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 March 31, 2000
[ ] 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
------------------------ -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, Georgia 30005
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(Address of principal executive offices) (Zip code)
Issuer'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. [ ]
The issuer's revenues for the fiscal year ended March 31, 2000 were $11,198,000.
On June 28, 2000, 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
$46,780,705.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,009,983 shares of Common
Stock outstanding on June 28, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portion of Registrant's definitive proxy statement relating to its annual
meeting of stockholders to be held on or about August 16, 2000, 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. 9
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters. 10
Item 6. Management's Discussion and Analysis of Operations. 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 18
2
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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 April 12, 2000, the Company, its wholly-owned subsidiary New Computone
Corporation (the "Merger Sub"), Multi-User Solutions, Ltd. ("Multi-User") and
Darrill S. Sherrill and John H. Gardner, Jr., (the "Shareholders") entered into
an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, Multi-User will merge with and into Merger Sub and will thereupon
become a wholly-owned subsidiary of the Company. In summary, the Merger
Agreement provides that upon the merger, each of the 1,000 outstanding shares of
common stock of Multi-User will be cancelled and extinguished and converted
automatically into the right to receive $4,000 in cash, an aggregate of
$4,000,000 and 800 shares of the Company's Common Stock, an aggregate of 800,000
shares (collectively, the "Merger Consideration"). In addition, the Merger
Consideration is subject to increase by up to $1,500,000, payable half in cash
and half in Company Common Stock, depending upon the satisfaction of specified
performance objectives through June 2003.
On June 28, 2000, the Company, Merger Sub, Multi-User and the Shareholders
consummated the transactions contemplated by the Merger Agreement.
Multi-User is a leading technology support and integration company
specializing in providing operating system support, systems integration and
on-site hardware maintenance for turnkey systems providers (i.e., software
developers with specialized application for a vertical market) in the United
States and Canada. The primary focus of both Multi-User and the Company are
companies utilizing the SCO UNIX, Linux and Microsoft WindowsNT operating
systems.
(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.
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Current Business
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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.
3
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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 did 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 Gartner
Group, approximately 130 million employees worldwide will be involved in remote
access as part of their jobs by 2002. In the U.S., roughly 1/3 of all jobs will
be impacted by remote access. In addition, the Yankee Group estimates the remote
access 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 often 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, our Intelligent servers that
incorporate a UNIX-like operating system and facilitate 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 several families of multi-port products with
widespread industry name recognition: ValuePortTM, IntelliPort IITM, IntelliPort
PlusTM, IntelliPort II ExpandableTM, RackPortTM, and the high speed Gold CardTM
solution. These products, combined with the IntelliServer and RAS2000TM
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 recently developed several server products that can be used
to facilitate secure e-commerce transactions and provides a local and remote
network management capabilities. These server products consist of a wide range
of software-based data communications solutions that provide users secure access
to administer networks from remote location or possibly even from home.
4
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Manufacturing
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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 manufacturers procure all
the necessary parts and components and perform quality control testing of the
assembled 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 personnel
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 for numerous applications
such as 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 and provides easy access to Internet
services. It routes TCP/IP traffic, uses RADIUS and the industry standard PPP
protocol. For remote / branch offices, the IntelliServer provides easy to use
access 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 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. The IntelliServer family of products are intelligent servers that
function as terminal servers, print servers, remote access servers and secure
console management servers. These products allow users to control and share
devices in an environment of multiple operating systems. A user will no longer
require a printer for the Unix environment and a separate printer or device for
the Windows NT environment. The IntelliServer performs the translation and
enables the user to share devices. In addition, a user can manage a network
securely from a remote location.
Both SlimLine and RAS2000 PowerRack models are available in the
IntelliServer product family. The RAS2000 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 tabletop 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 and
web browser graphical user interface (GUI) 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 PC server or "host" computer via a PCI or ISA slot.
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).
5
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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 4-port and 8-port solutions with
speeds of 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 - RAS 2000 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.
o GOLDCARD - high performance 4 port and 8 port PCI solution, utilizing
the Company's Direct Access Serial Hardware Engine ("DASHE").
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 and ISA 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 Linux
o Solaris
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 user 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 design first sold in fiscal 1999,
offers higher performance than competitive products for the ISA bus.
6
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The IntelliPort III RAS 2000 PowerRack 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 Gold 4 (4-port) and Gold 8 (8-post) products are 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 to provide plug and
play async multiport I/O, the Company can capture a significant share in this
explosive growth market. The Company's engineering group has created a powerful
direct interface with the PCI-bus. The Company's DASHE provide high transfer
speeds and efficient access to the full capabilities of the PCI-bus.
The Company intends to explore developing a second generation of the
TotalAccess DCS-5000, a high performance Ethernet Digital remote access server.
The DCS-5000 will be a digital communication server geared toward larger ISP's
and enterprise type organizations. The DCS-5000 will be designed to meet the
demands of many of the Company's current ISP customers and larger organizations.
It will facilitate higher bandwidth with multiple T1/E1/PRI transmissions and
offer "Hot Swappable" redundant power supplies. The higher end concentrator
market is a several billion dollar market with projected annual growth rates of
30% or better. The unit will operate in a heterogeneous environment and
terminate both digital and analog calls.
Sales and 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.
On February 17, 2000, the Company announced that its full line of
communications servers and multiport boards are now being distributed by Ingram
Micro, Inc., the world's largest wholesale provider of technology products and
services. Ingram Micro sells to more than 140,000 resellers in 130 countries.
Customers for the Company's products are located throughout the world.
During the Company's 2000 and 1999 fiscal years, approximately 85% and 82% of
the Company's revenues were generated in the United States, respectively.
Product testing and customer service are on-going programs 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 programs
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.
The Company intends to continue to develop sophisticated server-based
communication equipment with more software functionality, such as the
IntelliServer (i.e. intelligent server) and the DCS-5000 concentrator. This more
sophisticated equipment will require a greater level of support. The Company
intends to market support services to meet this need.
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.
7
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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, Perle, Specialix and
Chase Research Limited (both divisions of Perle System, Ltd.), and Equinox
frequently compete with the Company for the same customers in the United States
market. In the European market, Digi International, Perle, Specialix, Chase
Research Limited, 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 RAS2000 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. The Company has also 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 or have sufficient financial resources to do so.
Export Sales
------------
The Company's sales from customers located outside the United States,
primarily in Europe, Central and South America approximated 15% and 18% of net
revenues for the 2000 and 1999 fiscal years, respectively. 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 2000. These customers are Lowes Companies/Maxnet Systems
($3,201,000 or 29%), Tech Data ($1,464,000 or 13%) and Wal-Mart ($1,107,000 or
10%). In fiscal 1999, purchases by Lowes Companies/Maxnet Systems were
$1,496,000 or 15% of product sales, by Tech Data were $1,337,000 or 12% of
product sales, and by Wal-Mart were $1,582,000 or 16% of product sales.
Product Development
-------------------
During fiscal years 2000 and 1999, the Company's product development
expenditures were $1,749,000 and $1,947,000, respectively. In addition, for
fiscal years 2000 and 1999, the Company capitalized $175,000 and $198,000 of
software development costs.
Trademarks and Licenses
-----------------------
Due to rapidly changing technology in the computer industry, the Company
believes its success depends primarily on the engineering, marketing and support
skills of its personnel rather than on patent protection. Although the Company
may seek patents where appropriate, at present, none of the Company's products
are patented. The Company relies primarily on the copyright, trademark and trade
secret laws to protect its proprietary rights in its products.
8
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Employees
---------
At March 31, 2000, the Company had 51 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
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The Company's customers typically place orders for delivery within a short
period of time. Therefore, the Company does not believe that its backlog is a
good indicator of future sales. Typically, sufficient inventory of finished
products is held by the Company or its distributors to allow shipments to
customers to occur within one week of the receipt of the order.
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.
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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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On April 3, 2000, the Company and the Securities and Exchange Commission
(the "Commission") settled the matters contained in a complaint filed by the
Commission on September 28, 1999 in the United States District Court for the
Northern District of Georgia against the Company and five former officers of the
Company. The complaint contained allegations regarding efforts by former senior
management employees to overstate the Company's income from October 1993 through
October 1997.
Pursuant to the settlement agreement, without admitting or denying any of
the Commission's allegations, the Company consented to the entry of a Final
Judgment of Permanent Injunction (the "Final Judgment"). The Final Judgment
enjoins the Company from violating Section 10(b) of the Securities Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, Section 13(a) of the
Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder and Sections
13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13b2-1 thereunder. The
Final Judgment was entered on April 6, 2000. The consent to the Final Judgment
and the entry of the Final Judgment resolve the Commission's complaint against
the Company in regard to this matter.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
------- ----------------------------------------------------
During the 4th Quarter of the 2000 fiscal year, no matter was submitted to
a vote of the Company's security holders by means of the solicitation of proxies
or otherwise.
9
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
------ ---------------------------------------------------------
(a) Market Information.
-------------------
The following table sets forth for each period indicated the high and low
closing sale prices for the 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 March 31, 2000 Year Ended April 2, 1999
------------------------- ------------------------
High Low High Low
---- ---- ---- ----
1st Quarter $ 2.75 $ 1.44 $ 8.13 $ 4.25
2nd Quarter 1.94 1.19 4.88 4.00
3rd Quarter 4.25 1.00 3.63 2.00
4th Quarter 7.00 2.09 3.25 1.50
As of June 28, 2000, the closing price for the Company's common stock was $4.63
per share.
(b) Holders.
--------
As of March 31, 2000, the Company had approximately 1,000 holders of record
of the 9,977,214 shares of Common Stock then outstanding.
(c) Dividends.
----------
The Company has never declared or paid dividends on its Common Stock.
Item 6. Management's Discussion and Analysis of Operations.
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Results of Operations
---------------------
During fiscal 2000, the Company incurred a net loss of $1,251,000 on
revenues of $11,198,000 compared to a net loss in fiscal 1999 of $4,086,000 on
revenues of $10,181,000. The operating results during fiscal 2000 were favorably
affected by increased gross margins and sales volume. The Company also had
decreased selling, general and administrative expenses and product development
costs. The sales increases are attributable to the Company's continued focus on
distribution channels and to project-related business from two large customers.
The decrease in selling, general and administrative expenses is attributable to
decreases in compensation costs due to staff reductions, reduction in legal
costs due to settlement of litigation in the prior fiscal year, and the
successful implementation of other cost reduction efforts. The decrease in
product development costs is attributable to decreases in costs of third party
engineering services. The Company also sustained a $700,000 writedown of
advances in the 1999 fiscal year. These matters are discussed more fully below.
The Company has completed 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. As a result, net sales to domestic
distributors increased by $321,000, or 17%, and net sales to major customers
increased $1,082,000, or 30%. Additionally, the Company had increased sales to
OEM customers during fiscal year 2000 of $234,000, or 24%. These increases were
partially offset by a decrease of $700,000, or 36%, in net sales directly to
customers and VARs. Management will continue to focus on the distribution
channel but believes that sales to major accounts and OEMs will continue to be a
significant part of the Company's sales mix.
10
<PAGE>
Cost of products sold totaled $7,070,000, or 63% of product sales (37%
gross margin), for fiscal 2000 compared to $6,940,000, or 68% of product sales
(32% gross margin), for fiscal 1999. This increase in margin is attributable to
pricing improvements, lower component costs, and a change in product mix.
Selling, general and administrative expenses for fiscal 2000 totaled
$3,434,000 compared to $4,648,000 for fiscal 1999, a decrease of $1,214,000, or
26%, from the prior fiscal year. This decrease is primarily attributable to a
$492,000 decrease in legal expenses due to the settlement of pending litigation
in the 1999 fiscal year, a $124,000 decrease in compensation costs, and a
$61,000 decrease in bad debt expenses.
Product development costs charged to expense for fiscal 2000 totaled
$1,749,000, or 16% of product sales, compared to $1,947,000, or 19% of product
sales, for fiscal 1999. This fiscal 2000 decrease of $198,000, or 10%, is
primarily attributed to a $401,000 decrease in costs of third party engineering
services which is partially offset by an increase of $75,000 in compensation
costs, and a $70,000 increase in prototype development and testing.
During fiscal 1999, the Company, in conjunction with a contemplated (now
cancelled) merger transaction, made advances to Ladia in the amount of $700,000.
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 of fiscal
1999. In May 2000, the Company recorded a capital contribution of $250,000 upon
collection of the note receivable.
Liquidity and Capital Resources
-------------------------------
During fiscal years 2000 and 1999, the Company has suffered net losses of
$1.25 million and $4.1 million, respectively, and has suffered operating cash
deficiencies of $675,000 and $1,521,000, respectively. The Company has net
working capital of $155,000 for fiscal 2000 and a deficiency of $614,000 for
fiscal 1999. As discussed below, the Company has obtained cash flows during
these periods from reductions of accounts receivable and from financing
activities. In fiscal 1999, the Company obtained cash flows from the reduction
of inventories.
Approximately 75% of the net loss for fiscal 2000 occurred in the fourth
quarter. Shipments were adversely impacted by the delay in new system
installations during late 1999 due to year 2000 concerns. This slowdown, that
was industry-wide, carried over into early 2000. During February 2000, the
Company added Ingram Micro, Inc. as a distributor. Ingram Micro sells to more
than 140,000 resellers in 130 countries and will add significantly to the
Company's distribution strategy and coverage.
See "Outlook for Fiscal Year 2001" below for a description of financing
obtained during June 2000.
Fiscal 2000 Compared to Fiscal 1999
-----------------------------------
In order to meet the Company's liquidity needs arising from the operating
losses, the Company raised $1,142,000 of equity capital during fiscal 2000 by
offering for sale, to accredited investors, shares of the Company's common
stock. In addition, funds were provided from a reduction of accounts receivable
and the exercise of common stock options and warrants.
On November 17, 1998, the Company and a lender entered into a financing
agreement that provided for a line of credit of up to $1,650,000 based on the
available borrowing base, as defined (the "Line"). A portion of the proceeds
from the Line was used to retire debt borrowed under a June 20, 1997 financing
agreement. Borrowings under the Line bear interest at prime plus 2%. At March
31, 2000, the Company had $993,000 in outstanding borrowings leaving $152,000
available under the line. In October 1999 the Line was reduced to $1,400,000.
The Line is collateralized primarily by the Company's accounts receivable and
inventory. The Line contains minimum net working
11
<PAGE>
capital and tangible net worth covenants and, as of March 31, 2000, the Company
was in compliance with these covenants. The Line expires in November 2000.
Cash used in operating activities amounted to $675,000 during fiscal 2000
compared to $1,521,000 during fiscal 1999. A portion of the cash consumed by
operating losses in fiscal 2000 was offset by cash provided from a decrease in
accounts receivable.
Cash used in investing activities amounted to $468,000 during fiscal 2000
compared to $387,000 for fiscal 1999. The increase in net cash outflow in fiscal
2000 compared to fiscal 1999 resulted primarily from an increase in capital
expenditures of $101,000.
Cash provided by financing activities amounted to $1,322,000 during fiscal
2000 compared to $1,780,000 during fiscal 1999. The Company had a decrease in
net borrowings of $56,000 against its line of credit. The Company raised
$1,143,000 through private placements and $368,000 through the exercise of
common stock options and warrants. The Company repaid $188,000 in debt during
the 2000 fiscal year.
Working capital amounted to $155,000 at March 31, 2000 compared to a
deficit of $614,000 at April 2, 1999, an increase of $769,000. The ratio of
current assets to current liabilities at March 31, 2000 was 1.04 to 1.00
compared to 0.87 to 1.00 at April 2, 1999. The increase in working capital was
attributable primarily to the settlement of $691,000 of accounts payable through
the issuance of common stock.
The Company's primary cash commitments in fiscal 2001 include payments
under non-cancelable operating leases ($285,000), notes payable and current
maturities of long-term debt ($1,737,000) and investments in product development
($1,749,000 in fiscal 2000). With respect to notes payable and current
maturities of long-term debt, $590,000 of the $1,737,000 is due to related
parties, the payment terms of which the Company believes can be extended as
needed.
Outlook for Fiscal Year 2001
----------------------------
On June 28, 2000, the Company completed a $6,005,000 private financing for
net proceeds of $6,500,000 consisting of $2,325,000 in debt and $3,680,000 in
equity. Proceeds of $4,000,000 were used to pay a portion of the consideration
in the Company's acquisition, via merger, of Multi-User. The Company believes it
has sufficient capital resources to support its operations at least through the
conclusion of its 2001 fiscal year.
The Company will continue to introduce new products during fiscal 2001.
While the beginning of fiscal 2001 will continue to be impacted by the
industry-wide slowdown due partially to the delay in project startups following
the year 2000 changeover, the Company is optimistic that revenue will increase
as fiscal 2001 progresses. These increases will be driven by the introduction of
new products and new applications developed and brought to market over the last
six months.
The Multi-User Acquisition
--------------------------
As futher described in Item 1, Description of Business, on June 28, 2000,
the Company acquired 100% of the stock of Multi-User, a Georgia based support
and integration company for $8 million consisting of $4 million in cash and
800,000 shares of the Company's $.01 par value common stock. The Company could
pay additional consideration of up to $1.5 million through June 2003 depending
upon Multi-User's satisfaction of specified performance objectives.
Founded in 1991, Multi-User is a privately held company located in
Norcross, Georgia, a suburb of Atlanta. Multi-User is a leading technology
support and integration company specializing in providing operating system
support, systems integration and on-site hardware maintenance for turnkey system
providers (i. e., software developers with a specialized application for a
vertical market) in the United States and Canada. Multi-User's menu of services
and products enable the turnkey software vendor to provide a complete business
solution to its end user. This solution not only provides the software to run
the business, but all the necessary hardware and support to ensure the customer
is utilizing the software to its potential. This solution enhances the customer
satisfaction for the turnkey software vendor and provides increased profits on
hardware
12
<PAGE>
and maintenance contracts that it sells to its end-user customer base. In
addition, turnkey software vendors are able to provide this superior customer
service without investment or infringement on their software development
business. Multi-User, in concert with the software vendor's staff, provides the
hardware, maintenance and operating system support to provide the software
vendor's customer a one-stop approach to their software and hardware
requirements. By selling through the turnkey software provider, Multi-User is
able to leverage the sales forces of the turnkey software provider to market its
products and services. In addition, Multi-User benefits from an administrative
perspective, as the software provider collects accounts receivable from the
end-user.
Multi-User provides support and integration services to approximately 40
major software vendors with customers at over 10,000 locations. Multi-User
utilizes its own 24x7 (twenty-four hours per day, seven days a week) help desk
to handle and track all service calls. Multi-User dispatches field engineers as
needed from one of its nationwide service partners, including IBM(R) and NCR(R),
to provide on-site assistance. Multi-User's standard support is next day
service, but Multi-User also offers same day and 24x7 contracts. Multi-User
provides support on a variety of multi-user operating platforms including SCO(R)
UNIX(R), Linux(R), Windows(R) NT, Novell(R) and other Open Systems.
Multi-User has a long-standing relationship with Santa Cruz Operation
("SCO"). SCO has about 70% of the UNIX marketplace on Intel platforms.
Multi-User was the first Authorized Support Center ("ASC") for SCO in North
America.
On March 1, 1999, Caldera Systems, Inc. ("Caldera(R)"), one of the nation's
leading distributors of Linux, selected Multi-User as its first ASC. In
addition, Multi-User has operational responsibilities for Caldera's internal
help desk and telemarketing sales for support contracts. Multi-User also has a
support contract with TurboLinux. Linux has been receiving attention due to its
strong growth over the past two years as a server operating system.
Multi-User is a Microsoft Certified Solution Provider and authorized on
IBM, Compaq(R) and Hewlett Packard(R) systems and well as integrating its own
white-box custom configured servers for its customers.
Over 5,000 turnkey software vendors have been identified as potential
customers for Multi-User's services and products. At present, Multi-User
generates revenues from approximately 40 customers. Significant revenue
increases are possible by penetrating only 1% to 2% of the potential market.
Gross margins of Multi-User on services are typically 40% to 45% and
average 18% on hardware, resulting in combined gross margins in the 28% to 35%
range. Multi-User has been able to sustain margins in these ranges because 1)
the products and services it provides represent a small percentage of the total
solution expense for the end user, 2) the systems it services are mission
critical and preventing downtime is a priority, and 3) a lack of competition
that can provide the full range of services that Multi-User offers.
Multi-User has invested substantial financial resources in an automated
management information system for tracking its business. This information system
enhances the ability to quickly respond to customer service requirements, manage
service call flow and escalations, and to manage parts inventory. By developing
its own service call program, Multi-User is able to continue to customize to
meet a changing service environment and service levels required as the business
expands. The system accumulates costs by customers or by specific products
supported, and greatly assists productivity and quality control.
Multi-User diagnoses problems by help desk before sending the field
engineer on-site. The help desk is used to determine issues and select parts to
ship to the site. With this system in place, the field engineer arrives on-site
with parts to fix the problem on the first attempt. Senior-level help desk
engineers are used to diagnose and resolve issues quickly. The use of
senior-level qualified engineers eliminates unnecessary dispatches of field
engineers thereby saving both Multi-User and its customers' time and money.
Since Multi-User contracts field labor with a variety of national service
companies, the expense is variable and incurred only if required.
13
<PAGE>
Management of the Company believes that the acquisition of Multi-User will
provide numerous benefits to the Company including, but not limited to:
1) Providing the opportunity to obtain more revenue from the
existing customer base by enhancing and expanding the products
and services offered by the Company.
2) Allowing VAR's and system integrators who purchase the Company's
connectivity products to be able to offer their customers a more
complete solution, including 24 hour a day / 7 day a week
operating system support and hardware maintenance throughout the
United States and Canada.
3) Allowing the Company to double its revenues, resulting in the
ability to allocate certain fixed and variable costs over a
larger revenue base.
4) Providing support services to the rapidly growing number of
businesses utilizing the Linux operating system.
5) Obtaining more specific feedback on the needs of small to medium
size businesses through its customer service personnel.
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 Financial Accounting Standards Board issued SFAS 133,
"Accounting For Derivative Instruments And Hedging Activities" . This statement
(as amended by SFAS 137 and 138) is effective April 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet measured at fair value. The
Company will adopt SFAS 133 on April 1, 2001. Management has not determined how
SFAS 133 will impact the Company's results of operations or financial position.
In March 2000, the FASB issued Accounting Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation". The
interpretation clarified Accounting Principal Board ("APB") Opinion No. 25 and
established accounting and reporting standards for the issuance of certain stock
options and warrants on or after December 15, 1998. Implementation of this
interpretation will not affect the Company's financial position. The Company
will adopt this interpretation during fiscal 2001 and is currently unable to
determine its impact on the Company's results of operations or financial
position.
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 Commission, including the Company's ability to
maintain adequate working capital.
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 III, Item 13(a), of this
Form 10-KSB Annual Report.
Item 8. Changes in and Disagreements With Accountants On Accounting and
------- ----------------------------------------------------------------------
Financial Disclosure.
---------------------
On April 5, 2000, the Company filed Form 8-K announcing that on March 30,
2000 the Company dismissed BDO Seidman, LLP, as its independent accountants and
retained Deliotte and Touche, LLP. There were no disagreements between the
Company and its accountants.
14
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant.
------ ---------------------------------------------------
The information with respect to directors and executive officers of the
Company is incorporated by reference to the registrant's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A on
or about August 16, 2000.
Item 10. Executive Compensation.
------- -----------------------
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about August 16, 2000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
-------- ---------------------------------------------------------------
Same as Item 10. above.
Item 12. Certain Relationships and Related Transactions.
------- -----------------------------------------------
Same as Item 10. above.
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 Auditors as of and for the
year ended March 31, 2000 19
Report of Independent Certified Public Accountants
as of and for the year ended April 2, 1999 20
Consolidated Balance Sheets as of March 31, 2000
and April 2, 1999 21
Consolidated Statements of Operations for the years
ended March 31, 2000 and April 2, 1999 22
Consolidated Statements of Cash Flows for the years
ended March 31, 2000 and April 2, 1999 23
Consolidated Statements of Stockholders' Equity for
the years ended March 31, 2000 and April 2, 1999 24
Notes to Consolidated Financial Statements 25
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 36
All other schedules are omitted because they are not applicable or the
required information is provided in the Consolidated Financial Statements or
related notes thereto.
15
<PAGE>
(b) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3.1(i) Certificate of Amendment of Registrant's Certificate of
Incorporation and amendments thereto (Incorporated by reference
to Exhibit 3.1(i) to the Registrant's Report on Form 10-QSB for
the period ended January 2, 1998)
3.1(ii) By-laws of Registrant, as amended
10.71 Registrant's Amended and Restated Equity Incentive Plan
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Form S-8 filed April 1, 1999)
10.85 Employment Agreement dated as of July 31, 1998 between the
Registrant 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 McDonald Development and the
Registrant 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 Registrant'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
Registrant and Keith H. Daniel (Incorporated by reference to
Exhibit 10.89 to the Registrant's Annual Report on Form 10-KSB
for the year ended April 2, 1999)
16
<PAGE>
10.90 Amendment to the Registrant's line of credit dated October 1,
1999
10.91 April 17, 2000 press release issued by Computone Corporation
announcing the proposed acquisition of Multi-User, Ltd.
21 Subsidiaries of Registrant
23.1 Consent of Independent Auditors with respect to the Registrant's
Stock Option Plan
23.2 Consent of Independent Certified Public Accountants with respect
to the Registrant's Stock Option Plan
17
<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 June 30, 2000
-----------------------
John D. Freitag
/s/ Keith H. Daniel Chief Financial Officer June 30, 2000
----------------------- (principal financial and
Keith H. Daniel accounting officer)
/s/ Richard A. Hansen Director June 30, 2000
-----------------------
Richard A. Hansen
/s/ Perry J. Pickerign Director June 30, 2000
-----------------------
Perry J. Pickerign
/s/ Erik Monninkhof Director June 30, 2000
-----------------------
Erik Monninkhof
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Computone Corporation
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheet of Computone
Corporation and subsidiaries as of March 31, 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the consolidated financial statement schedule
listed in the Index at Item 13. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
consolidated financial statement and consolidated financial statement schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Computone Corporation and
subsidiaries as of March 31, 2000 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Atlanta, Georgia
June 30, 2000
19
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Computone Corporation
We have audited the accompanying consolidated balance sheet of Computone
Corporation and Subsidiaries (the Company) as of April 2, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the accompanying schedule of valuation
and qualifying accounts. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedule are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting amounts and disclosures in the financial statements and schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our audit provides 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 the results of their
operations and their cash flows for the year 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 1999 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
20
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
Computone Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
Year Ended
-----------------------------------------
March 31, 2000 April 2, 1999
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 197 $ 18
Receivables, net of allowance for
doubtful accounts of $265 at
March 31, 2000 and $489
at April 2, 1999 1,389 1,913
Inventories, net 2,421 2,197
Prepaid expenses and other 95 63
-------------- -------------
Total current assets 4,102 4,191
Property and equipment, net 654 591
Intangible assets, net 388 438
Other 52 38
-------------- -------------
Total assets $ 5,196 $ 5,258
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,042 $ 2,143
Accrued liabilities:
Deferred gross profit 358 229
Interest 255 194
Other 555 468
Line of credit 993 1,049
Notes payable to stockholders 590 590
Current maturities of long-term debt 154 132
-------------- -------------
Total current liabilities 3,947 4,805
Long-term debt, less current maturities 193 347
-------------- -------------
Total liabilities 4,140 5,152
-------------- -------------
Commitments and Contingencies (See note 4)
Stockholders' equity:
Common stock, $.01 par value;
25,000,000 shares authorized;
9,977,214 and 8,321,674 shares
issued and outstanding,
respectively 100 83
Additional paid-in capital 49,553 47,369
Accumulated deficit (48,597) (47,346)
-------------- -------------
Total stockholders' equity 1,056 106
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,196 $ 5,258
============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
21
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Computone Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended
-----------------------------------------
March 31, 2000 April 2, 1999
-------------- -------------
<S> <C> <C>
Revenues:
Product sales $ 11,198 $ 10,181
-------------- -------------
Expenses:
Cost of products sold 7,070 6,940
Selling, general and administrative 3,434 4,648
Product development 1,749 1,947
-------------- -------------
12,253 13,535
-------------- -------------
Operating loss (1,055) (3,354)
Other income (expense):
Other income (expense) (11) 114
Writedown of advance - - (700)
Interest expense - affiliates (76) (44)
Interest expense - other (109) (102)
-------------- -------------
Loss before income taxes (1,251) (4,086)
Provision for income taxes - - - -
-------------- -------------
Net loss $ (1,251) $ (4,086)
============== =============
Loss per common share - basic and diluted $ (0.14) $ (0.52)
============== =============
Weighted average shares outstanding
- basic and diluted 8,787 7,798
============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Computone Corporation and Subsidiaries
Consolidated Statements of Cash Flow
(in thousands)
Year Ended
-----------------------------------------
March 31, 2000 April 2, 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,251) $ (4,086)
Adjustments to reconcile net loss
to net cash used in operations:
Settlement of accounts payables
in exchange for common stock -- (14)
Writeoff of advance -- 700
Depreciation and amortization 441 447
Provision for uncollectible
accounts receivable 79 140
Provision for inventory reserve 239 243
Changes in current assets and
current liabilities:
Receivables 445 487
Inventories (463) 1,312
Prepaid expenses and other (32) 39
Accounts payable and accrued
liabilities (133) (789)
-------------- -------------
Net cash used in operations (675) (1,521)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (14) (11)
Capitalization of software costs (175) (198)
Capital expenditures (279) (178)
-------------- -------------
Net cash used in investing activities (468) (387)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates -- 545
Repayment of debt - net (132) (188)
Net repayments under lines of credit (56) (203)
Exercise of common stock options
and warrants 368 44
Issuance of common stock 1,142 1,582
-------------- -------------
Net cash provided by financing activities 1,322 1,780
-------------- -------------
Net increase (decrease) in cash and
cash equivalents 179 (128)
Cash and cash equivalents, beginning
of year 18 146
-------------- -------------
Cash and cash equivalents, end of year $ 197 $ 18
============== =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 109 $ 102
SUPPLEMENTAL DISCLOSURES OF NON-CASH
ACTIVITIES:
Common stock issued in
settlement of accounts payables $ 691 $ 14
Stock issued in settlement
of litigation -- 240
Conversion of debt to equity -- 450
</TABLE>
See accompanying notes to the consolidated financial statements.
23
<PAGE>
Computone Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Accumulated Stockholders'
Shares Amount Paid-In Capital Deficit Equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, April 3, 1998 7,382,622 $ 74 $ 45,062 $ (43,260) $ 1,876
Exercise of common stock options 38,655 -- 44 -- 44
Conversion of debt to equity -- -- 450 -- 450
Issuance of common stock for litigation settlement 119,880 1 248 -- 249
Issuance of common stock for cash 780,517 8 1,565 -- 1,573
Net loss -- -- -- (4,086) (4,086)
---------- ---------- ---------- ---------- ----------
Balance, April 2, 1999 8,321,674 $ 83 $ 47,369 $ (47,346) $ 106
Exercise of common stock options 267,206 3 365 -- 368
Issuance of common stock for payable settlement 325,000 3 688 -- 691
Issuance of common stock for cash 1,063,334 11 1,131 -- 1,142
Net loss -- -- -- (1,251) (1,251)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 2000 9,977,214 $ 100 $ 49,553 $ (48,597) $ 1,056
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<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 which represent one business
segment. 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 wholly-owned subsidiaries. All intercompany balances have been
eliminated in consolidation.
FISCAL YEAR END
For fiscal 2000, the Company changed its fiscal year end to March 31.
Previously, the Company's fiscal year ended on the first Friday in April.
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. At this
point, persuasive evidence of a sale arrangement exists, delivery has occurred,
the Company's price to the buyer is fixed and collectibility of the associated
receivable is reasonably assured. Beginning with the fourth quarter of fiscal
1998, the Company modified the application of its revenue recognition policy to
defer recognition of revenue and cost of products sold 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 $333,000 and $908,000 at March 31, 2000 and April 2, 1999, respectively.
25
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
Equipment 3 to 4 years
Furniture and fixtures 5 years
Leasehold improvements shorter of asset life or lease term
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized. Depreciation and
amortization charged to operations for fiscal 2000 and 1999 amounted to $216,000
and $181,000, 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 life of
4 years. The amortization of such costs is included in the Company's cost of
products sold.
Amortization expense during fiscal 2000 and 1999 was $225,000 and $266,000,
respectively; software development costs totaling $175,000 and $198,000,
respectively, were capitalized during such years.
IMPAIRMENT
Long-lived assets and certain intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of these assets may not be recoverable. Any impairment losses are reported in
the period in which the recognition criteria are first applied based on the fair
value of the assets. Assets held for sale are carried at the lower of carrying
amount or fair value , less estimated costs to sell such assets. The Company
discontinues depreciating or amortizing assets held for sale at the time the
decision to sell the assets is made.
PRODUCT DEVELOPMENT COSTS
Product development costs are expensed when incurred. Product development
costs amounted to $1,749,000 and $1,947,000 during fiscal 2000 and 1999,
respectively.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. ("SFAS") 109, "Accounting for
Income Taxes". Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
26
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share ("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
potention dilution that could occur if securities or other contracts to issue
common stocks were exercised or converted into common stock. There were 525,655
and 639,402 options and warrants that were deemed to be dilutive at fiscal year
end 2000 and 1999, respectively. For purposes of computing diluted EPS, the
company excluded the effects of outstanding common stock options and warrants
because they were anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could be different from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable 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 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 2000 and 1999, the
Company incurred advertising expenses of $120,000 and $126,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting For Derivative Instruments And Hedging Activities" . This
statement (as amended by SFAS 137 and 138) is effective April 1, 2001. This
statement establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet measured at
fair value. The Company will adopt SFAS 133 on April 1, 2001. Management has not
determined how SFAS 133 will impact the Company's results of operations or
financial position.
In March 2000, FASB issued Accounting Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation". The interpretation
clarified Accounting Principal Board ("APB") Opinion No. 25 and established
accounting and reporting standards for the issuance of certain stock options and
warrants issued on or after December 15, 1998. Implementation of this
interpretation will not affect the Company's financial position.
RECLASSIFICATION
Certain amounts have been reclassified in the prior year's consolidated
financial statements to conform to the current year.
27
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2. OTHER BALANCE SHEET INFORMATION
Other balance sheet information at March 31, 2000 and April 2, 1999
consists of the following (in thousands):
MARCH 31, APRIL 2,
2000 1999
---------- ----------
Inventories:
Finished goods $ 597 $ 165
Work in process 206 877
Raw materials 1,618 1,155
---------- ----------
$ 2,421 $ 2,197
========== ==========
Property and equipment:
Equipment $ 2,997 $ 3,533
Furniture and fixtures 495 488
Leasehold improvements 229 229
---------- ----------
3,721 4,250
Less accumulated depreciation
and amortization 3,067 3,659
---------- ----------
$ 654 $ 591
========== ==========
Intangible assets:
Software costs $ 884 $ 2,741
Less accumulated amortization 496 2,303
---------- ----------
$ 388 $ 438
========== ==========
3. LONG-TERM DEBT AND LINE OF CREDIT
(a) Long-term debt at March 31, 2000 and April 2, 1999 consists of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, APRIL 2,
2000 1999
---------- ----------
<S> <C> <C>
10% note payable to a major stockholder due June 2000 $ 300 $ 300
10% note payable to a major stockholder due June 2000 25 25
10% note payable to a stockholder due June 2000 100 100
7% note payable to a major stockholder due on demand 145 145
7% notes payable to two major stockholders, $10,000 due June 2000,
$10,000 due on demand 20 20
Non-interest bearing note payable, net of discount, in monthly
installments through October 2001 (see note 4) 347 479
---------- ----------
937 1,069
Less current maturities 744 722
---------- ----------
$ 193 $ 347
========== ==========
</TABLE>
The non-interest bearing note was discounted using an interest rate of 9.75%.
This discount is amortized over the life of the loan and has been recorded as
interest expense in the accompanying financial statements. The interest expense
is amortized over the life of the loan.
28
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
3. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Future maturities of long-term debt at March 31, 2000 are as follows (in
thousands):
2001 $ 744
2002 193
2003 --
2004 --
Thereafter --
-------
$ 937
=======
(b) On November 17, 1998, the Company and a lender entered into a financing
agreement that provided for a line of credit of up to $1,650,000 based on the
available borrowing base, as defined (the "Line"). A portion of the proceeds
from the Line was used to retire debt borrowed under a June 20, 1997 financing
agreement. Borrowings under the Line bear interest at prime plus 2%. At March
31, 2000, the Company had $993,000 in outstanding borrowings leaving $152,000
available under the line. In October 1999 the Line was reduced to $1,400,000.
The Line is collateralized primarily by the Company's accounts receivable and
inventory. The Line contains minimum net working capital and tangible net worth
covenants and, as of March 31, 2000, the Company was in compliance with these
covenants. The Line expires in November 2000.
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space and office equipment under non-cancelable
long-term operating lease agreements expiring at various dates through October
2007. Future minimum lease payments under these lease agreements at March 31,
2000 is as follows (in thousands):
2001 $ 285
2002 223
2003 212
2004 183
Thereafter 700
-------
$ 1,603
=======
Rent expense was $362,000 and $386,000 for fiscal 2000 and 1999,
respectively.
On April 3, 2000, the Company and the Securities and Exchange Commission
(the "Commission") settled the matters contained in a complaint filed by the
Commission on September 28, 1999 in the United States District Court for the
Northern District of Georgia against the Company and five former officers of the
Company. The complaint contained allegations regarding efforts by former senior
management employees to overstate the Company's income from October 1993 through
October 1997.
Pursuant to the settlement agreement, without admitting or denying any of
the Commission's allegations, the Company consented to the entry of a Final
Judgment of Permanent Injunction (the "Final Judgment"). The Final Judgment
enjoins the Company from violating Section 10(b) of the Securities Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, Section 13(a) of the
Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder and Sections
13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13b2-1 thereunder. The
Final Judgment was entered on April 6, 2000. The consent to the Final Judgment
and the entry of the Final Judgment resolve the Commission's complaint against
the Company in regard to this matter.
29
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 relates 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 worth of goods that were sold to Capella pursuant to the non-cancelable,
non-returnable 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 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 $189,000, 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.
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 $316,000. 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.
30
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
5. INCOME TAXES
A reconciliation of the statutory federal income tax provision to the
Company's provision for income taxes for fiscal 2000 and 1999 is as follows:
2000 1999
---------- ----------
Statutory tax rate 34% 34%
State tax rate, net of federal tax benefit 4 4
Valuation allowance (38) (38)
---------- ----------
--% --%
========== ==========
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 significant components
of the Company's deferred tax liabilities and assets at March 31, 2000 and April
2, 1999 are as follows (in thousands):
March 31, April 2,
2000 1999
---------- ----------
Deferred tax liabilities:
Software costs $ 130 $ 105
Depreciation -- 28
---------- ----------
Total deferred tax liabilities $ 130 $ 133
========== ==========
Deferred tax assets:
Allowance for doubtful accounts $ 34 $ 85
Depreciation 11 --
Inventory 86 345
Other accrued expenses 212 194
Net operating loss carryforwards 14,035 12,039
General Business Credit 46 --
Valuation allowance (14,294) (12,530)
---------- ----------
Total deferred tax assets $ 130 $ 133
========== ==========
During fiscal 2000 and 1999, the Company increased its valuation allowance
by $1,764,000 and $1,154,000, respectively.
At March 31, 2000 the Company has net operating and capital loss
carryforwards totaling $35.0 million which expire at various dates through 2015,
including a predecessor company preacquisition operating loss carryforward. 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 these loss carryforwards.
31
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6. STOCK OPTIONS AND WARRANTS
The Company has non-qualified equity incentive plans, 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
at market value at the date of the grant. Options are exercisable at prices
ranging from $1.13 to $6.00 per share, of which 99% of these options are
exercisable at $2.75 per share or lower. The options have a variety of vesting
periods and expire either five or ten years from the date of the grant. 750,000
shares of Common Stock have been reserved for issuance under these equity
incentive plans.
The following tables summarize activity on stock options and warrants for
fiscal 2000 and 1999:
<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 3, 1998 436,878 380,013
Granted 418,000 $ 1.65 360,000 $ 2.10
Exercised (38,655) 1.13 - - --
Forfeited or canceled (50,719) 2.54 (74,243) 2.08
-------- --------
Outstanding at April 2, 1999 765,504 665,770
Granted 223,000 $ 2.03 25,000 $ 1.13
Exercised (259,206) 1.38 (8,000) 1.13
Forfeited or canceled (29,655) 1.85 (72,770) 4.55
-------- --------
Outstanding at March 31, 2000 699,643 610,000
======== ========
</TABLE>
Of the 610,000 warrants outstanding, 410,000 are held by related parties.
Options and warrants exercisable at March 31, 2000 and April 2, 1999 are as
follows:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
------------- --------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
March 31, 2000 286,477 $ 1.78 610,000 $ 2.02
April 2, 1999 421,837 1.55 665,770 2.32
</TABLE>
The Company has 105,667 and 314,167 options available for future grant at
March 31, 2000 and April 2, 1999, respectively.
32
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
The weighted average per share fair value of options and warrants
granted during the fiscal years 2000 and 1999 are as follows:
OPTIONS WARRANTS
------- --------
Fiscal 2000 $ 3.90 $ 4.80
Fiscal 1999 3.10 2.01
The weighted average remaining life of options and warrants outstanding at
March 31, 2000 and April 2, 1999 was 5.3 years and 2.9 years, respectively.
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. 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 for fiscal 2000 and 1999
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 2000 1999
-------- --------
<S> <C> <C>
Net loss applicable to common shareholders: as reported $ (1,251) $ (4,086)
pro forma (1,713) (5,054)
Loss per common share, basic and diluted: as reported $ (0.14) $ (0.52)
pro forma (0.19) (0.65)
</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 2000 and 1999;
Dividend yield was excluded from the computation for both years; expected
volatility of 91.5% for fiscal 2000 and 86.4% for fiscal 1999; a risk free
interest rate of 5.83% for fiscal 2000 and 5.61% for fiscal 1999 and an expected
option life of 2.2 years for fiscal 2000 and 5.0 years for fiscal 1999.
7. EQUITY TRANSACTIONS
FISCAL 2000
-----------
During the second half of fiscal 2000, the Company issued 1,063,334 shares
of its $.01 par value common stock, including 135,000 shares as payment of
offering costs, for proceeds of $1,142,000 through a private placement.
Additionally, in December 1999, the Company issued 325,000 shares of its common
stock in settlement of $691,000 of accounts payables.
FISCAL 1999
-----------
During fiscal 1999 the Company issued 542,421 shares of its $.01 par value
common stock, for proceeds of $1,073,000 through a private placement. During the
fourth quarter of fiscal 2000, the February 5, 1999, the Company issued 119,880
shares of its $.01 par value common stock valued at $248,254 in settlement of
litigation (See Note 4). Also during the fourth quarter of fiscal 1999, the
Company issued 238,096 shares of its $.01 par value common stock for proceeds of
$500,000 to two major shareholders.
33
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
7. EQUITY TRANSACTIONS (CONTINUED)
CONVERTIBLE REDEEMABLE PREFERRED STOCK
--------------------------------------
The Company has authorized the issuance up to 10 million shares of
Convertible Redeemable Preferred Stock, .01 par value. At March 31, 2000 and
April 2, 1999 there were no shares issued.
8. OTHER RELATED PARTY TRANSACTIONS
The Company incurred interest expense totaling $76,000 and $44,000 during
fiscal 2000 and 1999, respectively, on obligations due to shareholders.
During fiscal 1999, the Company, in conjunction with a contemplated (now
cancelled) merger transaction, made advances to Ladia in the amount of $700,000.
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 of fiscal
1999. In May 2000, the Company recorded a capital contribution of $250,000 upon
collection of the note receivable.
9. FOREIGN SALES
The Company's revenues include approximately $1,638,000 and $1,745,000 from
foreign customers (principally in Europe, South Africa and Central and South
America) for fiscal 2000 and 1999, respectively.
10. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments, which subject the Company to credit risk, are
primarily trade accounts receivable. The Company had three customers whose
purchases represented 29%, 13% and 10% of product sales in fiscal 2000. Accounts
receivable from such customers were $114,000, $128,000 and $80,000 at March 31,
2000. These same customers had purchases representing 15%, 12% and 16% of
product sales in fiscal 1999. Accounts receivable from such customers were
$189,000, $363,000 and $148,000 at April 2, 1999. Management believes the risk
associated with trade accounts receivable is adequately provided for in the
allowance for doubtful accounts.
11. 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 fiscal 2000 and 1999 , the Company made no such
contributions to the plan.
12. SUBSEQUENT EVENTS
On June 28, 2000, the Company acquired 100% of the stock of Multi-User
Solutions ("Multi-User"), a Georgia based support and integration company for $8
million consisting of $4 million in cash and 800,000 shares of the Company's
$.01 par value common stock. The Company could pay additional consideration of
up to $1.5 million through June 2003 depending upon Multi-User's satisfaction of
specified performance objectives.
34
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
12. SUBSEQUENT EVENTS (CONTINUED)
On June 28, 2000, the Company issued 1,230,769 shares of its $.01 par value
common stock for net proceeds of $3,680,000 after offering costs of $320,000.
The net proceeds of this issuance were used to fund the acquisition of
Multi-User.
On June 28, 2000, the Company entered into an agreement with a lender to
provide a $2.5 million 11% note payable due in December 28, 2001 and a warrant
to purchase 392,577 of the Company's common stock expiring June 2003. The
Company expects to use the proceeds of this note to fund a portion of the
acquisition costs of Multi-User, to payoff other indebtedness and for working
capital purposes.
On June 30, 2000, the maturity dates of the notes payable to shareholders
in the amount of $580,000 were extended to June 30, 2001.
35
<PAGE>
Computone Corporation and Subsidiaries
Notes to Consolidated Financial Statements
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 2000 AND APRIL 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE, ADDITIONS BALANCE,
BEGINNING CHARGED TO COSTS END
DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ----------
Allowance for uncollectible accounts:
<S> <C> <C> <C> <C>
Year ended March 31, 2000 $ 489 $ 79 $ 303 $ 265
Year ended April 2, 1999 668 140 319 489
Allowance for slow-moving and
obsolete inventory:
Year ended March 31, 2000 908 239 814 333
Year ended April 2, 1999 851 243 186 908
Valuation allowance for deferred tax assets:
Year ended March 31, 2000 12,530 1,764 -- 14,294
Year ended April 2, 1999 11,376 1,154 -- 12,530
</TABLE>
36
