLE>
<CAPTION>
<S> <C> <C>
If Revenues are at least But less than Number of Additional Shares
------------------------ ------------- ---------------------------
$10,000,000 $15,000,000 737,776
$15,000,000 $20,000,000 2,039,770
$20,000,000 $25,000,000 4,109,590
$25,000,000 8,080,400
</TABLE>
(b Each Member and holder of 1997 Note Shares shall be entitled to
receive at the Final Exchange Closing a number of Additional Shares equal to the
total number of Additional Shares multiplied by a fraction, the numerator of
which is the number of Initial Member Shares and/or 1997 Note Shares to which
such Member or holder is entitled pursuant to Section 1.1 hereof and the
denominator of which is the sum of the number of Initial Member Shares and 1997
Note Shares.
(c Promptly following the receipt by HC of the report of its regular
independent certified public accountants with respect to its audited financial
statements for the fiscal year ending April 2, 1999, HC shall calculate the
number of Additional Shares issuable with respect to the portion of the Revenues
Measurement Period ended on such date, based on Cumulative Gross Revenues and
Cumulative Gross Margins from May 1, 1998 through such date. Promptly following
the preparation by HC of its unaudited financial statements for the period from
April 3, 1999 through and including April 30, 1999, HC shall calculate the
number of Additional Shares issuable with respect to such period based on
Cumulative Gross Revenues and Cumulative Gross Margins from the Preliminary
Exchange Closing through the end of such Revenues Measurement Period. HC's
Board of Directors shall be authorized, in its discretion and based on its good
faith assessment of the business and prospects of Ladia, to reduce the specified
revenue thresholds that must be achieved in order for the Members and the
holder(s) of the 1997 Note Shares to be entitled to receive any particular
number of Additional Shares.
(d For purposes of this Agreement, "Cumulative Gross Revenues" shall
mean, for any period, the accrued aggregate price per minute invoiced by Ladia
to all of its customers during such period, less any rebates, commissions,
discounts, returns or other credits granted or credited by Ladia to any customer
with respect to any such invoices, regardless of
3
<PAGE>
when granted or credited and "Cumulative Gross Margins" shall mean, for any
period (i) the accrued aggregate price per minute invoiced by Ladia to all of
its customers during such period, less any rebates, commissions, discounts,
returns or other credits granted or credited by Ladia to any customer with
respect to any such invoices, regardless of when granted or credited, minus (ii)
the accrued aggregate cost per minute invoiced to Ladia by all of its suppliers
during such period divided by (iii) Ladia's Cumulative Gross Revenues for such
period.
(e) The final closing of the Exchange (the "Final Exchange Closing"),
will take place at 10:00 a.m. on a date to be specified by the parties, which
shall be no later than May 31, 1999 (the "Final Exchange Closing Date") at the
offices of Duane, Morris & Heckscher LLP, One Liberty Place, Philadelphia,
Pennsylvania, 19103, unless another time or place is agreed to in writing by the
parties hereto. At the Final Exchange Closing, HC shall deliver to the Members
and the holder(s) of the 1997 Note Shares to Additional Shares to which they are
entitled pursuant to the provisions of this Section 1.5.
Section I.6 Managers. Subject to the provisions of Section 7.13 hereof,
--------
the Managers of Ladia on and immediately following the Preliminary Exchange
Closing Date shall be Frances Lynch (who shall be designated as the Chair of the
Board of Managers under Ladia's Operating Agreement), Robert E. Lynch or his
designee and Richard A. Hansen, each of whom shall serve in accordance with the
Operating Agreement of Ladia (the "Operating Agreement"). The Operating
Agreement shall provide that any expansion of the Board of Managers beyond three
(3) members shall be effected in increments of two (2), one of whom in each case
shall be designated by Frances Lynch and one of whom in each case shall be
designated by Richard A. Hansen. Such designation rights, and any rights to
remove a manager, shall be specified in the Operating Agreement. In her
capacity as Chair of the Board of Managers, Frances Lynch shall have the powers
and shall function under the Operating Agreement as would the President and
Chief Executive Officer of corporate entity.
Section I.7 Tax-Free Treatment. The Exchange is intended to constitute a
------------------
tax-free transfer under Section 351 of the Code, and the parties shall not
report the Exchange on any tax return in a manner or take any action
inconsistent therewith.
Section I.8 Accounting Treatment. The parties intend that the Exchange
--------------------
shall be treated by HC as pooling of interests for accounting purposes.
4
<PAGE>
ARTICLE II
THE MERGER
Section II.1 Effective Time of the Merger. Upon the terms and subject to
----------------------------
the conditions hereof, a certificate of merger (the "Certificate of Merger")
substantially in the form of Exhibit A attached hereto shall be duly prepared
---------
and executed by the Surviving Corporation (as defined in Section 2.3) and, not
later than the Merger Closing Date (as defined in Section 2.2), shall be
delivered to the Secretary of State of the State of Delaware for filing as
provided in the Delaware General Corporation Law (the "DGCL"). As soon as
practicable after the date hereof, Computone, Newco and HC shall enter into a
Plan of Merger substantially in the form of Exhibit B attached hereto (the
---------
"Merger Agreement") which shall provide for the Merger in accordance with the
laws of the State of Delaware. The Merger shall become effective upon the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware (the "Effective Time"; the date on which the Effective Time occurs is
hereinafter referred to as the "Effective Date").
Section II.2 Closing. The closing of the Merger (the "Merger Closing")
-------
will take place at 10:00 a.m. on a date to be specified by the parties, which
shall be no later than the earlier to occur of September 30, 1998 or the second
business day after satisfaction or waiver of the conditions set forth in Article
IX hereof (the "Merger Closing Date") at the offices of Duane, Morris and
Heckscher LLP, One Liberty Place, Philadelphia, Pennsylvania 19103, unless
another place or time is agreed to in writing by the parties hereto. The Merger
Closing shall take place simultaneously with the Preliminary Exchange Closing,
and the Effective Date shall be the same date as the Preliminary Exchange
Closing Date.
Section II.3 Effects of the Merger. The Merger shall have the effects set
---------------------
forth in the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time: (a) Newco shall merge with and into Computone,
which shall be the surviving corporation in the Merger (the "Surviving
Corporation") and a wholly owned subsidiary of HC; (b) the separate corporate
existence of Newco shall thereupon cease and (c) all the properties, rights,
privileges, powers and franchises of Computone and Newco shall vest in the
Surviving Corporation and all debts, liabilities and duties of Computone and
Newco shall become the debts, liabilities and duties of the Surviving
Corporation.
Section II.4 Certificate of Incorporation. The Certificate of
----------------------------
Incorporation of Computone as in effect on the Effective Date, as amended by the
Certificate of Merger, shall be the Certificate of Incorporation of the
Surviving Corporation, it being understood that such Certificate of
Incorporation does not and shall not contain any provision requiring the
approval of a greater percentage of outstanding shares eligible to vote on any
matter submitted to the stockholders for a vote than is set forth under the
DGCL.
Section II.5 Bylaws. The Bylaws of Computone as in effect on the Effective
------
Date shall be the Bylaws of the Surviving Corporation; provided, however, that
such Bylaws shall not contain any provision requiring the approval of a greater
percentage of outstanding shares eligible to vote on any matter submitted to the
stockholders for approval than is set forth under the DGCL.
Section II.6 Directors and Officers. The Directors of the Surviving
----------------------
Corporation on and immediately following the Effective Date shall be Richard A.
Hansen (Chair), Frances Lynch and a person to be designated by Frances Lynch on
5
<PAGE>
or before Closing, each of whom shall serve in accordance with the Bylaws of the
Surviving Corporation. The officers of the Surviving Corporation on and
immediately following the Effective Date shall be determined by the Board of
Directors of the Surviving Corporation, each of whom will serve in accordance
with the Bylaws of the Surviving Corporation.
Section II.7 Tax-Free Treatment. The Merger is intended to constitute a
------------------
tax-free reorganization under Section 368(a) of the Code, and the parties shall
not report the Merger on any tax return in a manner or take any action
inconsistent therewith.
Section II.8 Accounting Treatment. The parties intend that the Merger
--------------------
shall be treated by Computone and HC as a pooling of interests for accounting
purposes.
Section II.9 Affiliate Restrictions. In addition to any other restrictions
----------------------
set forth herein, all of the Merger Shares (as defined in Section 3.1 hereof) to
be received by any Computone Affiliate (for purposes of Rule 145) shall be
subject to the restrictions imposed by the Securities Act of 1933, as amended
(the "Securities Act"), and Rule 145 promulgated thereunder, and the
certificates evidencing such shares shall bear a restrictive legend to reflect
such restrictions.
ARTICLE III
CONVERSION OF SECURITIES IN MERGER
Section III.1 Conversion of Shares. As of the Effective Date, by virtue of
--------------------
the Merger and without any action on the part of the holder of any shares of
common stock, par value $0.01 per share, of Computone (the "Computone Common
Stock") or the holder of any shares of common stock, par value $0.01 per share,
of Newco (the "Newco Common Stock"):
(a) Capital Stock of Computone. Each share of Common Stock, par value
--------------------------
$0.01 per share, of Computone except Dissenters' Shares (as hereinafter defined)
issued and outstanding immediately prior to the Effective Date shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, par value $0.01 per share, of HC (the
"Merger Shares").
(b) Capital Stock of Newco. Each share of Common Stock, par value
----------------------
$0.01 per share, of Newco issued and outstanding immediately prior to the
Effective Date shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of Common Stock, par value $0.01 per share,
of the Surviving Corporation.
(c) Cancellation of HC Shares. All HC Common Stock owned by Computone
-------------------------
as of the Effective Date shall be canceled and retired and shall cease to exist,
and no stock of HC or the Surviving Corporation or other consideration shall be
delivered in exchange therefor.
(d) Dissenters' Rights. Shares of Computone Common Stock that have not
------------------
been voted for adoption of the Merger and with respect to which appraisal rights
6
<PAGE>
have been properly demanded in accordance with the DGCL ("Dissenters' Shares")
shall not be converted into HC Common Stock as set forth in Section 3.1(a) on
the Effective Date, but shall be converted into the right to receive from Newco
such consideration as may be determined to be due with respect to such
Dissenters' Shares pursuant to the provisions of the DGCL. Computone shall give
Newco (i) prompt notice of any written demands for appraisals, withdrawals of
demands for appraisal and any other instruments in respect thereof received by
Computone and (ii) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal. Computone will not, except
with the prior written consent of Newco, voluntarily make any payment with
respect to any demands for appraisal or settle or offer to settle any such
demands. The Surviving Corporation will pay all sums due to holders of
Dissenters' Shares.
Section III.2 Exchange of Certificates.
------------------------
(a) Exchange Agent. As of the Effective Time, HC shall deposit with an
--------------
agent designated by HC (the "Exchange Agent"), for the benefit of the holders of
Computone Common Stock (other than Dissenters' Shares), for exchange in
accordance with this Article III, through the Exchange Agent, certificates
representing the Merger Shares issuable pursuant to Section 3.1(a) in exchange
for outstanding Computone Common Stock.
(b) Exchange Procedures. As soon as practicable after the Effective
-------------------
Time, the Surviving Corporation shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding Computone Common Stock (the
"Certificates") whose shares were converted pursuant to Section 3.1(a) into the
right to receive Merger Shares (i) a letter of transmittal and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing Merger Shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by HC, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of Merger Shares which such holder has the
right to receive pursuant to the provisions of this Article III, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Computone Common Stock which is not registered in the
transfer records of Computone, a certificate representing the proper number of
Merger Shares may be issued to a transferee if the Certificate representing such
Computone Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 3.2, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender a certificate representing Merger Shares.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Merger Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate
7
<PAGE>
with respect to the Merger Shares represented thereby until the holder of record
of such Certificate shall surrender such Certificate as provided herein. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the record holder of the certificates representing whole
Merger Shares issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such Merger
Shares and (ii) at the appropriate payment date, the amount of dividends or
other distributions, if any, with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such Merger Shares.
(d) No Further Ownership Rights in Computone Common Stock. All Merger
-----------------------------------------------------
Shares issued upon the surrender for exchange of Computone Common Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Computone Common Stock subject,
however, to the Surviving Corporation's obligation to pay any dividends or make
any other distributions with a record date prior to the Effective Time which may
have been declared or made by Computone on such Computone Common Stock prior to
the date hereof and which remain unpaid at the Effective Time, and there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the Computone Common Stock which was outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article III.
(e) Termination of Exchange Fund. Any Merger Shares which remain
----------------------------
undistributed to the stockholders of Computone for one year after the Effective
Time shall be delivered to HC, upon demand, and any stockholders of Computone
who have not theretofore complied with this Article III shall thereafter look
only to HC for payment of their claim for Merger Shares and any dividends or
distributions with respect to Merger Shares.
(f) No Liability. None of Computone, HC or Newco, or any affiliate of
------------
any of them, shall be liable to any holder of shares of Computone Common Stock
for such shares (or dividends or distributions with respect thereto) delivered
to a public official to the extent required by any applicable abandoned
property, escheat or similar law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LADIA AND
PRINCIPAL MEMBERS
The Ladia Nominee Trust, John Sinclair and Frances Lynch (collectively, the
"Principal Members") and Ladia jointly and severally represent and warrant to
Computone and HC as follows:
Section IV.1 Existence. Good Standing. Compliance with Law. Ladia is a
---------------------------------------------
limited liability company duly organized, validly existing and in good standing
under the laws of the Commonwealth of Massachusetts. Ladia is duly licensed or
qualified to do business as a foreign
8
<PAGE>
limited liability company and is in good standing under the laws of any other
jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except for jurisdictions in which the failure to be so qualified or
to be in good standing would not have a material adverse effect on Ladia's
business as a whole. Ladia has all requisite power and authority to own its
properties and carry on its business as now conducted. The copies of Ladia's
Certificate of Organization and Operating Agreement which have been delivered to
Computone are complete and correct. Ladia is not in default with respect to any
order of any court, governmental authority or arbitration board or tribunal to
which Ladia is a party or is subject, and Ladia is not in violation of any laws,
ordinances, governmental rules or regulations to which it is subject, except for
laws, ordinances, governmental rules or regulations the violation of which would
not have a material adverse effect on Ladia's business as a whole. Ladia has
obtained all licenses, permits and other authorizations and has taken all action
required by applicable law or governmental regulation necessary for the conduct
of its business as now conducted, except for licenses, permits, authorizations
or actions the violation of which or the failure to obtain or take which would
not have a material adverse effect on Ladia's business as a whole.
Section IV.2 Capitalization of Ladia.
-----------------------
(a) Schedule A sets forth a complete and accurate list of all
outstanding Membership Interests.
(b) Except as disclosed in Section 4.2 of the disclosure schedule
prepared by Ladia and attached hereto as Schedule B (the "Ladia Disclosure
----------
Schedule"), there are no outstanding rights, warrants, options, subscriptions,
agreements or commitments giving anyone any right to require Ladia or any Member
to sell or issue any Membership Interest.
(c) Except as disclosed in Section 4.2 of the Ladia Disclosure
Schedule, there are no outstanding contractual obligations of Ladia or any
Member to repurchase, redeem or otherwise acquire any Membership Interest.
(d) Ladia has no Subsidiaries. For purposes of this Agreement, a
"Subsidiary" is any corporation or other organization, whether incorporated or
unincorporated, (i) of which either a person (A) directly or indirectly owns
securities or interests having by their terms ordinary voting power to elect a
majority of the Board of Directors or other persons performing a similar
function with respect to such corporation or other organization or (B) is a
general partner (excluding any partnerships the general partnership interests of
which held by such person directly or indirectly do not have a majority of the
voting interest in such partnership) or (ii) which is otherwise deemed to be a
significant subsidiary of a person within the meaning of Regulation S-X
promulgated by the Securities and Exchange Commission (the "Commission") as in
effect on the date hereof.
Section IV.3 Authority. Ladia and, to the knowledge of Ladia and each
---------
Principal Member, each of the Members has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by Ladia and the Members
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary action on the part of Ladia and, to the knowledge of
Ladia and each Principal Member, the Members. This Agreement has been duly
executed and delivered by Ladia and, to the knowledge of Ladia and each
Principal Member, each Member and constitutes their valid and binding
obligation, enforceable against them in accordance with its terms.
9
<PAGE>
Section IV.4 Consents and Approvals; No Violations. Except as set forth in
-------------------------------------
Section 4.4 of the Ladia Disclosure Schedule, the execution and delivery of this
Agreement by Ladia and the Members do not, and the consummation by Ladia and the
Members of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or to loss of a material benefit under (i) any provision of
the Certificate of Organization or the Operating Agreement of Ladia or (ii) any
mortgage, indenture, lease, or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Ladia or, to the knowledge of Ladia
and each Principal Member, any Member or their respective properties or assets,
other than any such conflicts, violations, defaults, terminations, cancellations
or accelerations which individually or in the aggregate would not have a
material adverse effect on Ladia's business as a whole or on the Membership
Interests. No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality (a "Governmental Entity") is
required by or with respect to Ladia or, to the knowledge of Ladia and each
Principal Member, any Member in connection with the execution and delivery of
this Agreement by Ladia or any Member or the consummation by Ladia or any Member
of the transactions contemplated hereby, except such consents, approvals,
orders, authorizations, registrations, declarations and/or filings which if not
obtained or made would not have a material adverse effect on Ladia's business as
a whole or on the Membership Interests.
Section IV.5 Ladia Financial Statements. Ladia has furnished a true and
--------------------------
complete copy of the unaudited balance sheet of Ladia as of December 31, 1997
and the related statements of income, Members' equity and cash flow and notes
thereto for the fiscal year then ended (the "Ladia Unaudited Financial
Statements"). Except as set forth on Section 4.5 of the Ladia Disclosure
Schedule, the Ladia Unaudited Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with prior periods (except as may be indicated in the notes thereto)
and fairly present the financial position of Ladia as at the dates thereof and
the results of its operations and changes in financial position for the period
then ended (subject to normal, recurring audit adjustments). Except as
disclosed in the Ladia Unaudited Financial Statements, or except as contemplated
by this Agreement or on account of the transactions contemplated hereby, since
December 31, 1997 there has not been any material adverse change in the results
of operations, financial condition, assets or business of Ladia taken as a
whole.
Section IV.6 Undisclosed Liabilities. Ladia has no liabilities, either
-----------------------
accrued, absolute, contingent or otherwise, of a nature required to be reflected
in a balance sheet or related notes prepared in accordance with generally
accepted accounting principles consistently applied which are not reflected or
provided for in the Ladia Unaudited Financial Statements except (i) those
arising after December 31, 1997 which are in the ordinary course of business and
which, in the aggregate, would not have a material effect on the financial
condition of Ladia and (ii) as and to the extent specifically described in
Section 4.6 of the Ladia Disclosure Schedule.
10
<PAGE>
Section IV.7 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Section 4.7 of the Ladia Disclosure Schedule, since December 31, 1997, Ladia has
not:
(a) incurred any obligation or liability (fixed or, to the knowledge
of Ladia and Frances Lynch, contingent), except normal trade or business
obligations incurred in the ordinary course of business and consistent with past
practice, and except in connection with this Agreement and the transactions
contemplated hereby;
(b) discharged or satisfied any lien, security interest or encumbrance
or paid any obligation or liability (fixed or contingent), other than in the
ordinary course of business and consistent with past practice;
(c) mortgaged, pledged or subjected to any lien, security interest or
other encumbrance any of its assets or properties (other than mechanic's,
materialman's and similar statutory liens arising by operation of law, liens for
current real and personal property taxes incurred but not yet due and payable,
purchase money security interests arising as a matter of law between the date of
delivery and payment and other liens of an immaterial nature);
(d) transferred, leased or otherwise disposed of any of its assets or
properties except in the ordinary course of business and consistent with past
practice or, except in the ordinary course of business and consistent with past
practice, acquired any assets or properties;
(e) canceled or compromised any debt or claim, except in the ordinary
course of business and consistent with past practice;
(f) waived or released any rights of material value;
(g) transferred or granted any rights under any concessions, leases,
licenses, agreements, patents, inventions, trademarks, trade names, service
marks or copyrights or with respect to any know-how;
(h) made or granted any wage or salary increase applicable to any
group or classification of employees generally, entered into any employment
contract with, or made any loan to, or entered into any material transaction of
any other nature with, any member, officer or employee of Ladia;
(i) entered into any transaction, contract or commitment which
provides for a period of performance which extends beyond twelve (12) months
from the date hereof or involves payment of or receipt after the date hereof of
amounts in excess of one percent of Ladia's net sales for the year ended
December 31, 1997, except (i) contracts listed in Section 4.7 of the Ladia
Disclosure Schedule, (ii) this Agreement and the transactions contemplated
hereby, (iii) ordinary course of business contracts for the purchase of
materials from vendors if such contracts are supported by firm released customer
purchase orders, and (iv) ordinary course of business orders for Ladia's
products; or
11
<PAGE>
(j) suffered any casualty loss or damage to any of its properties
(whether or not such loss or damage shall have been covered by insurance) which
adversely affects in any material respect its ability to conduct business.
Section IV.8 Certain Agreements. Except as disclosed in Section 4.8 of
------------------
the Ladia Disclosure Schedule, or as contemplated by this Agreement, Ladia is
not a party to any (i) agreement with any executive officer or other key
employee of Ladia (A) the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
Ladia of the nature of any of the transactions contemplated by this Agreement,
(B) providing any term of employment or compensation guarantee or (C) providing
severance benefits or other benefits (which are conditioned upon a change of
control) after the termination of employment of such employee regardless of the
reason for such termination of employment or (ii) agreement or plan, including,
without limitation, any stock option plan, stock appreciation right plan or
stock purchase plan, any of the benefits of which will be materially increased,
or the vesting of benefits of which will be materially accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
Section IV.9 Taxes.
-----
(a) Ladia (i) has duly and timely filed or caused to be filed all
federal, state, local and foreign tax returns (including, without limitation,
consolidated and/or combined tax returns) required to be filed by it which
relate to Ladia or with respect to which Ladia is liable or otherwise in any way
subject, which returns were true, correct and complete in all material respects,
(ii) has paid or fully accrued for all taxes shown to be due and payable on such
returns (which taxes are all the taxes due and payable under such returns or
pursuant to any assessment received by Ladia), and (iii) has properly accrued,
charged or established adequate reserves for all such taxes arising in respect
of Ladia for periods subsequent to the periods covered by such returns. Except
as set forth in Section 4.9 of the Ladia Disclosure Schedule, (A) no claims for
taxes have been asserted against Ladia, and no deficiency for any taxes has been
proposed, asserted or assessed which has not been resolved or paid in full, (B)
no tax return or taxable period of Ladia is under audit, investigation or
examination and Ladia has not received notice of any pending audit,
investigation or examination, (C) there are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any tax return for
any period of Ladia, (D) no issue or claim has been asserted for taxes by any
taxing authority for any prior period, the adverse determination of which could
for any prior, current or future period result in a deficiency which could have
a material adverse effect on Ladia, (E) there are no tax liens upon the assets
of Ladia other than liens for taxes not yet due and (F) no power of attorney has
been granted by Ladia with respect to any matter relating to taxes which is
currently in force, other than, in each case, those the outcome of which, as far
as reasonably can be foreseen, will not have a material adverse effect on Ladia.
Copies of all federal and state income (or franchise) tax returns of Ladia have
been made available for inspection by Computone.
12
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(b) Collapsible Corporation Status. No consent or agreement has been
------------------------------
made under Section 341 of the Code by or on behalf of Ladia or any predecessor
thereof.
(c) FIRPTA Status. Ladia is not, and has not been at any time during
-------------
the five year period preceding the date hereof, a "United States real property
holding corporation" as defined in Section 897 of the Code and the regulations
promulgated thereunder.
(d) Parachute Payments. No payments by Ladia to its officers,
------------------
directors, employees or consultants under any contract, plan or agreement,
including but not limited to this Agreement, or payments contemplated by this
Agreement, constitute "parachute payments" within the meaning of Section 280G of
the Code.
Section IV.10 Title to Assets. Section 4.10 of the Ladia Disclosure
---------------
Schedule sets forth a list of all real property owned or leased by Ladia, and
the aggregate monthly rental or other fee payable under any such lease. Except
as listed in Section 4.10 of the Ladia Disclosure Schedule, Ladia has good and
marketable title to its assets, free and clear of all security interests,
mortgages, encumbrances, liens or charges of any kind or character, except liens
for taxes not yet due and payable and such imperfections of title, liens and
easements as do not materially detract from or interfere with the present use of
the properties subject thereto or affected thereby, or otherwise materially
impair the present business operations of such properties.
Section IV.11 Condition of Personal Property. All of Ladia's tangible
------------------------------
personal property, equipment, fixtures and inventories used in the ordinary
course of its business are in good, merchantable condition, reasonable wear and
tear excluded, or in reasonably repairable condition, are suitable for the
purposes for which they are being used, and are valued at the lower of cost or
market in the Ladia Unaudited Financial Statements. No value in excess of
applicable reserves has been given to any inventory in the Ladia Unaudited
Financial Statements with respect to obsolete or discontinued products. All of
the inventories and equipment, including equipment leased to others, are well
maintained and in good operating condition.
Section IV.12 List of Contracts and Other Data. Section 4.12 of the Ladia
--------------------------------
Disclosure Schedule sets forth the following:
(a) all of Ladia's registered patents, trademarks, trade names,
service marks and copyrights, if any, used in connection with the operation of
its business, and all applications, if any, pending for patents or for
trademarks, trade names, service marks or copyright registrations;
(b) all collective bargaining agreements, employment and consulting
agreements, executive compensation plans, bonus plans, deferred compensation
agreements, employee pension or retirement plans, employee stock purchase and
stock option plans, group life insurance, hospitalization insurance or other
plans or arrangements providing for benefits to employees of Ladia, if any;
(c) all contracts (including, without limitation, mortgages,
indentures and loan agreements) to which Ladia is a party, or to which it or any
of its assets or properties are subject and which are not specifically referred
13
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to in Sections 4.12(a) or 4.12(b) above, and which provide for a period of
performance which extends beyond twelve (12) months from the date hereof or
involve payment of or receipt after the date hereof of amounts in excess of one
percent of Ladia's net sales for the year ended December 31, 1997, provided that
the foregoing shall not be deemed to include (i) ordinary course of business
purchase orders for materials from vendors if such purchase orders are supported
by firm released customer purchase orders for the Ladia products or (ii)
ordinary course of business orders for the Ladia products; and
(d) the names and current annual compensation rates of the top ten
(10) paid employees of Ladia.
True and complete copies of all documents and complete descriptions of all
oral understandings, if any, referred to in this Section 4.12 have been provided
or made available to Computone and its counsel.
Section IV.13 Business Property Rights. To the knowledge of Ladia, Ladia
------------------------
owns or has valid rights to use all designs, know-how, trade secrets, patents,
trademarks, trade names, service marks and copyrights, if any, which are
reasonably necessary to, or used primarily in, the conduct of its business (the
"Ladia Intellectual Property") without conflict with the rights of others.
Except as set forth in Section 4.13 of the Ladia Disclosure Schedule: (i) no
claim is pending or, to Ladia's knowledge, threatened to the effect that the
present or past operation of Ladia infringes upon or conflicts with the rights
of others with respect to any Ladia Intellectual Property, where such
infringement or conflict is reasonably likely to have a material adverse effect
on Ladia's business as a whole; (ii) no claim is pending or, to Ladia's
knowledge, threatened to the effect that any Ladia Intellectual Property is
invalid or unenforceable and (iii) no contract, agreement or understanding with
any party exists which would prevent the continued use by Ladia (as currently
used by Ladia) of any Ladia Intellectual Property.
Section IV.14 Compliance with Applicable Law. Ladia holds all permits,
------------------------------
licenses, variances, exemptions, orders and approvals of all Governmental
Entities necessary for the lawful conduct of its business (the "Ladia Permits"),
except for failures to hold such permits, licenses, variances, exemptions,
orders and approvals which would not, individually or in the aggregate, have a
material adverse effect on Ladia. Ladia is in compliance with the terms of the
Ladia Permits, except where the failure to comply would not have a material
adverse effect on Ladia's business as a whole. The business of Ladia is not
being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which individually or in the
aggregate do not and, insofar as reasonably can be foreseen, in the future will
not, have a material adverse effect on Ladia's business as a whole. Except as
set forth in Section 4.14 of the Ladia Disclosure Schedule, as of the date of
this Agreement, no investigation or review by any Governmental Entity with
respect to Ladia is pending or, to the knowledge of Ladia and each Principal
Member, threatened, nor has any Governmental Entity notified Ladia orally or in
writing of an intention to conduct the same, other than, in each case, those the
outcome of which, as far as reasonably can be foreseen, in the future will not
have a material adverse effect on Ladia's business as a whole.
14
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Section IV.15 No Breach or Default. Except as set forth in Section 4.15 of
--------------------
the Ladia Disclosure Schedule, Ladia is not in default under any material
contract to which it is a party or by which it is bound, nor has any event
occurred which, after the giving of notice or the passage of time or both, would
constitute a default under any such contract. Ladia has no reason to believe
that the parties to such contracts will not fulfill their obligations under such
contracts in all material respects or are threatened with insolvency. Ladia is
not a party to or bound by any mortgage, lien, lease, agreement, instrument,
order, judgment or decree which would prohibit or conflict with in any way the
execution or performance of this Agreement or prohibit the consummation of any
of the transactions provided for in this Agreement.
Section IV.16 Labor Controversies. Ladia is not a party to any collective
-------------------
bargaining agreement. Except as set forth in Section 4.16 of the Ladia
Disclosure Schedule, there are no controversies between Ladia and any of its
employees which might reasonably be expected to materially adversely affect the
conduct of its business, or any unresolved labor grievances or unfair labor
practice or labor arbitration proceedings pending or, to the knowledge of Ladia
and each Principal Member, threatened relating to its business, and, to the
knowledge of Ladia and each Principal Member, there are no organizational
efforts presently being made or threatened involving any of Ladia's employees.
Except as set forth in Section 4.16 of the Ladia Disclosure Schedule, Ladia has
not received notice of any claim that Ladia has not complied with any laws
relating to the employment of labor, including any provisions thereof relating
to wages, hours, collective bargaining, the payment of social security and
similar taxes, equal employment opportunity, employment discrimination and
employment safety, or that Ladia is liable for any arrears of wages or any taxes
or penalties for failure to comply with any of the foregoing.
Section IV.17 Litigation. Except as set forth in Section 4.17 of the
----------
Ladia Disclosure Schedule, there is no action, suit or proceeding with respect
to Ladia involving claims by or against Ladia or any its properties pending or,
to the knowledge of Ladia or any Principal Member, threatened, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality. There are no
orders, judgments, injunctions or decrees of any court or governmental agency
with respect to which Ladia has been named or is a party which apply, in whole
or in part, to the business of Ladia or any of its properties, or which would
result in a material adverse change in the business or prospects of Ladia's
business as a whole.
Section IV.18 Transactions with Affiliates. Except as set forth in
----------------------------
Section 4.18 of the Ladia Disclosure Statement, since December 31, 1997, there
have been no transactions to which Ladia has been a party in which any director
or officer of Ladia or any Principal Member or a member of any such person's
immediate family had or will have any direct or indirect interest.
Section IV.19 Environmental Matters. As of the date hereof, Ladia is in
---------------------
compliance with all applicable local, county, state, federal and foreign legal
requirements relating to the use, storage, handling, transport and disposal of
materials, hazardous materials and hazardous substances (the "Hazardous
Materials") including, but not limited to, the Resources Compensation and
15
<PAGE>
Recovery Act (42 U.S.C. Section 6902 et seq.) and the Comprehensive
Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. Section
9601). Ladia has no knowledge of any condition that would cause Ladia to incur
liability or be a responsible party with respect to Ladia's real properties
under any environmental or health regulation or act. To the knowledge of Ladia,
(i) none of Ladia's properties has ever been used as a sanitary land fill or as
a storage or dump site for Hazardous Materials, (ii) none of the listed
properties is contaminated with any Hazardous Materials, and (iii) Ladia has not
been responsible for spilling Hazardous Materials on its properties.
Section IV.20 ERISA Plans.
-----------
(a) With respect to each employee benefit plan (including, without
limitation, any "employee benefit plan", as defined in Section 3(d) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and any
material bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
insurance or other plan, arrangement or understanding (whether or not legally
binding) (all the foregoing being herein called the "Ladia Benefit Plans"),
maintained or contributed to by Ladia, Ladia has made available to Computone, or
will deliver to Computone, within 30 days after the date hereof, a true and
correct copy of (i) the most recent annual report (Form 5500) filed with the
Internal Revenue Service (the "IRS"), if any, (ii) such Ladia Benefit Plan,
(iii) each trust agreement and group annuity contract, if any, relating to such
Ladia Benefit Plan and (iv) the most recent actuarial report or valuation
relating to each Ladia Benefit Plan subject to Title IV of ERISA.
(b) Except as set forth in Section 4.20 of the Ladia Disclosure
Schedule, with respect to the Ladia Benefit Plans, individually and in the
aggregate, no event has occurred and, to the knowledge of Ladia and each
Principal Member, there exists no condition or set of circumstances in
connection with which Ladia could be subject to any liability that is reasonably
likely to have a material adverse effect on Ladia's business as a whole (except
liability for benefits claims and funding obligations payable in the ordinary
course), under ERISA, the Code or any other applicable law.
(c) Except as set forth in Section 4.20 of the Ladia Disclosure
Schedule, with respect to the Ladia Benefit Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the Ladia
Financial Statements which obligations are reasonably likely to have a material
adverse effect on Ladia's business as a whole.
Section IV.21 No Brokers. Except as disclosed in Section 4.21 of the
----------
Ladia Disclosure Schedule, neither Ladia nor, to the knowledge of Ladia and each
Principal Member any Member has entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of
Ladia or any Member to pay any finder's fees, brokerage or agent's commissions
or other like payments in connection with the negotiations leading to this
16
<PAGE>
Agreement or the consummation of the transactions contemplated hereby, and
neither Ladia nor any Principal Member has knowledge of any other claim or basis
for claim for payment by it of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
Ladia and each Principal Member shall indemnify and hold Computone and HC
harmless from and against any obligation with respect to any such fees,
brokerage or agent's commissions or other like payments.
Section IV.22 Pooling Matters. Neither Ladia nor any of Principal Members
---------------
has, based upon consultation with Ladia's independent accountants, taken or
agreed to take any action that would affect the ability of HC to account for the
business combination to be effected by the Exchange as a pooling of interests.
Section IV.23 Information Supplied. None of the information supplied by
--------------------
Ladia or any Principal Member for inclusion in the Registration Statement and
the Proxy Statement (as such terms are defined in Section 5.4 hereof) included
therein, at the date the Registration Statement is filed with the Commission
and at the time it becomes effective and at the time of the meeting of
Computone's stockholders to be held in connection with the Merger contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Section IV.24 No Misrepresentation or Omission. No representation or
--------------------------------
warranty made by Ladia in this Article IV or in any other Article or Section of
this Agreement, or in any certificate or other document furnished or required to
be furnished by Ladia pursuant hereto, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading in
light of the circumstances under which they are made.
ARTICLE IVA
REPRESENTATIONS AND WARRANTIES OF MEMBERS
Each Member severally represents and warrants to Computone and HC as
follows:
Section 4A.1 Capitalization of Ladia.
-----------------------
(a) Schedule A sets forth an accurate description of such Member's
Membership Interest.
(b) There are not outstanding rights, warrants, options,
subscriptions, agreements or commitments giving anyone any right to require such
Member to sell such Member's Membership Interest.
17
<PAGE>
(c) Such Member has no outstanding contractual obligation to acquire
any Membership Interest.
Section 4A.2 Authority. Such Member has all requisite power and authority
---------
to enter into this Agreement and to consummate the transactions contemplated to
be consummated by such Member. The execution and delivery of this Agreement by
such Member and the consummation of the transactions contemplated to be
consummated by such Member have been duly authorized by all necessary action on
the part of such Member. This Agreement has been duly executed and delivered by
such Member and constitutes such Member's valid and binding obligation,
enforceable against such Member in accordance with its terms.
Section 4A.3 Consent and Approvals; No Violations. The execution and
------------------------------------
delivery of this Agreement by such Member do not, and the consummation by such
Member of the transactions contemplated to be consummated by such Member will
not, conflict with, or result in any violation of, or default (with or without
notice or lapse of time or both) or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under any mortgage indenture, lease or other agreement or instrument, permit,
concession, franchise, license, judgement, order, decree, statute, law,
ordinance, rule or regulation applicable to such Member or such Member's
properties or assets other than any such conflicts, violations, defaults,
terminations, cancellations or accelerations that individually or in the
aggregate would not have a material adverse effect on such Member's Membership
Interest. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to such Member in connection with the execution and delivery of this
Agreement by such Member or the consummation by such Member of the transactions
contemplated to be consummated by such Member, except such consents, approvals,
orders, authorizations, registrations, declarations and filings which, if not
obtained or made, would not have a material adverse effect on such Member's
Membership Interest.
Section 4A.4 No Brokers. Such Member has not entered into any contract,
----------
arrangement or understanding with any person or firm which may result in the
obligation of such Member to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
and such Member has no knowledge of any claim or basis for claim for payment by
such Member of any finder's fees, brokerage or agent's commission or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby by such Member. Such Member
shall indemnify and hold Computone and HC harmless from and against any
obligation with respect to any such fees, brokerage or agent's commissions or
other like payments.
Section 4A.5 Ownership of Interest. Such Member owns its Membership
---------------------
Interest free and clear of any liens, claims, pledges or encumbrance of any
kind. The transfer by such Member of its Membership Interest to HC pursuant to
the Exchange will vest in HC good and marketable title to that Membership
Interest, free and clear of any liens, claims, pledges or encumbrances of any
kind.
18
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Section 4A.6 Information Supplied. None of the information supplied by
--------------------
such Member for inclusion in the Registration Statement and the Proxy Statement
included therein, at the date the Registration Statement is filed with the
Commission and at the time it becomes effective and at the time of the meeting
of Computone's stockholders to be held in connection with the Merger contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Section 4A.7 No Misrepresentations or Omission. No representation or
---------------------------------
warranty made by such Member in this Agreement contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF COMPUTONE
Computone represents and warrants to Ladia, the Members, HC and Newco as
follows:
Section V.1 Existence. Good Standing. Compliance with Law. Computone and
---------------------------------------------
each of its Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation.
Computone and each of its Subsidiaries is duly licensed or qualified to do
business as a foreign corporation and is in good standing under the laws of any
other jurisdiction in which the character of the properties owned or leased by
it therein or in which the transaction of its business makes such qualification
necessary, except for jurisdictions in which the failure to be so qualified or
to be in good standing would not have a material adverse effect on Computone and
its Subsidiaries taken as a whole. Computone and each of its Subsidiaries has
all requisite corporate power and authority to own its properties and carry on
its business as now conducted. The copies of Computone's Certificate of
Incorporation and Bylaws which have been delivered to Ladia and HC are complete
and correct. Computone is not in default with respect to any order of any
court, governmental authority or arbitration board or tribunal to which
Computone is a party or is subject, and Computone is not in violation of any
laws, ordinances, governmental rules or regulations to which it is subject,
except for laws, ordinances, governmental rules or regulations the violation of
which would not have a material adverse effect on Computone's business as a
whole. Computone has obtained all licenses, permits and other authorizations and
has taken all action required by applicable law or governmental regulation
necessary for the conduct of its business as now conducted, except for licenses,
permits, authorizations or actions the violation of which or the failure to
obtain or take which would not have a material adverse effect on the business of
Computone and its subsidiaries taken as a whole.
Section V.2 Capitalization of Computone. Computone has authorized capital
---------------------------
stock of 10,000,000 shares of convertible redeemable preferred stock, $0.01 par
value, and 25,000,000 shares of common stock, $0.01 par value per share (the
"Computone Common Stock"). As of April 3, 1998, 7,386,623 shares of the
19
<PAGE>
Computone Common Stock were issued and outstanding and no shares of Computone's
convertible redeemable preferred stock were issued or outstanding.
(a) There are no outstanding rights, warrants, options, subscriptions,
agreements or commitments giving anyone any right to require Computone to sell
or issue any capital stock or other securities, except that as of the close of
business on April 3, 1998:
(i) Computone had issued options under its Non-Qualified Equity
Incentive Plan to purchase an aggregate of 418,378 shares of the Computone
Common Stock (the "Computone Incentive Plan Shares") and had reserved an
additional 218,167 shares for future issuance under such Plan; and
(ii) Computone had issued warrants to purchase an aggregate of 372,013
shares of the Computone Common Stock (the "Computone Warrant Shares").
(b) Since April 3, 1998, Computone has not issued any additional stock
options, warrants or shares of the Computone Common Stock, except shares of the
Computone Common Stock which are described in Section 5.2 of the disclosure
schedule prepared by Computone and attached hereto as Schedule C (the "Computone
----------
Disclosure Schedule") and which were issuable upon the exercise of outstanding
options or warrants, in each case pursuant to the terms of (i) the applicable
agreements pursuant to which such options or warrants were issued, (ii) the
applicable Computone option plan and (iii) the Computone Certificate of
Incorporation.
(c) As of April 3, 1998, there were no outstanding contractual
obligations of Computone or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Computone or any of its
Subsidiaries.
(d) Section 5.2 of the Computone Disclosure Schedule lists all
Subsidiaries of Computone, the jurisdiction of incorporation of each such
Subsidiary of Computone and each jurisdiction where such Subsidiary of Computone
is qualified to do business. Computone owns, directly or indirectly, all of the
securities of each of the Subsidiaries of Computone, free and clear of all
liens, charges, pledges, security interest or other encumbrances, and all
capital stock of such Subsidiaries of Computone has been duly authorized and
validly issued and is fully paid and nonassessable. None of the Subsidiaries of
Computone has any commitment to issue or sell any shares of its capital stock or
any securities or obligations convertible into or exchangeable for, or giving
any person other than Computone or a Subsidiary of Computone any right to
acquire from a Subsidiary of Computone, any shares of its capital stock. Each
Subsidiary of Computone is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation, has the
corporate power and all necessary authorizations to own all of its properties
and assets and to carry on its business as it is now being conducted, and, to
the extent required by law, is duly qualified to do business and is in good
standing in each jurisdiction in which it owns property or conducts business,
except where the failure to have such authorization or to be so qualified would
not have a material adverse affect on the business or operations of such
Subsidiary or Computone.
20
<PAGE>
Section V.3 Authority. Computone has all requisite corporate power and
---------
authority to enter into this Agreement and the Merger Agreement and, subject
only to approval of this Agreement and the Merger Agreement by the stockholders
of Computone, to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the Merger Agreement by
Computone and the consummation by Computone of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Computone, subject only to such approval by the stockholders of
Computone. This Agreement and the Merger Agreement have been duly executed and
delivered by Computone and, subject only to such approval by the stockholders of
Computone, constitute valid and binding obligations of Computone, enforceable
against Computone in accordance with their respective terms.
Section V.4 Consents and Approvals; No Violations. Except as set forth in
-------------------------------------
Section 5.4 of the Computone Disclosure Schedule, and except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the DGCL (all of which shall
have been made or obtained on or before the Preliminary Exchange Closing Date
and the Merger Closing Date), the execution and delivery of this Agreement and
the Merger Agreement do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation or acceleration of any
obligation or to loss of a material benefit, under (i) any provision of the
Certificate of Incorporation or Bylaws of Computone or any Subsidiary of
Computone, or (ii) any mortgage, indenture, lease, or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Computone or any
Subsidiary of Computone or their respective properties or assets, other than any
such conflicts, violations, defaults, terminations, cancellations or
accelerations which individually or in the aggregate would not have a material
adverse effect on the business of Computone and its Subsidiaries taken as a
whole. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Computone or any of its Subsidiaries in connection with the execution
and delivery of this Agreement or the Merger Agreement by Computone or the
consummation by Computone of the transactions contemplated hereby or thereby,
except for the following, all of which shall have been accomplished on or before
the Preliminary Exchange Closing Date and the Merger Closing Date: (i) the
filing and effectiveness of a proxy statement relating to the meeting of
Computone's stockholders to be held in connection with the Merger (the "Proxy
Statement") under the Exchange Act, (ii) the filing and effectiveness of a
registration statement on Form S-4 (the "Registration Statement") with the
Commission in connection with the issuance of the Merger Shares pursuant to the
Merger and the Initial Member Shares, the 1997 Note Shares and the Additional
Shares pursuant to or in connection with the Exchange, which Registration
Statement shall include the Proxy Statement, (iii) the filing of such reports
under Section 13 of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby, (iv) the filing of the
Certificate of Merger or the Merger Agreement and officers' certificates with
the Secretary of State of the State of Delaware and appropriate documents with
the relevant authorities of other states in which Computone is qualified to do
21
<PAGE>
business, (v) such consents, approvals,. orders, authorizations, registration,
declarations and filings as may be required under applicable state securities
laws and the laws of any foreign country and (vi) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a material adverse effect on the business of Computone and
its Subsidiaries taken as a whole.
Section V.5 Computone SEC Documents. Computone has filed with the
-----------------------
Commission and has heretofore furnished to Ladia or to counsel for Ladia, a true
and complete copy of each form, report, and document required to be filed by
Computone with the Commission since April 4, 1997 (the "Computone SEC
Documents"). As of their respective filing dates: (i) the Computone SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and (ii) none of the Computone SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading except to the extent, if any, corrected by a subsequently
filed Computone SEC Document. At the time filed, the financial statements of
Computone included in the Computone SEC Documents (the "Computone Financial
Statements") complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto, had been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the Commission) and fairly
presented the consolidated financial position of Computone and its consolidated
Subsidiaries as at the dates thereof and the consolidated results of their
operations and changes in financial position for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments). Except as disclosed in the Computone SEC Documents filed prior to
the date of this Agreement, or except as contemplated by this Agreement, since
April 4, 1997, there has not been any material adverse change in the results of
operations, financial condition, assets or business of Computone and its
Subsidiaries taken as a whole.
Section V.6 Undisclosed Liabilities. Except as set forth on Section 5.6 of
-----------------------
the Computone Disclosure Schedule, neither Computone nor any of its Subsidiaries
has any liabilities, either accrued, absolute, contingent or otherwise, of a
nature required to be reflected in a balance sheet or related notes prepared in
accordance with generally accepted accounting principles consistently applied
which are not reflected or provided for in the Computone Financial Statements
except those arising after April 4, 1997, (i) which are in the ordinary course
of business, (ii) which, in the aggregate would not have a material effect on
the financial condition of Computone, and (iii) the nature and extent of which
are specifically described in Section 5.6 of the Computone Disclosure Schedule.
Section V.7 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Section 5.7 of the Computone Disclosure Statement, since April 4, 1997, neither
Computone nor any of its Subsidiaries has:
(a) incurred any obligation or liability (fixed or, to its knowledge,
contingent), except normal trade or business obligations incurred in the
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ordinary course of business and consistent with past practice, and except in
connection with this Agreement and the transactions contemplated hereby;
(b) discharged or satisfied any lien, security interest or encumbrance
or paid any obligation or liability (fixed or contingent), other than in the
ordinary course of business and consistent with past practice;
(c) mortgaged, pledged or subjected to any lien, security interest or
other encumbrance any of its assets or properties (other than mechanic's,
materialman's and similar statutory liens arising by operation of law, liens for
current real and personal property taxes incurred but not yet due and payable,
purchase money security interests arising as a matter of law between the date of
delivery and payment and other liens of an immaterial nature);
(d) transferred, leased or otherwise disposed of any of its assets or
properties except in the ordinary course of business and consistent with past
practice or, except in the ordinary course of business and consistent with past
practice, acquired any assets or properties;
(e) canceled or compromised any debt or claim, except in the ordinary
course of business and consistent with past practice;
(f) waived or released any rights of material value;
(g) transferred or granted any rights under any concessions, leases,
licenses, agreements, patents, inventions, trademarks, trade names, service
marks or copyrights or with respect to any know-how;
(h) made or granted any wage or salary increase applicable to any
group or classification of employees generally, entered into any employment
contract with, or made any loan to, or entered into any material transaction of
any other nature with, any officer or employee of Computone or any of its
Subsidiaries;
(i) entered into any transaction, contract or commitment which
provides for a period of performance which extends beyond twelve (12) months
from the date hereof or involves payment of or receipt after the date hereof of
amounts in excess of one percent of Computone's net sales for the year ended
April 4, 1997, except (i) contracts listed in Section 5.13 of the Computone
Disclosure Schedule, (ii) this Agreement and the transactions contemplated
hereby, (iii) ordinary course of business contracts for the purchase of
materials from vendors if such contracts are supported by firm released customer
purchase orders, and (iv) ordinary course of business orders for Computone's
products; or
(j) suffered any casualty loss or damage to any of its properties
(whether or not such loss or damage shall have been covered by insurance) which
adversely affects in any material respect its ability to conduct business.
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Section V.8 Information Supplied. None of the information supplied by
--------------------
Computone for inclusion in the Registration Statement, and the Proxy Statement
included therein, at the date the Registration Statement is filed with the
Commission and at the time it becomes effective and at the time of the meeting
of Computone's stockholders to be held in connection with the Merger, contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section V.9 Certain Agreements. Except as disclosed in Section 5.9 of the
------------------
Computone Disclosure Schedule, or as contemplated by this Agreement, neither
Computone nor any of its Subsidiaries is a party to any (i) agreement with any
executive officer or other key employee of Computone or any Subsidiary of
Computone (A) the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving Computone or
any Subsidiary of Computone of the nature of any of the transactions
contemplated by this Agreement and the Merger Agreement, (B) providing any term
of employment or compensation guarantee or (C) providing severance benefits or
other benefits (which are conditioned upon a change of control) after the
termination of employment of such employee regardless of the reason for such
termination of employment or (ii) agreement or plan, including; without
limitation, any stock option plan, stock appreciation right plan or stock
purchase plan, any of the benefits of which will be materially increased, or the
vesting of benefits of which will be materially accelerated, by the occurrence
of any of the transactions contemplated by this Agreement and the Merger
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement and the Merger
Agreement.
Section V.10 Taxes.
-----
(a) Computone and each of its Subsidiaries (i) has duly and timely
filed or caused to be filed all federal, state, local and foreign tax returns
(including, without limitation, consolidated and/or combined tax returns)
required to be filed by it which relate to Computone or any of its Subsidiaries
or with respect to which Computone or any of its Subsidiaries is liable or
otherwise in any way subject, which returns were true, correct and complete in
all material respects, (ii) has paid or fully accrued for all taxes shown to be
due and payable on such returns (which taxes are all the taxes due and payable
under such returns or pursuant to any assessment received by Computone or any of
its Subsidiaries), and (iii) has properly accrued, charged or established
adequate reserves for all such taxes arising in respect of Computone or any of
its Subsidiaries for periods subsequent to the periods covered by such returns.
Except as set forth in Section 5.10 of the Computone Disclosure Schedule, (A) no
claims for taxes have been asserted against Computone or any of its
Subsidiaries, and no deficiency-for any taxes has been proposed, asserted or
assessed which has not been resolved or paid in full, (B) no tax return or
taxable period of Computone or any of its Subsidiaries is under audit,
investigation or examination and none of Computone or any of its Subsidiaries
has received notice of any pending audit, investigation or examination, (C)
there are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any tax return for any period of Computone or its
Subsidiaries, (D) no issue or claim has been asserted for taxes by any taxing
authority for any prior period, the adverse determination of which could for any
prior, current or future period result in a deficiency which could have a
material adverse effect on Computone and its Subsidiaries taken as a whole, (E)
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there are no tax liens upon the assets of Computone or any of its Subsidiaries
other than liens for taxes not yet due and (F) no power of attorney has been
granted by Computone or any of its Subsidiaries with respect to any matter
relating to taxes which is currently in force, other than, in each case, those
the outcome of which, as far as reasonably can be foreseen, will not have a
material adverse effect on Computone and its Subsidiaries taken as a whole.
Copies of all federal and state income (or franchise) tax returns of Computone
or any of its Subsidiaries have been made available for inspection by HC and
Ladia.
(b) Collapsible Corporation Status. No consent or agreement has been
-----------------------
made under Section 341 of the Code by or on behalf of Computone or its
Subsidiaries or any predecessor thereof.
(c) FIRPTA Status. Computone is not, and has not been at any time
-------------
during the five year period preceding the date hereof, a "United States real
property holding corporation" as defined in Section 897 of the Code and the
regulations promulgated thereunder.
(d) Parachute Payments. No payments by Computone or its Subsidiaries
------------------
to its officers, directors, employees or consultants under any contract, plan or
agreement, including but not limited to this Agreement, or payments contemplated
by this Agreement constitute "parachute payments" within the meaning of Section
280G of the Code.
Section V.11 Title to Assets. Section 5.11 of the Computone Disclosure
---------------
Schedule sets forth a list of all real property owned or leased by Computone or
any of its Subsidiaries, and the aggregate monthly rental or other fee payable
under any such lease. Except as listed in Section 5.11 of the Computone
Disclosure Schedule, Computone and each of its Subsidiaries has good and
marketable title to its assets, free and clear of all security interests,
mortgages, encumbrances, liens or charges of any kind or character, except liens
for taxes not yet due and payable and such imperfections of title, liens and
easements as do not materially detract from or interfere with the present use of
the properties subject thereto or affected thereby, or otherwise materially
impair the present business operations of such properties.
Section V.12 Condition of Personal Property. All of Computone's and its
------------------------------
Subsidiaries' tangible personal property, equipment, fixtures and inventories
used in the ordinary course of its business are in good, merchantable condition,
reasonable wear and tear excluded, or in reasonably repairable condition, are
suitable for the purposes for which they are being used, and are valued at the
lower of cost or market in the Computone Financial Statements. No value in
excess of applicable reserves has been given to any inventory in the Computone
Financial Statements with respect to obsolete or discontinued products. All of
the inventories and equipment, including equipment leased to others, are well
maintained and in good operating condition.
Section V.13 List of Contracts and Other Data. Section 5.13 of the
--------------------------------
Computone Disclosure Schedule sets forth the following:
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(a) all of Computone's and its Subsidiaries' registered patents,
trademarks, trade names, service marks and copyrights, if any, used in
connection with the operation of Computone's and its Subsidiaries' business, and
all applications, if any, pending for patents or for trademarks, trade names,
service marks or copyright registrations;
(b) all collective bargaining agreements, employment and consulting
agreements, executive compensation plans, bonus plans, deferred compensation
agreements, employee pension or retirement plans, employee stock purchase and
stock option plans, group life insurance, hospitalization insurance or other
plans or arrangements providing for benefits to employees of Computone or any of
its Subsidiaries, if any;
(c) all contracts (including, without limitation, mortgages,
indentures and loan agreements) to which Computone or any of its Subsidiaries is
a party, or to which it or any of its assets or properties are subject and which
are not specifically referred to in Sections 5.13(a) or 5.l3(b) above and which
provide for a period of performance which extends beyond twelve (12) months from
the date hereof or involve payment of or receipt after the date hereof of
amounts in excess of one percent of Computone's net sales for the year ended
April 4, 1997, provided that the foregoing shall not be deemed to include (i)
ordinary course of business purchase orders for materials from vendors if such
purchase orders are supported by firm released customer purchase orders for
Computone's products or (ii) ordinary course of business orders for Computone's
products; and
(d) the names and current annual compensation rates of the top ten
(10) paid employees of Computone or any of its Subsidiaries.
True and complete copies of all documents and complete descriptions of all
oral understandings, if any, referred to in this Section 5.13 have been provided
or made available to HC, Ladia and their counsel.
Section V.14 Business Property Rights. To the knowledge of Computone,
------------------------
Computone owns or has valid rights to use all designs, know-how, trade secrets,
patents, trademarks, trade names, service marks and copyrights, if any, which
are reasonably necessary to, or used primarily in, the conduct of Computone's
and its Subsidiaries' businesses (the "Computone Intellectual Property") without
conflict with the rights of others. Except as set forth in Section 5.14 of the
Computone Disclosure Schedule: (i) no claim is pending or, to Computone's
knowledge, threatened to the effect that the present or past operation of
Computone or its Subsidiaries infringes upon or conflicts with the rights of
others with respect to any Computone Intellectual Property, where such
infringement or conflict is reasonably likely to have a material adverse effect
on Computone and its Subsidiaries taken as a whole; (ii) no claim is pending or,
to Computone's knowledge, threatened to the effect that any Computone
Intellectual Property is invalid or unenforceable and (iii) no contract,
agreement or understanding with any party exists which would prevent the
continued use by Computone or its Subsidiaries (as currently used by Computone
or its Subsidiaries) of any Computone Intellectual Property.
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Section V.15 Compliance with Applicable Law. Computone and its
------------------------------
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Computone Permits"), except for failures to hold
such permits, licenses, variances, exemptions, orders and approvals which would
not, individually or in the aggregate, have a material adverse effect on the
business of Computone and its Subsidiaries taken as a whole. Computone and its
Subsidiaries are in compliance with the terms of the Computone Permits, except
where the failure to comply would not have a material adverse effect on
Computone and its Subsidiaries taken as a whole. The businesses of Computone
and its Subsidiaries are not being conducted in violation of any law, ordinance
or regulation of any Governmental Entity, except for possible violations which
individually or in the aggregate do not, and, insofar as reasonably can be
foreseen, in the future will not, have a material adverse effect on the business
of Computone and its Subsidiaries taken as whole. Except as set forth in
Section 5.15 of the Computone Disclosure Schedule, as of the date of this
Agreement, no investigation or review by any Governmental Entity with respect to
Computone and its Subsidiaries is pending or, to the best knowledge of
Computone, threatened, nor has any Governmental Entity notified Computone orally
or in writing of an intention to conduct the same, other than, in each case,
those the outcome of which, as far as reasonably can be foreseen, in the future
will not have a material adverse effect on the business of Computone and its
Subsidiaries taken as a whole.
Section V.16 No Breach or Default. Except as set forth in Section 5.16 of
--------------------
the Computone Disclosure Schedule, neither Computone nor any of its Subsidiaries
is in default under any material contract to which it is a party or by which it
is bound, nor has any event occurred which, after the giving of notice or the
passage of time or both, would constitute a default under any such contract.
Neither Computone nor any of its Subsidiaries has reason to believe that the
parties to such contracts will not fulfill their obligations under such
contracts in all material respects or are threatened with insolvency. Neither
Computone nor any of its Subsidiaries is a party to or bound by any mortgage,
lien, lease, agreement, instrument, order, judgment or decree which would
prohibit or conflict with in any way the execution or performance of this
Agreement or prohibit the consummation of any of the transactions provided for
in this Agreement.
Section V.17 Labor Controversies. Neither Computone nor any of its
-------------------
Subsidiaries is a party to any collective bargaining agreement. Except as set
forth in Section 5.17 of the Computone Disclosure Schedule, there are no
controversies between Computone and any of its employees or any Subsidiary of
Computone and any of its employees which might reasonably be expected to
materially adversely affect the conduct of its business, or any unresolved labor
grievances or unfair labor practice or labor arbitration proceedings pending, or
to the knowledge of Computone or such Subsidiary threatened relating to its
business, and to the knowledge of Computone or such Subsidiary there are no
organizational efforts presently being made or threatened involving any of
Computone's or any of its Subsidiaries' employees. Neither Computone nor any of
its Subsidiaries has received notice of any claim that Computone or such
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Subsidiary has not complied with any laws relating to the employment of labor,
including any provisions thereof relating to wages, hours, collective
bargaining, the payment of social security and similar taxes, equal employment
opportunity, employment discrimination and employment safety, or that Computone
or such Subsidiary is liable for any arrears of wages or any taxes or penalties
for failure to comply with any of the foregoing.
Section V.18 Litigation. Except as set forth in Section 5.18 of the
----------
Computone Disclosure Schedule there is no action, suit or proceeding with
respect to Computone or any of its Subsidiaries involving claims by or against
Computone, any of its Subsidiaries or any of their respective properties,
pending or, to the knowledge of Computone, threatened, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality. There are no orders,
judgments, injunctions or decrees of any court or governmental agency with
respect to which Computone or any of its Subsidiaries has been named or is a
party which apply, in whole or in part, to the business of Computone or any of
its Subsidiaries or any of their respective properties, or which would result in
a material adverse change in the business or prospects of Computone and its
Subsidiaries taken as a whole.
Section V.19 Transactions with Affiliates. Except as set forth in the
----------------------------
Section 5.19 of the Computone Disclosure Statement, since April 4, 1997, there
have been no transactions to which Computone or any of its Subsidiaries has been
a party in which any director, officer or 5% stockholder of Computone or a
member of his immediate family had or will have any direct or indirect interest.
Section V.20 Environmental Matters. As of the date hereof, Computone is in
---------------------
compliance with all applicable local, county, state, federal and foreign legal
requirements relating to the use, storage, handling, transport and disposal of
materials, hazardous materials and hazardous substances (the "Hazardous
Materials") including, but not limited to, the Resources Compensation and
Recovery Act (42 U.S.C. Section 6902 et seq.) and the Comprehensive
Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. Section
9601). Computone has no knowledge of any condition that would cause Computone to
incur liability or be a responsible party with respect to Computone's real
properties under any environmental or health regulation or act. To the knowledge
of Computone, (i) none of Computone's properties has ever been used as a
sanitary land fill or as a storage or dump site for Hazardous Materials, (ii)
none of the listed properties is contaminated with any Hazardous Materials; and
(iii) Computone has not been responsible for spilling Hazardous Materials on its
properties.
Section V.21 ERISA Plans.
-----------
(a) With respect to each employee benefit plan (including, without
limitation, any "employee benefit plan", as defined in Section 3(d) of the
ERISA), and any material bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, insurance or other plan, arrangement or understanding (whether
or not legally binding) (all the foregoing being herein called the "Computone
Benefit Plans"), maintained or contributed to by Computone or any of its
Subsidiaries, Computone has made available to HC and Ladia, or will deliver to
HC and Ladia within 30 days after the date hereof, a true and correct copy of
(i) the most recent annual report (Form 5500) filed with the IRS, if any, (ii)
such Computone Benefit Plan, (iii) each trust agreement and group annuity
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contract, if any, relating to such Computone Benefit Plan and (iv) the most
recent actuarial report or valuation relating to each Computone Benefit Plan
subject to Title IV of ERISA.
(b) With respect to the Computone Benefit Plans, individually and in
the aggregate, no event has occurred, and to the knowledge of Computone and its
Subsidiaries, there exists no condition or set of circumstances in connection
with which Computone and its Subsidiaries could be subject to any liability that
is reasonably likely to have a material adverse effect on the business of
Computone and its Subsidiaries taken as a whole (except liability for benefits
claims and funding obligations payable in the ordinary course), under ERISA, the
Code or any other applicable law.
(c) Except as set forth in Section 5.21 of the Computone Disclosure
Schedule, with respect to the Computone Benefit Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the Computone
Financial Statements, which obligations are reasonably likely to have a material
adverse effect on Computone and its Subsidiaries, taken as a whole.
Section V.22 No Brokers. Except as disclosed in Section 5.22 of the
----------
Computone Disclosure Schedule, Computone has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Computone to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
and Computone is not aware of any other claim or basis for claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby. Computone shall indemnify and hold HC,
Ladia and the Members harmless from and against any obligation with respect to
any such fees, brokerage or agent's commissions or other like payments.
Section V.23 Pooling Matters. Neither Computone nor any of its affiliates
---------------
has, to its knowledge and based upon consultation with its independent
accountants, taken or agreed to take any action that would affect the ability of
Computone and HC to account for the business combination to be effected by the
Merger as a pooling of interests.
Section V.24 No Misrepresentation or Omission. No representation or
--------------------------------
warranty made by Computone in this Article V or in any other Article or Section
of this Agreement, or in any certificate or other document furnished or required
to be furnished by Computone pursuant hereto, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not misleading
in light of the circumstances under which they are made.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF HC AND NEWCO
HC and Newco jointly and severally represent and warrant to Ladia, the Members
and Computone as follows:
Section VI.1 Existence. Good Standing. Compliance with Law. Each of HC
---------------------------------------------
and Newco is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Each of HC and Newco is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other jurisdiction in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except for jurisdictions in which
the failure to be so qualified or to be in good standing would not have a
material adverse effect on the business of HC and Newco taken as a whole. Each
of HC and Newco has all requisite corporate power and authority to own its
properties and carry on its business as now conducted. The copies of the
Certificate of Incorporation and Bylaws of HC and Newco which have been
delivered to Ladia and Computone are complete and correct. Neither HC nor Newco
is in default with respect to any order of any court, governmental authority or
arbitration board or tribunal to which HC or Newco is a party or is subject.
Neither HC nor Newco is in violation of any laws, ordinances, governmental rules
or regulations to which it is subject, except for laws, ordinances, governmental
rules or regulations the violation of which would not have a material adverse
effect on HC's or Newco's business as a whole. HC and Newco have obtained all
licenses, permits and other authorizations and has taken all action required by
applicable law or governmental regulation necessary for the conduct of their
respective business as now conducted, except for licenses, permits,
authorizations or actions the violation of which or the failure to obtain or
take which would not have a material adverse effect on the business of HC and
Newco taken as a whole. HC and Newco were organized in May 1998 and neither has
conducted any material operations to date.
Section VI.2 Capitalization of HC. HC has authorized capital stock of
--------------------
10,000,000 shares of convertible redeemable preferred stock, $0.01 par value per
share, and 50,000,000 shares of common stock, $0.01 par value per share (the "HC
Common Stock"). As of the date of this Agreement, one share of the HC Common
Stock was issued and outstanding and owned beneficially and of record by
Computone (which share shall be canceled and retired, and shall cease to exit,
upon the Effective Time of the Merger, as provided in Section 3.1(c)), and no
shares of HC convertible redeemable preferred stock were issued or outstanding.
There are no outstanding rights, warrants, options, subscriptions, agreements or
commitments giving anyone any right to require HC to sell or issue any capital
stock or other securities. HC has no Subsidiaries other than Newco.
Section VI.3 Capitalization of Newco. Newco has authorized capital stock
-----------------------
of 100 shares of common stock, $0.01 par value per share (the "Newco Common
Stock"). As of the date of this Agreement, one share of the Newco Common Stock
was issued and outstanding and owned beneficially and of record by HC. There
30
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are no outstanding rights, warrants, options, subscriptions, agreements or
commitments giving anyone any right to require Newco to sell or issue any
capital stock or other securities. Newco has no Subsidiaries.
Section VI.4 Authority. Each of HC and Newco has all requisite corporate
---------
power and authority to enter into this Agreement and the Merger Agreement and,
subject only to approval of this Agreement and the Merger Agreement by the
stockholders of Computone, to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Merger
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of HC and Newco. This Agreement and the Merger Agreement have been duly
executed and delivered by HC and Newco and constitute valid and binding
obligations of HC and Newco, enforceable against them in accordance with their
respective terms.
Section VI.5 Consents and Approvals; No Violations. Except for filings,
-------------------------------------
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act and the
DGCL (all of which shall have been made or obtained on or before the Preliminary
Exchange Closing Date and the Merger Closing Date), the execution and delivery
by HC and Newco of this Agreement and the Merger Agreement do not, and the
consummation by HC and Newco of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under (i) any provision of the Certificate of Incorporation or
Bylaws of HC or Newco, or (ii) any mortgage, indenture, lease, or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to HC or
Newco or their respective properties or assets, other than any such conflicts,
violations, defaults, terminations, cancellations or accelerations which
individually or in the aggregate would not have a material adverse effect on the
business of HC and Newco taken as a whole. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to HC or Newco in connection with the
execution and delivery of this Agreement or the Merger Agreement by HC and Newco
or the consummation by HC and Newco of the transactions contemplated hereby or
thereby, except (i) the filing and effectiveness of the Proxy Statement under
the Exchange Act, (ii) the filing and effectiveness of the Registration
Statement with the Commission in connection with the issuance of the Merger
Shares pursuant to the Merger and the Initial Member Shares, the 1997 Note
Shares and the Additional Shares pursuant to or in connection with the Exchange,
which Registration Statement shall include the Proxy Statement, (iii) the filing
of such reports under Section 13 of the Exchange Act as may be required in
connection with this Agreement and the transactions contemplated hereby, (iv)
the filing of the Certificate of Merger of the Merger Agreement and officers'
certificates with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which HC
or Newco is qualified to do business, (v) such consents, approvals, orders,
authorizations, registration, declarations and filings as may be required under
applicable state securities laws and the laws of any foreign country and (vi)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not have a material adverse effect on the business
of HC and Newco taken as a whole.
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Section VI.6 Undisclosed Liabilities. Neither HC nor Newco has any
-----------------------
liabilities, either accrued, absolute, contingent or otherwise, of a nature
required to be reflected in a balance sheet or related notes prepared in
accordance with generally accepted accounting principles consistently applied.
Section VI.7 Absence of Certain Changes or Events. Since their respective
------------------------------------
dates of formation, neither HC nor any Newco has:
(a) incurred any obligation or liability (fixed or, to its knowledge,
contingent), except in connection with this Agreement and the transactions
contemplated hereby;
(b) discharged or satisfied any lien, security interest or encumbrance
or paid any obligation or liability (fixed or contingent);
(c) mortgaged, pledged or subjected to any lien, security interest or
other encumbrance any of its assets or properties (other than mechanic's,
materialman's and similar statutory liens arising by operation of law, liens for
current real and personal property taxes incurred but not yet due and payable,
purchase money security interests arising as a matter of law between the date of
delivery and payment and other liens of an immaterial nature);
(d) transferred, leased or otherwise disposed of any of its assets or
properties or acquired any assets or properties;
(e) canceled or compromised any debt or claim;
(f) waived or released any rights of material value;
(g) transferred or granted any rights under any concessions, leases,
licenses, agreements, patents, inventions, trademarks, trade names, service
marks or copyrights or with respect to any know-how;
(h) made or granted any wage or salary increase applicable to any
group or classification of employees generally, entered into any employment
contract with, or made any loan to, or entered into any material transaction of
any other nature with, any officer or employee of HC or Newco;
(i) entered into any transaction, contract or commitment which
provides for a period of performance which extends beyond twelve (12) months
from the date hereof except this Agreement and the transactions contemplated
hereby; or
(j) suffered any casualty loss or damage to any of its properties
(whether or not such loss or damage shall have been covered by insurance) which
adversely affects in any material respect its ability to conduct business.
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Section VI.8 Information Supplied. None of the information supplied by HC
--------------------
or Newco for inclusion in the Registration Statement, and the Proxy Statement
included therein, at the date the Registration Statement is filed with the
Commission and at the time it becomes effective and at the time of the meeting
of Computone's stockholders to be held in connection with the Merger, contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section VI.9 Certain Agreements. Except as contemplated by this Agreement,
------------------
neither HC nor Newco is a party to any (i) agreement with any executive officer
or other key employee of HC or Newco (A) the benefits of which are contingent,
or the terms of which are materially altered, upon the occurrence of a
transaction involving HC or Newco of the nature of any of the transactions
contemplated by this Agreement and the Merger Agreement, (B) providing any term
of employment or compensation guarantee or (C) providing severance benefits or
other benefits (which are conditioned upon a change of control) after the
termination of employment of such employee regardless of the reason for such
termination of employment or (ii) agreement or plan, including; without
limitation, any stock option plan, stock appreciation right plan or stock
purchase plan, any of the benefits of which will be materially increased, or the
vesting of benefits of which will be materially accelerated, by the occurrence
of any of the transactions contemplated by this Agreement and the Merger
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement and the Merger
Agreement.
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Section VI.10 Taxes.
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(a) HC and Newco (i) have duly and timely filed or caused to be filed
all federal, state, local and foreign tax returns (including, without
limitation, consolidated and/or combined tax returns) required to be filed by it
which relate to HC or Newco or with respect to which HC or Newco is liable or
otherwise in any way subject, which returns were true, correct and complete in
all material respects, (ii) have paid or fully accrued for all taxes shown to be
due and payable on such returns (which taxes are all the taxes due and payable
under such returns or pursuant to any assessment received by HC or Newco), and
(iii) have properly accrued, charged or established adequate reserves for all
such taxes arising in respect of HC or Newco for periods subsequent to the
periods covered by such returns. No claims for taxes have been asserted against
HC or Newco and no deficiency-for any taxes has been proposed, asserted or
assessed which has not been resolved or paid in full. No tax return or taxable
period of HC or Newco is under audit, investigation or examination and neither
HC nor Newco has received notice of any pending audit, investigation or
examination. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any tax return for any period of HC
or Newco. No issue or claim has been asserted for taxes by any taxing authority
for any prior period, the adverse determination of which could for any prior,
current or future period result in a deficiency which could have a material
adverse effect on HC or Newco taken as a whole. There are no tax liens upon the
assets of HC or Newco other than liens for taxes not yet due. No power of
attorney has been granted by HC or Newco with respect to any matter relating to
taxes which is currently in force, other than, in each case, those the outcome
of which, as far as reasonably can be foreseen, will not have a material adverse
effect on HC or Newco taken as a whole. Copies of all federal and state income
(or franchise) tax returns of HC or Newco have been made available for
inspection by Ladia, the Members and Computone.
(b) Collapsible Corporation Status. No consent or agreement has been
-----------------------
made under Section 341 of the Code by or on behalf of HC or Newco or any
predecessor thereof.
(c) FIRPTA Status. Neither HC nor Newco is , and neither has at any
-------------
time during the five year period preceding the date hereof been, a "United
States real property holding corporation" as defined in Section 897 of the Code
and the regulations promulgated thereunder.
(d) Parachute Payments. No payments by HC or Newco to its officers,
------------------
directors, employees or consultants under any contract, plan or agreement,
including but not limited to this Agreement, or payments contemplated by this
Agreement constitute "parachute payments" within the meaning of Section 280G of
the Code.
Section VI.11 Title to Assets. Neither HC nor Newco owns or leases any
---------------
real property. HC and Newco have good and marketable title to its assets, free
and clear of all security interests, mortgages, encumbrances, liens or charges
of any kind or character, except liens for taxes not yet due and payable and
such imperfections of title, liens and easements as do not materially detract
from or interfere with the present use of the properties subject thereto or
affected thereby, or otherwise materially impair the present business operations
of such properties.
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Section VI.12 Condition of Personal Property. All of HC's and Computone's
------------------------------
tangible personal property, equipment, fixtures and inventories used in the
ordinary course of its business are in good, merchantable condition, reasonable
wear and tear excluded, or in reasonably repairable condition, are suitable for
the purposes for which they are being used, and are valued at the lower of cost
or market. No value in excess of applicable reserves has been given to any
inventory with respect to obsolete or discontinued products. All of the
inventories and equipment, including equipment leased to others, are well
maintained and in good operating condition.
Section VI.13 List of Contracts and Other Data. Neither HC nor Newco has:
--------------------------------
(a) any registered patents, trademarks, trade names, service marks and
copyrights or any applications pending for patents or for trademarks, trade
names, service marks or copyright registrations;
(b) any collective bargaining agreements, employment and consulting
agreements, executive compensation plans, bonus plans, deferred compensation
agreements, employee pension or retirement plans, employee stock purchase and
stock option plans, group life insurance, hospitalization insurance or other
plans or arrangements providing for benefits to employees of HC or Newco;
(c) any contracts (including, without limitation, mortgages,
indentures and loan agreements) to which it is a party, or to which it or any of
its assets or properties are subject and which are not specifically referred to
in Sections 6.13(a) or 6.l3(b) above and which provide for a period of
performance which extends beyond twelve (12) months from the date hereof; and
(d) any employees.
Section VI.14 Business Property Rights. To the knowledge of HC and Newco,
------------------------
HC and Newco own or have valid rights to use all designs, know-how, trade
secrets, patents, trademarks, trade names, service marks and copyrights, if any,
which are reasonably necessary to, or used primarily in, the conduct of HC's and
Newco's businesses (the "HC/Newco Intellectual Property") without conflict with
the rights of others. No claim is pending or, to HC's or Newco's knowledge,
threatened to the effect that the present or past operation of HC or Newco
infringes upon or conflicts with the rights of others with respect to any
HC/Newco Intellectual Property, where such infringement or conflict is
reasonably likely to have a material adverse effect on HC and Newco taken as a
whole. No claim is pending or, to HC's or Newco's knowledge, threatened to the
effect that any HC/Newco Intellectual Property is invalid or unenforceable. No
contract, agreement or understanding with any party exists which would prevent
the continued use by HC or Newco (as currently used by HC or Newco) of any
HC/Newco Intellectual Property.
Section VI.15 Compliance with Applicable Law. HC and Newco hold all
------------------------------
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "HC/Newco Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which would not,
35
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individually or in the aggregate, have a material adverse effect on the business
of HC and Newco taken as a whole. HC and Newco are in compliance with the terms
of the HC/Newco Permits, except where the failure to comply would not have a
material adverse effect on HC and Newco taken as a whole. The business of HC
and Newco are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
individually or in the aggregate do not, and, insofar as reasonably can be
foreseen, in the future will not, have a material adverse effect on the business
of HC and Newco taken as whole. As of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to HC and Newco
is pending or, to the best knowledge of HC or Newco, threatened, nor has any
Governmental Entity notified HC or Newco orally or in writing of an intention to
conduct the same, other than, in each case, those the outcome of which, as far
as reasonably can be foreseen, in the future will not have a material adverse
effect on the business of HC and Newco taken as a whole.
Section VI.16 No Breach or Default. Neither HC nor Newco is in default
--------------------
under any material contract to which it is a party or by which it is bound, nor,
to HC's and Newco's knowledge, has any event occurred which, after the giving of
notice or the passage of time or both, would constitute a default under any such
contract. Neither HC nor Newco has reason to believe that the parties to such
contracts will not fulfill their obligations under such contracts in all
material respects or are threatened with insolvency. Neither HC nor Newco is a
party to or bound by any mortgage, lien, lease, agreement, instrument, order,
judgment or decree which would prohibit or conflict with in any way the
execution or performance of this Agreement or prohibit the consummation of any
of the transactions provided for in this Agreement.
Section VI.17 Labor Controversies. Neither HC nor Newco is a party to any
-------------------
collective bargaining agreement. There are no controversies between HC or Newco
and any of their respective employees which might reasonably be expected to
materially adversely affect the conduct of its business, or any unresolved labor
grievances or unfair labor practice or labor arbitration proceedings pending, or
to the knowledge of HC or Newco threatened relating to its business, and to the
knowledge of HC or Newco there are no organizational efforts presently being
made or threatened involving any of HC's or Newco's employees. Neither HC nor
Newco has received notice of any claim that HC or Newco has not complied with
any laws relating to the employment of labor, including any provisions thereof
relating to wages, hours, collective bargaining, the payment of social security
and similar taxes, equal employment opportunity, employment discrimination and
employment safety, or that HC or Newco is liable for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing.
Section VI.18 Litigation. There is no action, suit or proceeding with
----------
respect to HC or Newco involving claims by or against HC, Newco or any of their
respective properties pending to the knowledge of HC or Newco, threatened, at
law or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
There are no orders, judgments, injunctions or decrees of any court or
governmental agency with respect to which HC or Newco has been named or is a
party which apply, in whole or in part, to the business of HC or Newco or any of
their respective properties, or which would result in a material adverse change
in the business or prospects of HC and Newco taken as a whole.
36
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Section VI.19 Transactions with Affiliates. Since their respective dates
----------------------------
of formation, there have been no transactions to which HC or Newco has been a
party in which any director, officer or 5% stockholder of HC or Newco or a
member of his immediate family had or will have any direct or indirect interest.
Section VI.20 Environmental Matters. As of the date hereof, HC and Newco
---------------------
are in compliance with all applicable local, county, state, federal and foreign
legal requirements relating to the use, storage, handling, transport and
disposal of materials, hazardous materials and hazardous substances (the
"Hazardous Materials") including, but not limited to, the Resources Compensation
and Recovery Act (42 U.S.C. Section 6902 et seq.) and the Comprehensive
Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. Section
9601). Neither HC nor Newco has any knowledge of any condition that would cause
HC or Newco to incur liability or be a responsible party with respect to HC's or
Newco's real properties under any environmental or health regulation or act. To
the knowledge of HC and Newco, (i) none of HC's or Newco's properties has ever
been used as a sanitary land fill or as a storage or dump site for Hazardous
Materials, (ii) none of the listed properties is contaminated with any Hazardous
Materials; and (iii) neither HC nor Newco has been responsible for spilling
Hazardous Materials on its properties.
Section VI.21 ERISA Plans. There is no employee benefit plan (including,
-----------
without limitation, any "employee benefit plan", as defined in Section 3(d) of
the ERISA), or any material bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, insurance or other plan, arrangement or understanding
(whether or not legally binding), maintained or contributed to by HC or Newco.
Section VI.22 No Brokers. Neither HC nor Newco has entered into any
----------
contract, arrangement or understanding with any person or firm which may result
in the obligation of HC or Newco to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
and neither HC nor Newco is aware of any other claim or basis for claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby. HC and Newco shall
indemnify and hold Ladia, the Members and Computone harmless from and against
any obligation with respect to any such fees, brokerage or agent's commissions
or other like payments.
Section VI.23 Pooling Matters. None of HC, Newco or any of their
---------------
affiliates has, to its knowledge and based upon consultation with its
independent accountants, taken or agreed to take any action that would affect
the ability of Computone and HC to account for the business combination to be
effected by the Merger as a pooling of interests.
Section VI.24 No Misrepresentation or Omission. No representation or
--------------------------------
warranty made by HC or Newco in this Article VI or in any other Article or
37
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Section of this Agreement, or in any certificate or other document furnished or
required to be furnished by HC or Newco pursuant hereto, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances under which they are made.
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
The parties further covenant and agree as follows:
Section VII.1 Conduct of Computone, HC, Newco and Ladia Prior to the
------------------------------------------------------
Preliminary Exchange Closing and the Merger Closing. During the period from the
- ---------------------------------------------------
date hereof until the occurrence of the Effective Date and the Preliminary
Exchange Closing Date:
(a) Computone and Ladia each will conduct its operations according to
its ordinary course of business and will use commercially reasonable efforts to
maintain and preserve its business organization and relationships with agents
and all others.
(b) Except as disclosed by Computone, HC or Newco to Ladia or by Ladia
to Computone in writing prior to the date hereof, Ladia shall not, without the
prior written consent of Computone, and none of Computone, HC or Newco shall,
without the prior written consent of Ladia:
(i) incur any indebtedness for borrowed money, assume, guarantee,
endorse (other than endorsement of accounts receivable for collection) or
otherwise become responsible for the obligations of any other individual, firm
or corporation, or make any loans or advances to any individual, firm or
corporation, except any indebtedness borrowed under a line of credit agreement
with a bank which is in effect as of the date hereof;
(ii) make, declare or pay any dividend, or declare or make any
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its outstanding capital stock or membership interests
except for shares of such capital stock purchasable from employees or
consultants at the original purchase price upon termination of employment or
consulting in accordance with such party's usual and customary practice, or
authorize the creation or issuance of any additional shares of its capital stock
or membership interests or any options, calls or commitments relating to its
capital stock or membership interests or any securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire from it, any shares of its capital stock or membership
interests, or agree to take any such action;
(iii) except as necessary to consummate the transactions contemplated
in this Agreement, take any action to amend its Certificate of Incorporation or
Bylaws or Certificate of Organization or Operating Agreement;
38
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(iv) mortgage, pledge or otherwise encumber any of its properties
or assets;
(v) sell or transfer any of its properties or assets or cancel,
release or assign any indebtedness owed to it or any claims held by it, except
in the ordinary course of business;
(vi) make any investment of a capital nature in excess of $250,000 for
any single project either by purchase of stock or securities, contributions to
capital, property transfer or otherwise, or by the purchase of any property or
assets of any other individual, firm or corporation;
(vii) enter into or terminate any contract or agreement, or make any
change in any of its leases or contracts, other than in the ordinary course of
business;
(viii) increase in any manner the compensation or fringe benefits of
any of its officers or any employees earning over $50,000 annually or pay or
agree to pay any pension or retirement allowance not required by any existing
plan or agreement to any officers or employees, or commit itself to any pension,
retirement or profit-sharing plan or agreement or employment agreement with or
for the benefit of any officer, employee or other person provided that Ladia
may, without Computone's consent, hire up to three new employees with individual
annual compensation of up to $250,000 and may hire additional new employees with
aggregate annual compensation of up to $250,000;
(ix) permit any insurance policy (excluding, however, those policies
for which no replacement is available at a cost comparable to that currently in
effect) naming it as a beneficiary or a loss payable payee to be canceled or
terminated or any of the coverage thereunder to lapse, unless simultaneously
with such termination or cancellation replacement policies providing
substantially the same coverage are in full force and effect, other than in the
ordinary course of business; or
(x) take any other action which, although not expressly prohibited by
the foregoing provisions of this Section 7.1(b), would result or would be
reasonably likely to result in any of such party's representations and
warranties set forth in this Agreement being untrue or in any of the conditions
to the Merger or the Exchange set forth in Article VIII or Article IX not being
satisfied.
Section VII.2 HC Governance. Prior to the Preliminary Exchange Closing and
-------------
the Merger Closing, the stockholders and Board of Directors of HC shall take
such action as is necessary to cause the full Board of Directors of HC to
consist of the following persons as of the Preliminary Exchange Closing and the
Merger Closing: John D. Freitag, Richard A. Hansen, Frances Lynch, Robert Lynch
or his designee and two designees of the Computone Board of Directors.
Section VII.3 Stockholder Meeting. Computone shall call a meeting of its
-------------------
stockholders to be held as promptly as practicable after the date hereof for the
39
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purpose of voting upon this Agreement, the Merger Agreement and related matters.
Computone will, through its Board of Directors, unanimously recommend to its
stockholders (consistent with fiduciary duties) approval of such matters.
Section VII.4 Legal Conditions to the Merger or Exchange. Each party will
------------------------------------------
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on such party with respect to the Merger or
the Exchange and will promptly cooperate with and furnish information to the
other party in connection with any such requirements imposed upon any other
party or any Subsidiary of such other party in connection with the Merger or the
Exchange. Each party will take, and will cause its Subsidiaries to take, all
reasonable actions to obtain (and to cooperate with the other party and its
Subsidiaries in obtaining) any consent, authorization, order or approval of, or
any exemption by, any Governmental Entity, or other third party, required to be
obtained or made by such party or its Subsidiaries (or by the other party or its
Subsidiaries) in connection with the Merger or the Exchange or the taking of any
action contemplated thereby or by this Agreement.
Section VII.5 Cooperation. HC shall (i) prepare and file with the
-----------
Commission, as soon as is reasonably practicable after the date hereof, the
Registration Statement with respect to the Merger Shares issuable in the Merger,
the Initial Member Shares, the 1997 Note Shares and the Additional Shares (the
Initial Member Shares and the Additional Shares being hereinafter sometimes
referred to collectively as the "Exchange Shares") issuable in connection with
or pursuant to the Exchange, in each case as contemplated by this Agreement,
which Registration Statement shall include the Proxy Statement, (ii) use
commercially reasonable efforts to have the Registration Statement declared
effective by the Commission under the Securities Act as promptly as possible,
(iii) prepare and file with the Commission such supplements or amendments to the
Registration Statement as may be required by the Securities Act and/or the rules
and regulations thereunder, (iv) take all such action as may be required under
state blue sky or securities laws in connection with the transactions
contemplated by this Agreement, and (v) cooperate with Ladia, the Members, Newco
and Computone in determining whether any filings are required to be made or
consents required to be obtained in any jurisdiction prior to the Effective Date
and the Preliminary Exchange Closing Date in connection with the consummation of
the transactions contemplated by this Agreement and in making any such filings
promptly and in seeking to obtain timely any such consents. HC, Newco,
Computone, the Members and Ladia shall each furnish to one another's counsel all
such information as may be required in connection with the foregoing actions
including without limiting the generality of the foregoing the preparation by
Ladia of such audited financial statements for inclusion in the Registration
Statement as HC's independent accountants determine to be necessary pursuant to
Regulation S-X promulgated by the Commission.
Section VII.6 Satisfactory Affiliate Agreements. Ladia, on or prior to the
---------------------------------
date hereof, shall have caused to be delivered to HC a list, reviewed by Ladia's
counsel, identifying all persons who were in its opinion, at the time such list
is prepared, affiliates of Ladia for purposes of Rule 145 promulgated by the
Commission under the Securities Act ("Affiliates"). Ladia shall furnish such
information and documents as HC may reasonably request for the purpose of
reviewing such list. Ladia shall cause each person who is identified as an
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"Affiliate" in the list furnished pursuant to this Section 7.6 to execute a
written agreement at or prior to the Preliminary Exchange Closing Date (the
"Affiliate Agreement"), substantially in the form of Exhibit C attached hereto,
---------
that such person will not offer or sell or otherwise dispose of any Exchange
Shares issued to such person pursuant to this Agreement in violation of the
Securities Act or the rules and regulations promulgated by the Commission
thereunder.
Section VII.7 Expenses. All costs and expenses incurred in connection with
--------
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
Section VII.8 Public Announcements. No party hereto and none of their
--------------------
respective affiliates shall issue, or permit any agent or affiliate to issue,
any press releases or otherwise make, or permit any agent or affiliate to make,
any public statements with respect to this Agreement and the transactions
contemplated hereby without the prior written consent of each other party.
Notwithstanding the foregoing, if the parties cannot agree to the content of any
such press release or public statement, either party may, after furnishing the
proposed text thereof to the other parties and at least 24 hours' prior
consultation, issue, or permit any agent or affiliate to issue, any such press
release or make any such public statement which such party's legal counsel deems
to be required by law.
Section VII.9 Issuance of HC Common Stock and Ladia Options.
---------------------------------------------
(a) HC will, on the Preliminary Exchange Closing Date and on the Final
Exchange Closing Date, issue or cause to be issued or deliver or cause to be
delivered, from the authorized but unissued shares of the HC Common Stock,
certificates for the Exchange Shares for which the Ladia Membership Interests
are to be exchanged pursuant to Article I of this Agreement. HC at all times
shall maintain a sufficient number of authorized but unissued shares of the HC
Common Stock to enable HC to issue the Exchange Shares.
(b) HC will, promptly following the Effective Date, issue or cause to
be issued or deliver or cause to be delivered, from the authorized but unissued
shares of the HC Common Stock, certificates for the shares of the HC Common
Stock into which the Computone Common Stock outstanding on the Effective Date
shall then be converted and the shares of the HC Common Stock to be issued upon
the exercise thereafter of stock options and warrants assumed by HC in
accordance with Article X of this Agreement. HC at all times shall maintain a
sufficient number of authorized but unissued shares of the HC Common Stock to
enable HC to issue the shares contemplated by the preceding sentence.
(c) HC at all times shall maintain a sufficient number of authorized
but unissued shares of the HC Common Stock to enable HC to issue the Ladia
Option Shares issuable on exercise of the Ladia Options. As soon as practicable
after the Preliminary Exchange Closing Date, HC shall take such actions as shall
be necessary to assure that the Ladia Option Shares are registered on a Form S-8
registration statement filed with the Commission under the Securities Act.
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Section VII.10 Consents. Each party will use commercially reasonable
--------
efforts to obtain the written consents, if required, of all third parties,
including, but not limited to, governmental or regulatory agencies, foreign or
domestic, to the contracts listed on the Disclosure Schedule of such party and
will furnish to the other party executed copies of those consents on or before
the Effective Date and the Preliminary Exchange Closing Date.
Section VII.11 Stockholders' Agreement'. Simultaneously with the issuance
------------------------
of the 1997 Note Shares, the holders of the 1997 Note Shares shall have entered
into a stockholders' agreement with Frances Lynch substantially in the form of
Exhibit D attached hereto (the "Stockholders' Agreement") pursuant to which the
- ---------
holders of the 1997 Note Shares shall have given Frances Lynch (a) an
irrevocable proxy coupled with an interest to vote all of the 1997 Note Shares
and any Additional Shares issued to such holders pursuant to Section 1.5 hereof
on all matters submitted to the HC stockholders for a vote and (b) a right of
first refusal, to continue for a period of ten (10) years after the Exchange
Closing Date, to acquire some or all of the 1997 Note Shares and any Additional
Shares issued to such holders pursuant to Section 1.5 hereof if and when any one
or more of the holders thereof determine to dispose of such shares.
Section VII.12 Accountants' Letters'.
---------------------
(a) Ladia Accountants. Ladia shall use commercially reasonable efforts
-----------------
to cause to be delivered to HC a letter of Arthur Andersen LLP (or such other
firm of independent certified public accountants as is acceptable to Computone),
dated a date within two business days before the date on which the Registration
Statement shall become effective, and addressed to HC, in form and substance
reasonably satisfactory to HC and Computone and customary in scope and substance
for letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement.
(b) Computone's Accountants. Computone shall use commercially
-----------------------
reasonable efforts to cause to be delivered to HC a letter of BDO Seidman LLP,
Computone's independent auditors, dated a date within two business days before
the date on which the Registration Statement shall become effective, and
addressed to HC, in form and substance reasonably satisfactory to HC and Ladia
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
Section VII.13 Actions by Ladia. HC, Newco and Computone agree that, from
----------------
and after the Preliminary Exchange Closing and the Merger Closing and except as
specified below, Ladia, acting through its Board of Managers, and without
interference or the requirement of consent, authorization or approval from HC as
a holder of a Membership Interest in Ladia (or from any other holder or holders
of such a Membership Interest, the effective cooperation of which holder or
holders HC hereby agrees to obtain), shall have, except only in the specific
extraordinary circumstances hereinafter defined, exclusive control of Ladia's
business operations and finances. Such business operations and finances shall
include, but not be limited to, (i) the right to make acquisitions, either of
stock or assets or any combination thereof, of enterprises in the
telecommunications industry and (ii) the incurring of debt in any amount and on
any terms and conditions, provided only that such debt does not involve a
42
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guaranty by HC and is not convertible into, and does not afford any rights to
acquire, any equity interest in Ladia or HC. For purposes of this Section 7.13,
the specific extraordinary circumstances in which Ladia shall be required to
obtain the authorization, approval or consent of HC shall include and be limited
to (A) the issuance by Ladia of any additional membership interests in Ladia of
any kind and (B) any expenditure in an amount in excess of $500,000. The
provisions of this Section 7.13 shall be null and void if either (A) the
employment by Ladia of Frances Lynch is terminated for cause within the meaning
of her employment agreement with Ladia or (B) Ladia has not generated Cumulative
Gross Revenues during the first four full fiscal quarters following the
Preliminary Exchange Closing Date of at least $25,000,000, with a Cumulative
Gross Margin during the last such quarter of at least 4%, with such calculations
being based upon the unaudited financial statements of Ladia prepared by HC's
regular independent certified public accountants in connection with the filing
by HC of its periodic reports under the Exchange Act. HC, Computone and Newco
hereby agree that, prior to the Preliminary Exchange Closing and the Merger
Closing, Ladia may effect such amendments to its Operating Agreement and
Certificate of Organization as it shall deem necessary to reflect the provisions
of this Section 7.13 and to assure that the amendments so adopted may not
thereafter by modified, revoked or rescinded without the prior written consent
of Ladia.
Section VII.14 Role of HC and Computone. From and after the Preliminary
------------------------
Exchange Closing and the Merger Closing, HC and, to the extent applicable,
Computone, whether acting through their Boards of Directors or otherwise, shall
except to the extent contemplated by Section 7.13 hereof, (a) neither cause nor
permit any action to be taken, either directly or indirectly, which may
adversely affect the business, operations or prospects of Ladia or the ability
of Ladia and Frances Lynch to pursue and achieve the targets leading to the
issuance of the Additional Shares and the vesting of the Ladia Options pursuant
to Section 1.5 and Section 1.3 hereof and (b) cooperate with and support Ladia,
Frances Lynch and the Ladia Board of Managers in their management of the
business and affairs of Ladia and in their efforts to expand the growth of
Ladia's business.
Section VII.15 Limitations on Certain Transactions. During the Revenues
-----------------------------------
Measurement Period, HC will not, without Ladia's prior consent: (a) issue
additional shares of HC Common Stock or other equity in HC; (b) make any
distribution to holders of HC Common Stock from the proceeds of the sale of any
such additional shares of HC Common Stock or other equity of HC; or (c) sell or
otherwise transfer its membership interests in Ladia.
Section VII.16 Commission Filings. In connection with the intended
------------------
treatment of the Exchange and the Merger as a pooling of interests for
accounting purposes (as set forth in Section 1.8 and Section 2.8 hereof), HC
covenants and agrees that, as promptly as reasonably practicable and, in any
event, within forty-five (45) days after the end of the first full fiscal
quarter of HC beginning after the Final Exchange Closing Date, HC shall cause to
be filed with the Commission a completed Form 10-Q, including therein the
required statement of the financial results for the combined operations of HC,
Ladia and Computone as of the end of the fiscal quarter just completed.
43
<PAGE>
Section VII.17 Equity Financing.
----------------
(a) On or before the Preliminary Exchange Closing Date, HC shall use
commercially reasonable efforts to raise $5,000,000 of additional equity (the
"Equity Financing").
(b) The number of Initial Member Shares, 1997 Note Shares and
Additional Shares to be issued to the Members and the holders of the 1997 Note
Shares shall be subject to increase based on the number of shares of HC Common
Stock issued by HC in the Equity Financing or into which the securities issued
by HC in the Equity Financing are convertible, directly or indirectly
(collectively, the "New HC Equity Shares") as follows:
(i) the aggregate number of additional shares of HC Common Stock
issuable to the holders of the Initial Member Shares and the 1997 Note Shares
shall equal 5.0% of (A) the number of New HC Equity Shares divided by (B) 0.95
with such shares being issued on a pro rata basis to the holders of the Initial
Member Shares and the 1997 Note Shares; and
(ii) The number of Additional Shares specified in the schedule set
forth in Section 1.5(a) shall be increased by a number of shares equal to (A)
the number of New HC Equity Shares; (B) divided by "x"; (C) multiplied by "y",
where "x" and "y" have the respective values set forth below opposite the
respective revenue levels below and (D) reduced by the number of shares issued
pursuant to Section 7.17(b)(i) hereof:
If Revenues are at least But less than x y
------------------------ ------------- - -
$10,000,000 $15,000,000 .875 .125
$15,000,000 $20,000,000 .768 .232
$20,000,000 $25,000,000 .643 .357
$25,000,000 .49 .51
ARTICLE VIII
CONDITIONS TO THE PRELIMINARY EXCHANGE CLOSING
Section VIII.1 Conditions to Closing of HC. The obligation of HC to effect
---------------------------
the Exchange shall be, unless waived, subject to and conditioned upon the
satisfaction at or prior to the Preliminary Exchange Closing Date of each of the
following conditions:
(a) All representations and warranties of Ladia and the Members
contained in this Agreement and in the Ladia Disclosure Schedule shall be true
and correct at and as of the Preliminary Exchange Closing Date in all material
respects and Ladia and the Members shall have performed, in all material
respects, all agreements and covenants and satisfied all conditions on their
44
<PAGE>
part to be performed or satisfied by the Preliminary Exchange Closing Date
pursuant to the terms of this Agreement, and, with respect to matters relating
to Ladia, HC shall have received a certificate of an authorized member of the
Board of Managers of Ladia and of each Member, dated the Preliminary Exchange
Closing Date, to such effect.
(b) There shall have been no material adverse change since December
31, 1997 in the financial condition, operating results, business or affairs of
Ladia, and Ladia shall not have suffered any material loss (whether or not
insured) by reason of physical damage caused by fire, earthquake, accident or
other calamity which (i) substantially affects the value of its assets,
properties or business and (ii) has a material adverse effect on Ladia's
business as a whole, and HC shall have received a certificate of an authorized
officer of Ladia, dated the Preliminary Exchange Closing Date, to such effect.
(c) HC shall have received from Edwards & Angell LLP, counsel for
Ladia, an opinion, dated the Preliminary Exchange Closing Date, in form and
substance satisfactory to Computone and its counsel.
(d) Each of the current Ladia employees specified on Schedule D
-----------
attached hereto (each, a "Contracting Ladia Employee") shall have entered into
an employment agreement with HC (each, an "HC Employment Agreement") on terms
acceptable to HC and such employee.
(e) Ladia shall have delivered to HC certificates of the Secretary of
State of The Commonwealth of Massachusetts certifying as of a date reasonably
close to the Preliminary Exchange Closing Date that Ladia has filed all required
reports, paid all required fees and taxes and is, as of such date, in good
standing and authorized to transact business as a domestic limited liability
company.
(f) The Members shall have executed and delivered to HC appropriate
instruments transferring the Membership Interests in Ladia to HC.
(g) HC shall have received from each Ladia Affiliate an executed copy
of an Affiliates Agreement as contemplated by Section 7.6 hereof.
(h) All warrants, options or other rights to acquire any Membership
Interest in Ladia shall have been exercised or duly waived and terminated.
Section VIII.2 Conditions to Closing of Ladia and the Members. The
----------------------------------------------
obligation of Ladia and the Members to effect the Exchange shall be, unless
waived by Ladia, subject to and conditioned upon the satisfaction at or prior to
the Preliminary Exchange Closing Date of each of the following conditions:
(a) All representations and warranties of HC and Computone contained
in this Agreement and in the Computone Disclosure Schedule shall be true and
correct at and as of the Preliminary Exchange Closing Date in all material
respects and HC and Computone shall have performed all agreements and covenants
and satisfied all conditions on their part to be performed or satisfied by the
45
<PAGE>
Preliminary Exchange Closing Date pursuant to the terms of this Agreement, and
the Members shall have received a certificate of an authorized officer of each
of HC and Computone, dated the Preliminary Exchange Closing Date, to such
effect.
(b) There shall have been no material adverse change since April 4,
1997 in the financial condition, operating results, business or affairs of
either HC or Computone, and neither HC nor Computone shall have suffered any
material loss (whether or not insured) by reason of physical damage caused by
fire, earthquake, accident or other calamity which (i) substantially affects the
value of its assets, properties or business and (ii) has a material adverse
effect on the business of HC and Computone taken as a whole, and Ladia and the
Members shall have received a certificate of authorized officers of HC and of
Computone, dated the Preliminary Exchange Closing Date, to such effect.
(c) HC and Computone shall have delivered to Ladia and the Members
certificates of the Secretary of State of Delaware certifying as of a date
reasonably close to the Preliminary Exchange Closing Date that HC and Computone
have filed all required reports, paid all required fees and taxes and are, as of
such date, in good standing and authorized to transact business as domestic
corporations.
(d) The Members shall have received from Duane, Morris & Heckscher
LLP, counsel for HC, an opinion dated the Preliminary Exchange Closing Date in
form and substance satisfactory to Ladia and its counsel.
(e) The holders of the Note Shares shall have entered into the
Stockholders Agreement as contemplated by Section 7.11 hereof.
(f) The Merger Closing shall have occurred.
(g) Each Contracting Ladia Employee shall have entered into an HC
Employment Agreement") on terms acceptable to HC and the Contracting Ladia
Employee.
(h) The Registration Statement shall have been declared effective by
the Commission under the Securities Act and by all applicable state securities
regulatory authorities.
(i) The Bylaws of Computone shall be in form and substance
satisfactory to HC, Computone and Ladia.
(j) Each of HC and Computone shall have delivered to Ladia a
certificate of its corporate secretary attaching thereto a true, correct and
complete copy of its Certificate of Incorporation and Bylaws and certifying:
(i) Resolutions of its stockholders and Board of Directors authorizing
execution of this Agreement and the execution, delivery and performance of all
agreements, documents and transactions contemplated hereby; and
46
<PAGE>
(ii) the incumbency of its officers executing this Agreement and
all agreements and documents contemplated hereby.
Section VIII.3 Conditions to Closing of HC, Ladia and the Members. The
--------------------------------------------------
obligations of HC, Ladia and the Members to effect the Exchange shall be, unless
waived by both HC and Ladia, subject to and conditioned upon satisfaction at or
prior to the Preliminary Exchange Closing Date of each of the following
conditions:
(a) Any and all consents required from third parties relating to
contracts, licenses, leases and other instruments, material to the respective
businesses of Ladia and HC shall have been obtained.
(b) No temporary restraining order, preliminary injunction or
permanent injunction or other order preventing the consummation of the Exchange
or the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
or seeking the imposition against HC, Ladia or the Members of substantial
damages if the Exchange or the Merger is consummated, shall be pending which, in
the good faith judgment of Ladia or the Board of Directors of HC (acting upon
advice of their respective outside counsel) has a reasonable probability of
resulting in such order, injunction or damages. In the event any such order or
injunction shall have been issued, each party agrees to use its reasonable
efforts to have any such order or injunction lifted.
(c) No statute, rule or regulation shall have been enacted by the
government of the United States or any state or agency thereof which would make
the consummation of the Exchange or the Merger illegal.
(d) Each of HC and Ladia shall have received an opinion from its own
outside counsel, in form and substance satisfactory to both parties and
substantially identical in form and substance, to the effect that, when the
Exchange is consummated in accordance with the terms of this Agreement, the
Exchange should be treated for Federal income tax purposes as a tax free
transfer within the meaning of Section 351 of the Code.
(e) HC and Ladia shall have received letters from Arthur Andersen LLP
(or such other firm of independent certified public accountants as is acceptable
to Computone) and BDO Seidman LLP, each dated as of the date hereof and
confirmed in writing at the Exchange Closing Date and addressed to HC and Ladia,
stating that (i) in the case of Arthur Andersen LLP (or such other firm), Ladia
qualifies as a poolable entity and, in the case of BDO Seidman LLP, HC qualifies
as a poolable entity and (ii) the Exchange will be treated as a pooling of
interests under Opinion No. 16 of the Accounting Principles Board.
(f) Except as disclosed on the Computone Disclosure Schedule or the
Ladia Disclosure Schedule, there shall be no pending or threatened litigation
47
<PAGE>
against any of Ladia, any Member, HC or Computone or against their officers or
directors which may have a material adverse effect on HC, Ladia or Computone
after the Exchange and the Merger.
ARTICLE IX
CONDITIONS TO THE MERGER CLOSING
Section IX.1 Conditions to Closing of Computone. The obligation of
----------------------------------
Computone to effect the Merger shall be, unless waived, subject to and
conditioned upon the satisfaction at or prior to the Effective Date of each of
the following conditions:
(a) All representations and warranties of HC and Newco contained in
this Agreement shall be true and correct in all material respects at and as of
the Effective Date and HC and Newco shall have performed, in all material
respects, all agreements and covenants and satisfied all conditions on their
part to be performed or satisfied by the Effective Date pursuant to the terms of
this Agreement, and Computone shall have received a certificate of an authorized
officer of HC and Newco dated the Effective Date to such effect.
(b) Each of HC and Newco shall have delivered to Computone a
certificate of its corporate secretary attaching thereto a true, correct and
complete copy of its Certificate of Incorporation and Bylaws and certifying:
(i) Resolutions of its stockholder and Board of Directors
authorizing execution of this Agreement and the execution, performance and
delivery of all agreements, documents and transactions contemplated hereby; and
(ii) the incumbency of its officers executing this Agreement and
all agreements and documents contemplated hereby.
(c) HC shall have executed and delivered the Computone Option
Assumption Agreement (as defined in Section 10.1).
Section IX.2 Conditions to Closing of HC and Newco. The obligation of HC
-------------------------------------
and Newco to effect the Merger shall be, unless waived, subject to and
conditioned upon the satisfaction at or prior to the Effective Date of each of
the following conditions:
(a) All representations and warranties of Computone contained in this
Agreement and in the Computone Disclosure Schedule shall be true and correct at
and as of the Effective Date in all material respects and Computone shall have
performed all agreements and covenants and satisfied all conditions on its part
to be performed or satisfied by the Effective Date pursuant to the terms of this
Agreement, and HC and Newco shall have received a certificate of an authorized
officer of Computone dated the Effective Date to such effect.
48
<PAGE>
(b) There shall have been no material adverse change since April 4,
1997 in the financial condition, operating results, business or affairs of
Computone, and Computone shall not have suffered any material loss (whether or
not insured) by reason of physical damage caused by fire, earthquake, accident
or other calamity which substantially affects the value of its assets,
properties or business, and HC and Newco shall have received a certificate of an
authorized officer of Computone dated the Effective Date to such effect.
(c) Computone shall have delivered to HC and Newco a certificate of
its corporate secretary attaching thereto a true, correct and complete copy of
its Certificate of Incorporation and Bylaws and certifying:
(i) Resolutions of its stockholders and its Board of Directors
authorizing execution of this Agreement and the execution, performance and
delivery by such party of all agreements, documents and transactions
contemplated hereby; and
(ii) the incumbency of its officers executing this Agreement and
all agreements and documents contemplated hereby.
Section IX.3 Conditions to Closing of HC, Newco and Computone. The
------------------------------------------------
obligations of HC, Newco and Computone to effect the Merger shall be, unless
waived by both, subject to and conditioned upon satisfaction at or prior to the
Effective Date of each of the following conditions:
(a) The stockholders of Computone shall have duly approved this
Agreement and the Merger in accordance with Delaware law and Certificate of
Incorporation and Bylaws of Computone.
(b) The Registration Statement registering the Merger Shares issuable
as provided under this Agreement shall have been declared effective by the
Commission and the Commission shall not have issued a stop order nor instituted
a proceeding to obtain a stop order relative to the Registration Statement.
(c) A Certificate of Merger or the Merger Agreement and officers'
certificate shall have been filed with the Secretary of State of the State of
Delaware and the Merger shall have become effective pursuant thereto.
(d) Any and all consents required from third parties relating to
contracts, licenses, leases and other instruments, material to the business of
Computone shall have been obtained.
(e) No temporary restraining order, preliminary injunction or
permanent injunction or other order preventing the consummation of the Merger or
the Exchange shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
or seeking the imposition against HC, Newco, the Surviving Corporation or
Computone of substantial damages if the Merger or the Exchange is consummated,
shall be pending which, in the good faith judgment of the Board of Directors of
49
<PAGE>
HC, Newco or Computone (acting upon advice of their respective outside counsel)
has a reasonable probability of resulting in such order, injunction or damages.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such order or injunction
lifted.
(f) No statute, rule or regulation shall have been enacted by the
government of the United States or any state or agency thereof which would make
the consummation of the Merger illegal.
(g) Each of HC and Computone shall have received an opinion from its
own outside counsel in form and substance satisfactory to both parties and
substantially identical in form and substance, to the effect that, when the
Merger is consummated in accordance with the terms of this Agreement, the Merger
should be treated for Federal income tax purposes as a tax free reorganization
within the meaning of Section 368 of the Code.
(h) Newco and Computone shall have received a letter from BDO Seidman
LLP, dated as of the date hereof and confirmed in writing at the Effective Time
and addressed to Newco and Computone, stating that Newco and Computone qualify
as poolable entities and the Merger will be treated as a pooling of interests
under Opinion No. 16 of the Accounting Principles Board.
(i) Except as disclosed on the Computone Disclosure Schedule there
shall be no pending or threatened litigation against any of Newco, HC or
Computone or against their officers or directors which may have a material
adverse effect on the Surviving Corporation after the Merger.
(j) The Exchange Closing shall have occurred.
ARTICLE X
COMPUTONE OPTIONS AND WARRANTS
Section X.1 Computone's Stock Options and Warrants'. At the Merger
---------------------------------------
Closing, HC shall execute and deliver an agreement (the "Computone Option
Assumption Agreement") pursuant to which HC shall assume each option and warrant
to purchase shares of the Computone Common Stock (the "Computone Options")
outstanding at the Effective Date, and each Computone Option shall thereafter be
exercisable for a number of shares of the HC Common Stock equal to the number of
shares of the Computone Common Stock subject to such Computone Option
immediately prior to the Effective Date (the "HC Option"). The exercise price
per share of the HC Common Stock for such Computone Options so converted shall
be the exercise price per share specified in such Computone Options. Each HC
Option shall be upon the same terms and conditions as were applicable under the
Computone Option to purchase shares of the Computone Common Stock. HC will take
all corporate and other action necessary to reserve and make available
sufficient shares of HC Common Stock for issuance upon exercise of such HC
Options, will prepare and file with the Commission registration statements on
the appropriate forms relating to the issuance upon exercise of the shares of
50
<PAGE>
the HC Common Stock underlying the HC Options held by Computone employees and
will use its best efforts to have such registration statements declared
effective as soon as practicable after the Effective Date and shall maintain the
effectiveness of such registration statements.
ARTICLE XI
TERMINATION
This Agreement may be terminated and the Merger and the Exchange abandoned
at any time before the Preliminary Exchange Closing Date and the Effective Date,
whether before or after adoption of this Agreement by the stockholders of
Computone, as follows:
Section XI.1 Mutual Consent. By mutual consent of the Members and Boards
--------------
of Directors of HC, Newco and Computone.
Section XI.2 By Any Party. By Ladia, any of the Members, Computone or HC
------------
if:
(a) there has been a material breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of another party
set forth in this Agreement and such breach of a covenant or agreement has not
been cured during a period of 45 days following the giving of written notice
thereof to the breaching party;
(b) the Merger Closing and the Effective Date of the Merger shall not
have occurred before December 31, 1998;
(c) the Preliminary Exchange Closing shall not have occurred before
December 31, 1998;
(d) (i) there shall be a final nonappealable order of a federal or
state court in effect preventing consummation of the Merger or the Exchange or
(ii) there shall be any action taken, or any statute, rule regulation or order
enacted, promulgated or issued by any Governmental Entity which would make
consummation of the Merger or the Exchange illegal; or
(e) there shall be any action taken, or any statute, rule, regulation
or order enacted, promulgated or issued by any Governmental Entity, which would
(i) prohibit the ownership by HC of all of the issued and outstanding capital
stock of Computone to be acquired in the Merger or the ownership by HC and by a
person controlled by HC of all of the issued and outstanding Membership
Interests in Ladia to be acquired in the Exchange, (ii) compel HC to dispose of
all or a material portion of (A) the issued and outstanding capital stock of
Computone to be acquired in the Merger or (B) the issued and outstanding
Membership Interests of Ladia to be acquired in the Exchange, (iii) compel HC to
cause the disposition of all or a material portion of the business or assets of
Computone or Ladia to be acquired as a result of the Merger or the Exchange,
(iv) render Newco, HC or Computone unable to consummate the Merger or (v) render
HC or the Members unable to consummate the Exchange.
51
<PAGE>
Section XI.3 By Computone. By Computone's giving written notice to each
------------
other party if the conditions set forth in Sections 9.1 and 9.3 shall not have
been complied with or performed in all material respects, without fault on the
part of Computone, and such non-compliance or non-performance shall not have
been cured or eliminated within seven days following the meeting of the
stockholders of Computone.
Section XI.4 By Ladia. By Ladia's giving written notice to each other
--------
party if the conditions set forth in Sections 8.2 or 8.3 shall not have been
complied with or performed in all material respects, without fault on the part
of Ladia or the Members, and such non-compliance or non-performance shall not
have been cured or eliminated within seven days following the meeting of the
stockholders of Computone.
Section XI.5 By HC. By HC's giving written notice to each other party if
-----
the conditions specified in Sections 8.1, 8.3, 9.2 or 9.3 shall not have been
complied with or performed in all material respects, without fault on the part
of HC, and such non-compliance or non-performance shall not have been cured or
eliminated within seven days following the meeting of the stockholders of
Computone.
ARTICLE XII
MISCELLANEOUS
Section XII.1 Notice. Any notice required or permitted hereunder shall be
------
in writing and shall be sufficiently given if personally delivered or mailed by
certified or registered mail, return receipt requested, addressed as follows:
If to Ladia:
Ladia, L.L.C.
28 Cedar Street
Duxbury, MA 02332
Attn: Ms. Frances Lynch, President and CEO
copy to:
Edwards & Angell LLP
101 Federal Street
Boston, MA 02110
Attn: James D. McGinley, Esquire
If to a Member:
To such Member's address as set forth on Schedule E
----------
hereto.
52
<PAGE>
If to Computone, HC or Newco:
Computone Corporation
1060 Windward Ridge Parkway, Suite 100
Alpharetta, GA 30005
Attn: Mr. Richard A. Hansen, Chairman
copy to:
Duane, Morris & Heckscher LLP
One Liberty Place
Philadelphia, PA 19103-7396
Attention: Frederick W. Dreher, Esquire
or to such other address as any party shall specify by written notice so given,
and shall be deemed to have been delivered as of the date so personally
delivered or mailed.
Section XII.2 Binding Effect; Benefits. Subject to Section 12.11, this
------------------------
Agreement shall be binding upon and shall inure to the benefit of the parties to
this Agreement and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
to this Agreement or their respective heirs, successors, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
Section XII.3 Entire Agreement. This Agreement, together with the Exhibits
----------------
and Schedules to this Agreement, and other documents contemplated hereby,
constitute the final written expression of all of the agreements among the
parties, and is a complete and exclusive statement of those terms. It
supersedes all understandings and negotiations concerning the matters specified
herein. Any representations, promises, warranties or statements made by any
party that differ in any way from the terms of this written Agreement and the
Exhibits and Schedules to this Agreement and other documents contemplated
hereby, shall be given no force or effect. The parties specifically represent,
each to the others, that there are no additional or supplemental agreements
between them related in any way to the matters contained in this Agreement
unless specifically included or referred to in this Agreement or in the
Schedules hereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party unless made in writing and signed by
all parties.
Section XII.4 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. THE PARTIES
AGREE THAT JURISDICTION AND VENUE WITH RESPECT TO ANY LAWSUIT BETWEEN OR AMONG
THE PARTIES INVOLVING THE INTERPRETATION, COMPLIANCE OR ENFORCEMENT OF ANY
PROVISION UNDER THIS AGREEMENT SHALL BE EXCLUSIVELY IN THE FEDERAL COURTS
LOCATED IN THE DISTRICT OF DELAWARE.
53
<PAGE>
Section XII.5 Non-Survival of Representations, Warranties and Agreements.
----------------------------------------------------------
The representations, warranties and agreements in this Agreement shall terminate
on the Preliminary Exchange Closing Date and the Effective Date or upon the
termination of this Agreement pursuant to Article XI, as the case may be, except
that the agreements set forth in Sections 1.3, 1.5, 1.6, 1.7, 2.6, 2.7, 3.2,
7.6, 7.7, 7.9, 7.13, 7.14, 7.15, 7.16, 10.1 and this Section 12.5, and the
representation set forth in Section 4A.5, shall survive the Preliminary Exchange
Closing Date, the Effective Date, and the Final Exchange Closing Date
indefinitely and those set forth in Section 7.7 shall survive termination
indefinitely.
Section XII.6 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
Section XII.7 Headings. Headings of the Articles and Sections of this
--------
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section XII.8 Waivers. Any party hereto, may, by written notice to the
-------
other parties, (i) extend the time for the performance of any of the obligations
or other actions of the other parties under this Agreement; (ii) waive any
inaccuracies in the representations or warranties of the other parties contained
in this Agreement or in any document delivered pursuant to this Agreement; (iii)
waive compliance with any of. the conditions or covenants of the other parties
contained in this Agreement; or (iv) waive performance of any of the obligations
of the other parties under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereunder
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provision hereunder.
Section XII.9 Merger of Documents. This Agreement and all agreements and
-------------------
documents contemplated hereby constitute one agreement and are interdependent
upon each other in all respects.
Section XII.10 Incorporation of Schedules. All Exhibits and Schedules
--------------------------
attached to this Agreement are by this reference incorporated herein and made a
part of this Agreement for all purposes as if fully set forth herein.
Section XII.11 Assignability. Neither this Agreement nor any of the
-------------
parties' rights hereunder shall be assignable without the prior written consent
of the other parties.
Section XII.12 Severability. If for any reason whatsoever, any one or more
------------
of the provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid as applied to any particular case or in all cases, such
circumstances shall not have the effect of rendering such provision invalid in
any other case or of rendering any of the other provisions of this Agreement
inoperative, unenforceable or invalid.
54
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year hereinabove first
set forth.
COMPUTONE CORPORATION
By: /s/ Richard A. Hansen
------------------------------------
Name: Richard A. Hansen
----------------------------
Title: Chairman
---------------------------
LADIA COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Richard A. Hansen
------------------------------------
Name: Richard A. Hansen
----------------------------
Title: Chairman
---------------------------
NEW COMPUTONE CORPORATION
By: /s/ Richard A. Hansen
------------------------------------
Name: Richard A. Hansen
----------------------------
Title: Chairman
---------------------------
LADIA, L.L.C.
By: Ladia, Corporation,
its Managing Member
By:
------------------------------
John T. Sinclair, President
MEMBERS:
/s/ Frances Lynch
------------------------------------
Frances Lynch
55
<PAGE>
GEIST INVESTMENT TRUST
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
---------------------------------------
Richard Geist
---------------------------------------
Theodore Grossbart
---------------------------------------
Stephen W. Hiorns
---------------------------------------
W. Terence Jones
---------------------------------------
Harry Katz
LADIA, CORPORATION
By:
------------------------------------
John T. Sinclair, President
THE LADIA NOMINEE TRUST
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
---------------------------------------
Barry R. Levine
56
<PAGE>
-----------------------------
Daniel Levy
-----------------------------
Ray Levy
-----------------------------
Edward Manchur
-----------------------------
James P. Maselan
-----------------------------
F. Martin McDermott
-----------------------------
Frederick Pierce
-----------------------------
Mark Pollack
-----------------------------
Richard Pomerance
-----------------------------
Anthony Raymond
-----------------------------
Jerrold F. Rosenbaum
-----------------------------
Michael Seligman
57
<PAGE>
-------------------------------
Cynthia Seligman
-------------------------------
John T. Sinclair
-------------------------------
Larry Sinclair
-------------------------------
Michael Vucci
58
<PAGE>
SCHEDULE A
Ladia Members
-------------
- -------------------------------------------------------------------------
PERCENTAGE
NAME MEMBERSHIP INTEREST
- -------------------------------------------------------------------------
The Ladia Nominee Trust 61.186366%
- -------------------------------------------------------------------------
Frances Lynch 9.218798%
- -------------------------------------------------------------------------
John T. Sinclair 7.923002%
- -------------------------------------------------------------------------
Richard Geist 4.500000%
- -------------------------------------------------------------------------
Geist Investment Trust 2.867701%
- -------------------------------------------------------------------------
Frederick Pierce 1.874643%
- -------------------------------------------------------------------------
James P. Maselan 1.854489%
- -------------------------------------------------------------------------
W. Terence Jones 1.836319%
- -------------------------------------------------------------------------
Richard Pomerance 1.090984%
- -------------------------------------------------------------------------
Larry Sinclair 0.946058%
- -------------------------------------------------------------------------
Stephen W. Hiorns 0.789818%
- -------------------------------------------------------------------------
Ladia, Corporation 0.789818%
- -------------------------------------------------------------------------
Ray Levy 0.771948%
- -------------------------------------------------------------------------
Mark Pollack 0.665603%
- -------------------------------------------------------------------------
Jerrold F. Rosenbaum 0.665603%
- -------------------------------------------------------------------------
Theodore Grossbart 0.638073%
- -------------------------------------------------------------------------
Anthony Raymond 0.479440%
- -------------------------------------------------------------------------
Barry R. Levine 0.437220%
- -------------------------------------------------------------------------
F. Martin McDermott 0.404105%
- -------------------------------------------------------------------------
Edward Manchur 0.394909%
- -------------------------------------------------------------------------
Michael Vucci 0.239720%
- -------------------------------------------------------------------------
Michael and Cynthia Seligman 0.212691%
- -------------------------------------------------------------------------
59
<PAGE>
- -------------------------------------------------------------------------
Harry Katz 0.106345%
- -------------------------------------------------------------------------
Daniel Levy 0.106345%
- -------------------------------------------------------------------------
Total 100.000000%
- -------------------------------------------------------------------------
SCHEDULE B
Ladia Disclosure Schedule
-------------------------
60
<PAGE>
SCHEDULE C
Computone Disclosure Schedule
-----------------------------
61
<PAGE>
SCHEDULE D
Ladia Employees to Sign Employment Contracts
--------------------------------------------
Frances Lynch
John T. Sinclair
62
<PAGE>
SCHEDULE E
Members' Addresses
------------------
- -----------------------------------------------------------------------------
MEMBER ADDRESS
- -----------------------------------------------------------------------------
Geist, Richard A. 1905 Beacon Street
and Geist Investment Trust Waban, MA 02168
- -----------------------------------------------------------------------------
Grossbart, Theodore Goodwins Landing
Marblehead, MA 01945
- -----------------------------------------------------------------------------
Hiorns, Steven W. 227 Summit Avenue
Brookline, MA 02146
- -----------------------------------------------------------------------------
Jones, W. Terence Maselan & Jones
50 Milk Street
Boston, MA 02109
- -----------------------------------------------------------------------------
Katz, Harry 40 Broadway - 36th Floor
New York, NY 10005
- -----------------------------------------------------------------------------
Ladia Nominee Trust Ladia, Corporation
c/o John Sinclair, President
180 Ewing Drive
Stoughton, MA 02072
- -----------------------------------------------------------------------------
Ladia, Corporation c/o John Sinclair, President
180 Ewing Drive
Stoughton, MA 02072
- -----------------------------------------------------------------------------
Levine, Barry R. 154 The Lynnway
Lynn, MA 01902
- -----------------------------------------------------------------------------
Levy, Daniel 3332 Sabal Cove Lane
Long Boat Key, FL 34228
- -----------------------------------------------------------------------------
Levy, Raymond P.O. Box 93
Lincoln, MA 01773
- -----------------------------------------------------------------------------
Lynch, Frances 28 Cedar Street
Duxbury, MA 02332
- -----------------------------------------------------------------------------
Manchur, Edward L. 25 Vera Road
Middleton, MA 01949
- -----------------------------------------------------------------------------
63
<PAGE>
- -------------------------------------------------------------------------------
Maselan, James P. Maselan & Jones
50 Milk Street
Boston, MA 02109
- -------------------------------------------------------------------------------
McDermott, F. Martin 216 Sixteenth Ave., N.E.
St. Petersburg, FL 33704
- -------------------------------------------------------------------------------
Pierce, Frederick c/o Ladia, Corporation
28 Cedar Street
Duxbury, MA 02332
- -------------------------------------------------------------------------------
Pollack, Mark 46 Wauwinet Road
West Newton, MA 02165
- -------------------------------------------------------------------------------
Pomerance, Richard 45 Metacomet Street
Waban, MA 02168
- -------------------------------------------------------------------------------
Raymond, Anthony Anthony Raymond & Associates
1250 24th Street, NW
Suite 300
Washington, DC 20037-1124
- -------------------------------------------------------------------------------
Rosenbaum, Jerrold c/o Ladia, Corporation
28 Cedar Street
Duxbury, MA 02332
- -------------------------------------------------------------------------------
Seligmann, Michael & Cynthia New Horizons Club
P.O. Box 96
Ripton, VT 05766
- -------------------------------------------------------------------------------
Sinclair, John T. 180 Ewing Drive
Stoughton, MA 02072
- -------------------------------------------------------------------------------
Sinclair, Larry c/o Ladia, Corporation
28 Cedar Street
Duxbury, MA 02332
- -------------------------------------------------------------------------------
Vucci, Michael 9124 Lake Braddock Road
Burke, VA 22015
- -------------------------------------------------------------------------------
64
<PAGE>
EXHIBIT 10.82
[Logo of Computone Corporation
Appears Here]
PRESS RELEASE
Computone Investor Relations: Dianne Will FOR IMMEDIATE RELEASE
(214) 954-9300, FAX: (214) 954-9333 JUNE 9, 1998
Computone Media Contact: Page Caldwell
(770) 625-0000, FAX: (770) 625-0013
COMPUTONE AND LADIA SIGN DEFINITIVE
AGREEMENT TO COMBINE
_____________________________________________________________________
ALPHARETTA, GA--JUNE 9, 1998--Computone Corporation (NASDAQ SMALL CAP: CMPT)
and LADIA LLC (LADIA) announced today that they have entered into a definitive
agreement to combine the two companies. The closing is subject to approval of
the shareholders of each company as well as certain other conditions. The
transaction is expected to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. The combined company will be renamed
LADIA Communications Technologies Inc. The agreement provides that CMPT will
issue up to 8.5 million CMPT common shares to LADIA members and debtholders.
LADIA, based in Boston, Massachusetts, is a telecommunications service company
principally providing international long-distance carrier service to customers
worldwide. LADIA is constructing a national network of switches including
gateway locations in New York and Miami. LADIA's network design is expected to
permit its switches to be centrally maintained and controlled at LADIA's
computer center. LADIA believes its switching configuration will provide a
competitive advantage by optimizing the routing of calls over the LADIA carrier
network. Through its dedicated facilities and network of switches, LADIA
intends to offer a wide variety of international and domestic long-distance
telephony services. LADIA operates with a direct sales force that concentrates
on selling its telecommunications products and services to medium and large
international carrier customers as well as domestic carriers. In addition,
LADIA has a network of independent sales affiliates. LADIA also enters into
joint ventures and strategic partnerships in order to more efficiently sell its
telecommunications services and products to domestic and foreign markets.
LADIA's business plan calls for revenues of over $50 million for the full year
1998 and $100 million in 1999, with operating margins consistent with industry
standards. Barry Spillberg, Chief Operating Officer of LADIA, commented, "With
access to the capital markets through Computone, we will provide a wider range
of services to our existing customers and measurably expand our marketing and
sales base." Spillberg added, "LADIA is now positioned to execute an aggressive
business plan with exceptional growth potential."
For some time, Computone has sought to acquire a company with significant growth
potential that could substantially enhance its revenue and earnings growth, and
believes that LADIA's business plan is in-line with these requirements. In
addition, Computone hopes to gain significant additional management depth and
open up new markets for its new state-of-the-art digital communications server
TotalAccess DCS5000. This technology will assist in the routing of
communications traffic at the gateway locations for LADIA.
<PAGE>
(more)
Management of both companies believes that the synergies between the two
companies are very strong and will be of benefit to the shareholders of
Computone. Deregulation in the telecommunications sectors worldwide should
create tremendous opportunity for growth for companies such as the combined
Computone and LADIA. As such, Computone believes that the combination of the
two companies is an excellent complement to the growth strategies of Computone.
Computone Corporation designs and manufactures an extensive line of 200 -
921.6Kbps communications servers (modular and rack mount) for Ethernet TCP/IP
LANs, remote access, and INTERNET connectivity; 512 - 921.6Kbps ISDN solutions,
200 - 921.6Kbps asynchronous multi-port solutions for PCI, ISA, EISA, and Micro
Channel (modular and rack mount); and synchronous communications adapters for
ISA and PS/2. Computone has been awarded Arthur Andersen's prestigious "Fast
Tech 50" award for four consecutive years.
NOTE: The forward looking statements included in this press release are based
on current expectations, including the consummation of the transactions
contemplated by the Agreement, that involve risks and uncertainties. Actual
results including the level of sales and earnings of Computone and LADIA may
differ materially from that indicated due to the risks and uncertainties
including, but not limited to, risks associated with acquisitions, changes in
business and economic conditions, competition, availability of raw materials,
access to adequate capital on a timely basis, and the risk factors listed in the
reports that Computone files with the Securities and Exchange Commission.
Computone is located at 1060 Windward Ridge Pwy, Ste. 100 Alpharetta, GA
30005. To reach Computone Sales: call 800-241-3946 or 770-625-0000, Fax: 770-
625-0013, E-mail: [email protected], or visit our web site:
www.computone.com.
- -----------------
###
<PAGE>
EXHIBIT 10.83
SEPARATION AGREEMENT
--------------------
This Separation Agreement (hereinafter referred to as the "Agreement") is
entered into as of the 30th day of April, 1998 (hereinafter referred to as the
"Effective Date") by and between Computone Corporation (hereinafter referred to
as "Computone") and Thomas J. Anderson (hereinafter referred to as "Anderson").
In consideration of the mutual covenants, releases and payments described
herein, the receipt and sufficiency of which are acknowledged, Computone and
Anderson agree as follows:
1. RESIGNATION OF EMPLOYMENT: Anderson has determined to resign his
-------------------------
employment as President and Chief Executive Officer of Computone and as a
director of Computone and Computone has determined to accept Anderson's
resignation on the Effective Date in accordance with the terms set forth herein.
Anderson will discontinue any further responsibilities under his employment as
of the close of business on the Effective Date, except that Anderson agrees to
provide reasonable cooperation, to the extent deemed necessary by Computone, in
connection with any administrative or legal proceeding which has arisen or may
arise from circumstances occurring during the tenure of Anderson's employment at
Computone.
2. COMPENSATION AND BENEFIT CONTINUATION: Computone agrees to continue to
-------------------------------------
pay Anderson all of his base compensation and provide all benefits for a period
of six (6) consecutive months following the Effective Date (hereinafter referred
to as the "Payment Period") as required by Article VII(e)(1) of the November 26,
1996 Employment Agreement between Computone and Anderson (the "Employment
Agreement"). It is expressly agreed that Anderson waives any right to any
commission or bonus contemplated by the Employment Agreement or otherwise.
<PAGE>
3. VACATION PAY: Computone agrees to pay Anderson all of his accrued
------------
vacation pay of ninety-one (91) hours through April 3, 1998 ($5,687.50)] within
ten (10) days of the end of the Payment Period.
4. MEDICAL INSURANCE BENEFITS: At the conclusion of the Payment Period,
--------------------------
Anderson shall be offered the opportunity to continue coverage under Computone's
medical insurance plan in accordance with the requirements of the Consolidated
Omnibus Budget Reconciliation Act of 1985 (hereinafter referred to as "COBRA").
In the event that Anderson elects to continue medical insurance coverage under
COBRA, Anderson shall be responsible for the payment of any monthly premium
associated therewith.
5. LIFE INSURANCE BENEFITS: Computone agrees to maintain Anderson's life
-----------------------
insurance policy throughout the Payment Period.
6. EXERCISE OF STOCK OPTIONS: The parties acknowledge and agree that, as
-------------------------
of the Effective Date, Anderson had been duly granted, was fully vested and had
the right to purchase 150,000 shares of Computone common stock at an exercise
price of $1.12 1/2 pursuant to the Computone Corporation Amended and Restated
Equity Incentive Plan ("Incentive Plan"). Pursuant to Section VI(E) of the
Incentive Plan, the Compensation Committee has agreed to permit Anderson to
exercise his right to purchase all or any portion of the 150,000 shares to which
he is vested at any time between the Effective Date and two (2) year after the
Effective Date in accordance with the terms of such options.
7. INDEMNIFICATION: The parties acknowledge and agree that Anderson is
---------------
covered by Article VI of Computone's By-Laws governing indemnification, a copy
of which is attached hereto and expressly incorporated into this Agreement by
reference. The parties further agree that Computone shall pay expenses,
-2-
<PAGE>
including expenses and attorneys' fees, incurred by Anderson in defending any
civil, criminal, administrative or investigative action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding and within
30 days of the submission by Anderson or his attorneys of a statement for
services to be rendered. In accordance with the By-Laws, Anderson undertakes to
repay amounts so advanced if it shall be ultimately and finally adjudicated that
Anderson is not entitled to be indemnified by Computone as authorized by the By-
Laws or under the Delaware General Corporation Law.
8. NONDISPARAGEMENT AND PUBLICATION: Computone and Anderson agree not to
--------------------------------
disparage each other in the future. The parties agree that neither will issue a
press release or any public statement regarding Anderson's resignation from
Computone unless such language is acceptable to both parties. It is agreed that
neither party will make public the terms set forth herein, except as may be
required in any filing required to be made by Computone with the Securities and
Exchange Commission. Computone agrees that it will provide Anderson and his
attorneys the opportunity to review and comment upon a draft of the language
which Computone intends to include in any public filing that is necessary or
appropriate relating to Anderson's resignation. Computone agrees to work with
Anderson and his attorneys to ensure that such language is acceptable to both
parties. Computone further agrees that any comments made by Computone, its
officers, directors or attorneys', in response to inquiries about Anderson's
resignation, except any inquiry which may be made by the SEC or other public
agency in connection with any current or future investigation, shall be limited
to the information disclosed in such public filings.
-3-
<PAGE>
9. RELEASE OF CLAIMS:
-----------------
A. ANDERSON'S RELEASE OF CLAIMS: In consideration of the promises,
payments and covenants contained in this Agreement, Anderson, for himself and
his heirs, executors, administrators and assigns, now and forever releases and
discharges Computone and all of its past and present owners, officers,
directors, stockholders, employees, agents, attorneys, parent corporations,
subsidiaries, affiliates, predecessors, estates, successors and assigns from any
and all claims, actions, charges, causes of action, sums of money due, suits,
debts, covenants, contracts, agreements, promises, demands or liabilities
whatsoever, in law or in equity, which Anderson ever had or now has from the
beginning of time up to the date this Agreement is executed except as to any
claim that Anderson may make pursuant to or in the event of breach of this
Agreement.
B. COMPUTONE'S RELEASE OF CLAIMS: In consideration of the promises,
payments and covenants contained in this Agreement, Computone, for itself and
all its past and present owners, officers, directors, employees, agents,
attorneys, parent corporations, subsidiaries, affiliates, predecessors, estates,
successors and assigns, now and forever releases and discharges Anderson and all
his past and present heirs, executors, administrators, assigns and attorneys
from any and all claims, actions, charges, causes of action, sums of money due,
suits, debts, covenants, contracts, agreements, promises, demands or liabilities
whatsoever, in law or in equity, which Computone ever had or now has from the
beginning of time up to the date this Agreement is executed, except as to any
claim that Computone may make pursuant to or in the event of breach of this
Agreement.
-4-
<PAGE>
10. ACKNOWLEDGMENT: This Agreement is executed by the parties
--------------
voluntarily. The parties agree that they have had a full and reasonable
opportunity to consider this Agreement and that they have not been pressured or
in any way coerced into its execution.
11. GOVERNING LAW AND SEVERABILITY: This Agreement and the rights and
------------------------------
obligations of the parties hereto shall be governed and construed in accordance
with the laws of the State of Georgia. If any provision hereof is enforceable
or is held to be unenforceable, such provisions shall be fully severable, and
this document and its terms shall be construed and enforced as if such
unenforceable provision had never comprised a part hereof, the remaining
provisions hereof shall remain in full force and effect, and a court construing
the provisions shall add as a part hereof a provision as similar in terms and
effect to such unenforceable provision as may be enforceable, in lieu of the
unenforceable provision.
12. INTEGRATION: This Agreement, the Computone By-Laws, including all
-----------
exhibits and attachments thereto and the Incentive Plan, contain all the terms
of the separation agreement by and between the parties and supersede and
invalidate any previous agreements or contracts. No representations,
inducements, promises, or agreements, oral or otherwise, which are not embodied
herein have been made and none shall be of any force or effect.
WHEREFORE, the parties hereto have this Agreement to be signed as of the
Effective Date.
COMPUTONE CORPORATION
By: /s/ Thomas J. Anderson By: /s/ Richard A. Hansen
---------------------- ---------------------
THOMAS J. ANDERSON RICHARD A. HANSEN
Chairman
-5-
<PAGE>
EXHIBIT 10.84
SEPARATION AGREEMENT
--------------------
This Separation Agreement (hereinafter referred to as this "Agreement") is
entered into as of the 27th day of July, 1998 (hereinafter referred to as the
"Effective Date") by and between Computone Corporation (hereinafter referred to
as "Computone") and Gregory A. Alba (hereinafter referred to as "Alba").
In consideration of the mutual covenants, releases and payments described
herein, the receipt and sufficiency of which are acknowledged, Computone and
Alba agree as follows:
1. Resignation of Employment. Alba has determined to resign his
-------------------------
employment as Vice President-Finance and Administration and Chief Financial
Officer of Computone and Computone has determined to accept Alba's resignation
on the Effective Date in accordance with the terms set forth herein. Alba will
discontinue any further responsibilities under his employment as of the close of
business on the Effective Date, except that (a) Alba agrees to provide
reasonable cooperation, to the extent deemed necessary by Computone, in
connection with any administrative or legal proceeding which has arisen or may
arise from circumstances occurring during the tenure of Alba's employment at
Computone and (b) Alba will provide the consulting services described in
paragraph 2.
2. Engagement as Consultant. Computone hereby engages Alba as a
------------------------
consultant to Computone, and Alba hereby accepts such engagement, on the
following terms and conditions:
(a) As a consultant to Computone, Alba shall assist Computone's
management in the preparation of financial reports, analysis of proposed
accounting adjustments, verification of financial information and such other
services as are requested
<PAGE>
from time to time by Computone's management and Computone's independent
auditors. Computone recognizes that in the performance of Alba's duties
hereunder Alba and during the severance period may be required periodically to
travel to Philadelphia, Pennsylvania. Computone agrees to reimburse Alba for up
to $3,000 in travel expenses to Philadelphia, Pennsylvania upon presentation of
appropriate vouchers therefor.
(b) The term of Alba's consultancy hereunder shall commence on the
date hereof and shall terminate (the "Termination Date") on the later of (i) one
month from the date hereof and (ii) the date on which Computone files its Form
10-K Report for its fiscal year ended April 3, 1998 with the Securities and
Exchange Commission.
(c) As compensation for his consulting services hereunder, Alba shall
be paid a consulting fee at the monthly rate of $7,500. In addition, during the
period of his consultancy hereunder, Alba shall be entitled to receive all of
the employee benefits he was receiving from Computone immediately prior to his
resignation.
(d) Alba shall be responsible for all out-of-pocket expenses incurred
by him in performing his consulting services hereunder and during the Payment
Period, unless Alba incurs expenses at the request of Computone in which event
Computone shall reimburse Alba for such expenses upon presentation of
appropriate vouchers therefor.
(e) The compensation provided for in this Agreement shall constitute
full payment for the consulting services to be rendered by Alba hereunder.
3. Compensation and Benefit Continuation. Computone agrees to pay Alba
-------------------------------------
$7,500 per month and continue all employee benefits Alba was receiving from
Computone immediately prior to his resignation for a period of seven consecutive
months following the Termination Date (hereinafter referred to as the "Payment
Period"). It is expressly agreed that Alba waives and
-2-
<PAGE>
releases Computone from all other duties and obligations under any and all
employment agreements between Computone and Alba or otherwise other than any
rights to indemnification.
4. Vacation Pay. Computone agrees to pay Alba all of his accrued vacation
------------
pay through the Termination Date within ten days of the end of the Payment
Period.
5. Medical Insurance Benefits. At the conclusion of the Payment Period,
--------------------------
Alba shall have the opportunity to continue coverage under Computone's medical
insurance plan in accordance with the requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 (hereinafter referred to as "COBRA"). In the
event that Alba elects to continue medical insurance coverage under COBRA, Alba
shall be responsible for the payment of any monthly premium associated
therewith.
6. Life Insurance Benefits. Computone agrees to maintain Alba's life
-----------------------
insurance policy as currently in effect throughout the Payment Period.
7. Exercise of Stock Options. The parties acknowledge and agree that, as
-------------------------
of the Effective Date, Alba had been duly granted, was fully vested and had the
right to purchase 13,277 shares of Computone Common Stock at an exercise price
of $1.13 pursuant to the Computone Corporation Amended and Restated Equity
Incentive Plan ("Incentive Plan"). Pursuant to Section VI(E) of the Incentive
Plan, Computone and the Compensation Committee of Computone's Board of Directors
has agreed that Alba may exercise his right to purchase all or any portion of
the 13,277 options in which he is vested, in accordance with the terms of such
options, at any time between the Termination Date and two years after the
Termination Date.
8. Indemnification. The parties acknowledge and agree that Alba is
---------------
covered by Article VI of Computone's By-laws governing indemnification, subject
to the terms thereof and Section 145 of the Delaware General Corporation Law.
The parties further agree that
-3-
<PAGE>
Computone may, at its sole discretion, pay expenses, including expenses and
attorneys' fees, incurred by Alba in defending any civil, criminal,
administrative or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding and within 30 days of the
submission by Alba or his attorneys of a statement for services to be rendered.
In accordance with the By-laws, Alba undertakes to repay amounts so advanced,
including amounts advanced prior to the date hereof, if it shall be ultimately
and finally adjudicated that Alba is not entitled to be indemnified by Computone
as authorized by Computone's By-laws or under the Delaware General Corporation
Law.
9. Nondisparagement and Publication. Computone and Alba agree not to
--------------------------------
disparage each other in the future. The parties agree that neither will issue a
press release or any public statement regarding Alba's resignation from
Computone unless such language is acceptable to both parties. It is agreed that
neither party will make public the terms set forth herein, except as may be
required in any filing required to be made by Computone with the Securities and
Exchange Commission. Computone agrees that it will provide Alba and his
attorneys the opportunity to review and comment upon a draft of the language
which Computone intends to include in any public filing that is necessary or
appropriate relating to Alba's resignation. Computone agrees to work with Alba
and his attorneys to ensure that such language is acceptable to both parties.
Computone further agrees that any comments made by Computone, its officers,
directors or attorneys, in response to inquiries about Alba's resignation,
except any inquiry which may be made by the SEC or other public agency in
connection with any current or future investigation, shall be limited to the
information disclosed in such public filings.
-4-
<PAGE>
10. Release of Claims.
-----------------
(a) Alba's Release of Claims. In consideration of the promises,
------------------------
payments and covenants contained in this Agreement, Alba, for himself and his
heirs, executors, administrators and assigns, now and forever releases and
discharges Computone and all of its past and present owners, officers,
directors, stockholders, employees, agents, attorneys, parent corporations,
subsidiaries, affiliates, predecessors, estates, successors and assigns from any
and all claims, actions, charges, causes of action, sums of money due, suits,
debts, covenants, contracts, agreements, promises, demands or liabilities
whatsoever, in law or in equity, which Alba ever had or now has from the
beginning of time up to the date this Agreement is executed except as to any
claim that Alba may make pursuant to or in the event of breach of this
Agreement.
(b) Computone's Release of Claims. In consideration of the promises,
-----------------------------
payments and covenants contained in this Agreement, Computone, for itself and
all its past and present owners, officers, directors, employees, agents,
attorneys, parent corporations, subsidiaries, affiliates, predecessors, estates,
successors and assigns, now and forever releases and discharges Alba and all his
past and present heirs, executors, administrators, assigns and attorneys from
any and all claims, actions, charges, causes of action, sums of money due,
suits, debts, covenants, contracts, agreements, promises, demands or liabilities
whatsoever, in law or in equity, which Computone ever had or now has from the
beginning of time up to the date this Agreement is executed, except as to any
claim that Computone may make pursuant to or in the event of breach of this
Agreement.
11. Acknowledgment. This Agreement is executed by the parties
--------------
voluntarily. The parties agree that they have had a full and reasonable
opportunity to consider this Agreement and that they have not been pressured or
in any way coerced into its execution.
-5-
<PAGE>
12. Governing Law and Severability. This Agreement and the rights and
------------------------------
obligations of the parties hereto shall be governed and construed in accordance
with the laws of the State of Georgia. If any provision hereof is enforceable
or is held to be unenforceable, such provisions shall be fully severable, and
this document and its terms shall be construed and enforced as if such
unenforceable provision had never comprised a part hereof, the remaining
provisions hereof shall remain in full force and effect, and a court construing
the provisions shall add as a part hereof a provision as similar in terms and
effect to such unenforceable provision as may be enforceable, in lieu of the
unenforceable provision.
13. Integration. This Agreement, the Computone By-laws, including all
-----------
exhibits and attachments thereto and the Incentive Plan, contain all the terms
of the separation agreement by and between the parties and supersede and
invalidate any previous agreements or contracts. No representations,
inducements, promises, or agreements, oral or otherwise, which are not embodied
herein have been made and none shall be of any force or effect.
IN WITNESS WHEREOF, the parties hereto have executed this Separation
Agreement as of the date first above written.
COMPUTONE CORPORATION
By: /s/ John D. Freitag
-------------------
John D. Freitag, Acting President
By: /s/ Gregory A. Alba
-------------------
Gregory A. Alba
-6-
<PAGE>
Exhibit 10.85
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of August 2, 1998 between
Computone Corporation, a Delaware corporation having its principal place of
business at Suite 100, 1060 Windward Ridge Parkway, Alpharetta, Georgia 30005
(the "Employer") and Perry Pickerign, an individual residing at 41 Apple Orchard
Road, Dellwood, Minnesota 55110 (the "Executive").
WITNESSETH:
----------
WHEREAS, the Employer desires to employ the Executive, and the Executive
desires to be employed by the Employer, all in accordance with the terms and
subject to the conditions set forth herein; and
WHEREAS, the parties are entering into this Agreement to set forth and
confirm their respective rights and obligations with respect to the Executive's
employment by the Employer;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. Employment and Term.
-------------------
(a) Effective on the date hereof, the Employer shall employ the
Executive, and the Executive shall be employed by the Employer, as the President
and Chief Executive Officer of the Employer (the "Position"), in accordance with
the terms and subject to the conditions set forth herein for a term (the
"Initial Term") which shall commence on the date hereof and, subject to
paragraphs 1(b) and 1(c) hereof, shall terminate, on July 31, 2001.
(b) Unless written notice in accordance with this paragraph 1
terminating the Executive's employment hereunder is given by either the Employer
or the Executive not less than 180 days in advance of the termination date of
this Agreement, this Agreement shall be automatically extended for successive
terms of one year (each, a "Renewal Term"). The Initial Term and each Renewal
Term are collectively referred to herein as the "Term," and, unless otherwise
provided herein or agreed by the parties hereto, all of the terms and conditions
of this Agreement shall continue in full force and effect throughout the Term
and, with respect to those terms and conditions that apply after the Term, after
the Term.
(c) Notwithstanding paragraph 1(b) hereof, the Employer, by action of
its Board of Directors (the "Board") and effective as specified in a written
notice thereof to the Executive in accordance with the terms hereof, shall have
the right to terminate the Executive's employment hereunder at any time during
the Term hereof, but only for Cause (as defined herein) or on account of the
Executive's death or Permanent Disability (as defined herein) as of the date of
such death or Permanent Disability.
<PAGE>
(i) "Cause" shall mean (A) the Executive's willful and continued
failure substantially to perform his material duties with the Employer, or the
commission by the Executive of any activities constituting a violation or breach
under any material federal, state or local law or regulation applicable to the
activities of the Employer after notice thereof from the Employer to the
Executive and a reasonable opportunity for the Executive to cease such failure,
breach or violation in all material respects, (B) fraud, breach of corporate
opportunity, dishonesty, misappropriation or other intentional material damage
to the property or business of the Employer by the Executive, (C) the
Executive's habitual intoxication or drug addiction or repeated absences other
than for physical or mental impairment or illness, (D) the Executive's admission
or conviction of, or plea of nolo contendere to, any felony that, in the
reasonable judgment of the Board, adversely affects the Employer's reputation or
the Executive's ability to carry out his obligations under this Agreement or (E)
the Executive's non-compliance with the provisions of paragraphs 2(b) or 6(b)
hereof after notice thereof from the Employer to the Executive and a reasonable
opportunity for the Executive to cure such non-compliance.
(ii) "Permanent Disability" shall mean a physical or mental disability
such that the Executive is substantially unable to perform those duties that he
would otherwise be expected to continue to perform and the nonperformance of
such duties has continued for a period longer than 90 consecutive days,
provided, however, that in order to terminate the Executive's employment
hereunder on account of Permanent Disability, the Employer must provide the
Executive with written notice of the Board's good faith determination to
terminate the Executive's employment hereunder for reason of Permanent
Disability not less than 30 days prior to such termination which notice shall
specify the date of termination. Until the specified effective date of
termination by reason of Permanent Disability, the Executive shall continue to
receive compensation at the rates set forth in paragraph 3 hereof less any
payments received by the Executive pursuant to the Employer's short-term
disability insurance coverage. No termination of this Agreement because of the
Permanent Disability of the Executive shall impair any rights of the Executive
under any disability insurance policy maintained by the Employer at the
commencement of the aforesaid 90-day period.
(d) Any notice of termination of this Agreement by the Employer to the
Executive or by the Executive to the Employer shall be given in accordance with
the provisions of paragraph 10 hereof.
2. Duties of the Executive.
-----------------------
(a) Subject to the ultimate control and discretion of the Board, the
Executive shall serve in the Position and perform all duties and services
commensurate with the Position. Throughout the Term, the Executive shall
perform all duties reasonably assigned or delegated to him under the By-laws of
the Employer or from time to time by the Board consistent with the Position.
Except for travel normally incidental and reasonably necessary to the business
of the Employer and the duties of the Executive hereunder, the duties of the
Executive shall be performed in the greater Atlanta, Georgia metropolitan area.
-2-
<PAGE>
(b) The Executive shall devote substantially all of the Executive's
business time and attention to the performance of the Executive's duties
hereunder and, during the term of his employment hereunder, the Executive shall
not engage in any other business enterprise which requires any significant
amount of the Executive's personal time or attention, unless granted the prior
permission of the Board. The foregoing provision shall not prevent the
Executive's purchase, ownership or sale of any interest in, or the Executive's
engaging (but not to exceed an average of five hours per week) in, any business
which does not compete with the business of the Employer, the Executive's taking
actions permitted by paragraph 6(b) hereof or the Executive's involvement in
charitable or community activities, provided, that the time and attention which
the Executive devotes to such business and charitable or community activities
does not materially interfere with the performance of his duties hereunder.
(c) The Executive shall be entitled to 30 business days of leave
during each calendar year with full compensation for vacation to be taken at
such time or times, as the Executive and the Employer shall mutually determine.
Unused days of vacation may not be carried over from year to year or received in
cash. Such vacation shall be separate from time devoted by the Executive to
trade shows, customer visits, seminars and other business-related activities.
3. Compensation. For all services to be rendered by the Executive
------------
hereunder:
(a) Base Salary. The Employer shall pay the Executive (i) a base
-----------
salary (the "Base Salary") at an annual rate of One Hundred Fifty Thousand
Dollars ($150,000) during (A) the Initial Term and (B) each Renewal Term, (ii)
an annual bonus (the "Bonus") in such amount as is derived from the Company's
attainment of performance-related objectives, including the Employer's revenues
and net income, to be mutually determined by the Executive and the Employer and
(iii) such other compensation as may, from time to time, be determined by the
Employer in its sole discretion. Such salary and other compensation shall be
payable in accordance with the Employer's normal payroll practices as in effect
from time to time.
(b) Stock Options. Effective on the date hereof, the Employer shall
-------------
grant the Executive options, which shall be non-qualified stock options, to
purchase an aggregate of 300,000 shares of the Employer's Common Stock with the
exercise price per share to be equal to the closing bid price of one share of
the Employer's Common Stock as reported by Nasdaq on the date of such grant.
Such options shall have the following principal terms:
(i) Such options shall become vested and become exercisable for a
period of ten years from the date hereof in installments as follows:
(A) 50,000 shares shall become vested and become
exercisable on and after the date of commencement of
your employment by the Employer;
-3-
<PAGE>
(B) 50,000 shares shall become vested and become
exercisable on and after the first anniversary of the
date hereof;
(C) an additional 100,000 shares shall become vested and
become exercisable on and after the second anniversary
of the date hereof; and
(D) an additional 100,000 shares shall become vested and
become exercisable on and after the third anniversary
of the date hereof;
(ii) Such options to the extent not then vested shall terminate
immediately in the event of (a) a termination of this Agreement by the Employer
for Cause or (B) the resignation of the Executive;
(iii) After such options become vested and become exercisable they
shall remain exercisable until the earlier of (A) the expiration of their term
or (B) one year after the termination of this Agreement by the Employer because
of the Executive's death or Permanent Disability; and
(iv) The Employer shall prepare and file a Form S-8 registration
statement with the Securities and Exchange Commission as promptly as practicable
after the date hereof for the purpose of registering the Common Stock of the
Employer issuable upon exercise of such options.
(C) Automobile Lease. From and after the date hereof and throughout
----------------
the Term, the Employer shall provide the Executive with an automobile at the
Employer's sole cost and expense. Such automobile shall be leased by the
Employer and shall be a Ford Explorer or a substantially equivalent sports
utility vehicle acceptable to the Executive and shall be replaced every three
years or every 60,000 miles, whichever first occurs. The Employer shall bear
all gas, insurance, repairs, maintenance and other operating expenses for the
automobile. To the extent any of such automobile benefits are taxable to the
Executive, the Executive shall be solely responsible for such taxes.
(D) Reimbursement of Relocation Expenses. The Employer shall promptly
------------------------------------
reimburse the Executive for all reasonable expenses incurred by the Executive
since July 1, 1998 in establishing a residence in the greater Atlanta, Georgia
metropolitan area, including without limitation, travel, moving and relocation
expenses, but in no event in excess of $25,000 in the aggregate.
(E) Temporary Housing Allowance. The Employer agrees to provide the
---------------------------
Executive with a temporary housing allowance of up to $2,500 per month for up to
three months pending the Executive's establishment of a permanent residence in
the greater Atlanta, Georgia metropolitan area.
-4-
<PAGE>
(F) Other Benefits. From and after the date hereof and throughout the
--------------
Term, the compensation provided for in this paragraph 3 shall be in addition to
such rights as the Executive may have, during the Executive's employment
hereunder or thereafter, to participate in and receive benefits from or under
the Employer's medical, term life and disability insurance plans and such other
benefit plans the Employer may in its discretion establish for its employees or
executives.
4. Expenses. The Employer shall promptly reimburse the Executive for all
--------
reasonable expenses paid or incurred by the Executive in connection with the
performance of the Executive's duties and responsibilities hereunder, upon
presentation of expense vouchers or other appropriate documentation therefor.
5. Indemnification. The Employer shall indemnify the Executive, to the
---------------
fullest extent permitted by law, for any and all liabilities to which the
Executive or his Estate may be subject as a result of, in connection with or
arising out of his service as an employee, an officer or a director of the
Employer hereunder or his service as an employee, officer or director of another
enterprise at the request of the Employer, as well as the costs and expenses
(including attorneys' fees) of any legal action brought or threatened to be
brought against him or the Employer as a result of, in connection with or
arising out of such employment. The Employer will advance professional fees and
disbursements to the Executive in connection with any such legal action,
provided the Executive delivers to the Employer his undertaking to repay any
expenses so advanced in the event it is ultimately determined that the Executive
is not entitled to indemnification against such expenses. Expenses reasonably
incurred by the Executive in successfully establishing the right to
indemnification or advancement of expenses, in whole or in part, pursuant to
this paragraph 5, shall also be indemnified by the Employer. The Executive
shall be entitled to the full protection of any insurance policies which the
Employer may elect to maintain generally for the benefit of their respective
directors and officers. The rights granted under this paragraph 5 shall survive
the termination of this Agreement.
6. Confidential Information.
------------------------
(a) The Executive understands that in the course of his employment by
the Employer, the Executive will receive confidential information concerning the
business of the Employer, and which the Employer desires to protect. The
Executive agrees that he will not at any time during or after the period of his
employment by the Employer reveal to anyone outside the Employer, or use for his
own benefit, any such information that has been designated as confidential by
the Employer or understood by the Executive to be confidential, without specific
written authorization by the Employer. Upon termination of this Agreement, and
upon the request of the Employer, the Executive shall promptly deliver to the
Employer any and all written materials, records and documents, including all
copies thereof, made by the Executive or coming into his possession during the
Term and retained by the Executive containing or concerning confidential
information of the Employer and all other written materials furnished to and
retained by the Executive by the Employer for his use during the Term, including
all copies thereof, whether of a confidential nature or otherwise.
-5-
<PAGE>
(b) During the Executive's employment with the Employer, the Executive
shall not be engaged as an officer, director or employee of, or in any way be
associated in a management or ownership capacity with, any corporation or other
entity that conducts a business in competition with the business of the Employer
during the Term, provided, however, that the Executive may own not more than
-------- -------
4.99% of the outstanding securities, or equivalent equity interests, of any
class of any corporation or other entity which is in competition with the
business of the Employer, which securities are listed on a national securities
exchange or traded in the over-the-counter market.
7. Representation and Warranty of the Executive. The Executive represents
--------------------------------------------
and warrants that he is not under any obligation, contractual or otherwise, to
any other firm or corporation, which would prevent his entry into the employ of
the Employer or his performance of the terms of this Agreement.
8. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement between the Employer and the Executive with respect to the subject
matter hereof, and may not be amended, waived, changed, modified or discharged
except by an instrument in writing executed by the parties hereto.
9. Assignability. This Agreement shall be binding upon, and inure to the
-------------
benefit of, the Employer and its successors and assigns hereunder. This
Agreement shall not be assignable by the Executive, but shall inure to the
benefit of the Executive's heirs, executors, administrators and legal
representatives.
10. Notice. Any notice which may be given hereunder shall be in writing
------
and be deemed given when hand delivered and acknowledged or, if mailed, one day
after mailing by registered or certified mail, return receipt requested, to
either party hereto at their respective addresses stated above, or at such other
address as either party may by similar notice designate, provided that a
photocopy of such notice is dispatched at the same time as the notice is mailed.
Copies of such notices also shall be sent to the Employer's counsel, attention:
Frederick W. Dreher, Esq., Duane, Morris & Heckscher LLP, 4200 One Liberty
Place, Philadelphia, Pennsylvania 19103 (telecopier no.: 215-979-1213) and to
Richard A. Hansen, Chairman of the Board, c/o Pennsylvania Merchant Group, Four
Falls Corporate Center, West Conshohocken, Pennsylvania 19428 (telecopier no.:
610-260-6404).
11. Specific Performance. The parties agree that irreparable damage would
--------------------
occur in the event that any of the provisions of paragraph 6 hereof were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of paragraph 6 hereof and to enforce
specifically the terms and provisions of paragraph 6 hereof, this being in
addition to any other remedy to which any party is entitled at law or in equity.
12. No Third Party Beneficiaries. Nothing in this Agreement, express or
----------------------------
implied, is intended to confer upon any person or entity other than the parties
(and the Executive's
-6-
<PAGE>
heirs, executors, administrators and legal representatives) any rights or
remedies of any nature under or by reason of this Agreement.
13. Successor Liability. The Employer shall require any subsequent
-------------------
successor, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all of the business and/or assets of the
Employer to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Employer would be required to perform it
if no such succession had taken place.
14. Arbitration. Any dispute which may arise between the parties hereto
-----------
shall be submitted to binding arbitration in Atlanta, Georgia in accordance with
the Rules of the American Arbitration Association; provided that any such
dispute shall first be submitted to the Board in an effort to resolve such
dispute without resort to arbitration, and provided, further, that the Board
shall have a period of 60 days within which to respond to the Executive's
submitted dispute, and if the Board fails to respond within said time, or the
Executive's dispute is not resolved, the matter may then be submitted for
arbitration.
15. Waiver of Breach. The failure at any time to enforce or exercise any
----------------
right under any of the provisions of this Agreement or to require at any time
performance by the other parties of any of the provisions hereof shall in no way
be construed to be a waiver of such provisions or to affect either the validity
of this Agreement or any part hereof, or the right of any party hereafter to
enforce or exercise its rights under each and every provision in accordance with
the terms of this Agreement.
16. Severability. The invalidity or unenforceability of any term, phrase,
------------
clause, paragraph, restriction, covenant, agreement or other provision hereof
shall in no way affect the validity or enforceability of any other provision, or
any part thereof, but this Agreement shall be construed as if such invalid or
unenforceable term, phrase, clause, paragraph, restriction, covenant, agreement
or other provision had never been contained herein unless the deletion of such
term, phrase, clause, paragraph, restriction, covenant, agreement or other
provision would result in such a material change as to cause the covenants and
agreements contained herein to be unreasonable or would materially and adversely
frustrate the objectives of the parties as expressed in this Agreement.
17. Survival of Benefits. Any provision of this Agreement which provides
--------------------
a benefit to the Executive and which by the express terms hereof does not
terminate upon the expiration of the Term shall survive the expiration of the
Term and shall remain binding upon the Employer until such time as such benefits
are paid in full to the Executive or his Estate.
18. Construction. This Agreement shall be governed by and construed in
------------
accordance with the internal laws of the State of Georgia, without giving effect
to principles of conflict of laws. All headings in this Agreement have been
inserted solely for convenience of reference only, are not to be considered a
part of this Agreement and shall not affect the interpretation of any of the
provisions of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMPUTONE CORPORATION
By: /S/ RICHARD A. HANSEN
----------------------
RICHARD A. HANSEN,
CHAIRMAN OF THE BOARD
By: /S/PERRY J. PICKERIGN
---------------------
PERRY J. PICKERIGN
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<PAGE>
EXHIBIT 10.86
LEASE AGREEMENT
---------------
This LEASE AGREEMENT, made and entered into by and between McDONALD WINDWARD
PARTNERS IV, L. L. C., a Georgia limited liability company (hereinafter referred
to as "Tenant"):
W I T N E S S E T H:
1. Premises. For and in consideration of the obligation of Tenant to pay rent
--------
as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant
hereby leases from Landlord certain premises (Suite 100), being
approximately 22, 400 square feet of space within the building located a t
1060 Windward Ridge Parkway (known as Building 400 at Windward Ridge),
situated within the County of Forsyth, State of Georgia, Described in
Exhibit "A" attached hereby and incorporated herein by reference, together
-----------
with all rights, privileges, easements, and appurtenances belonging to or in
any way pertaining to said premises and together with the building and other
improvements situated or to be situated upon said premises (said real
property, building and improvements being hereinafter referred to as the
"Premises"). Landlord represents that it has not given to any other tenant
exclusive rights to parking around the building.
TO HAVE AND TO HOLD the premises for the Demised Term, as hereinafter
defined.
2. TERM. The term of this lease (hereinafter referred to as the "Demised Term")
----
shall be for a period commencing on the Commencement Date, as hereinafter
defined, and ending one hundred twenty (120) months thereafter, unless
sooner terminated as provided in this Lease; provided, however, that, in the
event the Commencement Date is not the first day of a calendar month, the
Demised Term shall extend for the remainder of the calendar month in which
the Commencement Date occurs plus said number of months.
2A. CONSTRUCTION OF PREMISES.
------------------------
a. Within ten (10) days after the lease date, Landlord shall prepare, at
Landlord's sold cost and expense, and submit to Tenant a set of plans
and specifications and/or construction drawings (collectively, the
"Plans and Specifications") Based on the preliminary plans and
specifications and/or preliminary floor plans set forth on Exhibit
-------
"B" attached hereto and incorporated herein, covering all work to be
---
performed by landlord in constructing the leasehold improvements to
be constructed in the Premises by or at the Expense of Landlord
(collectively, the "Improvements"). Tenant shall have ten (1) days
after receipt to approve the Plans and Specifications. After Tenant
has approved the Plans and Specifications requested by Tenant shall
by at tenant's
<PAGE>
sole cost and expense and subject to Landlord's written approval,
which approval shall not be unreasonably withheld, conditioned or
delayed.
b. Upon substantial completion of the Improvements (the "Commencement
Date"), a representative of Landlord and representative of Tenant
together shall inspect the Premises and generate a punchlist of
defective or uncompleted items relating to the completion of
construction of the Improvements. Landlord shall, within thirty (3)
days after such punchlist is prepared and agreed upon by Landlord and
Tenant, complete such incomplete work and remedy such defective work
as are set forth on the punchlist.
c. Landlord hereby warrants to Tenant that the materials and equipment
(including the building system and other improvements) to be
furnished by Landlord's contractors in the completion of the
Improvements will be of good quality and new, that during the one (1)
year period following the Commencement Date, such materials and
equipment and the work of such contractors shall be free from defects
not inherent in the quality required or permitted hereunder, and that
such work will conform to the Plans and Specifications.
d. In the event that Landlord does not substantially complete the
Improvements on or before March 31, 1998, as extended by Delay (as
defined below), Landlord shall give Tenant credit towards Tenant's
monthly base rent in the amount of one (1) day's base rent for each
day after March 31, 1998 that Landlord does not substantially
complete the Premises. For purposes of this Lease, "Delay" shall mean
delays incurred by reason of Tenant's failure to approve the Plans
and Specifications as set forth above or changes requested by Tenant
in the Plans and Specifications before or after Tenant's approval
thereof that result in a delay in the completion of construction.
e. For purposes of this Lease, the term "substantial completion" or any
grammatical variation thereof shall mean sufficient completion" of
construction of the Premises in accordance with the Plans and
Specifications so that Tenant can lawfully occupy the Premises for
the uses permitted herein, subject only to minor punchlist items ,
the completion of which will not interfere with such permitted uses
by Tenant, as evidenced by the delivery by Landlord to Tenant of (I)
a certificate of Occupancy or its equivalent for the Premises issued
by the appropriate governmental authority if so required by
applicable law, and (ii) a Certificate of Substantial Completion on
standard AIA Form G-704 certified by Landlord's architect.
f. Landlord represents and warrants to tenant that, to Landlord's actual
knowledge, the design and construction of the Building materially
complies with all applicable federal, state, county and municipal
laws, ordinances and codes, expecting therefrom any requirements
related to Tenant's specific use of the Demised Premises.
<PAGE>
g. Landlord, at its sole cost and expense, shall be responsible for
causing the Premises to comply with Title III of the Americans With
Disabilities of 1990 (the "ADA") or the regulations promulgated
thereunder, as said Title III pertains to the General public, as of
the Commencement Date.
h. After the Commencement Date, Tenant shall, upon demand, execute and
deliver a letter of acceptance of delivery of the Premises to
Landlord.
3. BASE RENT.
---------
a. Tenant agrees to pay Landlord rent for the Premises, in advance,
without demand, deduction or set off, for the Demised Term at the
rate of Twelve Thousand Nine Hundred Seventy-Three and 33/100
($12,973.33) Per month. One monthly rent installment shall be due and
payable on the date hereof and a like monthly rent installment shall
be due and payable on or before the first day of each calendar month
during the Denised Term, except that the rental payment for
fractional calendar month at the commencement or end of the Demised
Term shall be prorated on the basis of the thirty-day month.
b. Landlord and Tenant agree that the Base Rent set forth in Paragraph
3.a. above shall be increased annually on each anniversary date of
the Commencement Date during the Demised Term by three percent (3%),
which adjusted rental amount shall remain in effect for the next
twelve (12) consecutive months.
4. USE. The Premises shall be used only for the purpose of receiving, storing,
---
shipping and selling products, materials and merchandise made on the
Premises and/or distributed by Tenant and for such other lawful purposes as
may be incidental thereto. Outside storage, including without limitation,
trucks and other vehicles, is prohibited without Landlord's prior written
consent. Tenant shall at its own cost and expense obtain any and all other
licenses and permits necessary for such use. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to its specific use
of the Premises and shall promptly comply with all governmental orders and
directives for the correction, prevention and abatement of nuisances in or
upon, or connected with, the Premises all at Tenant's sole expense. Tenant
shall not permit any objectionable or unpleasant odors, smoke, dust, gas,
noise or vibrations to emanate from the Premises, nor take any other action
which would constitute a nuisance or would disturb or endanger any other
action which would constitute a nuisance or would disturb or endanger any
other tenants of the building or buildings in which the Premises are
situated or unreasonably interfere with their use of their respective
premises. Without Landlord's prior written consent, Tenant shall not
receive, store or otherwise handle any product, material or merchandise
which is explosive or highly flammable. Tenant will not permit the Premises
to be used for any purpose or in any manner (including, without limitation,
any method of storage) which would render the insurance thereon void or the
insurance risk more hazardous
<PAGE>
thank the risk associated with Tenant's stated use or cause the State Board
of Insurance or other insurance authority to disallow any sprinkler credits.
Tenant shall not use the Premises for the generation, storage,
transportation or disposal of dangerous, toxic or hazardous materials,
chemicals, wastes or similar substances.
Without the prior consent of the Landlord, Tenant shall be entitled to use
at the Premises cleaning supplies, toner for photocopying machines and other
similar materials, in containers and ordinary use by Tenant in the routine
operation or maintenance of Tenant's office equipment or in the routine
janitorial service, cleaning and maintenance for the Premises. In addition,
Landlord acknowledges that as part of the business Tenant will conduct at
the Premises, a waste product known as solder flux is produced. Landlord
hereby consents to the presence on the Premises of such product as part of
Tenant's routine business provided that Tenant agrees that the storage,
handling and disposal of such products shall be in accordance with
environmental laws. Landlord represents that Landlord has not treated,
stored or disposed of any hazardous or toxic substances upon or within the
Premises, nor, to the best of Landlord's actual knowledge, has any
predecessor owner of the Premises.
5. TAXES.
-----
a. Landlord agrees to pay before delinquency, all taxes, assessments and
governmental charges of any kind and nature whatsoever (hereinafter
collectively referred to as "taxes") lawfully levied or
assessed against the Premises; provided, however, that the amount of
taxes to be paid by Landlord hereunder for the Premises during anyone
tax year shall be reimbursed to it by Tenant (the "Landlord's Tax
Share"). Tenant shall pay to Landlord as additional rental, upon
demand the amount of such taxes. In the event any such amount is not
paid within twenty (200 days after the date of Landlord's invoice to
Tenant, the unpaid amount shall bear interest a the rate of fifteen
percent (15%) per annum from the date of the invoice until payment by
Tenant.
In the event the Premises constitute a portion of a multiple
occupancy building or there are several buildings located in the tax
parcel in which the Premises are situated. Tenant agrees to pay to
Landlord, as additional rent, upon demand, the amount of Tenant's
"proportionate share" of the Landlord's Tax Share. Tenant's
"proportionate share", as used in this Lease, shall mean a fraction,
the numerator of which is gross square footage space contained in the
Premises and the denominator of which is the gross square footage
contained in the building or buildings located on the tax parcel in
which the Premises are situated.
b. If at any time during the term of this Lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of
any taxes, assessments or governmental charged, levied assessed or
imposed on real estate and the improvements thereon, there shall be
charged, levied, assessed or imposed on Landlord a capital levy or
other tax directly on the rents received therefrom and/or a franchise
tax, assessment, levy or charged
<PAGE>
measured by or based, in whole part, upon such premises, then all
such taxes, assessments, levies or charges, or the part thereof so
measured or based, shall be deemed to be included within the term
"taxes" for the purposes hereof
If Landlord does not elect to contest taxes, Tenant may request in
writing that Landlord contest taxes. Landlord may then elect to contest
taxes or allow Tenant to so contest taxes subject to Landlord's
reasonable approval of the firm or individual hired to protest taxes.
c. Landlord shall have the right (but no obligation) to employ a tax
consulting firm to attempt to assure a fair tax burden on the
buildings in which the Premises are located and grounds surrounding
the Premises within the applicable tax jurisdiction. Tenant shall
pay to Landlord upon demand from time to time, as additional rent,
the amount of Tenant's "proportionate share" (as defined in
subparagraph 5. a herein) of the reasonable cost of such service.
d. Any payment to be made pursuant to this Paragraph 5 shall be
prorated4ed in the event any portion of the Demised Term is not
within a full real estate tax year.
6. LANDLORD'S REPAIRS. Landlord shall at its expense maintain only the roof,
------------------
foundation and the structural soundness of the exterior walls of the Premises in
good repair, reasonable wear and tear expected. Tenant shall repair and pay for
bay damage caused by the negligence of Tenant, or Tenant's employees, agents or
invitees, or caused by Tenant's default hereunder. The term "walls" as used
herein shall not include windows glass or plate glass, doors, special store
fronts or office entries. Tenant shall within a reasonable amount of time give
Landlord written notice of defect or need for repairs, after which Landlord
shall have reasonable opportunity to repair same or cure such defect.
Landlord's failure to repair or cure such defect after a reasonable notice and
right-to-cure period (but in no event less than thirty (30) days) shall be a
default hereunder by Landlord. Landlord's liability with respect to any
defects, repairs or maintenance for which Landlord is responsible under any of
the provisions of this Lease shall be limited to the cost of such repairs or
maintenance or the curing of such defect.
7. TENANT'S REPAIRS.
----------------
a. Tenant shall at its own cost and expense keep and maintain all parts
of the Premises (except those for which Landlord is expressly
responsible under the terms of this Lease) in which Landlord is
expressly responsible under the terms of this Lease) in good
condition, promptly making all necessary repairs and replacements,
including but not limited to, windows, glass and plate glass, doors
any special office entry, interior walls and finish work, floors and
floor covering, downsprouts, gutters, heating and air conditioning
systems, dock boards, truck doors, dock bumbers, paving plumbing work
and fixtures, interior termite and pest extermination, and regular
removal of trash and debris.
<PAGE>
Tenant shall provide Landlord with prior notice of any repair to be
undertaken by Tenant and such other information as Landlord may
reasonably request with respect to such repair, except such notice shall
not be required if immediate repair is be necessary for security or
safety reasons.
b. Tenant shall not damage any wall or disturb the integrity and support
provided by any wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any wall caused by Tenant or
its employees, agents or invites.
c. In the event the Premises constitute a portion of a multiple
occupancy building, Tenant and its employees, customers and licensees
shall have the exclusive right to use the parking areas, if any, as
may be designated by Landlord in writing, subject to such reasonable
rules and regulations as Landlord may from time to time prescribe to
rights of ingress and egress of other tenants. Landlord shall not be
responsible for enforcing Tenant's exclusive parking rights against
any third parties.
d. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance
contractor for serving al hot water, heating and air conditioning
systems and equipment within the Premises. The maintenance contractor
and the contract must be reasonably approved by Landlord. The service
contract must include all services suggested by the equipment
manufacturer within the operation/maintenance manual and must become
effective (and a copy thereof delivered to Landlord) no later than
thirty (3) days after the Commencement Date).
8. COMMON AREA MAINTENANCE. Tenant shall pay to Landlord as additional rent a
-----------------------
common area operating and maintenance fee equal to Tenant's "proportionate
share" (as defined in subparagraph 5a herein) of the common areas of the
building and park in which the Premises are located, including, but not
limited to , the mowing of grass, care of shrubs, general landscaping,
common sewage, line plumbing, maintenance of building, parking areas,
entrances, driveways and management (no more than four percent (4%) of gross
rents for the Premises) thereof. If Tenant can be clearly identified as
being responsible for obstruction or stoppage of the common sanitary sewer,
the Tenant, if Tenant is responsible, shall pay the entire cost thereof,
upon demand, as addition rent. Payment shall be made on the first day of
each month based on the projected cost of such maintenance. At the end of
each year Landlord shall determine the actual costs of such maintenance. Any
additional costs due from Tenant based on the actual costs shall be promptly
paid by Tenant. Any savings will be paid promptly to Tenant after such
determination.
9. TENANT IMPROVEMENTS TO PREMISES. Except for nonstructural changes costing
-------------------------------
Five Thousand Dollars ($5,000.00) or less per change, Tenant shall not make
any alterations, additions or improvements to the Premises, exterior or
interior, without the prior written consent of Landlord, except for
unattached movable fixtures which may be installed without drilling, cutting
or otherwise defacing, damaging or
<PAGE>
overloading the Premises. All alterations, additions or improvements erected
by Tenant shall be and remain the property of Tenant during the term of this
Lease and Tenant shall, unless Landlord otherwise elects as provided below,
remove all alterations, additions or improvements erected by Tenant and
restore the Premises to their original Condition, reasonable wear and tear
excepted, by the date of the termination of this Lease. Tenant may not use
or penetrate the roof of the Premises for any purpose whatsoever without
landlord's prior written consent. All construction work done by Tenant in
the Premises shall be performed in a good and workmanlike manner, in
compliance with all governmental requirements, and at such times and in such
manner as will cause a minimum of interference with other construction in
progress and with the transactions business in the building or buildings in
which the Premises are located.
10. SIGNAGE. Tenant shall not install any signs visible from outside the
-------
Premises except with the prior written consent of Landlord. Any permitted
signs shall be maintained in compliance with applicable governmental rules
and regulations governing such signs. Tenant shall be responsible to
Landlord for any damage caused by the installation, use or maintenance of
said signs. Tenant agrees, upon removal of said signs, to repair all damage
incidental thereto.
11. RIGHT OF ENTRY; INSPECTION. Upon reasonable notice to Tenant (except in case
--------------------------
of an emergency), Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the Premises at any reasonable time
during business hours, to ascertain the condition of the Premises, to make
such repairs as may be required or permitted to be made by Landlord under
the terms of this Lease, or, within the last year of the Demised Term, to
show the Premises to prospective purchasers or tenants. Landlord
<PAGE>
EXHIBIT 10.87
COMPUTONE CORPORATION
1997 EQUITY INCENTIVE PLAN
--------------------------
Computone Corporation, a Delaware corporation (the "Company"), hereby sets
forth the Computone Corporation 1997 Equity Incentive Plan (the "Plan"). The
Plan provides for the grant of non-qualified stock options ("Options") to
officers, directors, employees and consultants of the Company.
1. Purpose. The purpose of the Plan is to further the growth, development
-------
and financial success of the Company by providing additional incentives to
officers, directors, employees and consultants of the Company, which will enable
them to participate directly in the growth of the value of the capital stock of
the Company. The Company intends that the Plan will facilitate securing,
retaining and motivating officers, directors, employees and consultants of high
caliber and potential. To accomplish these purposes, the Plan provides a means
whereby officers, directors, employees and consultants of the Company may
receive Options to purchase shares of the Company's Common Stock, par value $.01
per share (the "Common Stock").
2. Administration.
--------------
(a) Administration by the Board. The Plan shall be administered by the
---------------------------
Board of Directors of the Company (the "Board"), which, in its discretion, may
appoint a committee (the "Committee") consisting solely of two or more non-
employee directors of the Company, as that term is defined in Rule 16b-
3(b)(3)(i) of the Securities Exchange Act of 1934 (the "1934 Act"), to
administer the Plan in lieu of the Board, subject to the ultimate authority of
the Board to administer the Plan. If the Board appoints a Committee, the Board,
from time to time, may increase the size of the Committee and appoint additional
members thereof, remove members with or without cause and appoint new members in
substitution therefor, fill vacancies, however caused, or remove all members of
the Committee and thereafter directly administer the Plan.
(b) Authority of the Board. The Board or the Committee, if such is
----------------------
appointed, shall have full and final authority, in its sole discretion, to
interpret the provisions of the Plan and to decide all questions of fact arising
in its application and to make all other determinations necessary or advisable
for the administration of the Plan. As used herein the "Board" shall be deemed
to refer to the "Committee," as such is appointed, subject to the ultimate
authority of the Board as set forth in Section 2(a) hereof. All decisions,
determinations and interpretations of the Board shall be final and binding on
all holders of Options granted under the Plan and their successors in interest.
The Board shall determine the officers, directors, employees or consultants to
whom Options are to be granted; the type, amount, size and terms of each such
grant; and the time(s) when Options are to be exercisable. Members of the Board
shall not receive any compensation for their services in administering the Plan,
but all expenses and liabilities they incur in connection with the
administration of the Plan shall be borne by the Company. No member of the
Board or of the Committee shall be personally liable for any action,
<PAGE>
determination or interpretation made in good faith with respect to the Plan, and
all members of the Board and of the Committee shall be fully protected and
indemnified by the Company in respect to any such action, determination or
interpretation.
3. Grant of Options.
----------------
(a) Limitations. The number of shares of Common Stock available under the
-----------
Plan for issuance pursuant to Options is 250,000 shares of Common Stock in the
aggregate. Such shares may be authorized and unissued shares or shares issued
and subsequently reacquired by the Company. Except as otherwise provided
herein, any shares subject to an Option that for any reason expires or is
terminated unexercised as to such shares shall again be available under the
Plan.
(b) Eligibility To Receive Options. Officers, directors, employees and
------------------------------
consultants of the Company shall be eligible to receive Options under the Plan
as determined by the Board or the Committee, if such is appointed, in its sole
discretion.
(c) Type of Options. Grants may be made at any time and from time to
---------------
time by the Board or the Committee, if such is appointed, in the form of Options
to purchase shares of Common Stock. Options granted hereunder are not intended
to qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") or any amendment or
substitute thereto.
(d) Option Agreements. Options for the purchase of Common Stock shall be
-----------------
evidenced by written agreements in such form not inconsistent with the Plan as
the Board or the Committee, if such is appointed, shall approve from time to
time. The Options granted hereunder may be evidenced by a single agreement or
by multiple agreements, as determined by the Board or the Committee, if such is
appointed, in its sole discretion. Each option agreement shall contain in
substance the following terms and conditions:
(i) Exercise Price. Each option agreement shall set forth the exercise
--------------
price of the Common Stock purchasable upon the exercise of the Option evidenced
thereby. The exercise price of the Common Stock subject to an Option shall be
not less than 100% of the fair market value of such stock on the date the Option
is granted, as determined by the Board or the Committee, if such is appointed,
but in no event less than the par value of such stock. For this purpose, fair
market value on any date shall mean the closing price of the Common Stock as
reported in The Wall Street Journal or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
System ("Nasdaq"), or if the price of the Common Stock is not reported by
Nasdaq, the fair market value shall be as determined by the Board or the
Committee, if such is appointed.
(ii) Exercise Term. Each Option shall state the period or periods of
-------------
time within which the Option may be exercised, in whole or in part, as
determined by the Board, provided that no Option shall be exercisable after ten
years from the date of grant thereof. The Board shall have the power to permit
an acceleration of exercise terms upon such circumstances and subject to such
terms and conditions as the Board deems appropriate in its sole discretion.
-2-
<PAGE>
(iii) Substitution of Options. Options may be granted under the Plan
-----------------------
from time to time in substitution for stock options held by officers, directors,
employees or consultants of other corporations who are about to become, and who
do concurrently with the grant of such options become, officers, directors,
employees or consultants of the Company as a result of a merger or consolidation
of such corporation with the Company, or the acquisition by the Company of the
assets of such corporation or the acquisition by the Company of stock of such
corporation. The terms and conditions of the substitute Options so granted may
vary from the terms and conditions set forth in this Section 3 to such extent as
the Board or the Committee, if such is appointed, at the time of grant may deem
appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which Options are granted.
4. Date of Grant. The date on which an Option shall be deemed to have
-------------
been granted under the Plan shall be the date of the Board's authorization of
the Option or such later date as may be determined by the Board at the time the
Option is authorized. Notice of the determination shall be given to each
individual to whom an Option is so granted within a reasonable time after the
date of such grant.
5. Manner of Exercise. Options may be exercised in whole or in part, from
------------------
time to time, by giving written notice of exercise to the President of the
Company, specifying the number of shares to be purchased. The purchase price of
the shares with respect to which an Option is exercised shall be payable in full
with the notice of exercise in cash, Common Stock of the Company at fair market
value or a combination thereof, as the Board may determine from time to time and
subject to such terms and conditions as may be prescribed by the Board for such
purpose. The Board may also, in its discretion and subject to prior
notification to the Company by an optionee, permit an optionee to enter into an
agreement with the Company's transfer agent or a brokerage firm of national
standing whereby the optionee will simultaneously exercise the Option and sell
the shares acquired thereby through the Company's transfer agent or such a
brokerage firm and either the Company's transfer agent or the brokerage firm
executing the sale will remit to the Company from the proceeds of sale the
exercise price of the shares as to which the Option has been exercised. The
Company shall not be required to issue fractional shares on exercise of an
Option.
6. Rights upon Termination of Service. In the event an optionee ceases to
----------------------------------
be an officer, director, employee or consultant of the Company for any reason
other than death, total disability (within the meaning of Section 22(e)(3) of
the Code) or retirement, the optionee shall have the right to exercise the
Option during its term within a period of three months after such termination to
the extent that the Option was exercisable at the time of termination, or within
such other period, and subject to such other or different terms and conditions,
as may be specified by the Board in a written agreement evidencing an Option.
In the event that an optionee dies, retires or becomes totally disabled prior to
the expiration of his or her Option and without having fully exercised such
Option, the optionee or the optionee's successor in interest shall have the
right to exercise the Option during its term within a period of one year after
such termination due to death, retirement or total disability to the extent that
the Option was exercisable at the time of such termination or within such other
period, and subject to such other or different terms and conditions, as may be
-3-
<PAGE>
specified by the Board in a written agreement evidencing an Option. As used in
this Section 6, "retirement" means a termination of employment by reason of an
optionee's retirement at or after the optionee's earliest permissible retirement
date pursuant to and in accordance with the Company's regular retirement plan or
personnel practices.
7. General Restrictions. Each Option granted under the Plan shall be
--------------------
subject to the requirement that if at any time the Board shall determine that
(i) the listing, registration or qualification of the shares of Common Stock
subject or related thereto upon any securities exchange or under any state or
federal law, or (ii) the consent or approval of any government regulatory body,
or (iii) the satisfaction of any tax withholding obligation or (iv) an agreement
by the recipient of an Option with respect to the disposition of shares of
Common Stock is necessary or desirable as a condition of or in connection with
the granting of such Option or the issuance or purchase of shares of Common
Stock thereunder, such Option shall not be consummated in whole or in part
unless such listing, registration, qualification, consent, approval or agreement
shall have been effected or obtained free of any conditions not acceptable to
the Board.
8. Rights of a Stockholder. The recipient of any Option under the Plan,
-----------------------
unless otherwise provided by the Plan, shall have no rights as a stockholder
unless and until certificates for shares of Common Stock are issued and
delivered to such recipient.
9. Right to Terminate Employment. Nothing contained in the Plan or in any
-----------------------------
option agreement entered into pursuant to the Plan shall confer upon any
optionee the right to continue in the employment or service of the Company or
affect any right that the Company may have to terminate the service or
employment of such optionee.
10. Withholding. Whenever the Company proposes or is required to issue or
-----------
transfer shares of Common Stock under the Plan, the Company shall have the right
to require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state or local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares. If and to the extent
authorized by the Board, in its sole discretion, an optionee may make an
election, by means of a form of election to be prescribed by the Board, to have
shares of Common Stock that are acquired upon exercise of an Option withheld by
the Company or to tender other shares of Common Stock of the Company owned by
the optionee to the Company at the time of exercise of an Option to pay the
amount of tax that would otherwise be required by law to be withheld by the
Company as a result of any exercise of an Option. Any such election shall be
irrevocable and shall be subject to termination by the Company, in its sole
discretion, at any time. Any securities so withheld or tendered will be valued
by the Board at the fair market value thereof as of the date of exercise.
11. Assignability. Options under the Plan shall be assignable and
-------------
transferable by the recipient thereof to the extent that the agreement
evidencing such Option expressly so indicates. The Company shall not be
required to recognize any such transfer or assignment until written notice
thereof, signed by the holder of the Option, is delivered to the secretary of
the Company. Unless otherwise transferred or assigned, the Option shall be
exercisable only by the recipient or by the recipient's guardian or legal
representative during the life of the recipient.
12. Non-Uniform Determinations. Determinations by the Board and the
--------------------------
Committee, if such is appointed, under the Plan (including, without limitation,
-4-
<PAGE>
recommendations and determinations of the persons to receive Options, the form,
amount and timing of such grants, the terms and provisions of Options, and the
agreements evidencing same) need not be uniform and may be made selectively
among persons who receive, or are eligible to receive, grants of Options under
the Plan whether or not such persons are similarly situated.
13. Adjustments.
-----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any securities convertible into or
exchangeable for Common Stock of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board or the Committee, if such is appointed, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein or in an agreement evidencing an Option, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number of shares of Common Stock subject to an Option or the
exercise price thereof.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, all outstanding Options will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, in the exercise of its
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Option holder the right to exercise his or
her Option as to all or any part of the shares of Common Stock covered by the
Option, including shares as to which the Option would not otherwise then be
exercisable.
(c) Sale or Merger. In the event of a proposed sale of all or
--------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Board, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by the successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that each Option holder shall have the
right to exercise his or her Option as to all of the shares of Common Stock
covered by the Option, including shares as to which the Option would not
otherwise then be exercisable or (iii) declaring that an Option shall terminate
at a date fixed by the Board, provided that the Option holder is given notice
thereof and opportunity to exercise the then exercisable portion of his or her
Option prior to such date.
14. Rights Upon Change in Control. In the event of a Change of Control of
-----------------------------
-5-
<PAGE>
the Company, the Board may, in its absolute discretion and upon such terms and
conditions as it deems appropriate, provide, by resolution adopted prior to such
Change in Control, that at some time prior to the effective date of such Change
in Control, that all Options granted pursuant to the Plan shall become
immediately exercisable as to all of the shares covered thereby, notwithstanding
any other provision contained herein or in the option agreements. As used
herein, "Change of Control" shall mean (a) the acquisition of shares of the
Company by any "person" or "group" (as such terms are used in Rule 13d-3 under
the 1934 Act as now or hereafter amended) in a transaction or series of
transactions, that result in such person or group directly or indirectly first
owning beneficially more than 35% of the Company's Common Stock, (b) the
consummation of a merger or other business combination after which the holders
of voting capital stock of the Company do not collectively own 50% or more of
the voting capital stock of the entity surviving such merger or other business
combination or the sale, lease, exchange or other transfer in a transaction or
series of transactions of all or substantially all of the assets of the Company
or (c) as the result of or in connection with any cash tender offer or exchange
offer, merger or other business combination, sale of assets or contested
election of directors or any combination of the foregoing transactions (a
"Transaction"), the persons who constituted a majority of the members of the
Boards of Directors of the Company on July 30, 1997 and persons whose election
as members of the Boards of Directors of the Company was approved by such
members then still in office or whose election was previously so approved after
July 30, 1997, but before the event that constitutes a Change of Control, no
longer constitute such a majority of the members of the Boards of Directors of
the Company then in office. A Transaction constituting a Change in Control
shall only be deemed to have occurred upon the closing of the Transaction.
15. Amendment, Suspension or Termination of the Plan. The Plan may be
------------------------------------------------
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board, subject to any required stockholder
approval or any stockholder approval that the Board may deem advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange or automated quotation system listing requirements.
The Board may not, without the consent of the holder of an Option, alter or
impair any Option previously granted under the Plan, except as specifically
authorized herein.
16. Reservation of Shares. The Company, during the term of the Plan, will
---------------------
at all times reserve and keep available such number of shares of Common Stock as
shall be sufficient to satisfy the requirements of the Plan. The inability of
the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any shares hereunder, shall relieve the Company of any
liability for the failure to issue or sell such shares as to which such
requisite authority shall not have been obtained.
17. Effect on Other Plans. Participation in the Plan shall not affect an
---------------------
optionee's eligibility to participate in any other benefit or incentive plan of
the Company. Any Options granted pursuant to the Plan shall not be used in
determining the benefits provided under any other plan of the Company unless
specifically provided.
-6-
<PAGE>
18. Duration of the Plan. The Plan shall remain in effect until all
--------------------
Options granted under the Plan have been satisfied by the issuance of shares or
expired, but no Option shall be granted after July 29, 2007.
19. Forfeiture for Dishonesty. Notwithstanding anything to the contrary
-------------------------
in the Plan, if the Board or the Committee, if such is appointed, finds, by a
majority vote, after full consideration of the facts presented on behalf of both
the Company and any optionee, that an optionee has been engaged in fraud,
embezzlement, theft, commission of a felony or dishonest conduct in the course
of such optionee's employment, service or retention by the Company or any
subsidiary of the Company that damaged the Company or that the optionee has
disclosed confidential information of the Company or any subsidiary of the
Company, such optionee shall forfeit all unexercised Options and all exercised
Options under which the Company has not yet delivered the certificates, provided
that the Company shall return to the optionee any exercise price theretofore
paid by the optionee to the Company. The decision of the Board or the
Committee, if such is appointed, in interpreting and applying the provisions of
this Section 19 shall be final. No decision of the Board, however, shall affect
the finality of the discharge or termination of such optionee by the Company or
any subsidiary of the Company in any manner.
20. No Prohibition on Corporate Action. No provision of the Plan shall be
----------------------------------
construed to prevent the Company, or any officer or director of the Company,
from taking any action deemed by the Company, or such officer or director, to be
appropriate or in the best interest of the Company, whether or not such action
could have an adverse effect on the Plan or any Options granted hereunder, and
no optionee or optionee's successor in interest shall have any claim against the
Company or any officer or director of the Company or member of the Committee, as
a result of the taking of such action.
21. Indemnification. With respect to the administration of the Plan, the
---------------
Company shall indemnify each present and future member of the Board and the
Committee against, and each member of the Board and the Committee shall be
entitled, without further action on such member's part, to indemnity from the
Company for all expenses, including the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself, reasonably incurred by the member
in connection with or arising out of any action, suit or proceeding in which the
member may be involved by reason of his or her being or having been a member of
the Board or of the Committee, whether or not he or she continues to be such
member at the time of incurring such expenses; provided, however, that such
indemnity shall not include any expenses incurred by any such member of the
Board or of the Committee (a) in respect of matters as to which he or she shall
be finally adjudged in any such action, suit or proceeding to have been guilty
of gross negligence or willful misconduct in the performance of his or her duty
as such member of the Board or such Committee or (b) in respect of any matter in
which any settlement is effected for an amount in excess of the amount approved
by the Company on the advice of its legal counsel; and provided further that no
right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Board or of the Committee
unless, within 60 days after institution of any such action, suit or proceeding,
he or she shall have offered the Company in writing the opportunity to defend
-7-
<PAGE>
such action, suit or proceeding at its own expense. The foregoing right of
indemnification shall inure to the benefit of the heirs, executors or
administrators of each such member of the Board and of the Committee and shall
be in addition to all other rights to which such member may be entitled as a
matter of law, contract or otherwise.
22. Miscellaneous Provisions.
------------------------
(a) Compliance with Plan Provisions. No optionee or other person shall
-------------------------------
have any right with respect to the Plan, the Common Stock reserved for issuance
under the Plan or in any Option until a written option agreement shall have been
executed on behalf of the Company and by the optionee and all the terms,
conditions and provisions of the Plan and the Option applicable to such
optionee, and each person claiming under or through such optionee, have been
met.
(b) Approval of Counsel. In the discretion of the Board, no shares of
-------------------
Common Stock, other securities or property of the Company or other forms of
payment shall be issued hereunder with respect to any Option unless counsel for
the Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign legal, securities exchange and
other applicable requirements.
(c) Effects of Acceptance. By accepting any Option under the Plan, each
---------------------
optionee and each person claiming under or through such optionee shall be
conclusively deemed to have indicated his or her acceptance and ratification of,
and consent to, any action taken under the Plan by the Company or its officers,
the Board or the Committee.
(d) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the
--------------------------
1934 Act applies to Options granted under the Plan, it is the intention of the
Company that the Plan comply in all respects with the requirements of Rule 16b-
3, that any ambiguities or inconsistencies in construction of the Plan be
interpreted to give effect to such intention and that, if the Plan shall not so
comply, whether on the date of adoption or by reason of any later amendment to
or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to
have been automatically amended so as to bring the provisions of the Plan into
full compliance with such Rule.
23. Stockholder Approval. No Option may be exercised until the Plan shall
--------------------
have been approved by the affirmative vote of the holders of a majority of the
shares of the Company's outstanding Common Stock present or represented and
entitled to vote at a duly convened meeting of stockholders.
24. Titles. Titles are provided herein for convenience of reference only
------
and are not to serve as a basis for interpretation or construction of the Plan.
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> APR-03-1998 APR-04-1997
<PERIOD-START> APR-05-1997 APR-06-1996
<PERIOD-END> APR-03-1998 APR-04-1997
<CASH> 0 88
<SECURITIES> 0 0
<RECEIVABLES> 3,208 2,167
<ALLOWANCES> 668 531
<INVENTORY> 3,752 4,740
<CURRENT-ASSETS> 6,540 6,634
<PP&E> 4,072 3,829
<DEPRECIATION> 3,478 3,553
<TOTAL-ASSETS> 7,667 7,655
<CURRENT-LIABILITIES> 5,665 4,231
<BONDS> 0 0
0 0
0 0
<COMMON> 74 67
<OTHER-SE> 1,802 3,237
<TOTAL-LIABILITY-AND-EQUITY> 7,667 7,655
<SALES> 11,894 12,638
<TOTAL-REVENUES> 11,894 12,638
<CGS> 9,240 7,344
<TOTAL-COSTS> 15,442 12,624
<OTHER-EXPENSES> 240 (31)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (158) (116)
<INCOME-PRETAX> (3,466) (71)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,466) (71)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,466) (71)
<EPS-PRIMARY> 0 (.01)
<EPS-DILUTED> (.49) (.01)
</TABLE>
