Computone: Form 10-QSB For Quarter Ended 1/2/98 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 quarterly period ended January 2, 1998 [ ] 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 registrant as specified in its charter) Delaware 23-2472952 - --------------------------------------------------------------------------- ------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) 1060 Windward Ridge Parkway, Suite 100, Alpharetta, GA 30005 - ------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (770) 625-0000 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: 7,255,952 shares of common stock as of February 9, 1998. Transitional Small Business Disclosure Format (check one): Yes No X ---- - INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of January 2, 1998 and April 4, 1997 3 Consolidated Statements of Operations for the three months ended January 2, 1998 and January 3, 1997 4 Consolidated Statements of Operations for the nine months ended January 2, 1998 and January 3, 1997 5 Consolidated Statements of Cash Flows for the nine months ended January 2, 1998 and January 3, 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operations for the three and nine months ended January 2, 1998 8 PART II - OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibits Index 15 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements Computone Corporation Consolidated Balance Sheets (in thousands except par value and number of shares) January 2, 1998 April 4, 1997 --------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 14 $ 88 Receivables, net 2,166 1,896 Inventories, net 4,278 4,600 Prepaid expenses and other 282 170 -------- -------- Total current assets 6,740 6,754 Property, equipment and improvements, net 466 276 Intangible assets, net 600 655 Other 28 90 -------- -------- Total assets $ 7,834 $ 7,775 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 1,794 $ 2,647 Accrued liabilities: Payroll 88 112 Prepaid sales 0 9 Professional fees 63 171 Other 397 439 Line of credit 663 -- Notes payable to stockholders 350 250 Current maturities of long term debt 89 603 -------- -------- Total current liabilities 3,444 4,231 Notes payable to stockholders 120 120 Long term debt, less current maturities 129 -- -------- -------- Total liabilities 3,693 4,351 Stockholders' Equity Convertible redeemable preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 7,255,633 and 6,712,074 shares outstanding 75 67 Additional paid in capital 45,043 43,031 Accumulated deficit (40,977) (39,674) -------- -------- Total stockholders' equity 4,141 3,424 -------- -------- Total liabilities and stockholders' equity $ 7,834 $ 7,775 ======== ======== See accompanying notes to the consolidated financial statements. 3 ITEM 1. Financial Statements (continued) Computone Corporation Consolidated Statements of Operations (in thousands except per share amounts) (unaudited) Three Months Ended January 2, 1998 January 3, 1997 ------------------- ------------------- Revenues: Product sales $ 1,863 $ 3,477 Expenses: Cost of products sold 1,824 1,945 Selling, general and administrative 1,338 1,090 Product development 304 312 -------- -------- 3,466 3,347 -------- -------- Operating income (loss) (1,603) 130 Other income (expense): Other, net (50) 23 Interest expense (41) (27) -------- -------- Income (loss) before income taxes (1,694) 126 Provision for income taxes -- -- -------- -------- Net income (loss) $ (1,694) $ 126 ======== ======== Net income (loss) per share - basic (0.22) 0.02 Net income (loss) per share - diluted (0.22) 0.02 Shares used in computing net income (loss) per share - basis 7,672 6,848 Shares used in computing net income (loss) per share - dilutive 7,672 6,848 See accompanying notes to the consolidated financial statements. 4 ITEM 1. Financial Statements (continued) Computone Corporation Consolidated Statements of Operations (in thousands except per share amounts) (unaudited) Nine Months Ended January 2, 1998 January 3, 1997 ------------------ ------------------ Revenues: Product sales $ 8,868 $ 10,006 Expenses: Cost of products sold 6,054 5,856 Selling, general and administrative 3,377 2,824 Product development 872 851 ------------------ ------------------ 10,303 9,531 ------------------ ------------------ Operating income (loss) (1,435) 475 Other income (expense): Other, net 247 28 Interest expense (115) (94) ------------------ ------------------ Income (loss) before income taxes (1,303) 409 Provision for income taxes -- -- ------------------ ------------------ Net income (loss) $(1,303) $ 409 ================== ================== Net income (loss) per share - basic (0.18) 0.06 Net income (loss) per share - diluted (0.18) 0.06 Shares used in computing net income (loss) per share - basis 7,362 6,848 Shares used in computing net income (loss) per share - dilutive 7,362 6,848 See accompanying notes to the consolidated financial statements. 5 Computone Corporation Consolidated Statements of Cash Flows (in thousands) For the nine months ended ------------------------------------- January 2, 1998 January 3, 1997 --------------- --------------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $(1,303) $ 409 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) continuing operations: Depreciation and amortization 389 515 Provision for possible losses 154 70 Changes in current assets and current liabilities: Accounts receivables (363) (1,064) Inventories 261 (522) Prepaid expenses and other (112) 4 Accounts payable and accrued liabilities (1,035) (229) ------- ------- Net cash (used in) operating activities (2,009) (817) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in other assets 63 (3) Capitalization of software costs (185) (105) Capital expenditures (88) (86) ------- ------- Net cash (used in) investing activities (210) (194) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt net (500) (429) Net borrowings under lines of credit 663 -- Net borrowings under term loan 180 -- Net borrowings from affiliates 35 250 Issuance of common stock 1,742 1,418 Exercise of common stock options and warrants 25 4 ------- ------- Net cash provided by financing activities 2,145 1,243 ------- ------- Net decrease in cash and cash equivalents (74) 232 Cash and cash equivalents, beginning of period 88 143 ------- ------- Cash and cash equivalents, end of period $ 14 $ 375 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 115 94 See accompanying notes to the consolidated financial statements. 6 COMPUTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements included in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-KSB for the year ended April 4, 1997. The consolidated financial statements presented herein, as of January 2, 1998 reflect in the opinion of management, all adjustments, consisting only of normal recurring accruals, 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. INVENTORIES Inventories, net of a reserve for obsolete, excess and non-salable items, consisted of the following at January 2, 1998 and April 4, 1997 (in thousands): January 2, 1998 April 4, 1997 --------------- ------------- Finished goods $ 1,375 $ 1,740 Work in progress 687 725 Raw materials 2,216 2,135 --------------- ---------------- $ 4,278 $ 4,600 =============== ================ 3. INCOME PER SHARE Earnings per share ("EPS") is computed based on the weighted average number of common shares, and common stock options and warrants (unless conversion would have an antidilutive effect on EPS) (using the treasury method), in accordance with the requirements of FASB Statement of Standards No. 128 Earnings per Share. For purposes of computing EPS, for all periods presented the numerator is represented by net income or net loss for each respective period; the denominator for computing basic EPS is represented by the weighted average number of shares outstanding for each respective period; the denominator for computing diluted EPS for fiscal 1998 periods presented is the same number as used in computing basic EPS as the effects of conversion would be antidilutive. 4. INCOME TAXES Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No.109 (SFAS 109), "Accounting for Income Taxes". Management provides a valuation allowance against its deferred tax assets to the extent that management concludes that it is more likely than not that the Company will not benefit from the utilization of such deferred tax assets. 5. DEBT On June 20, 1997, the Company entered into a financing arrangement with Heller Financial to provide a term loan in the amount of $254,000, which is collateralized by the Company's inventory, and a line of credit of up to $2,500,000, based on the available borrowing base, collateralized by the Company's accounts receivable. The term loan bears interest at a rate of prime plus 1.50% and is payable in monthly installments of $4,233 plus accrued interest for the first thirty-five months with a final monthly payment in the amount of the entire then outstanding principal plus accrued interest. The line of credit bears interest at a rate of prime plus 1.25%. At January 2, 1998, the balance outstanding on the term loan was approximately $179,562 and the balance under the line of credit was approximately $662,894. The available borrowings under the line of credit at January 2, 1998 were $102,356. The Company also paid in full, on June 20, 1997, its outstanding balance to NationsBank, N.A. in the amount of $447,000. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS RESULTS OF OPERATIONS For the Three Months Ended January 2, 1998 Compared to the Three Months Ended January 3, 1997 The Company reported an operating loss of $1,603,000 and net loss of $1,694,000 for the three months ended January 2, 1998 compared to operating income of $130,000 and net income of $126,000 for the comparable three months of the prior fiscal year. The decrease in income is due primarily to working capital shortages and subsequent payment delays to the Company's major outsourcing vendors during the first quarter of the fiscal year which resulted in the Company's accounts being placed on credit hold with these vendors. After the Company's accounts were again in good standing, one of these vendors was unable to procure certain long lead time components in a timely enough manner to provide the Company with sufficient products to meet its open orders during the second quarter. The current period's decrease in income is due primarily to the continued effects of the product mix shortages, the lingering effects of the lost sales opportunities during the second quarter resulting from the product shortages and numerous one-time or non-recurring expenses amounting to approximately $600,000. Product sales revenue for the quarter ended January 2, 1998 total approximately $1,863,000 compared to $3,477,000 for the comparable quarter of the prior fiscal year, a decrease of 46%. This change in product sales revenue is attributable to the continued effects of the product mix shortages and the lingering effects of lost sales opportunities during the second quarter resulting from the product shortages. A significant increase in sales to major accounts was offset by decreases in sales to North American distributors, OEM's, VAR's and international customers. Cost of products sold for the quarter ended January 2, 1998 amounted to $1,824,000 or 98% of product sales revenues compared to $1,945,000 or 56% for the comparable quarter of the prior year. The decrease in cost of products sold is attributable to the decrease in product sales revenue. However, the increase in cost of goods sold as a percentage of revenues is attributable to the Company's sales of remote access products with a higher cost and the reduction of capitalized overhead costs resulting from the Company's move toward greater outsourcing of its product assembly. Selling, general and administrative expenses amounted to $1,338,000 or 72% of product sales revenue for the three months ended January 2, 1998 compared to $1,090,000 or 31% of product sales revenue for the comparable three months of the prior fiscal year. The increase in expenses during the quarter ended January 2, 1998 compared to the same period of the prior fiscal year is attributable to the Company's relocation to its new facility, an increase in professional fees and the Company's annual shareholders' meeting and related open house. The Company experienced an increase in selling related costs associated with the Company's efforts to sell the remote access products that were shipped to a major customer during last fiscal year (and accounted for as a consignment) and returned to the Company during the second quarter of this fiscal year. The Company implemented additional sales promotions in an effort to sell the remaining products associated with this transaction along with other products that were not affected by delivery delays. Product development expenses amounted to $304,000 or 16% of product sales revenue for the three months ended January 2, 1998 compared to $312,000 or 9% of product sales revenue for the comparable three month period of the prior fiscal year. For the Nine Months Ended January 2, 1998 Compared to the Nine Months Ended January 3, 1997 The Company reported an operating loss of $1,435,000 and net loss of $1,303,000 for the nine months ended January 2, 1998 compared to operating income of $475,000 and net income of $409,000 for the comparable nine months of the prior fiscal year. The decrease in income is due primarily to working capital shortages and subsequent payment delays to the Company's major outsourcing vendors during the first quarter of this fiscal year which resulted in the Company's accounts being placed on credit hold with these vendors. After the Company's accounts were again in good standing, one of these vendors was unable to procure certain long lead time components in a timely enough manner to provide the Company with sufficient products to meet its open orders during the second quarter. The current period's decrease in income is due primarily to the continued effects of the product mix shortages, the lingering effects of lost sales opportunities during the second quarter resulting from the product shortages an numerous one-time or non-recurring expenses amounting to approximately $600,000. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) For the Nine Months Ended January 2, 1998 Compared to the Nine Months Ended January 3, 1997 Product sales revenue for the nine months ended January 2, 1998 totaled approximately $8,868,000 compared to $10,006,000 for the comparable nine months of the prior fiscal year, a decrease of 11%. This decrease in product sales revenue is attributable to the continued effects of the product mix shortages and the lingering effects of lost sales opportunities during the second quarter resulting from the product shortages. Significant increases in sales to major accounts and OEM's were offset by decreases in sales to North American distributors, VAR's and international customers. Cost of products sold for the nine months January 2, 1998 amounted to $6,054,000 or 68% of product sales revenues compared to $5,856,000 or 59% for the comparable nine months of the prior year. The increase in cost of products sold is attributable to the reduction of capitalized overhead costs, resulting from the Company's move toward greater outsourcing of its product assembly, along with an increase in fixed manufacturing overhead expenses. Selling, general and administrative expenses amounted to $3,377,00 or 38% of product sales revenue for the nine months ended January 2, 1998 compared to $2,824,000 or 28% of product sales revenue for the comparable nine months of the prior fiscal year. The increase in expenses during the nine months ended January 2, 1998 compared to the same period of the prior fiscal year is attributable to the Company's relocation to its new facility, an increase in professional fees and the Company's annual shareholders' meeting and related open house. The Company experienced an increase in selling related costs associated with the Company's effort to sell the remote access products that were shipped to a major customer during last fiscal year (and accounted for as a consignment) and returned to the Company during the second quarter of this fiscal year. The Company implemented additional sales promotions in an effort to sell the remaining products associated with this transaction along with other products that were not affected by delivery delays. Product development expenses amounted to $872,000 or 10% of product sales revenue for the nine months ended January 2, 1998 compared to $851,000 or 9% of product sales revenue for the comparable nine month period of the prior fiscal year. The Company recorded $132,000 in net non-operating income for the nine months ended January 2, 1998. This non-operating income was the net of $313,000 in investment income resulting from the Company's sales of shares in another company's initial public offering, $115,000 in interest expense, the write-off of $46,000 in prepaid license fees and $15,000 in one-time late charges. This total compares to $66,000 in net non-operating expenses, predominately interest expense, during the same nine month period fiscal year. LIQUIDITY In response to the Company's working capital needs, on June 20, 1997, the Company entered into a funding arrangement with Heller Financial to provide a term loan in the amount of $254,000, which is collateralized by the Company's inventory, and a line of credit of up to $2,500,000, based on the available borrowing base, collateralized by the Company's accounts receivable. As of January 2, 1998, $102,356 was available for borrowing under the line of credit. The Company believes that the working capital provided by Heller Financial, together with anticipated funds expected to be generated by operating activities, should be reasonably sufficient to cover operating expenses to be incurred during the remainder of fiscal 1998. Cash commitments for non-cancelable long-term operating real and personal property leases during fiscal 1998 are approximately $262,000. The Company has no plans for any major capital improvements. Relationships with major vendors are satisfactory, although the Company is on a "Cash On Delivery" status with a significant number of raw materials vendors. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY (CONTINUED) Cash used in continuing operations amounted to $2,009,00 for the nine months ended January 2, 1998 compared to cash used in continuing operations of $817,000 for the comparable nine months ended January 3, 1997. The increase in cash used in continuing operations compared to the prior year fiscal period reflects primarily the loss from continuing operations. Accounts payable and accrued liabilities decreased by $1,035,000 as a result of the working capital that was made available by the line of credit and private placement proceeds. Accounts receivable increased by approximately $363,000, prepaid expenses increased by $112,000 and inventories decreased by $261,000. On October 11, 1997, the Company completed the relocation to its new headquarters in Alpharetta, Georgia. The new facility is located in a new office park in the suburbs of Atlanta. The Company has a ten-year lease on 22,000 square feet of a new 40,000 square foot one-story brick building and expects to save approximately $170,000 per year in total occupancy costs compared to the Company's prior lease arrangement. Cash used in investing activities amounted to $210,000 for the nine month ended January 2, 1998 compared with $194,000 used in financing activities for the comparable nine months of the prior fiscal year. This increase from the same period of the prior fiscal year can be attributable to the decrease in other assets along with an increase in capitalized software development costs. Cash provided by financing activities during the nine months ended January 2, 1998 was $2,145,000 compared to $1,243,000 of cash provided by financing activities for the nine months ended January 3, 1997. This change is attributable to the Company's aforementioned new financing arrangement with Heller Financial along with the proceeds from the private placement that was completed in mid-October. Working capital amounted to $3,296,000 at January 2, 1998 an increase of $773,000, since April 4, 1997. The ratio of current assets to current liabilities at January 2, 1998 was 1.96 to 1.00 compared to 1.60 to 1.00 at April 4, 1997. OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998 SALES BY PRODUCT LINE The Company continues to experience growth in its sales of remote access products following its decision to strategically aligned its sales focus towards this marketplace versus sales of input\output devices. The sales information for the second quarter of fiscal 1998 ended January 2, 1998 is listed below. Management is fairly optimistic that the level of sales of remote access products as a percentage of net revenue will continue to increase over the remainder of the current fiscal year and should approach the level of 50% of net revenues by the end of the fiscal year. Remote Access Servers Input\Output Devices Total Sales $ (000's) % of Total Sales $ (000's) % of Total Sales $ (000's) % of Total --------------- ----------- --------------- ---------- --------------- ---------- Third Quarter: 98 $ 782 42% $1,081 58% $ 1,863 100% 97 1,344 39 2,133 61 3,477 100 First Nine Months: 98 $4,142 47% $4,726 53% $ 8,868 100% 97 3,426 34 6,580 66 10,006 100 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998 LIQUIDITY AND CAPITAL RESOURCES During the three months ended January 2, 1998, the Company initiated a private placement of 500,000 shares of Common Stock. As of January 2, 1998, the Company raised $934,400 and an additional $724,800 through October 16, 1997. The proceeds from this private placement are to be used to fund new product development and provide additional working capital. The proceeds from the private placement along with the working capital provided by Heller Financial, and the funds expected to be generated by operating activities, should be reasonably sufficient to cover operating expenses to be incurred during fiscal 1998. Cash commitments for non-cancelable long-term operating real and personal property leases during fiscal 1998 are approximately $262,000. The Company has no plans for any major capital improvements. The Company expects continued growth in the sales of its remote access products. At January 2, 1998, the Company had open orders of approximately $89,000. Management believes that the additional funding raised through the private placement along with the funding available from the Heller Financial relationship should provide the Company with the working capital required to grow the Company through new product development and marketing activities. The Company's management believes that the financial results for the third quarter that ended on January 2, 1998 was not indicative of the anticipated financial results for the fourth quarter of this fiscal year. The Company has resolved the problems that it had with its major outsourcing vendor and has subsequently entered into a relationship directly with a manufacturer of the products that the outsourcing vendor had manufactured. As of February 12, 1998, the Company is in receipt of purchase orders from a major customer totaling in excess of $2,000,000 for products that the Company believes it will be able to ship during the fourth quarter of this fiscal year. Management believes that sales to VAR's and international customers are on-track to exceed sales to these customers during the third quarter. The Company has sufficient inventory available to meet these anticipated increases in sales. 11 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 The Company held, on November 25, 1997, its Annual Meeting of Stockholders at which the following actions were taken: 1. Four directors were elected to serve until the 1998 Annual Meeting of Stockholders and until their successors are elected: Name For Withheld ---- --- -------- Thomas J. Anderson 3,765,267 1,000 Richard A. Hansen 3,765,267 1,000 John D. Freitag 3,765,267 1,000 William C. Lovely 3,765,267 1,000 2. A proposal to adopt the Company's Equity Incentive Plan for officers, directors, employees and consultants was approved: For Against Abstain --- ------- ------- 3,757,487 7,280 1,500 3. A proposal to amend the Company's Certificate of Incorporation to reduce the number of shares of Common Stock the Company is authorized to issue from 50,000,000 shares to 25,000,000 was approved: For Against Abstain --- ------- ------- 3,764,054 1,214 1,000 4. BDO Seidman, LLP was elected as independent public accountants for the Company for its 1998 fiscal year: For Against Abstain --- ------- ------- 3,752,085 1,172 13,010 12 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibit Number Description of Exhibit -------------- ---------------------- 3.1(i) Restated Certificate of Incorporation of Registrant as amended 27 Financial Data Schedule b. On November 12, 1997, the filed Form 8-K reporting that on October 16, 1997, the Company sold an aggregate of 187,500 shares of common stock, par value $.01, for an aggregate purchase price of $600,000. The shares were placed through Pennsylvania Merchant Group Ltd., which received a commission in the aggregate amount of $37,500. The Company sold the shares to one investor, The Tailwind Fund Ltd. Pursuant to the exemption from registration afforded by Regulation S under the Securities Act of 1933, as emended. 13 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: February 13, 1998 By: \s\ Thomas J. Anderson ---------------------- President and Chief Executive Officer (Principal Operating Officer) By: \s\ Gregory A. Alba ------------------- Gregory A. Alba Vice President of Finance & Administration and Chief Financial Officer (Principal Accounting Officer) 14 EXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 (i) Restated Certificate of Incorporate of Registrant as amended 27 Financial Data Schedule 15 Secretary of State Division of Corporation Filed 03:30 P.M. 07/11/1991 911925192 - 2122686 RESTATED CERTIFICATE OF INCORPORATION OF COMPUTONE CORPORATION PURSUANT TO SECTION 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Computone Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, in order to restate its Certificate of Incorporation, as amended or supplemented heretofore and as presently in effect, pursuant to Section 245 of said General Corporation Law, certifies as follows: 1. The name of the Corporation is Computone Corporation and the name under which the corporation was originally incorporated is CPX, Inc. The date of filing its original Certificate of Incorporation with the Secretary of State of the State of Delaware is April 6, 1987. 2. This restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation, as amended or supplemented heretofore, and there is no discrepancy between the provisions of the Certificate of Incorporation of the Corporation, as amended or supplemented heretofore and as presently in effect, and the provisions of this Restated Certificate of Incorporation. 3. The Executive Committee of the Board of Directors of the Corporation, acting by unanimous written consent pursuant to Section 141(f) of the General Corporation Law of the State of Delaware, duly adopted a resolution proposing and declaring advisable the adoption of a restatement of the Certificate of Incorporation of the Corporation in the form hereinafter set forth in Item 6. 4. The aforesaid Restated Certificate of Incorporation was duly adopted in accordance with the applicable provisions of Section 245 of the General Corporation Law of the State of Delaware. 5. The authorized capital of the Corporation shall not be increased nor reduced under or by reason of the restatement of the Certificate of Incorporation of the Corporation. 6. The text of the Certificate of Incorporation, as amended or supplemented heretofore and as presently in effect, is hereby restated so as to read in its entirety as follows: FIRST. The name of this Corporation is Computone Corporation. SECOND. Its registered office in the State of Delaware is to be located at 1013 Centre Road in the City of Wilmington, County of New Castle, zip code 19805. The Registered Agent in charge thereof is Corporation Service Company. THIRD. The nature of the business and, the objects and purposes proposed to be transacted, promoted and carried on, are to do any or all the things therein mentioned, as fully and to the same extent as natural persons might or could do, and in any part of the world, viz: "The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware." FOURTH. (A) Capital Stock. The total number of shares of all classes of stock which the Corporation shall have authority to issue is Sixty Million (60,000,000) shares consisting of Fifty Million (50,000,000) shares of Common Stock, One Cent ($.01) par value per share, and Ten Million (10,000,000) shares of Preferred Stock, One Cent ($.01) par value per share. (B) Common Stock. The shares of authorized Common Stock of the Corporation shall be identical in all respects and shall have equal rights and privileges. (C) Preferred Stock. The Board of Directors shall have authority to issue the shares of Preferred Stock from time to time on such terms as it may determine, and to divide the Preferred Stock into one or more classes or series and, in connection with the creation of any such class or series, the board of Directors shall have authority to fix by the resolution or resolutions providing for the issue of shares thereof the designations, voting powers, preferences -2- and relative participating, optional or other special rights of such class or series, and the qualifications, limitations, or restrictions thereof, to the fullest extent now or hereafter permitted by law. Pursuant to the authority conferred upon the Board of Directors of the Corporation under this Article Fourth, the Board of Directors established and designated for issuance 1,250,000 shares of Series A Convertible Preferred Stock and 200,000 shares of Series B Convertible Preferred Stock with the relative rights, powers and preferences set forth in the following resolution: RESOLVED, that pursuant to the authority conferred upon the Board of Directors of the Corporation by Article Fourth of the Certificate of Incorporation, the Board of Directors does hereby establish and designate and provide for the issuance of a series of preferred stock, $.01 par value, designated "Series A Convertible Preferred Stock" (the "Preferred Stock"), consisting of 1,250,000 shares, and does hereby fix and determine the relative rights, powers and preferences thereof to be as follows: I. Rights on Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of shares of the Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, either from capital, surplus or earnings, before any payment shall be made to the holders of shares of the Corporation's Common Stock, the amount of $8.00 per share plus all accrued but unpaid dividends thereon and all interest due thereon. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the holders of the Preferred Stock shall be insufficient to pay the holders of the Preferred Stock the full amounts to which they respectively shall be entitled pursuant to this Section I(a), the holders of shares of the Preferred Stock shall share ratably in any distribution of assets according to the respective amounts that would be payable in respect of the shares of Preferred stock held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (b) In the event of any liquidation, dissolution or winding up of the Corporation, after payment shall have been made to the holders of shares of the Preferred Stock of the full amounts to which they shall have been entitled pursuant to the first sentence of Section I(a) hereof, the holders of shares of the Corporation's Common Stock shall have the exclusive right to share in all remaining assets of the Corporation available for distribution to its stockholders, such remaining assets to be shared by the holders of shares of the Corporation's Common Stock on a pro rata basis. II. Voting. -3- (a) On all matters presented to the holders of the Corporation's Common Stock, each holder of shares of the Preferred Stock shall be entitled to exercise such number of votes per share of Preferred Stock held by such holder as shall equal the number (including any fraction to one decimal place) of shares of Common Stock into which each share of Preferred Stock is convertible pursuant to Section III hereof on the date as of which a record of those entitled to vote is taken or, if no such record date is established, on the date such vote is taken. In the event such number of votes is not ascertained or not readily ascertained, each share of the Preferred Stock shall be entitled to one vote. Except as otherwise required by law or hereunder, the holders of the Preferred Stock and the holders of the Common Stock shall vote as a single class on all such matters. (b) The Corporation shall not, without the affirmative vote or consent of the holders of shares representing at least 60% of the shares of the Preferred Stock then outstanding, acting as a separate class: (i) in any manner authorize or create any class of capital stock ranking, either as to payment of dividends or distribution of assets, prior to the Preferred Stock or except with respect to the shares of preferred stock to be issued in connection with the transaction disclosed in the Corporation's Acquisition Summary Book II (the "Corporation's Acquisition Summary Book II") previously furnished to the holders of the Preferred Stock, pari passu with the Preferred Stock; (ii) in any manner alter or change the designations, powers, preferences or rights or the qualifications, limitations or restrictions of the Preferred Stock; (iii) declare or make any such dividend or distribution as described in Section IV hereof; (iv) liquidate or repurchase any Common Stock; (v) redeem or repurchase any Common Stock; or (vi) sell all or substantially all of the assets of the Corporation. III. Conversion. (a) Each holder of shares of the Preferred Stock shall have the right, at such holder's option, at any time or from time to time, to convert all or any of such shares of Preferred Stock into such number of fully paid and nonassessable shares of the Corporation's Common Stock as $8.00 multiplied by the number of shares of the Preferred Stock being converted is a multiple of the Conversion Price (as hereinafter defined and as last adjusted pursuant to this Section III and then in effect) for the shares of the Preferred Stock being -4- converted, by surrender of the certificate or certificates representing the shares of the Preferred Stock so to be converted in the manner provided in this Section III(a). The "Conversion Price" per share at which shares of Common Stock shall be issuable upon conversion of shares of the Preferred Stock shall initially be $8.00; provided, however, that such Conversion Price shall be subject to adjustment as set forth in Section III(c) hereof. The holder of any shares of the Preferred Stock may exercise the conversion right provided in this Section III(a) by delivering to the Corporation during regular business hours, at the Corporation's principal office (or at such other place as may be designated by the Corporation), the certificate or certificates representing the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address) in which the certificate or certificates for the shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date." As promptly as practicable after the Conversion Date the Corporation shall issue and deliver to or upon the written order of such holder, at such office or to the place designated by the Corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock as provided in Section III(c) hereof. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a holder of record of such common Stock on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event the person shall be deemed to have become a holder of record on the next succeeding date on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle the holder thereof to dividends on the shares of Preferred Stock represented thereby to the same extent as if the certificate theretofore covering such unconverted shares had not been surrendered for conversion. (b) No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of the Preferred Stock. If more than one share of Preferred Stock shall be surrendered or conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then Current Market Price (as defined in Section III(d)(vi) hereof) of a share of Common -5- Stock multiplied by such fractional interest. Fractional interests shall not be entitled to dividends, and the holders thereof shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests. (c) The Conversion Price shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after September 30, 1988 is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after September 30, 1988 is decreased by a combination of the outstanding shares of Common Stock, then, immediately following the record date for such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iii) If the Corporation shall declare a cash dividend upon its Common Stock payable otherwise than out of earnings or earned surplus or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends and distributions) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), then, in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend or distribution, the Conversion Price in effect thereafter shall be determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be an amount equal to the remainder of (x) the Current Market Price of one share of Common Stock less (y) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the stock, securities, evidences or indebtedness, assets, options or rights so distributed in respect of one share of Common Stock, and of which the denominator shall be such current Market Price. Such adjustment shall be made on the date such dividend or distribution is made and shall become effective at the opening of business on the business day next following the record date for the determination of shareholders entitled to such dividend or distribution. -6- (iv) If, at any time after September 30, 1988, any capital reorganization, or any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any change in the Common Stock) or of the sale or other disposition of all or substantially all the properties and assets of the Corporation as an entirety to any other person, each share of the Preferred Stock shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the Corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation, merger, sale or other disposition) upon conversion of such shares would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this clause (iv) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales and other dispositions. (v) All calculations under this Section III(c) shall be made to the nearest cent or to the nearest one-tenth of a share, as the case may be. (vi) For the purpose of any computation pursuant to this Section III(c) or Section III(b), the "Current Market Price" at any date of one share of Common Stock shall be deemed to be the average of the daily closing prices for the 30 consecutive business days ending no more than 15 business days before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 30 business day period), or, in case no sales took place on any day in question, the last bid price on such day, in either case on the principal national securities exchange on which the Common Stock then be listed or admitted to trading or on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") National Market System (or, if the Common Stock is not listed or admitted for trading on any such exchange or on the NASDAQ National Market System on any day in question, then such price as shall be deemed to be the last bid price quoted on the NASDAQ interdealer quotations system on such day, or, if, on any day in question, the security shall not be quoted on the NASDAQ interdealer quotations system, then such price shall be deemed to be the last reported bid price on such day as reported by the National Quotation Bureau, Inc. (or any similar reputable quotation and reporting service if such quotation is not reported by the National Quotation Bureau, Inc.); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to in this clause (viii) are available for the period required hereunder, the Current Market Price shall be determined in good faith by at least a majority of the members of the Board of Directors of the Corporation, or, if such determination cannot be made, by a nationally recognized independent investment banking firm -7- selected by the Board of Directors of the Corporation (or if such selection cannot be made, by a nationally recognized independent investment banking firm selected by the American Arbitration Association in accordance with its rules); provided further, that if the Common Stock is listed on any national securities exchange, the term "business days," as used in this clause (viii), shall mean business days on which such exchange is open for trading. (vii) In any case in which the provisions of this Section III(c) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the holder of any share of Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon the conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section III(b) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares and such cash, upon the occurrence of the event requiring such adjustment. (d) Whenever the Conversion Price shall be adjusted as provided in Section III(c) hereof, the Corporation shall prepare a statement, signed by its chief financial officer, setting forth the facts requiring such adjustment and showing the calculation of the Conversion Price that shall be in effect after such adjustment. The Corporation shall cause a copy of such statement to be sent by mail, first class, postage prepaid, or by a national overnight delivery service, to each holder of shares of the Preferred Stock at his address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section III(e) hereof. (e) In the event the Corporation shall propose to take any action of the types described in clauses (i), (ii), (iii), or (iv) of Section III(c) hereof, the Corporation shall give notice to each holder of shares of the Preferred Stock, in the manner set forth in Section III(d) hereof, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Preferred Stock. In the case of any action that would require the fixing of a record date, such notice shall be given at least 20 days prior to the date so fixed, and in the case of all other action, such notice shall be given at least 30 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. -8- (f) For the purposes of this Section III, the sale or other disposition of any capital stock of the Corporation theretofore held in its treasury shall be deemed to be an issuance thereof. (g) The Corporation shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of the preferred stock; provided, however, that the Corporation shall not be required to pay any taxes that may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Preferred Stock in respect of which such shares are being issued. (h) The Corporation shall reserve, free from preemptive rights, out of its treasury stock or its authorized but unissued shares of the Corporation's Common Stock, or both, solely for the purpose of effecting the conversion of the shares of the Preferred Stock pursuant to this Section III a sufficient number of shares to provide for the conversion of all outstanding shares of the Preferred Stock. IV. Dividends. The holder of each share of the Preferred Stock shall be entitled to receive, before any dividend shall be declared or paid upon or set aside for the Corporation's Common Stock, when and as declared by the Board of Directors of the Corporation, out of funds legally available for that purpose, quarterly dividends in cash at the rate of $.80 per share per annum, and no more. Dividends on shares of the Preferred Stock shall be payable in quarter-annual installments on January 1, April 1, July 1 and October 1 in each year commencing January 1, 1989. Dividends on shares of the Preferred Stock shall be cumulative (whether or not there shall be net profits or net assets of the Corporation legally available for the payment of such dividends) so that if Full Cumulative Dividends (as hereinafter defined) upon the Preferred Stock to the end of the last completed Dividend Period (as hereinafter defined) have not been paid or declared and a sum sufficient for payment thereof set apart, then the amount of the deficiency in such dividends must be fully paid with an incremental dividend equal to 10% per annum of the aforesaid dividend from the date such dividend was due to the date such dividend is paid, or dividends in such amount must be declared on the shares of the Preferred Stock and a sum sufficient for the payment thereof must be set apart for such payment, before any dividend may be declared or paid or any other distribution ordered or made upon the Corporation's Common Stock (other than a dividend payable in Common Stock) and before any sum or sums may be set aside for or applied to the purchase or redemption of any shares of any Common Stock or the Preferred Stock. All dividends declared upon the Preferred Stock shall be declared pro rata per share. Dividends accruing during each Dividend Period shall be payable on the next succeeding Dividend Payment Date (as hereinafter defined). Holders of shares of the Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of the Full Cumulative Dividends at the rate set forth herein. As long as any Preferred Stock is outstanding and the dividends set forth herein as well as the dividends to holders of preferred stock issued in connection with the transaction disclosed in the Corporation's -9- Acquisition Summary Book II have not been paid in full, no dividend or distribution shall be declared or made with respect to any other type or class of securities issued by the Corporation. For purposes of this Section IV: "Dividend Payment Date" means, as to each respective Dividend Period, the first day after the expiration of such Dividend Period. "Full Cumulative Dividends" means (whether or not in any Dividend Period, or any part thereof, in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends at the full rate fixed for the Preferred Stock as provided herein for the period of time elapsed from October 3, 1988 to the date as of which Full Cumulative Dividends are to be computed. "Dividend period" means each fiscal quarter or portion thereof during which the relevant share of the Preferred Stock is outstanding. V. Redemption. (a) After September 30, 1990, the Corporation shall have the right, at its option, to redeem all or any portion of the shares of Preferred Stock then outstanding at a price per share of $10.00 plus an amount equal to all accrued but unpaid dividends thereon and any interest due thereon (the "Redemption Price"). Prior to September 30, 1990, the Corporation shall have the right, at its option, to redeem all or any portion of the shares of Preferred Stock then outstanding at the Redemption Price if the Current Market price of one share of Common Stock shall be $12.00 or more for 30 consecutive days. If less than all outstanding shares of Preferred Stock then outstanding are redeemed, the Corporation shall redeem a like percentage of the shares of Preferred Stock held by each holder thereof. (b) At least 30 days prior to the date of any such redemption (the "Redemption Date"), written notice thereof (the "Redemption Notice") shall be given by the Corporation by mail, postage paid, or by telex to non-United States residents, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Preferred Stock notifying such holder of the redemption. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. From and after the close of business on the Redemption Date, unless there shall have been a default in the payment of the Redemption Price, all rights of holders of shares of Preferred Stock, except the right to receive the Redemption Price, shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. -10- (c) For each share of the Preferred Stock to be redeemed pursuant to Section V(a) hereof, the Corporation shall be obligated on the applicable Redemption Date to pay the holder thereof, upon surrender by such holder at the Corporation's principal office (or at such other place as may be designated by the Corporation) of the certificate or certificates representing such shares an amount in immediately available funds equal to the Redemption Price. If the funds of the Corporation legally available for the redemption of shares of the Preferred Stock on any Redemption Date are insufficient to redeem the number of shares to be redeemed on such date, those funds that are legally available shall be used to redeem the maximum number of shares of the Preferred Stock ratably among the holders of the shares to be redeemed based upon the respective aggregate Redemption Prices of the shares held by each holder, and an amount equal to the balance that would have been payable to each such holder shall become an obligation of the Corporation to the respective holder, the amount of which shall bear simple interest at a floating rate equal to the prime rate of interest announced by Citibank, N.A. as in effect from time to time. At any time after such Redemption Date when additional funds of the Corporation are legally available for the redemption of such shares, such funds shall promptly be used to redeem the maximum number of shares of the Preferred Stock that the Corporation had become obligated to redeem but has not redeemed. (d) The Corporation shall redeem the Shares of the Preferred Stock then outstanding to the extent set forth in a notice given by the holders of Preferred Stock pursuant to Section 8.3(k) of the Purchase Agreement dated September 30, 1988 between the Corporation and the holders of the Preferred Stock. The Corporation shall have 180 days after its receipt of such notice to make payment in full of the Redemption Price; and FURTHER RESOLVED, that pursuant to the authority conferred upon the Board of Directors of the Corporation by Article Fourth of the Certificate of Incorporation, the Board of Directors does hereby establish and designate and provide for the issuance of a series of preferred stock, $.01 par value, designated "Series B Preferred Stock" ("Series B Preferred Stock"), consisting of 200,000 shares, and does hereby fix and determine the relative rights, powers and preferences thereof to be as follows: I. Rights on Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, either from capital, surplus or earnings, before any payment shall be made to the holders of shares of the Corporation's Common Stock, the amount of $8.00 per share plus all accrued but unpaid dividends thereon and all interest due thereon. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the holders of the Series B Preferred Stock the full amounts to which they respectively shall be entitled pursuant to this Section I(a), the holders of shares of the shares of -11- the Series B Preferred Stock shall share ratably in any distribution of assets according to the respective amounts that would be payable in respect of the shares of Series B Preferred Stock held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. Notwithstanding the foregoing, the rights of the holders of Series B Preferred Stock to receive any payment as aforesaid upon the liquidation, dissolution or winding up of the Corporation shall be subordinate to the prior rights of the holders of the Series A Preferred Stock to receive payment upon the occurrence of the aforesaid events pursuant to Section I(a) of the Amended Certificate of Designation dated October 4, 1988 (the "Series A Certificate"). (b) In the event of any liquidation, dissolution or winding up of the Corporation, after payment shall have been made to the holders of shares of (i) the Series A Preferred Stock of the full amounts to which they shall have been entitled pursuant to the Series A Certificate and (ii) the Series B Preferred Stock of the full amounts to which they shall have been entitled pursuant to the first sentence of Section I(a) hereof, the holders of shares of the Corporation's Common Stock shall have the exclusive right to share in all remaining assets of the Corporation available for distribution to its stockholders, such remaining assets to be shared by the holders of shares of the Corporation's Common Stock on a pro rata basis. II. Voting. (a) On all matters presented to the holders of the Corporation's Common Stock, each holder of shares of the Series B Preferred Stock shall be entitled to exercise such number of votes per share of Series B Preferred Stock held by such holder as shall equal the number (including any fraction to one decimal place) of shares of Common Stock into which each share of Series B Preferred Stock is convertible pursuant to Section III hereof on the date as of which a record of those entitled to vote is taken or, if no such record date is established, on the date such vote is taken. In the event such number of votes is not ascertained or not readily ascertainable, each share of the Series B Preferred Stock shall be entitled to one vote. Except as otherwise required by law or hereunder, the holders of the Series B Preferred Stock and the holders of the Common Stock shall vote as a single class on all such matters. (b) The Corporation shall not, without the affirmative vote or consent of the holders of shares representing at least 60% of the shares of the Series B Preferred Stock then outstanding, acting as a separate class: (i) in any manner alter or change the designations, powers, preferences or rights or the qualifications, limitations or restrictions of the Series B Preferred Stock; (ii) liquidate the Corporation; or (iii) sell all or substantially all of the assets of the Corporation. -12- III. Conversion. (a) Each holder of shares of the Series B Preferred Stock shall have the right, at such holder's option, at any time or from time to time, to convert all or any of such shares of Series B Preferred Stock into such number of fully paid and nonassessable shares of the Corporation's Common Stock as $8.00 multiplied by the number of shares of the Series B Preferred Stock being converted is a multiple of the Conversion Price (as hereinafter defined and as last adjusted pursuant to this Section III and then in effect) for the shares of the Series B Preferred Stock so to be converted in the manner provided in this Section III(a). The "Conversion Price" per share at which shares of Common Stock shall be issuable upon conversion of shares of the Series B Preferred Stock shall initially be $8.00; provided, however, that such Conversion Price shall be subject to adjustment as set forth in Section III(c) hereof. The holder of any shares of the Series B Preferred Stock may exercise the conversion right provided in this Section III(a) by delivering to the Corporation during regular business hours, at the Corporation's principal office (or at such other place as may be designated by the Corporation), the certificate or certificates representing the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address) in which the certificate or certificates of the shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date." As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver to or upon the written order of such holder, at such office or to the place designated by the Corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check for cash in respect of any fractional interest in a share of Common Stock as provided in III(c) hereof. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a holder of record of such Common Stock on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event the person shall be deemed to have become a holder of record on the next succeeding date on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series B Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series B Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle the holder thereof to dividends on the shares of Series B Preferred Stock represented thereby. -13- (b) No fractional shares of Common Stock or scrip shall be issued upon the conversion of shares of the Series B Preferred Stock. If more than one share of Series B Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series B Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then Current Market Price (as defined in Section III(c) (vi) hereof) of a share of Common Stock multiplied by such fractional interest. Fractional interests shall not be entitled to dividends, and the holders thereof shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests. (c) The Conversion Price shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the issuance of the Series B Preferred Stock is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be increased in proportion to such increase in outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the issuance of the Series B Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then, immediately following the record date for such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iii) If the Corporation shall declare a cash dividend upon its Common Stock payable otherwise than out of earnings or earned surplus or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends and distributions) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), then, in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend or distribution, the Conversion Price in effect thereafter shall be determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be an amount equal to the remainder of (x) -14- the Current Market Price of one share of Common Stock less (y) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the stock, securities, evidences or indebtedness, assets, options or rights so distributed in respect of one share of Common Stock, and of which the denominator shall be such Current Market Price. Such adjustment shall be made on the date such dividend or distribution is made and shall become effective at the opening of business on the business day next following the record date for the determination of shareholders entitled to such dividend or distribution. (iv) If, at any time after the issuance of the Series B Preferred Stock, any capital reorganization, or any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any change in the Common Stock) or of the sale or other disposition of all or substantially all the properties and assets of the Corporation as an entirety to any other person, each share of the Series B Preferred Stock shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the Corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation, merger, sale or other disposition) upon conversion of such shares would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this clause (iv) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales and other dispositions. (v) All calculations under this Section III(c) shall be made to the nearest cent or to the nearest one-tenth of a share, as the case may be. (vi) For the purpose of any computation pursuant to this Section III(c) or Section III(b), the "Current Market Price" at any date of one share of Common Stock shall be deemed to be the average of the daily closing prices for the 30 consecutive business days ending no more than 15 business days before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 30 business day period), or, in case no sales took place on any day in question, the last bid price on such day, in either case on the principal national securities exchange on which the Common Stock then be listed or admitted to trading or on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") National Market System (or, if the Common Stock is not listed or admitted for trading on any such exchange or on the NASDAQ National Market System on any day in question, then such price as shall be deemed to be the last bid price quoted on the NASDAQ interdealer quotations system on such day, or, if, on any day in question, the security -15- shall not be quoted on the NASDAQ interdealer quotations system, then such price shall be deemed to be the last reported bid price on such day as reported by the National Quotation Bureau, Inc. (or any similar reputable quotation and reporting service if such quotation is not reported by the National Quotation Bureau, Inc.); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to in this clause (vi) are available for the period required hereunder, the Current Market Price shall be determined in good faith by at least a majority of the members of the Board of Directors of the Corporation, or, if such determination cannot be made, by a nationally recognized independent investment banking firm selected by the Board of Directors of the Corporation (or if such selection cannot be made, by a nationally recognized independent investment banking firm selected by the American Arbitration Association in accordance with its rules); provided, further, that if the Common Stock is listed on any national securities exchange, the term "business days," as used in this clause (vi), shall mean business days on which such exchange is open for trading. (vii) In any case in which the provisions of this Section III(c) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the holder of any share of Series B Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon the conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section III(b) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares and such cash, upon the occurrence of the event requiring such adjustment. (d) Whenever the Conversion Price shall be adjusted as provided in Section III(c) hereof, the Corporation shall prepare a statement, signed by its chief financial officer, setting forth the facts requiring such adjustment and showing the calculation of the Conversion Price that shall be in effect after such adjustment. The Corporation shall cause a copy of such statement to be sent by mail, first class, postage prepaid, or by a national overnight delivery service, to each holder of shares of the Series B Preferred Stock at his address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section III(e) hereof. (e) In the event the Corporation shall propose to take any action of the types described in clauses (i), (ii), (iii), or (iv) of Section III(c) hereof, the Corporation shall give notice to each holder of shares of the Series B Preferred Stock, in the manner set forth in Section III(d) hereof, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, -16- kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series B Preferred Stock. In the case of any action that would require the fixing of a record date, such notice shall be given at least 20 days prior to the date so fixed, and in the case of all other action, such notice shall be given at least 30 days prior to the taking of such proposed action. Failure to give such notice, or any effect therein, shall not affect the legality or validity of any such action. (f) For the purposes of this Section III, the sale or other disposition of any capital stock of the Corporation therefore held in its treasury shall be deemed to be an issuance thereof. (g) The Corporation shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series B Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes that may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series B Preferred Stock in respect of which such shares are being issued. (h) The Corporation shall reserve, free from preemptive rights, out its treasury stock or its authorized but unissued shares of the Corporation's Common Stock, or both, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock pursuant to this Section III a sufficient number of shares to provide for the conversion of all outstanding shares of the Series B Preferred Stock. IV. Dividends. The holder of each share of the Series B Preferred Stock shall be entitled to receive, before any dividend shall be declared or paid upon or set aside for the Corporation's Common Stock, when and as declared by the Board of Directors of the Corporation, out of funds legally available for that purpose, quarterly dividends in cash at the rate of $.52 per share per annum, and no more. Dividends on shares of the Series B Preferred Stock shall be payable in quarter-annual installments on January 1, April 1, July and October 1 in each year commencing April 1, 1989. Dividends on shares of the Series B Preferred Stock shall be cumulative (whether or not there shall be net profits or net assets of the Corporation legally available for the payment of such dividends). All dividends declared upon the Series B Preferred Stock shall be declared pro rata per share. Dividends accruing during each Dividend Period (as hereinafter defined) shall be payable on the next succeeding Dividend Payment Date (as hereinafter defined). As long as any Series B Preferred Stock is outstanding and the dividends set forth herein have not been paid in full, no dividend or distribution shall be declared or made with respect to any other type or class of securities issued by the Corporation other than Series A Preferred Stock. Notwithstanding the foregoing, the rights of the holders of Series B Preferred Stock to receive any dividends as aforesaid shall be subordinate to the prior rights of the holders of the Series A Preferred Stock to receive dividends as provided in Section IV of the Series A Certificate . -17- For purposes of this Section IV: "Dividend Payment Date" means, as to each respective Dividend Period, the first day after the expiration of such Dividend Period. "Dividend Period" means each fiscal quarter or portion thereof during which the relevant share of the Series B Preferred stock is outstanding. V Redemption. (a) The Corporation shall have the right, at its option and subject to the written consent of the holder of at least 60% of the shares of Series A Preferred Stock then outstanding, to redeem all or any portion of the shares of Series B Preferred Stock then outstanding at a price per share of $10.00 plus an amount equal to all accrued but unpaid dividends thereon (the "Redemption Price"). If less then all outstanding shares of Series B Preferred Stock then outstanding are redeemed, the Corporation shall redeem a like percentage of the share of Series B Preferred Stock held by each holder thereof. Notwithstanding the foregoing, the Corporation's right of redemption shall not exist with respect to those shares of Series B Preferred Stock for which the Corporation shall have received a notice of conversion pursuant to Section III hereof. (b) At least 30 days prior to the date of any such redemption (the "Redemption Date"), written notice thereof (the "Redemption Notice") shall be given by the Corporation by mail, postage prepaid, or by telex to non-United States residents, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series B Preferred Stock notifying such holder of the redemption. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. From and after the close of business on the Redemption Date, unless there shall have been a default in the payment of the Redemption Price, all rights of holders of shares of Series B Preferred Stock, except the right to receive the Redemption Price, shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (c) For each share of the Series B Preferred Stock to be redeemed pursuant to Section V(a) hereof, the Corporation shall be obligated on the applicable Redemption Date to pay the holder thereof, upon surrender by such holder at the Corporation's principal office (or at such other place as may be designated by the Corporation) of the certificate or certificates representing such shares, an amount in immediate available funds equal to the Redemption Price. If the funds of the Corporation legally available for the redemption of shares of the Series B Preferred Stock on any Redemption Date are insufficient to redeem the number of shares to be redeemed on such date, those funds that are legally available shall be used to redeem the maximum number of -18- shares of the Series B Preferred Stock ratably among holders of the shares to be redeemed based upon the respective aggregate Redemption Prices of the shares held by each holder, and an amount equal to the balance that would have been payable to each such holder shall become an obligation of the Corporation to the respective holder, the amount of which shall bear simple interest at a floating rate equal to the prime rate of interest announced by Citibank, N.A. as in effect from time to time. At any time after such Redemption Date when additional funds of the Corporation are legally available for the redemption of such shares, such funds shall promptly be used to redeem the maximum number of shares of the Series B Preferred Stock that the Corporation had become obligated to redeem but has not redeemed. FIFTH. The Directors shall have power to adopted, amend or repeal the By-Laws; to fix the amount to be reserved as working capital, and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchise of the Corporation. The stockholders and Directors of the Corporation shall have the right to inspect the books and records of the Corporation in accordance with the Delaware General Corporation Law. The stockholders and Directors shall have power to hold their meetings and keep the books, documents and papers of the Corporation outside the State of Delaware, at such place as may be from time to time designated by the By-Laws or by resolution of the Directors, except as otherwise required by the laws of Delaware. SIXTH. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the future limitation or elimination of the liability of a Director, then the liability of a Director of the Corporation shall be limited or eliminated to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this Article Sixth shall be prospective only, and shall not adversely affect any limitation or elimination of the personal liability of a director of the Corporation existing at the time of such repeal or modification. IN WITNESS WHEREOF, Computone Corporation has caused this Restated Certificate of Incorporation to be duly executed this 2nd day of July 1991. COMPUTONE CORPORATION -19- By: /s/ Thomas P. Tanis, Jr. ----------------------------- Thomas P. Tanis, Jr. President ATTEST: By:/s/ Ronald W. Johnston ----------------------------- Ronald W. Johnston Assistant Secretary (Seal) -20- CERTIFICATE OF AMENDMENT of CERTIFICATE OF INCORPORATION COMPUTONE SYSTEMS INCORPORATED (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Corporation's Board of Directors, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing that said amendment be submitted for approval by written consents of the holders of a majority of the outstanding shares of stock of the Corporation. The amendment to the Certificate of Incorporation amends Article "First" to read as follows: "FIRST. The name of this Corporation is WORLD-WIDE TECHNOLOGY INC." SECOND: That thereafter, pursuant to resolutions of its Board of Directors, said amendment was approved by written consents of the holders of a majority of the outstanding stock of the Corporation entitled to vote by written consent, in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware, and written notice of the action so taken has been given to all stockholders who have not consented in writing as provided in Section 228(d) of the General Corporation Law of the State of Delaware. THIRD: That said amendment was duly adopted in accordance with the provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, COMPUTONE SYSTEMS INCORPORATED has caused its corporate seal to be hereunto affixed and this certificate to be signed by Thomas P. Tanis, Sr., Chairman of its Board of Directors, and attested by Thomas P. Tanis, Jr., its Secretary, this 23rd day of May, 1988. ATTEST: [Corporate Seal] COMPUTONE SYSTEMS INCORPORATED /s/ Thomas P. Tanis, Jr. By: /s/ Thomas P. Tanis, Sr. - -------------------------------- ------------------------------- Thomas P. Tanis, Jr. Thomas P. Tanis, Sr. Secretary Chairman CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF COMPUTONE CORPORATION Computone Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That by a meeting of the Board of Directors of Computone Corporation (the "Corporation"), resolutions were adopted setting forth a proposed amendment of the Certificate of Incorporation of said Corporation, declaring said amendment to be advisable and calling for a meeting of the stockholders of said Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this Corporation be amended by changing the Article thereof number "FOURTH" so that, as amended, said Article shall be and read in its entirety as follows: "FOURTH (A) Capital Stock. The total number of shares of all classes of stock which the Corporation shall have authority to issue is Thirty-Five Million (35,000,000) shares consisting of Twenty-Five Million (25,000,000) shares of Common Stock, One Cent ($.01) par value per share, and Ten Million (10,000,000) shares of Preferred Stock One Cent ($.01) par value per share. The designations, rights (including voting rights), preferences, qualifications, limitations and restrictions of the Preferred Stock, and particularly the shares of each series thereof, may, to the extent permitted by law, be similar to or may differ from those of any other series. The Board of Directors is hereby expressly granted authority to issue from time to time Preferred Stock in one or more series and to fix from time to time before issuance thereof, by filing a certificate pursuant to the General Corporation Law of the State of Delaware, the number of shares in each series and all designations, relative rights (including the right to vote and to convert into any class or any series of any class), preferences, qualifications, limitations and restrictions of the shares in each such series. SECOND: That thereafter, pursuant to resolution of its Board of Directors, by a meeting of the stockholders of said Corporation held in accordance with the General Corporation Law of the State of Delaware, the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said Corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said Computone Corporation has caused this certificate to be signed by its President attested by its Secretary this 18th day of December, 1997. COMPUTONE CORPORATION (SEAL) Attest: By: /s/ Thomas J. Anderson ---------------------------- Thomas J. Anderson, President /s/ Frederick W. Dreher - -------------------------------- Frederick W. Dreher, Secretary -2- --