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 2, 1999
[ ] 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 _________________
SEC file number 0-16172
COMPUTONE CORPORATION
(Name of small business issuer in its charter)
Delaware 23-2472952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, Georgia 30005
- ----------------------------------------------------------- ----------
(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
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 2, 1999 were $10,181,000.
On June 25, 1999, 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
$9,518,444.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,471,674 shares of Common
Stock outstanding on June 25, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portion of Registrant's definitive proxy statement relating to its annual
meeting of stockholders to be held August 12, 1999 are incorporated in Part III
of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
COMPUTONE CORPORATION
INDEX TO FORM 10-KSB
Page
----
PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 8
Item 3. Legal Proceedings. 8
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters. 9
Item 6. Management's Discussion and Analysis or Plan of Operation. 10
Item 7. Consolidated Financial Statements. 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 14
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 15
Item 10. Executive Compensation. 15
Item 11. Security Ownership of Certain Beneficial Owners and Management. 15
Item 12. Certain Relationships and Related Transactions. 15
Item 13. Exhibits and Reports on Form 8-K. 15
Signatures 17
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PART I
Item 1. Description of Business.
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(a) General Development of Business.
--------------------------------
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.
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, New Computone Corporation, a newly
formed subsidiary of the Company, 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. On December 3, 1998 the Company and Ladia agreed in principle on a
renegotiation of certain terms of the Agreement. However, on May 26, 1999, the
Company announced that the Agreement, as amended in principle, with Ladia had
been terminated.
(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 ("SFAS") No. 131 or
Regulation S-B.
(c) Narrative Description of Business.
----------------------------------
Current Business
----------------
The Company designs, manufactures and markets hardware and software
communications connectivity products for business and industrial systems using
personal computers, servers and workstations. 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. 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 a good reputation for reliable
products and 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. According to Forrester Research, over 75% of companies worldwide are
now deploying or plan to deploy remote access solutions. According to
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Gartner Group, 55 million employees work outside the traditional office setting
and these numbers are anticipated to grow to more than 100 million employees by
2002. In addition, the Yankee Group estimates the remote assess market will grow
from $4.1 billion in 1997 to $12.4 billion in 2000. Companies have realized that
in order to stay competitive in the global marketplace, they must adopt a remote
access solution. 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 is intended to prevent any unwanted intrusion into the network by
persons outside the firewall.
Both the communication server products and traditional multi-port products
of the Company address remote access markets. The 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. In short, the Company's
products enable multiple devices to be connected to a single PC or
microprocessor.
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), and EISA-compatible systems). In addition, the products are
compatible with and support a large number of industry-standard operating
systems (SCO UNIX, Unixware, Solaris, UNIX derivatives, Microsoft WindowsNT, IBM
OS/2, DOS and Multi-User DOS, Novell Netware and Linux).
The Company currently offers four families of multi-port products with
widespread industry name recognition: ValuePort, IntelliPort II, IntelliPort II
Expandable and the high speed PowerRack Port solution. These products, combined
with the IntelliServer communication server products, are currently marketed to
distributors, systems integrators, value added resellers ("VARs") and large
volume end-users. Products are also sold and licensed to selected original
equipment manufacturers ("OEMs").
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 users access to worldwide.
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
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Communication Servers
---------------------
Historically, the Company's terminal server products and multiport
controllers were used in multi-user UNIX environments. There are numerous
applications and markets for the products including point of sale, factory
automation, office automation, health care and remote access. The IntelliServer
product line provides remote communication to LANs (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.
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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 LANs.
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 ("ISP") 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 "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:
o ValuePort - economical 4-port solutions for ISA/EISA computers.
o IntelliPort II - high-performance 4-port and 8-port solutions for ISA,
EISA and Micro Channel computers.
o IntelliPort Plus - high-performance 921Kbps on all ports ISA
Controller.
o IntelliPort II EXpandable - scaleable high-performance 16 to 64 port
subsystems for PCI, ISA, and EISA computers.
o 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 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 and EISA
compatible systems; downloadable "firmware" software for easy upgrades and
software device drivers for a large number of different operating systems,
including:
o SCO UNIX
o UNIX System V.3.2 and derivatives (AT&T, Interactive, etc.)
o UNIX SVR4 and derivatives (AT&T, UnixWare, Solaris, etc.)
o DOS and Multi-User DOS variants (Concurrent Controls DOS, THEOS, etc.)
o Microsoft WindowsNT
o IBM OS/2 and CITRIX
o Novell Netware
o Linux
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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 Intelliport Plus, a new product desigh first sold in fiscal 1999,
offers higher performance at a lower costs.
The 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.
The PowerGate is a low-cost, high-speed serial card for a PCI-bus. This
product is specifically designed to address the needs of the remote access
market. The Company believes by providing a more efficient, better solution and
by providing a comprehensive communications solution that leverages the tools of
Microsoft's Windows NT, the Company can capture a significant share in this
explosive growth market.
The new TotalAccess DCS-5000 is a high performance Ethernet Digital remote
access server. The DCS-5000 is a digital communication server geared toward
larger ISP's and enterprise type organizations. The higher end concentrator
market is a several billion dollar market with annual growth rates projected in
excess of 40%. The DCS-5000 was designed to meet the demands of many of the
Company's current ISP customers. It will facilitate higher bandwidth, multiple
T1 transmissions and offer "Hot Swappable" redundant power supplies. The unit
will operate in a heterogeneous environment and terminate both digital and
analog calls.
Marketing
- ---------
To accommodate the evolving computer systems marketplace, the Company has
established sales channels through distributors, VARs, ISPs, 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 1999 and 1998 fiscal years, approximately 82% of the
Company's revenues were generated in the United States.
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 or may obtain them 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%.
More than 20 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, Bay
Networks and Equinox frequently compete with the Company for the same customers
in the United States market. In the European market, Digi International, 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 Intelliport Plus 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 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.
Export Sales
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The Company's sales from customers located outside the United States,
primarily in Europe, Central and South America approximated 18% of net revenues
for the 1999 and 1998 fiscal years. All of the Company's foreign transactions
are negotiated, invoiced and paid in US dollars.
Significant Customers
- ---------------------
The Company had three customers whose purchases exceeded 10% of product
sales in fiscal 1999. These customers are Wal-Mart ($1,582,000 or 16%), Lowes
Companies / Maxnet Systems ($1,496,000 or 15%) and Tech Data ($1,337,000 or
12%). In fiscal 1998, purchases by Wal-Mart were $2,925,000 or 25% of product
sales.
Research and Development
- ------------------------
During fiscal years 1999 and 1998, the Company's research and development
expenditures were $1,947,000 and $1,288,000, respectively. In addition, for
fiscal years 1999 and 1998, the Company capitalized $198,000 and $168,000 of
software development costs.
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Trademarks and Licenses
- -----------------------
Due to rapidly changing technology in the computer industry, the Company
believes its success depends primarily on the engineering, marketing and support
skills of its personnel rather than on patent protection. Although the Company
may seek patents where appropriate, at present, none of the Company's products
are patented. The Company relies primarily on the copyright, trademark and trade
secret laws to protect its proprietary rights in its products.
Employees
- ---------
At April 2, 1999, the Company had 55 full-time employees. None of the
Company's employees are 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
- -------
At April 2, 1999, the Company's backlog was approximately $2,573,000. The
Company anticipates that a substantial portion of its backlog will be shipped
during the first quarter of the 2000 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.
Item 3. Legal Proceedings.
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Since March 1996, the Company has been the subject of an investigation by
the Securities and Exchange 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 SEC's Atlanta
District Office of the SEC's intention to recommend an enforcement action
against the Company for alleged violations of the federal securities laws.
Specifically, the SEC 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. The Company has proposed a
settlement to the SEC pursuant to which the Company would agree, without
admission or monetary penalty, to the entry of a permanent order enjoining the
Company from future violation of certain reporting provisions of the Securities
Exchange Act of 1934 and the Company would further agree to restate certain
financial statements filed with the SEC. As of June 30, 1999 the Company has
restated three quarterly reports on Form 10-QSB with respect to fiscal 1998. The
SEC has not, to date, responded to this settlement proposal. At this time
management cannot determine the ultimate outcome or effect in regards to this
matter.
During the Company's 1999 fiscal year, the Company settled pending
litigation with Marshall Industries, Inc., Capella Worldwide Networking, Inc.,
The Software Group, Ltd. and a former employee. See Note 13 of the Notes to the
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Company's Consolidated Financial Statements for the year ended April 2, 1999,
which is incorporated by reference in Item 3.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
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") prior to December 3, 1998
and the OTC Bulletin Board since December 3, 1998.
Year ended April 2, 1999 Year ended April 3, 1998
------------------------ ------------------------
High Low High Low
---- --- ---- ---
1st Quarter $ 8.13 $ 4.25 $ 5.63 $ 3.13
2nd Quarter 4.88 4.00 5.50 3.13
3rd Quarter 3.63 2.00 6.50 3.00
4th Quarter 3.25 1.50 6.75 3.00
As of June 25, 1999, the closing price for the Company's common stock was $1.50
per share.
On July 22, 1998, the Company was notified by the Nasdaq Stock Market, Inc.
("NASDAQ") that effective July 29, 1998, the Company's Common Stock would be
delisted from the Nasdaq SmallCap Market. On July 27, 1998, the Company filed an
appeal with the Nasdaq Stock Market, Inc. On September 17, 1998, the Company's
appeal was heard by a Nasdaq Listing Qualifications Panel (the "Panel"). On
October 22, 1998, the Panel determined to continue the listing of the Company's
Common Stock on the Nasdaq SmallCap Market subject to the condition that on or
before November 30, 1998 the Company must make a public filing with the SEC and
NASDAQ evidencing a minimum of $3,000,000 in net tangible assets. A copy of the
October 22, 1998 determination by the Panel was included as Exhibit 99.1 to the
Company's October 2, 1998 Form 10-QSB Quarterly Report and reference is made to
the text of the Panel's determination for a full statement of the terms and
conditions of the exception granted. On December 2, 1998, the Company's Common
Stock was delisted from the Nasdaq SmallCap Market for failure to satisfy the
NASDAQ requirement that the Company maintain net tangible assets of not less
than $3 million. The Company's Common Stock is now being traded on the OTC
Bulletin Board. On December 3, 1998, the Company issued a press release
reporting the delisting, a copy of which was included as Exhibit 99.1 to the
Company's January 1, 1999 Form 10-QSB Quarterly Report.
(b) Holders.
--------
As of April 2, 1999, the Company had approximately 1,700 holders of record
of the 8,321,674 shares of Common Stock then outstanding.
(c) Dividends.
----------
The Company has never declared or paid dividends on its Common Stock.
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Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------- ----------------------------------------------------------
Results of Operations
- ---------------------
During fiscal 1999, the Company incurred a net loss of $4,086,000 on
revenues of $10,181,000 compared to a loss in fiscal 1998 of $3,466,000 on
revenues of $11,894,000. The operating results during fiscal 1999 were
unfavorably affected by depressed sales volume and increased product development
costs, but were offset by increased margins on sales and decreased general and
administrative expenses. As was the case in fiscal 1998, sales volume during
fiscal 1999 was unfavorably affected by internal delays in releasing new product
into the market and external delays in receiving product delivery from suppliers
due to the Company's cash shortages. Product development expenses increased as a
result of additional staffing expenses necessary to complete the Company's
product release dates for the upcoming fiscal year. Margins were favorably
affected by a lower percentage of sales made to the Company's largest customer
(representing 16% of aggregate revenues) at reduced margins, a change in sales
mix reflecting the discontinuation of low margin sales of third party products
that were bundled with the Company's remote access products, and increases on
sales to the Company's other customers at higher gross margins. General and
administrative expenses were favorably affected by decreases in occupancy costs,
advertising costs and the Company's provision for uncollectible accounts. The
Company also sustained a $700,000 writedown of advances. These matters are
discussed more fully below.
As noted previously, the Company suffered throughout the year from working
capital and cash shortages. The Company experienced disappointing sales volume
in fiscal 1999. During the fall of 1998, as a result of the foregoing, the
Company was placed on credit hold with its principal contract manufacturing
supplier. These payment issues were resolved during the fourth quarter, however,
due to long lead times for certain components the supplier was unable to make
significant deliveries during fiscal 1999. This delay resulted in a
significantly higher backlog at April 2, 1999 of approximately $2,573,000 than
otherwise would be expected. The Company anticipates that substantially all of
this backlog will be shipped during the first quarter of the current fiscal
year.
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 1999 compared to fiscal 1998, net sales through the
domestic distribution channel, including net VAR sales, decreased by
approximately $1,681,000, or 31%, and sales through the international
distribution channel decreased approximately $349,000, or 17%.
The Company has continued to make 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
domestic distributors and major corporations. During the 1998 fiscal year, 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%. During the 1999 fiscal year, the Company discontinued sales of these
third party products.
Management believes that the release of the Company's TotalAccess DCS-5000
will have a significant impact on the Company's sales growth. This product
combines the features of a high performance Ethernet digital remote access
server with up to 12 DSP 24-channel modem cards. It is intended for use by ISPs
and medium to large companies that require high-density connectivity, allowing
remote users and locations access to the Internet and corporate Intranets.
Management believes that it can be sold at a considerable margin. The Company
currently has several customers testing or evaluating this product.
During fiscal 1999, net sales to major accounts increased by approximately
$396,000, or 12%, to $3,635,000 from $3,239,000 in fiscal 1998. This increase is
attributable to sales of approximately $1,496,000 or 15% of net revenue to the
Company's second largest customer. Sales to OEM accounts increased during fiscal
1999 to approximately $969,000 from
10
<PAGE>
approximately $891,000 during fiscal 1998, an increase of $79,000, or 9%.
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 1999 totaled $6,940,000 or 68% of product
sales (32% gross margin) in fiscal 1999 compared to $9,240,000 or 78% of product
sales (22% gross margin) for fiscal 1998. This decrease in cost of goods sold as
a percentage of product sales can be attributed primarily to the decrease in
reduced margin sales of third party products along with the lower sales, as a
percentage of net revenues, to one major customer. The remaining increase in
margin can be attributed to the Company's net increase in sales to other major
customers.
Selling, general and administrative expenses for fiscal 1999 totaled
approximately $4,648,000 compared to approximately $4,914,000 for fiscal 1998, a
decrease of $266,000 or 5% from the prior fiscal year. This decrease can be
attributed to a $165,000 decrease in relocation costs expenses, a $98,000
decrease in bad debt expenses and a $80,000 decrease in advertising/marketing
costs. These decreases were partially offset by an increase of $294,000 in legal
expenses, primarily related to the SEC's investigation, the settlement of
pending litigation and the (now cancelled) merger transaction with Ladia.
Product development costs charged to expense for fiscal 1999 totaled
approximately $1,947,000, or 19% of product sales, compared to approximately
$1,288,000, or 11%, of product sales for fiscal 1998. This fiscal 1999 increase
of $659,000, or 51%, is attributed primarily to a $640,000 increase in costs for
personnel costs for development of new products and enhancement of existing
products.
During fiscal 1999, the Company, in conjunction with the (now cancelled)
merger transaction, made advances to Ladia in the amount of $700,000 (See Item
1. Description of Business). On June 24, 1999 the Company assigned its rights,
effective March 31, 1999, (i) to $450,000 of these advances to Pennsylvania
Merchant Group, ("PMG"), an affiliated entity, in exchange for a $450,000
reduction in notes payable by the Company to PMG and (ii) to $250,000 of these
advances to a major shareholder in exchange for a $250,000 note receivable due
on demand no earlier than October 1, 1999. For financial reporting purposes, the
Company recorded a $700,000 writedown for uncollectibility on the advances
against the results of operations and recorded a $450,000 capital contribution
during the fourth quarter. Further, the Company expects to record an additional
$250,000 capital contribution when the note receivable is collected.
Liquidity and Capital Resources
- -------------------------------
The Company's consolidated 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 years
ended April 2, 1999 and April 3, 1998, the Company has suffered net losses of
$4.1 million and $3.5 million, respectively, and has suffered operating cash
deficiencies of $1,521,000 and $2,096,000, respectively. Further the Company has
a net working capital deficiency of $614,000 and minimal shareholders' equity at
April 2, 1999. 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As noted previously, the Company suffered throughout the year from working
capital and cash shortages. During the fall of 1998, as a result of working
capital shortages, the Company was placed on credit hold with its principal
contract manufacturing supplier. These payment issues were resolved during the
fourth quarter, however, due to long lead times for certain components the
supplier was unable to make significant deliveries during fiscal 1999. This
delay resulted in a significantly higher backlog at April 2, 1999 of
approximately $2,573,000.
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 at a rate of
prime plus 1.50%, which was collateralized by the Company's inventory. In
addition, a line of credit agreement existed with the lender for up to
$2,500,000 and was based on the available borrowing base, at a rate of prime
plus 1.25% which was collateralized by the Company's accounts receivable.
On September 8, 1998, the Company received notice that the lender had
accelerated all sums due under the financing agreement and made demand for
payment of all outstanding balances due to the Company's violation of the
11
<PAGE>
minimum net worth covenant. The Company and the lender entered into a
forbearance agreement while the Company sought to find another lender.
On November 17, 1998, the Company and a new lender entered into a financing
arrangement which provides for a line of credit up to $1,650,000 ($1,049,000
outstanding at April 2, 1999) and is based on the available borrowing base, at
the prime rate plus 2.00%. A portion of the proceeds from this line of credit
was used to retire the debt borrowed under the June 20, 1997 financing
agreement. The line of credit is primarily collateralized by the Company's
accounts receivable and inventory. The financing arrangement contains various
affirmative and negative covenants and, as of January 1, 1999, the Company was
in violation of the minimum consolidated tangible net worth covenant and the
minimum net working capital covenant. The company obtained from the lender a
waiver through March 31, 1999 regarding compliance with these two covenants.
Effective March 31, 1999, the financing arrangement was amended and the Company
was in compliance with these two covenants. This financing arrangement expires
in November 1999.
During the fourth quarter of fiscal 1999 and the first quarter of fiscal
2000, the Company believes that significant progress has been made in
stabilizing its financial condition and eliminating substantial contingencies,
as follows: (i) Sales during the first quarter of fiscal 2000 are expected to be
in the range of $4.5 million, a 70+% increase over the fourth quarter of fiscal
1999, (ii) The Company expects to report net income in the first quarter of
fiscal 2000 and believes that cash flow is being generated from operations,
(iii) The financing agreement with our primary lender has been amended to
eliminate the Company's non-compliance with two covenants. The Company has
borrowing availability of over $600,000 on this $1.65 million line of credit as
of June 30, 1999, (iv) The Company has eliminated substantial contingencies
related to lawsuits against the Company (see Note 13), (v) Credit terms are
being reestablished with our major vendors, and (vi) As of June 30, 1999, the
order backlog was approximately $1.4 million.
By adding sales personnel, both domestically and internationally, and by
leveraging the distribution channel, the Company continues to seek opportunities
to expand sales volume.
The Company will continue to seek additional equity capital, however, the
Company believes that such funds are not mandatory in order to fund its
operations in fiscal 2000. Funds raised will be used to finance additional
marketing programs on new products and to reduce debt.
No assurances can be given that the Company will be successful in
maintaining profitable operations or in raising additional equity capital.
Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------
In order to meet the Company's liquidity needs arising from the operating
losses, the Company raised $1,582,000 of equity capital by offering for sale, to
accredited investors, shares of the Company's common stock under Regulation D of
the Securities Act of 1993. In addition, funds were provided under the Company's
new financing arrangement and from a reduction in accounts receivable and
inventory.
On November 17, 1998, the Company and a new lender entered into a financing
arrangement which provides for a line of credit up to $1,650,000 ($1,049,000
outstanding at April 2, 1999) and is based on the available borrowing base, at
rate of prime plus 2.00%. The line of credit is primarily collateralized by the
Company's accounts receivable and inventory.
Cash used in operating activities amounted to $1,521,000 during fiscal 1999
compared to cash used in operating activities of $2,096,000 during fiscal 1998.
A portion of the cash consumed by operating losses in fiscal 1999 was offset by
cash provided by a decrease in accounts receivable and inventories.
Cash used in investing activities amounted to an outflow of $387,000 during
fiscal 1999 compared with an outflow of $607,000 for fiscal 1998. The decrease
in net cash outflow in fiscal 1999 compared to fiscal 1998 resulted primarily
from a decrease in capital expenditures of $324,000.
Cash provided by financing activities amounted to $1,780,000 during fiscal
1999 versus cash provided by financing activities of $2,761,000 during fiscal
1998. The Company had a decrease in net borrowings of $203,000 against its line
12
<PAGE>
of credit. The Company raised $1,582,000 through private placements and an
additional $545,000 through a shareholder loan. The Company repaid approximately
$188,000 in debt during the 1999 fiscal year.
Working capital amounted to a deficit of $614,000 at April 2, 1999 compared
to a surplus of $875,000 at April 3, 1998, a decrease of $1,489,000. The ratio
of current assets to current liabilities at April 2, 1999 was 0.87 to 1.00
compared to 1.15 to 1.00 at April 3, 1998. The decrease in working capital was
attributable to the loss from operations.
The Company's primary cash commitments in fiscal 2000 include payments
under non-cancelable operating leases ($293,000), notes payable and current
maturities of long-term debt ($722,000) and investments in research and
development ($1,947,000 in fiscal 1999). With respect to notes payable and
current maturities of long-term debt, approximately $590,000 of the $722,000 is
due to related parties, the payment terms of which the Company believes can be
extended as needed. With respect to research and development, the Company
believes that its expenditures in fiscal 2000 will approximate the expenditures
made in fiscal 1999.
Outlook for Fiscal Year 2000
- ----------------------------
The Company expects to report net income for the first quarter of fiscal
year 2000.
Management believes that new or redesigned products will enhance the
Company's ability to increase its sales in fiscal 2000. The Total Access
DCS-5000 combines the features of a high performance Ethernet digital remote
access server with up to 12 DSP 24-channel modem cards. The DCS-5000 is intended
for use by ISPs and medium to large companies that require high-density
connectivity, allowing remote users and locations access to the Internet and
corporate Intranets. The new Powergate family of products are high performance,
cost effective PCI controller products specifically designed to meet the needs
of the remote access market. The Powerrack RAS-2000 is a redesign of the
Powerrack family of products and will add additional features such as Ethernet
"Plug `n Play" connectivity.
Capital Expenditures
- --------------------
The Company does not plan any major capital expenditures in the foreseeable
future.
Impact of Inflation
- -------------------
Management believes that inflation has not had a material effect on the
Company's operations.
New Accounting Pronouncements
- -----------------------------
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.
In December 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise".
SFAS No. 134 requires that an entity engaged in mortgage banking activities
classify certain mortgage securities as trading securities. Implementation of
this disclosure standard will not affect the Company's financial position or
results of operations.
In May 1999, the FASB issued SFAS No. 135, "Rescission of SFAS No. 75 and
Technical Corrections". SFAS No. 135 establishes financial reporting standards
for defined benefit pension plans and for the notes to the consolidated
financial
13
<PAGE>
statements of defined contribution plans of state and local governmental
entities. Implementation of this disclosure standard will not affect the
Company's 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 risks
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 and the
Company's ability to obtain adequate working capital.
Year 2000 Risks
- ---------------
The year 2000 issue relates to computer programs and systems that 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 believes that its current product line, including its Value
Port, Intelliport II, Intelliport Plus, Intelliport II Expandable, Intelliport
III and IntelliServer product families, does not create, access, or depend upon
absolute date information and is, therefore, year 2000 compliant.
The Company is continuing a comprehensive program designed to identify
internal computer and information systems, manufacturing and delivery equipment,
and facilities equipment to determine their year 2000 readiness. The process
includes replacing equipment that does not meet year 2000 readiness standards.
In order to improve operating effeciencies, the Company is in the process of
implementing a new financial and manufacturing software package. The Company
believes the functions of this software package relating to critical operations
such as accounting, order entry, purchasing, inventory, production, shipping and
billing are year 2000 compliant. This implementation is expected to be completed
by September 1999.
The Company is currently contacting its suppliers, service providers and
other business associates to evaluate their year 2000 readiness. In the event
any of these businesses are unlikely to resolve their year 2000 issues, the
Company's contingency plans include seeking alternative sources of supply for
products and services.
The Company cannot reasonably estimate the costs or related contingencies
that could be incurred if the year 2000 issue results in significant operational
difficulties.
Many of the factors that would guarantee year 2000 compliance are beyond
the control of the Company. These factors include the availability of vendor
compliant products and services, interface system partner compliance, government
activity and suppliers in areas such as utilities, communications,
transportation and other services. Because of the technological interdependence
of commercial activities, the Company cannot realistically offer any
certifications, representations or guarantees of total year 2000 compliance.
Although the Company is optimistic that it will be able to timely address any
year 2000 issues that it identifies, there can be no assurance that certain
factors relating to year 2000 compliance issues, including litigation, will not
have a material adverse effect on the Company's business, financial condition,
cash flows or results of operations.
Item 7. Consolidated Financial Statements.
- ------- ----------------------------------
The consolidated 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.
---------------------
N/A.
14
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ------- ----------------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act.
---------------------------------------------------
The response to this item is incorporated by reference to the Company's
definitive proxy statement relating to its annual meeting of stockholders to be
held August 12, 1999 under the caption "Election of Directors" and "Section 16
(a) Beneficial Ownership Reporting Compliance".
Item 10. Executive Compensation.
- -------- -----------------------
The response to this item is incorporated by reference to the Company's
definitive proxy statement relating to its annual meeting of stockholders to be
held August 12, 1999 under the caption "Executive Compensation".
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The response to this item is incorporated by reference to the Company's
definitive proxy statement relating to its annual meeting of stockholders to be
held August 12, 1999 under the caption "Beneficial Ownership of Common Stock".
Item 12. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The response to this item is incorporated by reference to the Company's
definitive proxy statement relating to its annual meeting of stockholders to be
held August 12, 1999 under the caption "Executive Compensation - Certain
Transactions".
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 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Cash Flows 21
Consolidated Statements of Stockholders' Equity 22
Notes to Consolidated Financial Statements 23
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 34
(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
15
<PAGE>
4.3 Certificate of Designation for Registrant's Series D Preferred
Stock
10.71 Registrant's Amended and Restated Equity Incentive Plan Plan
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Form S-8 filed April 1, 1999)
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. (Incorporated by reference to Exhibit 10.81 to the
Registrant's Annual Report on Form 10-KSB for the year ended
April 3, 1998)
10.82 June 9, 1998 press release issued by Computone Corporation
(Incorporated by reference to Exhibit 10.82 to the Registrant's
Annual Report on Form 10-KSB for the year ended April 3, 1998)
10.83 Separation Agreement dated as of April 30, 1998 between the
Company and Thomas J. Anderson (Incorporated by reference to
Exhibit 10.83 to the Registrant's Annual Report on Form 10-KSB
for the year ended April 3, 1998)
10.84 Separation Agreement dated as of July 27, 1998 between the
Company and Gregory A. Alba (Incorporated by reference to Exhibit
10.84 to the Registrant's Annual Report on Form 10-KSB for the
year ended April 3, 1998)
10.85 Employment Agreement dated as of July 31, 1998 between the
Company and Perry J. Pickerign (Incorporated by reference to
Exhibit 10.85 to the Registrant's Annual Report on Form 10-KSB
for the year ended April 3, 1998)
10.86 Lease dated March 28, 1997 between MacDonald Development and the
Company for certain premises located at 1060 Windward Ridge
Parkway, Alpharetta, Georgia (Incorporated by reference to
Exhibit 10.86 to the Registrant's Annual Report on Form 10-KSB
for the year ended April 3, 1998)
10.87 1997 Equity Incentive Plan (Incorporated by reference to Exhibit
10.87 to the Registrant's Annual Report on Form 10-KSB for the
year ended April 3, 1998)
10.88 The Company's 1998 Equity Incentive Plan (Incorporated by
reference to Exhibit 4.3 to the Registrant's Form S-8 filed April
1, 1999)
10.89 Employment Agreement dated as of February 1, 1999 between the
Company and Keith H. Daniel
21 Subsidiaries of Registrant
23 Consent of Independent Certified Public Accountants with respect
to the Company's Stock Option Plan
16
<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/ Perry J. Pickerign
-------------------------------------
President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
/s/ John D. Freitag Chairman of the Board July 2, 1999
- --------------------------
John D. Freitag
/s/ Keith H. Daniel Chief Financial Officer July 2, 1999
- -------------------------- (principal financial and
Keith H. Daniel accounting officer)
/s/ Richard A. Hansen Director July 2, 1999
- --------------------------
Richard A. Hansen
/s/ Perry J. Pickerign Director July 2, 1999
- --------------------------
Perry J. Pickerign
17
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Computone Corporation
We have audited the accompanying consolidated balance sheets of Computone
Corporation and Subsidiaries (the Company) as of April 2, 1999 and April 3,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. We have also audited the
accompanying schedule of valuation and qualifying accounts. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the consolidated
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 consolidated financial statements
and schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computone
Corporation and Subsidiaries at April 2, 1999 and April 3, 1998, and the results
of their operations and their 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 consolidated financial statements and schedule have been
prepared assuming the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses and operating cash deficiencies and has a working capital
deficit and minimal stockholders' equity. 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 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO SEIDMAN, LLP
Atlanta, Georgia
June 30, 1999
18
<PAGE>
Computone Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
April 2, 1999 April 3, 1998
------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 18 $ 146
Receivables, net of allowance for doubtful accounts
of $489 at April 2, 1999 and $668 at April 3, 1998 1,963 2,540
Inventories, net 2,197 3,752
Prepaid expenses and other 63 102
---------- ----------
Total current assets 4,241 6,540
Property, equipment and improvements, net 591 594
Intangible assets, net 438 506
Other 38 27
---------- ----------
TOTAL ASSETS $ 5,308 $ 7,667
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,143 $ 2,600
Accrued liabilities:
Payroll 83 97
Prepaid sales 229 523
Professional fees 109 153
Other 520 504
Line of credit 1,049 1,252
Notes payable to stockholders 590 485
Current maturities of long-term debt 132 51
---------- ----------
Total current liabilities 4,855 5,665
Notes payable to stockholders -- 10
Long-term debt, less current maturities 347 116
---------- ----------
Total liabilities 5,202 5,791
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; 8,321,674 and 7,382,622 shares outstanding 83 74
Additional paid-in capital 47,369 45,062
Accumulated deficit (47,346) (43,260)
---------- ----------
Total stockholders' equity 106 1,876
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,308 $ 7,667
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
19
<PAGE>
Computone Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except share data)
Year Ended
------------------------------
April 2, 1999 April 3, 1998
------------- -------------
Revenues:
Product sales $ 10,181 $ 11,894
-------- --------
Expenses:
Cost of products sold 6,940 9,240
Selling, general and administrative 4,648 4,914
Product development 1,947 1,288
-------- --------
13,535 15,442
-------- --------
Operating loss (3,354) (3,548)
Other income (expense):
Other income (expense) 114 240
Writedown of advances (700) --
Interest expense - affiliates (44) (50)
Interest expense - other (102) (108)
-------- --------
Loss before income taxes (4,086) (3,466)
Provision for income taxes -- --
-------- --------
Net loss $ (4,086) $ (3,466)
======== ========
Loss per common share:
Basic $ (0.52) $ (0.49)
======== ========
Diluted $ (0.52) $ (0.49)
======== ========
See accompanying notes to the consolidated financial statements.
20
<PAGE>
Computone Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------
April 2, 1999 April 3, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (4,086) $ (3,466)
Adjustments to reconcile income (loss) from operations
to net cash used in operations:
Settlement of litigation in exchange for common stock, net (14) --
Writeoff of advance 700 --
Depreciation and amortization 447 501
Provision for uncollectible accounts 140 344
Provision for inventory reserve 243 462
Changes in current assets and current liabilities:
Accounts receivable 437 (1,248)
Inventories 1,312 526
Prepaid expenses and other 39 68
Accounts payable and accrued liabilities (739) 717
--------- ---------
Net cash used in operations (1,521) (2,096)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets (11) 63
Capitalized software development costs (198) (168)
Capital expenditures (178) (502)
--------- ---------
Net cash used in investing activities (387) (607)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates 545 100
Repayment to affiliates -- (75)
Incurrence of debt -- 167
Repayment of debt (188) (503)
Net borrowings (repayments) under lines of credit (203) 1,252
Exercise of common stock options and warrants 44 45
Issuance of common stock 1,582 1,775
--------- ---------
Net cash provided by financing activities 1,780 2,761
--------- ---------
Net increase (decrease) in cash and cash equivalents (128) 58
Cash and cash equivalents, beginning of period 146 88
--------- ---------
Cash and cash equivalents, end of period $ 18 $ 146
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 102 $ 142
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Stock issued in settlement of litigation $ 240 $ --
Conversion of debt to equity 450 218
</TABLE>
See accompanying notes to the consolidated financial statements.
21
<PAGE>
Computone Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------ ------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 4, 1997 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
Exercise of common stock options -- -- 38,655 0 44 -- 44
Conversion of debt to equity -- -- -- -- 450 -- 450
Issuance of common stock -- -- 900,397 9 1,813 -- 1,822
Net loss -- -- -- -- -- (4,086) (4,086)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, April 2, 1999 0 $ 0 8,321,674 $ 83 $ 47,369 $ (47,346) $ 106
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF 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 produces
communications subsystems under the Computone name and markets its products to a
broad range of worldwide distributors, systems integrators, value added
resellers and original equipment manufacturers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. There were no material intercompany accounts to eliminate.
FISCAL YEAR END
The Company's fiscal year ends on the first Friday in April. The fiscal
years ended April 2, 1999 and the fiscal year ended April 3, 1998 each had 52
weeks. For fiscal 2000, the Company is changing its fiscal year end to March 31.
Additionally, the Company's interim fiscal quarters will end on the last
calendar day of the third, sixth and ninth month of the year.
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.
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 $908,000 and $851,000 at April 2, 1999 and April 3, 1998, respectively.
23
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are provided by charges to operations using the straight-line method based on
estimated useful lives (shorter of asset life or lease term for leasehold
improvements). Expenditures for maintenance and repairs are charged to
operations as incurred, while renewals and betterments are capitalized.
Depreciation and amortization charged to operations for the years ended April 2,
1999 and April 3, 1998 amounted to $181,000 and $188,000, 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 2, 1999 and April 3, 1998
was $266,000 and $313,000, respectively; software development costs totaling
$198,000 and $168,000, 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 $1,947,000 and $1,288,000 during the years ended April
2, 1999 and April 3, 1998, respectively.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards ("SFAS") No.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.
SIGNIFICANT RISKS UNCERTAINTIES AND USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements. Actual results could be different from these estimates.
Certain estimates used by management are particularly susceptible to
significant changes in the economic environment. These include estimates of
inventory obsolescence, provisions for sales returns and allowances, allowance
for uncollectible accounts, and deferred tax assets. Each of these estimates, as
well as the related amounts reported in the consolidated 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 2, 1999, the estimates used in the consolidated
financial statements are adequate based on the information currently available.
24
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 its 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 1999 and 1998, the
Company incurred advertising expenses of $126,000 and $204,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
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.
In December 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise".
SFAS No. 134 requires that an entity engaged in mortgage banking activities
classify certain mortgage securities as trading securities. Implementation of
this disclosure standard will not affect the Company's financial position or
results of operations.
In May 1999, the FASB issued SFAS No. 135, "Rescission of SFAS No. 75 and
Technical Corrections". SFAS No. 135 establishes financial reporting standards
for defined benefit pension plans and for the notes to the consolidated
financial statements of defined contribution plans of the state and local
governmental entities. Implementation of this disclosure standard will not
affect the Company's financial position or results of operations.
RECLASSIFICATION
Certain amounts have been reclassified in the prior year's consolidated
financial statements to conform to the current year.
2. GOING CONCERN UNCERTAINTY AND FUTURE OPERATIONS
The Company's consolidated 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 years
ended April 2, 1999 and April 3, 1998, the Company has suffered net losses of
$4.1 million and $3.5 million, respectively, and has suffered operating cash
deficiencies of $1,521,000 and $2,096,000, respectively. Further, the Company
has a net working capital deficiency of $614,000 and minimal stockholders'
equity at April 2, 1999. 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
25
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2. GOING CONCERN UNCERTAINTY AND FUTURE OPERATIONS (CONTINUED)
The Company suffered throughout the year from working capital and cash
shortages. During the fall of 1998, as a result of working capital shortages,
the Company was placed on credit hold with its principal contract manufacturing
supplier. These payment issues were resolved during the fourth quarter, however,
due to long lead times for certain components the supplier was unable to make
significant deliveries during fiscal 1999. This delay resulted in a
significantly higher backlog at April 2, 1999 of approximately $2,573,000.
During the fourth quarter of fiscal 1999 and the first quarter of fiscal
2000, the Company believes that significant progress has been made in
stabilizing its financial condition and eliminating substantial contingencies,
as follows: (i) Sales during the first quarter of fiscal 2000 are expected to be
in the range of $4.5 million, a 70+% increase over the fourth quarter of fiscal
1999, (ii) The Company expects to report net income in the first quarter of
fiscal 2000 and believes that cash flow is being generated from operations,
(iii) The financing agreement with our primary lender has been amended to
eliminate the Company's non-compliance with two covenants. The Company has
borrowing availability of over $600,000 on this $1.65 million line of credit as
of June 30, 1999, (iv) The Company has eliminated substantial contingencies
related to lawsuits against the Company (see Note 13), (v) Credit terms are
being reestablished with our major vendors, and (vi) As of June 30, 1999, the
order backlog was approximately $1.4 million.
By adding sales personnel, both domestically and internationally, and by
leveraging the distribution channel, the Company continues to seek opportunities
to expand sales volume.
The Company will continue to seek additional equity capital, however, the
Company believes that such funds are not mandatory in order to fund its
operations in fiscal 2000. Funds raised will be used to finance additional
marketing programs on new products and to reduce debt.
No assurances can be given that the Company will be successful in
maintaining profitable operations or in raising additional equity capital.
3. OTHER BALANCE SHEET INFORMATION (IN THOUSANDS)
APRIL 2, APRIL 3,
1999 1998
------ ------
Inventories:
Finished goods $ 165 $1,414
Work in process 877 533
Raw materials 1,155 1,805
------ ------
$2,197 $3,752
====== ======
Property and equipment:
Equipment $3,533 $3,356
Furniture and fixtures 488 487
Leasehold improvements 229 229
------ ------
$4,250 $4,072
Less accumulated depreciation
and amortization 3,659 3,478
------ ------
$ 591 $ 594
====== ======
Intangible assets:
Software costs $2,741 $2,543
Less accumulated amortization 2,303 2,037
------ ------
$ 438 $ 506
====== ======
26
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. LONG-TERM DEBT AND LINE OF CREDIT
(a) Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 2, APRIL 3,
1999 1998
-------- --------
<S> <C> <C>
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 4b) $ -- $ 167
10% note payable to a major stockholder in December 1999 300 350
10% note payable to a major stockholder due in December 1999 25 --
10% note payable to a stockholder due in December 1999 100 --
7% note payable to a major stockholder due on demand 145 125
7% notes payable to two major stockholders, $10,000 due
April 2, 1999, $10,000 due December 31, 1999 20 20
Non-interest bearing note payable in monthly installments
through October 2001 479 --
-------- --------
1,069 662
Less current maturities 722 536
-------- --------
$ 347 $ 126
======== ========
</TABLE>
Future maturities of long-term debt are as follows (See Note 4b) (in thousands):
2000 $ 722
2001 193
2002 154
2003 --
2004 --
Thereafter --
-------
$ 1,069
=======
(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 at a rate of
prime plus 1.50%, which was collateralized by the Company's inventory. In
addition, a line of credit agreement existed with the lender for up to
$2,500,000 and was based on the available borrowing base, at a rate of prime
plus 1.25% which was collateralized by the Company's accounts receivable.
On September 8, 1998, the Company received notice that the lender had
accelerated all sums due under the financing agreement and made demand for
payment of all outstanding balances due to the Company's violation of the
minimum net worth covenant. The Company and the lender entered into a
forbearance agreement while the Company sought to find another lender.
On November 17, 1998, the Company and a new lender entered into a financing
arrangement which provides for a line of credit up to $1,650,000 ($1,049,000
outstanding at April 2, 1999) and is based on the available borrowing base, at
the prime rate plus 2.00%. A portion of the proceeds from this line of credit
was used to retire the debt borrowed under the June 20, 1997 financing
agreement. The line of credit is primarily collateralized by the Company's
accounts receivable and inventory. The financing arrangement contains various
affirmative and negative covenants and, as of January 1, 1999, the
27
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Company was in violation of the minimum consolidated tangible net worth covenant
and the minimum net working capital covenant. The company obtained from the
lender a waiver through March 31, 1999 regarding compliance with these two
covenants. Effective March 31, 1999, the financing arrangement was amended and
the Company was in compliance with these two covenants. This financing
arrangement expires in November 1999.
5. COMMITMENTS
Rent payable under noncancelable long-term operating leases for real and
personal property is as follows (in thousands):
2000 $ 293
2001 284
2002 222
2003 211
Thereafter 884
-------
$ 1,894
=======
Rent expense was $192,000 and $276,000 for the years ended April 2, 1999
and April 3, 1998, respectively.
6. INCOME TAXES
The Company has available net operating and capital loss carryforwards
amounting to approximately $50 million, including preacquisition operating loss
carryforwards which relate to a predecessor company, which expire in 2014. As a
result of several ownership changes, which have occurred since the losses
started to accumulate, statutory provisions will substantially limit the
Company's future use of the loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The components of deferred tax liabilities and deferred tax assets are as
follows (in thousands):
1999 1998
-------- --------
Deferred tax liabilities:
Software costs $ 105 $ 141
Depreciation 28 0
-------- --------
Total deferred tax liabilities $ 133 $ 141
======== ========
Deferred tax assets:
Allowance for doubtful accounts $ 85 $ 152
Depreciation 0 44
Inventory reserves 345 324
Other accrued expenses 194 407
Net operating loss carryforwards 12,039 10,590
Valuation allowance (12,530) (11,376)
-------- --------
Total deferred tax assets $ 133 $ 141
======== ========
28
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6. INCOME TAXES (CONTINUED)
The statutory federal income tax rate differed from the effective income tax
rate as follows:
1999 1998
------ ------
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)
------ ------
-- % -- %
====== ======
7. EARNINGS PER SHARE
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. For purposes of computing basic and
diluted EPS, the net loss for each period presented (the numerator) ($4,086,000
for fiscal 1999 and $3,466,000 for fiscal 1998) is divided by the weighted
average number of common shares outstanding (the denominator) (7,798,000 in
fiscal 1999 and 7,088,000 in fiscal 1998) resulting in basic and diluted EPS of
($0.52) for fiscal 1999 and ($0.49) for fiscal 1998. For purposes of computing
diluted EPS, the Company excluded the effects of outstanding common stock
options and warrants because they were anti-dilutive.
8. STOCK OPTIONS AND WARRANTS
The Company has a non-qualified equity incentive plan, under which a
committee of the Board of Directors is authorized to grant key employees,
including officers and directors, options to purchase the Company's Common
Stock. Options are exercisable at 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 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
Granted 418,000 $ 1.67 360,000 $ 2.10
Exercised (38,655) 1.13 -- --
Forfeited or canceled (50,719) 2.54 (74,243) 2.08
------- -------
Outstanding at April 2, 1999 765,504 657,770
======= =======
</TABLE>
29
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options and warrants exercisable at:
<TABLE>
<CAPTION>
Stock Options Warrants
------------- --------
Number of Weighted average Number of Weighted average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
April 3, 1998 382,128 $ 1.62 372,013 $ 2.58
April 2, 1999 421,837 $ 1.61 657,770 $ 2.34
</TABLE>
The weighted average per share fair value of options and warrants granted
during the fiscal years 1999 and 1998 are as follows:
Options Warrants
------- --------
April 3, 1998 $ 2.83 $ --
April 2, 1999 $ 3.10 $ 2.01
The weighted average remaining life of options outstanding at April 2, 1999
was 3.5 years. The weighted average remaining life of warrants outstanding at
April 2, 1999 was 5.2 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 1999 and
1998. 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:
<TABLE>
<CAPTION>
Year ended Year ended
(in thousands, except per share data) April 2, 1999 April 3, 1998
------------- -------------
<S> <C> <C>
Net loss applicable to common shareholders: as reported $(4,086) $(3,466)
pro forma (5,054) (3,662)
Loss per common share, basic and diluted: as reported $ (0.52) $ (0.49)
pro forma (0.65) (0.52)
</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 1999 and 1998;
Dividend yield was excluded from the computation for both years; expected
volatility of 86.4% for fiscal 1999 and 80.6% for fiscal 1998; a risk free
interest rate of 5.61% for fiscal 1999 and 5.75% for fiscal 1998 and an expected
option life of 5.0 years for both fiscal 1999 and 1998.
9. EQUITY TRANSACTIONS
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, 1997 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.
YEAR ENDED APRIL 2, 1999
- ------------------------
During the period of June 24, 1998 through January 28, 1999, the Company
raised $1,073,000 through a private placement. A total of 510,940 shares of its
common stock were sold at an average offering price of $2.10. On February 5,
30
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
9. EQUITY TRANSACTIONS (CONTINUED)
1999, the Company issued 50,000 shares of its common stock at the price of $2.10
in settlement of litigation (See Note 13). On March 15, 1999, the Company issued
69,880 shares of its common stock in settlement of litigation (See Note 13).
Also during the fourth quarter, the Company raised $500,000 through the issuance
of 238,096 shares of its common stock to two major shareholders.
10. OTHER RELATED PARTY TRANSACTIONS
The Company incurred interest expense totaling $44,000 and $50,000 during
the fiscal years ended April 2, 1999 and April 3, 1998 on obligations due to
stockholders.
The Company utilized 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 1999 and 1998 fiscal years, the Company made
purchases of $9,000 and $87,000, respectively, at rates not in excess of those
charged to other persons in arms' length transactions.
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, New Computone Corporation, a newly
formed subsidiary of the Company, 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. On December 3, 1998 the Company and Ladia agreed in principle on a
renegotiation of certain terms of the Agreement. However, on May 26, 1999, the
Company announced that the Agreement, as amended in principle, with Ladia had
been terminated.
During fiscal 1999, the Company, in conjunction with the (now cancelled)
merger transaction, made advances to Ladia in the amount of $700,000 (See Item
1. Description of Business). On June 24, 1999 the Company assigned its rights,
effective March 31, 1999, (i) to $450,000 of these advances to Pennsylvania
Merchant Group, ("PMG"), an affiliated entity, in exchange for a $450,000
reduction in notes payable by the Company to PMG and (ii) to $250,000 of these
advances to a major shareholder in exchange for a $250,000 note receivable due
on demand no earlier than October 1, 1999. For financial reporting purposes, the
Company recorded a $700,000 writedown for uncollectibility on the advances
against the results of operations and recorded a $450,000 capital contribution
during the fourth quarter. Further, the Company expects to record an additional
capital $250,000 contribution when the note receivable is collected.
11. FOREIGN SALES AND MAJOR CUSTOMERS
The Company's revenues include approximately $1,850,000 and $2,115,000 from
foreign customers (principally in Europe, South Africa and Central and South
America) for the years ended April 2, 1999 and April 3, 1998, respectively.
The Company had three customers whose purchases exceeded 10% of product
sales in fiscal 1999. These customers are Wal-Mart ($1,582,000 or 16%), Lowes
Companies / Maxnet Systems ($1,496,000 or 15%) and Tech Data ($1,337,000 or
12%). In fiscal 1998, purchases by Wal-Mart were $2,925,000 or 25% of product
sales.
12. EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code (the "Code"), whereby eligible employees may
contribute up to 15% 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 1999 and 1998 fiscal years, the Company made no
such contributions to the plan.
31
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
13. LITIGATION
Since March 1996, the Company has been the subject of an investigation by
the SEC 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 SEC of the SEC's Atlanta District Office
(the "SEC") of the SEC's intention to recommend an enforcement action against
the Company for alleged violations of the federal securities laws. Specifically,
the SEC 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. The Company has proposed a
settlement to the SEC pursuant to which the Company would agree, without
admission or monetary penalty, to the entry of a permanent order enjoining the
Company from future violation of certain reporting provisions of the Securities
Exchange Act of 1934 and the Company would further agree to restate certain
consolidated financial statements filed with the SEC. As of June 30, 1999 the
Company has restated three quarterly reports on Form 10-QSB with respect to
fiscal 1998. At this time management cannot determine the ultimate outcome or
effect in regards to 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 sought 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
arose from the Company's failure to order further product from Marshall. In
March 1999, the Company reached an agreement with Marshall to settle this
matter. This agreement called for the Company to issue 69,880 shares of its
common stock and sign a non-interest bearing promissory note in the amount of
$579,000. In return, the Company received $386,000 of inventory and settled
accounts payable referenced above in the amount of $368,000. This settlement did
not have an adverse effect on the Company's financial condition.
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 sought recovery for
breach of contract relating to an alleged receivable owed by the Company of
approximately $167,000. The Company disputed the value of the returned goods and
defended itself against the preference action by alleging that it was
fraudulently induced to provide product to Capella. In the alternative, the
Company served a counterclaim alleging a breach of contract claim against
Capella seeking approximately $2.7 million dollars in damages for Capella's
breach. The Company had also been advised by Comerica Bank of Comerica's
alleging security interest in the product returned to the Company. In December
1998, the Company reached a settlement with Capella Worldwide and Comerica Bank
in this matter. The settlement called for the Company to pay both parties an
aggregate amount of $150,000. The Company had adequate amounts accrued to cover
the cost of this settlement. In exchange, both parties released all claims
against the Company.
On June 30, 1997, Edward T. Lack, Jr., 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. Mr. Lack sought $189,421.94, plus
interest costs and expenses of litigation, including attorney's fees. On March
15, 1999, the Company reached a settlement with Mr. Lack, Jr. in this matter.
The settlement called for the Company to issue Mr. Lack 50,000 shares of its
common stock. In exchange, Mr. Lack released all claims against the Company.
32
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
13. LITIGATION (CONTINUED)
On or about October 22, 1998, the Company was served with a complaint in
the Superior Court of Fulton County, Georgia by The Software Group ("SGL"). SGL
sought unpaid royalty fees and interest in the amount of $315,923.15. In May
1999, the Company entered into a Consent Judgment with SGL whereby all claims
were settled for payment of $110,000, payable in eleven equal installments of
$10,000, without interest.
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.
33
<PAGE>
Computone Corporation
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
Years ended April 2, 1999 and April 3, 1998
<TABLE>
<CAPTION>
Additions
Balance, Charged
Beginning to Costs Balance,
Description of Year and Expenses Deductions End of Year
- ----------- ------- ------------ ---------- -----------
(in thousands)
Allowance for uncollectible accounts:
<S> <C> <C> <C> <C>
Year ended April 2, 1999 $ 668 $ 140 $ 319 $ 489
Year ended April 3, 1998 531 344 207 668
Allowance for slow-moving and obsolete inventory:
Year ended April 2, 1999 851 243 186 908
Year ended April 3, 1998 400 462 11 851
Valuation allowance for deferred tax assets:
Year ended April 2, 1999 11,376 1,154 -- 12,530
Year ended April 3, 1998 9,931 1,445 -- 11,376
</TABLE>
34
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of February 1, 1999
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 Keith H. Daniel, an individual residing at 560 Croydon
Lane, Alpharetta, Georgia 30022 ( the "Employee").
WITNESSETH:
-----------
WHEREAS, the Employer desires to employ the Employee, and the Employee
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 Employee'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
Employee and the Employee shall be employed by the Employer, as the Chief
Financial 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 January 31, 2001.
(b) Unless written notice in accordance with this paragraph 1
terminating the Employee's employment hereunder if given by either the Employer
or the Employee 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 the Agreement shall continue in full force and effect throughout the Term
and, with respect to those terms and conditions that apply 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 the Employee in accordance with the terms hereof, shall have the
right to terminate the
<PAGE>
Employee's employment hereunder at any time during the Term hereof, but only for
Cause (as defined herein) or on account of the Employee's death or Permanent
Disability (as defined herein) as of the date of such death or Permanent
Disability.
(i) "Cause" shall mean (A) the Employee's willful and continued
failure substantially to perform his material duties with the Employer, or the
commission by the Employee 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
Employee and a reasonable opportunity for the Employee 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 Employee, (C) The Employee's
habitual intoxication or drug addiction or repeated absences other than physical
or mental impairment or illness, (D) the Employee's admission or conviction of,
or plea of nolo contendere to, any felony that in the reasonable judgement of
the Board, adversely affects the Employer's reputation or the Employee's ability
to carry out his obligations under this Agreement or (E) the Employee's
non-compliance with the provisions of paragraphs 2(b) or 6(b) hereof after
notice thereof from the Employer to the Employee and a reasonable opportunity
for the Employee to cure such non-compliance.
(ii) "Permanent Disability" shall mean a physical or mental disability
such that the Employee 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 Employee's employment
hereunder on account of Permanent Disability, the Employer must provide the
Employee with written notice of the Board's good faith determination to
terminate the Employee'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 Employee shall continue to receive compensation at
the rates set forth in paragraph 3 hereof less any payments received by the
Employee pursuant to the Employer's short-term disability insurance coverage. No
termination of this Agreement because of the Employee shall impair any rights of
the Employee under any disability insurance policy maintained by the Employer at
the commencement of the aforesaid 90-day period.
2
<PAGE>
(d) (i) If the Employer terminates the Employee's employment
hereunder for any reason other than for Cause or on account of the Employee's
death or Permanent Disability and such termination occurs as of a date that is
within 180 days preceding or within 180 days after the consummation of a Change
in Control (as defined herein) (such 180-day periods being hereinafter
collectively referred to as a "Change in Control Period"), the Employer shall
pay to the Employee within 30 days after the event giving rise to such payment
occurs an amount equal to the sum of (x) (1) the Employee's Base Salary (as
defined herein) accrued through the date of termination of the Employee's
employment hereunder and (2) any Bonus ( as defined herein) required to be paid
to the Employee pursuant to paragraph 3(b) hereof, with such payment described
in clauses (x)(1) and (x)(2) hereof being collectively referred to herein as the
"Accrued Obligation" and (y) a severance payment equal to one-half the
Employee's annual Base Salary as of the effective date of termination of the
Employee's employment hereunder.
(ii) If: (A) the Employer terminates the Employee's employment
hereunder for Cause, (b) this Agreement is terminated as a result of the death
or Permanent Disability of the Employee or (C) the Employer gives notice of
non-renewal of this Agreement effective as of a date that is not within a Change
in Control Period, the sole obligation of the Employer shall be to pay the
Accrued Obligation to the Employee.
(iii) "Change of Control" shall mean (A) the acquisition of
shares of the Employer by any "person" or "group" (as such terms are used in
rule 13d-3 under the Securities Exchange Act of 1934 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
Employer's Common Stock after the date of this Agreement, (B) the consummation
of a merger or other business combination after which the holders of voting
capital stock of the Employer 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 Employer 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 Board on the date
hereof and persons whose election as members of the Board was approved by such
members then still in office or whose election was previously so approved after
the date hereof, but before the event that constitutes a Change of Control, no
longer constitute such a majority of the members of the Board then in office. A
transaction constituting a Change in Control shall only be deemed to have
occurred upon the closing of the Transaction
(e) Any notice of termination of this Agreement by the Employer to the
Employee or by the Employee to the Employer shall be given in accordance with
provisions of paragraph 10 hereof.
2. Duties of the Employee.
-----------------------
(a) Subject to the ultimate control and discretion of the Board, the
Employee shall serve in the Position and perform all duties and services
commensurate with the Position. Throughout the Term, the Employee 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 Employee hereunder, the duties of the Employee
shall be performed in the greater Atlanta, Georgia metropolitan area.
3
<PAGE>
(b) The Employee shall devote substantially all of the Employee's
business time and attention to the performance of the Employee's duties
hereunder and, during the term of his employment hereunder, the Employee shall
not engage in any other business enterprise which requires any significant
amount of the Employee's personal time or attention, unless granted the prior
permission of the Board. The foregoing provision shall not prevent the
Employee's purchase, ownership or sale of any interest in, or the Employee's
engaging (but not to exceed and an average of five hours per week) in, any
business which does not compete with the business of the Employer, the
Employee's taking actions permitted by paragraph 6(b) hereof or the Employee's
involvement in charitable or community activities, provided, that the time and
attention which the Employee devotes to such business and charitable or
community activities does bot materially interfere with the performance of his
duties hereunder.
(c) The Employee shall be entitled to 15 business days of leave during
each calendar year with full compensation for vacation to be taken at such time
or times, as the Employee and the Employer shall mutually determine. Unused days
of vacation may not be carried over from year to year or received in cash.
3. Compensation:
-------------
For all services to be rendered by the Employer hereunder:
(a) Base Salary. The Employer shall pay the employee (i) a base salary
(the "Base Salary") at an annual rate of One Hundred Ten Thousand Dollars
($110,000) during the Initial Term and each renewal Term and (ii) 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. If, during the Term, the Employee's duties and responsibilities
hereunder are materially increased as a result of his financial reporting duties
with respect to a new subsidiary of the Company acquired in a merger or other
acquisition, the Employee's annual Base Salary shall be increased to One Hundred
Twenty Six Thousand Five Hundred Dollars ($126,500).
(b) Bonus. The Employer shall pay the Employee (i) a quarterly bonus
of $5,000 for each quarter ending during the Term if the Employer's EBIT (as
defined herein) for such quarter exceeds $100,000 and (ii) an annual bonus of
$10,000 for each fiscal year ending during the Term if the Employer's EBIT for
such calendar year exceeds $1,000,000 (collectively, the "Bonus"). "EBIT" shall
mean, for any period, an amount equal to the Employer's Net Income (as defined
herein) for such period, plus (without duplication to the extent deducted in
determining Net Income) the sum of ( i )interest expense for such period, plus
(ii) income tax expense deducted in determining Net Income for such period, all
of which shall be determined in accordance with generally accepted accounting
principles. "Net Income" shall mean, for any period, the aggregate amount of net
income, after taxes, for such period. Notwithstanding the foregoing, EBIT shall
be determined without deducting any bonuses paid or accrued by the Company based
on EBIT.
(c) Stock Options. Effective on the date hereof, the Employer shall
grant the Employee options, which shall be non-qualified stock options, to
purchase an aggregate of 75,000 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 on the OTC Bulletin Board on the date of
such grant. Such options shall have the following principal terms:
4
<PAGE>
(i) Such options shall become vested and become exercisable for a
period of ten years from the date hereof in installments as follows:
(A) 25,000 shares shall become vested and become exercisable on
and after the date of commencement of Employee's employment by
the Employer;
(B) 25,000 shares shall become vested and become exercisable on
and after the first anniversary of the date hereof; and
(C) an additional 25,000 shares shall become vested and become
exercisable on and after the second anniversary of the date
hereof;
(ii) Such options shall become fully vested and immediately
exercisable following a Change in Control and shall remain exercisable for a
period of five years from the date hereof;
(iii) 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 Employee;
(iv) 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 Employee's death or Permanent Disability; and
(v) 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.
(d) 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 Employee may have, during the Employee's employment hereunder
or thereafter, to participate in and receive benefits from or under the
Employer's medical, term life and disability insurance pans 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 Employee for all reasonable
expenses paid or incurred by the Employee in connection with the performance of
the Employee's duties and responsibilities hereunder upon presentation of
expense vouchers or other appropriate documentation.
5
<PAGE>
5. Indemnification.
----------------
The Employer shall indemnify the Employee, to the fullest extend
permitted by law, for any and all liabilities to which the Employee 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 Employee in
connection with any such legal action, provided the Employee delivers to the
Employer his undertaking to repay any expenses so advanced in the event it is
ultimately determined that the Employee is not entitled to indemnification
against such expenses. Expenses reasonably incurred by the Employee 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 Employee 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 Employee understands that in the course of his employment by
the Employer, the Employee will receive confidential information concerning the
business of the Employer, and which the Employer desires to protect. The
Employee 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 Employee to be confidential, without specific
written authorization by the Employer. Upon termination of this Agreement, upon
the request of the Employer, the Employee shall promptly deliver to the Employer
any and all written materials, records and documents, including all copies
thereof, made by the Employee or coming into his possession during the Term and
retained by the Employee containing or concerning confidential information of
the Employer and all other written materials furnished to and retained by the
Employee by the Employer for his use during the Term, including all copies
thereof, whether of a confidential nature or otherwise.
(b) During the Employee's employment with the Employer, the Employee
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 Employee 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
6
<PAGE>
7. Representation and Warranty of the Employee.
--------------------------------------------
The Employee 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 Employee with respect to the subject matter hereof, and supersedes all prior
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, including without limitation, the
Consulting Agreement between the Employer and the Employee dated October 29,
1998 (the "Prior Consulting Agreement"), except as herein contained. The
Employee and the Employer understand and agree that the Prior Consulting
Agreement is terminated effective as of the date hereof, subject to the terms of
this Agreement. The Employee acknowledges and agrees that all obligations of the
Employer under the Prior Consulting Agreement, including without limitation, the
payment of any money, have been satisfied. This Agreement 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 Employee, but shall inure to the benefit of the Employee'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 had 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 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: Fredrick 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 Employee's heirs,
executors, administrators and legal representatives) any rights or remedies of
any nature under or by reason of this Agreement.
7
<PAGE>
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 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 Employee's submitted dispute and
if the Board fails to respond within said time, or the Employee'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 the Agreement or to require at any time performance by the
other parties 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
Employee 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 Employee 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.
IN WHITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
COMPUTONE CORPORATION
By: /s/ Perry J. Pickerign
------------------------------
Perry J. Pickerign, President
and Chief Executive Officer
/s/ Keith H. Daniel
------------------------------
Keith H. Daniel
Exhibit 21
Computone Corporation and Subsidiaries
Subsidiaries of the Registrant
Jurisdiction of Percent of
Incorporation Voting
Name of corporation Or Organization Securities Held
- ------------------- --------------- ---------------
Ladia Communications Technologies, Inc. Delaware 100%
New Computone Corporation Delaware 100%
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Computone Corporation
Alpharetta, Georgia
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to the Computone Corporation Amended and
Restated Equity Incentive Plan, 1997 Equity Incentive Plan, and 1998 Equity
Incentive Plan of our report dated June 30, 1999 relating to the consolidated
financial statements and schedule of Computone Corporation included in the
Company's Annual Report on Form 10-KSB for the year ended April 2, 1999. Our
report contains an explanatory paragraph regarding the Company's ability to
continue as a going concern.
BDO Seidman, LLP
Atlanta, Georgia
June 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000819479
<NAME> Computone Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> APR-02-1999
<PERIOD-START> APR-04-1998
<PERIOD-END> APR-02-1999
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 2,452
<ALLOWANCES> 489
<INVENTORY> 2,197
<CURRENT-ASSETS> 4,241
<PP&E> 4,250
<DEPRECIATION> 3,659
<TOTAL-ASSETS> 5,308
<CURRENT-LIABILITIES> 4,855
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 23
<TOTAL-LIABILITY-AND-EQUITY> 5,308
<SALES> 10,181
<TOTAL-REVENUES> 10,181
<CGS> 6,940
<TOTAL-COSTS> 13,535
<OTHER-EXPENSES> 586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> (4,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,086)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
