UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the three month period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16172
COMPUTONE CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 23-2472952
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, GA 30005
------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (770) 625-0000
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State 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 on
August 11, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
and April 2, 1999 3
Consolidated Statements of Operations for the
three months ended June 30, 1999 and July 3, 1998 4
Consolidated Statements of Cash Flows for the three
months ended June 30, 1999 and July 3, 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or Plan of
Operations for the three months ended June 30, 1999
compared to three months ended July 3, 1998 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Computone Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 April 2, 1999
------------- -------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 61 $ 18
Receivables, net of allowance for doubtful accounts
of $468 at June 30, 1999 and $489 at April 2, 1999 2,878 1,963
Inventories, net 2,224 2,197
Prepaid expenses and other 48 63
------------ ------------
Total current assets 5,211 4,241
Property, equipment and improvements, net 600 591
Intangible assets, net 408 438
Other 27 38
------------ ------------
TOTAL ASSETS $ 6,246 $ 5,308
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,770 $ 2,143
Accrued liabilities:
Payroll 60 83
Deferred sales 433 229
Professional fees 62 109
Other 733 520
Line of credit 440 1,049
Notes payable to stockholders 590 590
Current maturities of long-term debt 132 132
------------ ------------
Total current liabilities 5,220 4,855
Long-term debt, less current maturities 322 347
------------ ------------
Total liabilities 5,542 5,202
------------ ------------
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; 8,471,674 and 8,321,674 shares outstanding 85 83
Additional paid-in capital 47,536 47,369
Accumulated deficit (46,917) (47,346)
------------ ------------
Total stockholders' equity 704 106
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,246 $ 5,308
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Computone Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
June 30, 1999 July 3, 1998
------------- ------------
(unaudited)
Revenues:
<S> <C> <C>
Product sales $ 4,733 $ 2,844
---------- ----------
Expenses:
Cost of products sold 2,849 1,998
Selling, general and administrative 942 1,329
Product development 459 436
---------- ----------
4,250 3,763
---------- ----------
Operating income (loss) 483 (919)
Other expense:
Interest expense - affiliates 20 10
Interest expense - other 34 21
---------- ----------
Income (loss) before income taxes 429 (950)
Provision for income taxes -- --
---------- ----------
Net income (loss) $ 429 $ (950)
========== ==========
Income (loss) per common share:
Basic $ 0.05 $ (0.13)
========== ==========
Diluted $ 0.05 $ (0.13)
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Computone Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, 1999 July 3, 1998
------------- ------------
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) from operations $ 429 $ (950)
Adjustments to reconcile income (loss) from operations
to net cash provided by (used in) operations:
Depreciation and amortization 117 117
Provision for uncollectible accounts 38 139
Provision for inventory reserve 70 30
Changes in current assets and current liabilities:
Accounts receivable (953) 1,083
Inventories (97) 584
Prepaid expenses and other 15 (35)
Accounts payable and accrued liabilities 974 (195)
------------ ------------
Net cash provided by operations 593 773
------------ ------------
Cash flows from investing activities:
Decrease in other assets 11 --
Capitalization of software costs (31) (48)
Capital expenditures (65) (45)
------------ ------------
Net cash used in investing activities (85) (93)
------------ ------------
Cash flows from financing activities:
Repayment of debt - net (25) (13)
Net repayments under lines of credit - others (609) (890)
Exercise of common stock options 169 2
Issuance of common stock -- 572
------------ ------------
Net cash used in financing activities (465) (329)
------------ ------------
Net increase in cash and cash equivalents 43 351
Cash and cash equivalents, beginning of period 18 146
------------ ------------
Cash and cash equivalents, end of period $ 61 $ 497
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 34 $ 21
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All statements contained in this Form-10QSB Quarterly Report that are not
historical facts are based on current expectations. Such statements are
forward-looking (as defined in the Private Securities Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties. Actual results
could vary materially. The factors that could cause actual results to vary
materially include: the ability of the Company to obtain and maintain adequate
working capital, future supply and demand for the Company's products, the
outcome of a Securities and Exchange Commission ("SEC") investigation, changes
in business and economic conditions, availability of raw materials and parts,
possible disruptions of normal business activity from year 2000 issues, and
other risks that may be described from time to time in reports the Company files
with the SEC. Undue reliance should not be placed on any such forward-looking
statements.
1. BASIS OF PRESENTATION
---------------------
The financial statements included in this Form 10-QSB Quarterly Report have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed, or omitted, pursuant to such rules
and regulations. These financial statements should be read in conjunction with
the financial statements and related notes included in the Company's Annual
Report on Form 10-KSB for its fiscal year ended April 2, 1999.
The financial statements presented herein as of June 30, 1999 reflect, in
the opinion of management, all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
the results for the full year.
2. 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 is accrued at the date
of shipment. The Company generally provides a warranty of five years on all of
its products sold.
3. 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 $978,000 and $908,000 at June 30, 1999 and April 2, 1999, respectively.
7
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
3. INVENTORIES, CONTINUED
----------------------
Inventories, net of a reserve for obsolete, excess and non-salable items,
consisted of the following at June 30, 1999 and April 2, 1999 (in thousands):
June 30, 1999 April 2, 1999
------------- -------------
Finished goods $ 185 $ 165
Work in progress 934 877
Raw materials 1,105 1,155
---------- ----------
$ 2,224 $ 2,197
========== ==========
4. INCOME (LOSS) 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 income (loss) for each period presented (the numerator)
($429,000 for the three month period ended June 30, 1999 and $(950,000) for the
three months ended July 3, 1998) is divided by the weighted average number of
common shares outstanding (the denominator). Basic EPS were $0.05 for the three
months ended June 30, 1999 and a loss of ($0.13) for the three months ended July
3, 1998. The weighted average number of common shares outstanding used in the
basic EPS calculation are 8,464,932 and 7,468,000 for the 1999 and 1998 periods,
respectively. The weighted average number of common shares outstanding used in
the diluted EPS calculation is 8,751,363 for the 1999 period. For purposes of
computing diluted EPS, the Company excluded the effects of outstanding common
stock options and warrants in the 1998 period because they were anti-dilutive.
5. INCOME TAXES
------------
The Company has available net operating and capital loss carryforwards
amounting to approximately $50 million at April 2, 1999, including 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.
6. DEBT
----
On November 17, 1998, the Company entered into a financing arrangement
which provides for a line of credit up to $1,650,000 ($440,000 outstanding at
June 30, 1999) and is based on the available borrowing base, at an interest rate
of prime plus 2.00%. A portion of the proceeds from this line of credit was used
to retire the debt borrowed under a previous financing agreement. The line of
credit is primarily collateralized by the Company's accounts receivable and
inventory. This financing arrangement expires in November 1999. The agreement
can be renewed for an additional year with the mutual consent of both parties.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JULY 3, 1998.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income for the three month period ended June 30,
1999 of $429,000 compared to a net loss of $950,000 for the comparable three
month period of the prior fiscal year. The Company's operating results for the
three months ended June 30, 1999 were favorably affected by increased sales to
major customers, higher gross margins, and decreased general and administrative
expenses.
Product sales revenue for the three month period ended June 30, 1999
totaled approximately $4,733,000 compared to $2,844,000 for the comparable three
month period of the prior fiscal year, an increase of $1,889,000, or 66%. This
increase is attributable to higher sales to the Company's two major customers.
Cost of products sold for the three month period ended June 30, 1999
amounted to $2,849,000, or 60% of product sales revenues versus $1,998,000, or
70%, for the comparable three month period of the prior year. The decrease in
cost of products sold as a percentage of revenues is due to pricing improvements
and increased sales volumes.
Selling, general and administrative expenses amounted to $942,000, or 20%
of product sales revenue, for the three months ended June 30, 1999 versus
$1,329,000, or 47%, for the comparable three months of the prior fiscal year.
The decrease in selling, general and administrative expenses during the three
month period ended June 30, 1999 versus the same period of the prior fiscal year
is attributable to decreases in compensation costs due to staff reductions,
reduced legal costs due to settlement of litigation in the prior fiscal year,
and the successful implementation of other cost reduction efforts.
Product development expenses amounted to $459,000, or 10% of product sales
revenue, for the three months ended June 30, 1999 versus $436,000, or 15%, for
the comparable three month period of the prior fiscal year. The Company expects
that product development expenses will continue at the current level for the
remainder of the fiscal year.
LIQUIDITY
- ---------
On November 17, 1998, the Company entered into a financing arrangement
which provides for a line of credit up to $1,650,000 ($440,000 outstanding at
June 30, 1999) and is based on the available borrowing base, at an interest rate
of prime plus 2.00%. The line of credit is primarily collateralized by the
Company's accounts receivable and inventory. At June 30, 1999, the borrowing
availability under this line of credit was $589,000.
The Company's primary cash commitments in fiscal 2000 include payments
under non-cancelable operating leases ($293,000), short-term debt ($722,000) and
investments in research and development ($459,000 in the first three months of
fiscal year 2000). 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.
Cash provided by operations amounted to $593,000 for the three months ended
June 30, 1999 compared to $773,000 for the three months ended July 3, 1998. The
decrease in cash provided by operations compared to the prior year fiscal period
primarily reflects the increase in accounts receivable and inventories.
Cash used in investing activities amounted to $85,000 for the three
months ended June 30, 1999 compared with $93,000 for the three months ended July
3, 1998. This slight decrease from the same period of the prior fiscal year is
attributable the decrease in other long-term assets. The Company does not
anticipate a significant increase in the level of capital expenditures.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JULY 3, 1998, CONTINUED.
LIQUIDITY, CONTINUED
- ----------
Cash used in financing activities during the three months ended June 30,
1999 was $465,000 versus $329,000 for the three months ended July 3, 1998. This
increase is primarily due to repayments on the Company's line of credit which
were partially offset by a decrease in cash received from the issuance of common
stock.
Working capital was a deficit of $9,000 at June 30, 1999 versus a deficit
of $614,000 at April 2, 1999, an improvement of $605,000. The ratio of current
assets to current liabilities at June 30, 1999 was 1.00 to 1.00 compared to .87
to 1.00 at April 2, 1999.
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 efficiencies, 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 cost 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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JULY 3, 1998, CONTINUED.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 1999
- -----------------------------------------
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 internet service providers and medium to large companies that require
high-density connectivity, allowing remote users and locations access to the
Internet and corporate Intranets. The new "Gold" card family of products are
high performance, cost effective PCI controller products specifically designed
to meet the needs of the remote access market. The Intelliserver RAS-2000
Powerrack is a redesign of the Powerrack family with enhanced performance,
remote access server features and configurations added.
During the first quarter of fiscal 2000, the Company's backlog decreased
from $2,573,000 at April 2, 1999 to $1,485,000 at June 30, 1999. The backlog at
April 2, 1999 was significantly higher than would normally be expected. During
the fourth quarter of fiscal year 1999, the Company resolved a payment issue
with its principal contract manufacturing supplier. However, due to long lead
times for certain components the supplier was unable to make significant
deliveries during the later portion of fiscal year 1999. The Company anticipates
that substantially all of its backlog at June 30, 1999 will be shipped during
the second quarter of fiscal year 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None, other than those matters described in Item 3 to the Company's
Annual Report on Form 10-KSB for the year ended April 2, 1999.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTONE CORPORATION
Date: August 11, 1999 By: /s/ Perry J. Pickerign
----------------------
Perry J. Pickerign
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Keith H. Daniel
-------------------
Keith H. Daniel
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> JUN-30-1999
<CASH> 61
<SECURITIES> 0
<RECEIVABLES> 3,346
<ALLOWANCES> 468
<INVENTORY> 2,224
<CURRENT-ASSETS> 5,211
<PP&E> 4,309
<DEPRECIATION> 3,709
<TOTAL-ASSETS> 6,246
<CURRENT-LIABILITIES> 4,220
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 619
<TOTAL-LIABILITY-AND-EQUITY> 6,246
<SALES> 4,733
<TOTAL-REVENUES> 4,733
<CGS> 2,849
<TOTAL-COSTS> 4,250
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 429
<INCOME-TAX> 0
<INCOME-CONTINUING> 429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
