UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the three month period ended June 30, 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: 12,122,058 shares of common stock on
August 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000
and March 31, 2000 3
Consolidated Statements of Operations for the
three months ended June 30, 2000 and June 30, 1999 4
Consolidated Statements of Cash Flows for the
three months ended June 30, 2000 and June 30, 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis for the three months
ended June 30, 2000 compared to the three months
ended June 30, 1999 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Computone Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------ ------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 886 $ 197
Receivables, net of allowance for doubtful accounts
of $310 at June 30, 2000 and $265 at March 31, 2000 2,218 1,389
Inventories, net 2,650 2,421
Prepaid expenses and other 154 95
------------ ------------
Total current assets 5,908 4,102
Property and equipment, net 711 654
Goodwill, net 8,620 --
Other intangible assets, net 359 388
Other 205 52
------------ ------------
TOTAL ASSETS $ 15,803 $ 5,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,784 $ 1,042
Accrued liabilities:
Deferred maintenance revenue 1,291 --
Deferred gross profit 279 358
Interest 274 255
Other 843 555
Line of credit 150 993
Notes payable to stockholders 740 590
Current maturities of long-term debt -- 154
------------ ------------
Total current liabilities 5,361 3,947
Long-term debt, less current maturities, net of
discount of $1,328 at June 30, 2000 1,172 193
------------ ------------
Total liabilities 6,533 4,140
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares
authorized; 12,038,885 and 9,977,214 shares issued
and outstanding, respectively 120 100
Additional paid-in capital 58,672 49,553
Accumulated deficit (49,522) (48,597)
------------ ------------
Total stockholders' equity 9,270 1,056
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,803 $ 5,196
============ ============
</TABLE>
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)
For the three months ended
------------------------------
June 30, 2000 June 30, 1999
------------- -------------
(unaudited)
Revenues:
Product sales $ 1,238 $ 4,733
------------ ------------
Expenses:
Cost of products sold 927 2,849
Selling, general and administrative 804 942
Product development 357 459
------------ ------------
2,088 4,250
------------ ------------
Operating income (loss) (850) 483
Other expense:
Other expense 2 --
Interest expense - affiliates 19 20
Interest expense - other 54 34
------------ ------------
Income (loss) before income taxes (925) 429
Provision for income taxes -- --
------------ ------------
Net income (loss) $ (925) $ 429
============ ============
Earnings (loss) per common share -
basic and diluted $ (0.09) $ 0.05
============ ============
Weighted average shares outstanding - basic 10,024 8,465
============ ============
Weighted average shares outstanding - diluted 10,024 8,751
============ ============
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
Computone Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the three months ended
-----------------------------
June 30, 2000 June 30, 1999
------------- -------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (925) $ 429
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 135 117
Provision for uncollectible accounts receivable 31 38
Provision for inventory reserve 45 70
Changes in current assets and current liabilities,
net of effects from business acquired
Receivables 252 (953)
Inventories 61 (97)
Prepaid expenses and other 11 15
Accounts payable and accrued liabilities 211 974
------------ ------------
Net cash provided by (used in) operations (179) 593
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (145) 11
Acquisition of business (4,145) --
Capitalization of software costs (23) (31)
Capital expenditures (140) (65)
------------ ------------
Net cash used in investing activities (4,453) (85)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 2,500 --
Repayment of debt (347) (25)
Net repayments under lines of credit (843) (609)
Capital contribution 250 --
Cost associated with the issuance of common stock (325) --
Proceeds from exercise of common stock options 24 169
Proceeds from issuance of common stock 4,062 --
------------ ------------
Net cash provided by (used in) financing activities 5,321 (465)
------------ ------------
Net increase in cash and cash equivalents 689 43
Cash and cash equivalents, beginning of year 197 18
------------ ------------
Cash and cash equivalents, end of period $ 886 $ 61
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 54 $ 34
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Common stock issued for business acquired $ 3,800 $ --
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All statements contained in this Form-10QSB Quarterly Report that are not
historical facts are based on current expectations. Such statements are
forward-looking (as defined in the Private Securities Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties. Actual results
could vary materially. The factors that could cause actual results to vary
materially include: the ability of the Company to obtain and maintain adequate
working capital, future supply and demand for the Company's products, 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 June 30, 2000 reflect, in
the opinion of management, all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
the results for the full year.
2. ACQUISITION
-----------
On June 28, 2000, the Company acquired 100% of the stock of Multi-User
Solutions ("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 for proceeds of $3,737,000
net of $325,000 in issuance costs, and the issuance of a $2,500,000 11% note
payable (Note 7). 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 three months ended
June 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 $ 2,884,000 $7,147,000
=========== ==========
Net income (loss) $(1,237,000) $ 304,000
=========== ==========
Net income (loss) per share - basic and diluted $ (0.11) $ 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.
6
<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. 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. 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 June 30, 2000 and March 31, 2000 (in thousands):
June 30, March 31,
2000 2000
---------- ----------
Inventories:
Finished goods $ 695 $ 597
Work in process 305 206
Raw materials 1,650 1,618
---------- ----------
$ 2,650 $ 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 872,175
and 286,431 options and warrants that were deemed to be dilutive at June 30,
2000 and 1999, respectively. For purposes of computing diluted EPS for the
three-month period ended June 30, 2000, the Company excluded the effects of
outstanding common stock options and warrants because they were anti-dilutive.
6. 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, which have occurred since the losses
started to accumulate, statutory provisions will substantially limit the
Company's future use of these loss carryforwards.
7
<PAGE>
COMPUTONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. 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. At June 30, 2000, the Company had
$150,000 in outstanding borrowings leaving $390,000 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 June 30, 2000, the Company was in compliance with these
covenants. The Line expires in November 2000.
On June 28, 2000, the Company entered into an agreement with a lender to
provide a $2,500,000 11% note payable due on December 28, 2001 with a detachable
warrant 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 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 million 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999.
RESULTS OF OPERATIONS
---------------------
During the three-month period ended June 30, 2000, the Company incurred a
net loss of $925,000 on revenues of $1,238,000 compared to net income during the
three-month period ended June 30, 1999 of $429,000 on revenues of $4,733,000.
Product sales revenue for the three-month period ended June 30, 2000
totaled $1,238,000 compared to $4,733,000 for the comparable three-month period
of the prior fiscal year, a decrease of $3,495,000, or 74%. Approximately
$2,500,000 of the decrease was attributable to lower sales to the Company's two
largest non-distribution customers. During the prior year's three-month period,
these two customers were involved in projects to replace competitor's equipment
and to expand the use of the Company's products in additional applications.
Similar projects did not reoccur in this year's three-month period. The
remaining decrease in product sales of approximately $1,000,000 was a result of
lower sales to distribution and OEM customers due to the lingering effect of
post year 2000 reductions in spending. The acquisition of Multi-User on June 28,
2000 had minimal effect on sales revenue for the three-month period ended June
30, 2000.
Cost of products sold for the three-month period ended June 30, 2000
amounted to $927,000, or 75% of product sales revenues, versus $2,849,000, or
60%, for the comparable three-month period of the prior year. The increase in
cost of products sold as a percentage of revenues is due primarily to the
continuation of certain fixed operating costs that were not affected by the
reduction in sales volume.
Selling, general and administrative expenses for the three-month period
ended June 30, 2000 totaled $804,000 compared to $942,000 for the three-month
period ended June 30, 1999, a decrease of $138,000, or 15%, from the prior
fiscal year. This decrease is primarily attributable to decreases in
compensation costs, reduced legal costs due to settlement of litigation in the
prior fiscal year, and the continued successful implementation of other cost
reduction efforts.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999, CONTINUED.
Product development costs charged to expense for the three-month period
ended June 30, 2000 totaled $357,000 compared to $459,000, for the three-month
period ended June 30, 1999. This decrease of $102,000, or 22%, is primarily
attributed 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. At June 30, 2000, the Company had
$150,000 in outstanding borrowings leaving $390,000 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 June 30, 2000, the Company was in compliance with these
covenants. The Line expires in November 2000.
On June 28, 2000, the Company entered into an agreement with a lender to
provide a $2,500,000 11% note payable due on December 28, 2001 with a detachable
warrant 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 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 million 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.
Cash used in operating activities amounted to $179,000 during the
three-month period ended June 30, 2000 compared to cash provided by operations
of $593,000 during the three-month period ended June 30, 1999. A portion of the
cash consumed by operating losses for the three-month period ended June 30, 2000
was offset by a decrease in accounts receivables and increases in accounts
payables and accrued liabilities.
Cash used in investing activities amounted to $4,453,000 during the
three-month period ended June 30, 2000 compared to $85,000 for the three-month
period ended June 30, 1999. The increase in net cash outflow resulted primarily
from the acquisition of Multi-User.
Cash provided by financing activities amounted to $5,321,000 during the
three-month period ended June 30, 2000 compared to cash used in financing
activities of $465,000 during the three-month period ended June 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 $547,000 at June 30, 2000 compared $155,000 at
March 31, 2000, an increase of $443,000. The ratio of current assets to current
liabilities at June 30, 2000 was 1.10 to 1.00 compared to 1.04 to 1.00 at March
31, 2000. The increase in working capital was attributable primarily the
financing obtained in conjunction with the purchase of Multi-User.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 2001
-----------------------------------------
The Company will continue to introduce new products during fiscal 2001.
While the beginning 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 increase as fiscal 2001
progresses. These increases will be driven by the introduction of new products
and new technologies developed and brought to market over the last six months of
fiscal 2001. In addition, significant revenues are anticipated from the service
and support business of Multi-User.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
In June 2000, the Company sold 1,249,671 shares of common stock at a
price of $3.25 to a limited number of accredited investors in a
private placement being effected through a registered broker dealer as
a placement agent. The private placement was effected pursant to
Regulation D under the Securities Act of 1933. The placement agent
received $325,000 and a warrant to purchase 24,993 shares of the
Company's common stock for $3.25 per share as compensation. The
aggregate proceeds from such sales were used primarily to fund the
cash portion of the acquisition of Multi-User. As part of the
acquisition of Multi-User, the Company issued 800,000 shares of common
stock to the principal shareholders of Multi-User.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTONE CORPORATION
Date: August 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)
