UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the three month period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16172
COMPUTONE CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 23-2472952
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1060 Windward Ridge Parkway, Suite 100, Alpharetta, GA 30005
------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (770) 625-0000
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,137,786 shares of common stock on
November 1, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 and
March 31, 2000 3
Consolidated Statements of Operations for the three months
ended September 30, 2000 and September 30, 1999 4
Consolidated Statements of Operations for the six months
ended September 30, 2000 and September 30, 1999 5
Consolidated Statements of Cash Flows for the six months
ended September 30, 2000 and September 30, 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis for the three and
six months ended September 30, 2000 compared to three and
six months ended September 30, 1999 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Computone Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 30, March 31,
2000 2000
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 153 $ 197
Receivables, net of allowance for doubtful
accounts of $102 at September 30, 2000 and
$84 at March 31, 2000 2,442 1,389
Inventories, net 2,301 2,421
Prepaid expenses and other 102 95
----------- -----------
Total current assets 4,998 4,102
Property and equipment, net 684 654
Goodwill, net 8,405 --
Other intangible assets, net 327 388
Other 164 52
----------- -----------
TOTAL ASSETS $ 14,578 $ 5,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 836 $ 1,042
Accrued liabilities:
Deferred maintenance revenue 1,265 --
Deferred gross profit 267 358
Interest 298 255
Other 579 555
Line of credit 796 993
Notes payable to stockholders 740 590
Current maturities of long-term debt -- 154
----------- -----------
Total current liabilities 4,781 3,947
Long-term debt, less current maturities, net of
discount of $1,122 at September 30, 2000 1,378 193
----------- -----------
Total liabilities 6,159 4,140
----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares
authorized; 12,137,786 and 9,977,214 shares
issued and outstanding, respectively 121 100
Additional paid-in capital 58,955 49,553
Accumulated deficit (50,657) (48,597)
----------- -----------
Total stockholders' equity 8,419 1,056
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,578 $ 5,196
=========== ===========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
Computone Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------ ------------
(unaudited)
Revenues:
Net sales $ 2,940 $ 2,646
------------ ------------
Expenses:
Cost of sales 1,960 1,577
Amortizaton of goodwill 215 --
Selling, general and administrative 1,261 946
Product development 332 430
------------ ------------
3,768 2,953
------------ ------------
Operating loss (828) (307)
Other income (expense):
Other income 7 --
Interest expense - affiliates (25) (18)
Loan discount amortization (206) --
Interest expense - other (83) (26)
------------ ------------
Loss before income taxes (1,135) (351)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,135) $ (351)
============ ============
Loss per common share - basic and diluted $ (0.09) $ (0.04)
============ ============
Weighted average shares outstanding -
basic and diluted 12,116 8,472
============ ============
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
Computone Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Six Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------ ------------
(unaudited)
Revenues:
Net sales $ 4,178 $ 7,379
------------ ------------
Expenses:
Cost of sales 2,887 4,427
Amortizaton of goodwill 220 --
Selling, general and administrative 2,060 1,887
Product development 689 889
------------ ------------
5,856 7,203
------------ ------------
Operating income (loss) (1,678) 176
Other income (expense):
Other income 5 --
Interest expense - affiliates (44) (38)
Loan discount amortization (206) --
Interest expense - other (137) (60)
------------ ------------
Income (loss) before income taxes (2,060) 78
Provision for income taxes -- --
------------ ------------
Net income (loss) $ (2,060) $ 78
============ ============
Earnings (loss) per common share -
basic and diluted $ (0.19) $ 0.01
============ ============
Weighted average shares outstanding - basic 11,075 8,468
============ ============
Weighted average shares outstanding - diluted 11,075 8,487
============ ============
See accompanying notes to the consolidated financial statements.
5
<PAGE>
PART I - FINANCIAL INFORMATION
Computone Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (2,060) $ 78
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 661 219
Provision for uncollectible accounts receivable 25 63
Provision for inventory reserve 130 100
Changes in current assets and current liabilities
net of effects from business acquired:
Receivables 34 245
Inventories 325 (229)
Prepaid expenses and other 63 (18)
Other assets (104) 19
Accounts payable and accrued liabilities (1,005) 300
------------ ------------
Net cash provided by (used in) operations (1,931) 777
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business (4,150) --
Capitalization of software costs (41) (75)
Capital expenditures (163) (160)
------------ ------------
Net cash used in investing activities (4,354) (235)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 2,500 --
Repayment of debt (347) (60)
Net repayments under lines of credit (197) (631)
Capital contribution 250 --
Cost associated with the issuance of common stock (325) --
Proceeds from exercise of common stock options 48 169
Proceeds from issuance of common stock 4,312 --
------------ ------------
Net cash provided by (used in) financing activities 6,241 (522)
------------ ------------
Net increase (decrease) in cash and cash equivalents (44) 20
Cash and cash equivalents, beginning of period 197 18
------------ ------------
Cash and cash equivalents, end of period $ 153 $ 38
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 137 $ 60
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Common stock issued for business acquired $ 3,800 $ --
Common stock issued for professional services 10 --
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All statements contained in this Form-10QSB Quarterly Report that are not
historical facts are based on current expectations. Such statements are
forward-looking (as defined in the Private Securities Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties. Actual results
could vary materially. The factors that could cause actual results to vary
materially include: the ability of the Company to obtain and maintain adequate
working capital, future supply and demand for the Company's products, changes in
business and economic conditions, availability of raw materials and parts, and
other risks that may be described from time to time in reports the Company files
with the Securities and Exchange Commission ("SEC"). Undue reliance should not
be placed on any such forward-looking statements.
1. BASIS OF PRESENTATION
---------------------
The financial statements included in this Form 10-QSB Quarterly Report have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed, or omitted, pursuant to such rules
and regulations. These financial statements should be read in conjunction with
the financial statements and related notes included in the Company's Annual
Report on Form 10-KSB for its fiscal year ended March 31, 2000.
The financial statements presented herein as of September 30, 2000 reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of financial position
and the results of operations for the periods presented. The results of
operations for any interim period are not necessarily indicative of the results
for the full year.
2. ACQUISITION
-----------
On June 28, 2000, the Company acquired 100% of the stock of Multi-User
Solutions Ltd. ("Multi-User"), a Georgia-based system support and integration
company for $7,945,000, including $145,000 in expenses, consisting of $4,145,000
in cash and 800,000 shares of the Company's $.01 par value common stock valued
at $3,800,000. The acquisition was financed through the issuance of 1,249,671
shares of the Company's $.01 par value common stock, net of $325,000 in issuance
costs, and the issuance of a $2,500,000 11% note payable (Note 8). The
acquisition has been accounted for using the purchase method of accounting.
Goodwill arising from the acquisition of $8,625,000 is being amortized using the
straight-line method over 10 years. The consolidated statements of operations
include the operations of the business since the acquisition date.
The following unaudited pro forma information for the six months ended
September 30, 2000 and 1999 gives effect to the acquisition of Multi-User as if
it had occurred on April 1 of each respective year:
2000 1999
------------ ------------
Net sales $ 5,823 $ 12,542
============ ============
Net loss $ (2,370) $ (307)
============ ============
Net loss per share - basic and diluted $ (0.20) $ (0.03)
============ ============
The unaudited pro forma information is not necessarily indicative of the
results of operations that would have been reported had such acquisition
occurred on such date, nor is it indicative of the Company's future operations.
7
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. REVENUE RECOGNITION
-------------------
The Company generally recognizes revenue when products are shipped and
services are performed, net of an allowance for estimated sales returns. 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. The Company's recognition policy is 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 distributor has
sold the product. The Company receives non-refundable advance payments for
operating system and hardware support service contracts for varying periods of
no more than one year. The Company defers these payments and recognizes revenue
on these contracts on a straight-line basis over the term of the related
contract.
The Company generally provides a warranty of five years on all products
originally manufactured by the Company. 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.
4. 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, net of a reserve for obsolete, excess and non-salable items,
consisted of the following at September 30, 2000 and March 31, 2000 (in
thousands):
September 30, March 31,
2000 2000
------------ ------------
Inventories:
Finished goods $ 729 $ 597
Work in process 205 206
Raw materials 1,616 1,618
------------ ------------
$ 2,550 $ 2,421
============ ============
5. 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
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. There were 751,358
and 18,666 options and warrants that were deemed to be dilutive at September 30,
2000 and 1999, respectively. For purposes of computing diluted EPS for the
three-month period ended September 30, 2000 and September 30, 1999 and for the
six-month period ended September 30, 2000, the Company excluded the effects of
outstanding common stock options and warrants because they were anti-dilutive.
8
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SEGMENT INFORMATION
-------------------
With the acquisition of Multi-User, the Company currently generates revenue
from two lines of business: 1) network connectivity products ("Connectivity
Products") and 2) operating system support, systems integration and on-site
hardware maintenance ("Service and Support"). The Company identifies its
reportable segments based on the segment's product offerings.
Segment information for the three and six months ended September 30, 2000,
as well as the year ended March 31, 2000, follows:
<TABLE>
<CAPTION>
CONNECTIVITY SERVICE CONSOLIDATED
PRODUCTS & SUPPORT TOTALS
------------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2000
<S> <C> <C> <C>
Revenue $ 1,536 $ 1,404 $ 2,940
Operating Loss (678) (150) (828)
Total Assets 4,779 9,799 14,578
SIX MONTHS ENDED SEPTEMBER 30, 2000
Revenue $ 2,714 $ 1,464 $ 4,178
Operating Loss (1,531) (147) (1,678)
Total Assets 4,779 9,799 14,578
YEAR ENDED MARCH 31, 2000
Revenue $ 11,198 $ -- $ 11,198
Operating Loss (1,055) -- (1,055)
Total Assets 5,196 -- 5,196
</TABLE>
7. INCOME TAXES
------------
At March 31, 2000, the Company had 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 that have occurred since the losses started
to accumulate, statutory provisions will substantially limit the Company's
future use of these loss carryforwards.
8. LONG-TERM DEBT AND LINE OF CREDIT
---------------------------------
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%. In October
1999, the Line was reduced to $1,400,000 and the term was extended through
November 17, 2000. At September 30, 2000, the Company had $796,000 in
outstanding borrowings leaving $123,000 available under the Line. The Line is
collateralized primarily by the Company's Connectivity Products accounts
receivable and inventory. The Line contains minimum net working capital and
tangible net worth covenants and, as of September 30, 2000, the Company was in
compliance with these covenants. The Company and the lender have agreed to
extend the expiration date by up to 90 days in order to modify the Line for the
inclusion of Multi-User's collateral in the borrowing base.
9
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. LONG-TERM DEBT AND LINE OF CREDIT, CONTINUED.
---------------------------------------------
On June 28, 2000, the Company entered into an agreement with a lender to
purchase a $2,500,000, 11% note payable due on December 28, 2001. The Company
also issued a warrant to the lender to purchase 392,577 shares of the Company's
$.01 par value common stock exercisable at $3.25 per share. The warrant expires
in June 2003. In accordance with Accounting Principles Board Opinion No. ("APB")
14, Accounting for Convertible Debt and Debt Issued With Stock Purchase
Warrants, the Company has recorded the fair value of the warrant of $1,328,000
as a credit to additional paid-in capital and the fair value of the note payable
of $1,172,000 in the accompanying financial statements. The resulting $1,328,000
note payable discount will be amortized over the life of the note payable using
the interest method. The Company recorded $206,000 of note payable discount
amortization during the three-month and six-month periods ended September 30,
2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 1999.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
SEPTEMBER 30, 1999
------------------
During the three-month period ended September 30, 2000, the Company
incurred a net loss of $1,135,000 on net sales of $2,940,000 compared to a net
loss of $351,000 during the three-month period ended September 30, 1999 on net
sales of $2,646,000. The results for the three-month period ended September 30,
2000 include the operations of Multi-User for the full period.
Net sales for the three-month period ended September 30, 2000 totaled
$2,940,000 compared to $2,646,000 for the comparable three-month period of the
prior fiscal year. Net sales of Connectivity Products decreased from $2,646,000
to $1,536,000. A substantial portion of this decrease is attributable to lower
sales to the Company's two largest non-distribution customers. During the prior
year's three-month period, these customers were involved in projects to replace
competitor's equipment and expand the use of the Company's products in
additional applications. The net sales from Service and Support, a line of
business acquired on June 28, 2000, were $1,404,000 during the current year's
three-month period. Net sales of Connectivity Products in the current quarter
increased by $358,000 or 30% over the immediately preceding quarter.
Cost of sales for the three-month period ended September 30, 2000 amounted
to $1,960,000 versus $1,577,000 for the three-month period ended September 30,
1999. Cost of sales for Connectivity Products was $1,001,000, resulting in a
gross margin of 35%. The reduction in gross margin compared to the prior year of
40% is primarily due to the continuation of certain fixed operating costs that
were not affected by the reduction in sales volume and a higher provision for
inventory obsolescence. Cost of sales for Service and Support were $960,000,
resulting in a gross margin of 32%. The Company's gross margin is dependant on
product costs, product or service mix, vendor costs and overhead expense, all of
which fluctuate from period to period.
In the three-month period ended September 30, 2000, the Company recorded a
non-cash expense of $215,000 for amortization of goodwill related to the
acquisition of the Service and Support line of business.
Selling, general and administrative ("SGA") expenses amounted to $1,261,000
for the three-month period ended September 30, 2000 versus $946,000 for the
comparable three-month period in the prior fiscal year. SGA expenses related to
Connectivity Products decreased by $65,000 or 7% from the comparable period in
the prior fiscal year as a result of the continuing implementation of cost
reduction efforts. SGA expenses for Service and Support were $379,000 for the
three-month period ended September 30, 2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED).
Product development expenses amounted to $332,000, or 22% of net sales of
Connectivity Products for the three-month period ended September 30, 2000 versus
$430,000, or 16%, for the comparable three-month period of the prior fiscal
year. This decrease in expense amount of $98,000 is primarily due to decreases
in costs of third party engineering services.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
--------------------------------------------------------------------------------
30, 1999
--------
During the six-month period ended September 30, 2000, the Company incurred
a net loss of $2,060,000 on revenues of $4,178,000 compared to net income of
$78,000 during the six-month period ended September 30, 1999 on revenues of
$7,379,000.
Net sales for the six-month period ended September 30, 2000 totaled
$4,178,000 compared to $7,379,000 for the comparable six-month period of the
prior fiscal year. Net sales of Connectivity Products decreased from $7,379,000
to $2,714,000. A substantial portion of the decrease in net revenues between the
two periods is attributable to lower sales to the Company's two largest
non-distribution customers. During the prior year's six-month period, these
customers were involved in projects to replace competitor's equipment and expand
the use of the Company's products in additional applications. The net sales from
Service and Support were $1,464,000 for the current year's six-month period.
Cost of sales for the six-month period ended September 30, 2000 amounted to
$2,887,000 versus $4,427,000 for the six-month period ended September 30, 1999.
Cost of sales for Connectivity Products for the six-month period ended September
30, 2000 were $1,891,000, resulting in a gross margin of 30%. The reduction in
gross margin compared to the prior year of 40% is primarily due to the
continuation of certain fixed operating costs that were not affected by the
reduction in sales volume and a higher provision for inventory obsolescence.
Cost of sales for Service and Support for the six-month period ended September
30, 2000 were $997,000, resulting in a gross margin of 32%.
In the six-month period ended September 30, 2000, the Company recorded a
non-cash expense of $220,000 for amortization of goodwill related to the
acquisition of the Service and Support line of business.
SGA expenses amounted to $2,060,000 for the six-month period ended
September 30, 2000 versus $1,887,000 for the comparable six-month period in the
prior fiscal year. SGA expenses related to Connectivity Products decreased by
$221,000 or 12% from the comparable period in the prior fiscal year as a result
of the continuing implementation of cost reduction efforts. SGA expenses for
Service and Support were $394,000 for the six-month period ended September 30,
2000.
Product development expenses amounted to $689,000, or 25% of net sales of
Connectivity Products for the six-month period ended September 30, 2000, versus
$889,000, or 12%, for the comparable six-month period of the prior fiscal year.
This decrease in expense of $200,000 is primarily due to decreases in costs of
third party engineering services.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
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%. In October
1999, the Line was reduced to $1,400,000 and the term was extended through
November 17, 2000. At September 30, 2000, the Company had $796,000 in
outstanding borrowings leaving $123,000 available under the Line. 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 September 30, 2000, the Company was in compliance with these covenants.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED).
The Company and the lender have agreed to extend the expiration date by up to 90
days in order to modify the Line for the inclusion of Multi-User's collateral in
the borrowing base.
On June 28, 2000, the Company entered into an agreement with a lender to
purchase a $2,500,000, 11% note payable due on December 28, 2001. The Company
also issued a warrant to the lender to purchase 392,577 shares of the Company's
$.01 par value common stock exercisable at $3.25 per share. The warrant expires
in June 2003. In accordance with Accounting Principles Board Opinion No. ("APB")
14, Accounting for Convertible Debt and Debt Issued With Stock Purchase
Warrants, the Company has recorded the fair value of the warrant of $1,328,000
as a credit to additional paid-in capital and the fair value of the note payable
of $1,172,000 in the accompanying financial statements. The resulting $1,328,000
note payable discount will be amortized over the life of the note payable using
the interest method. The Company recorded $206,000 of note payable discount
amortization during the three-month and six-month periods ended September 30,
2000.
Cash used in operating activities amounted to $1,931,000 for the six-month
period ended September 30, 2000 compared to cash provided by operating
activities of $777,000 for the six-month period ended September 30, 1999. A
portion of the cash consumed by operating losses and decreases in accounts
payables and accrued liabilities was offset by a decrease in accounts
receivables and inventories. In addition, depreciation and amortization
increased to $661,000 during the current six-month period from $219,000 during
the comparable period in the prior fiscal year.
Cash used in investing activities amounted to $4,354,000 for the six-month
period ended September 30, 2000 compared with $235,000 for the six-month period
ended September 30, 1999. The increase in net cash outflow resulted primarily
from the acquisition of Multi-User.
Cash provided by financing activities amounted to $6,241,000 during the
six-month period ended September 30, 2000 compared to cash used in financing
activities of $522,000 during the six-month period ended September 30, 1999. The
increase in net cash inflow resulted primarily from proceeds collected from the
issuance of stock and additional borrowings.
Working capital amounted to $217,000 at September 30, 2000 compared to
$155,000 at March 31, 2000, an increase of $62,000. The ratio of current assets
to current liabilities at September 30, 2000 was 1.05 to 1.00 compared to 1.04
to 1.00 at March 31, 2000.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 2001
-----------------------------------------
At September 30, 2000, the Company's Connectivity Products backlog was
$900,000, an increase of $633,000 since the beginning of the quarter. The
Company anticipates that a substantial portion of this backlog will be shipped
during the third quarter ending December 31, 2000.
During the third quarter ending December 31, 2000, the Company anticipates
increased shipments of its new IntelliServer RAS2000 ("RAS2000") product for use
in remote console management. This feature allows system administrators to
securely administer, troubleshoot or reboot any server, router or PBX device on
their network from remote locations throughout the world. For security, the
RAS2000 provides 128-bit encryption for sensitive data. The RAS2000 is currently
available in a 16-port unit that is expandable to 64 ports. In the near future,
the Company will introduce 4-port and 8-port versions. Shipments to a major
internet service provider and two leading computer manufacturers are anticipated
to occur in the third quarter.
While the first half of fiscal 2001 was 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 continue to increase as
fiscal 2001 progresses. The substantial backlog the Company had going into the
third quarter of fiscal 2001 further increases the Company's optimism that the
second half of fiscal 2001 will result in higher sales volumes of Connectivity
Products as well as growth in Service and Support revenues and secure remote
console management.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED).
Based upon its current business plan, the Company expects that cash and
cash equivalents, availability under the Company's Line and/or funds budgeted to
be generated from operations will be adequate to meet its liquidity and capital
resource requirements through the remainder of the fiscal year 2001. Currently
unforeseen future developments and increased working capital requirements may,
however, require the Company to obtain additional debt or equity financing.
There can be no assurances that the Company will be able to achieve higher sales
volumes of Connectivity Products, successfully modify its Line to include the
collateral of Multi-User, or obtain any required additional debt or equity
financing on terms acceptable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On July 13, 2000, the Company filed Form 8-K reporting under Item 2
the June 28, 2000 acquisition of Multi-User, Ltd.
On September 11, 2000, the Company filed Form 8-K/A amending the July
13, 2000 8-K. This amendment included the Multi-User financial
information and the pro forma combined financial information.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTONE CORPORATION
Date: November 14, 2000 By: /s/ Perry J. Pickerign
----------------------
Perry J. Pickerign
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Keith H. Daniel
-------------------
Keith H. Daniel
Chief Financial Officer
(Principal Financial and Accounting Officer)
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