UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three month period ended June 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16172 COMPUTONE CORPORATION (Exact name of small business issuer as specified in its charter) Delaware 23-2472952 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1060 Windward Ridge Parkway, Suite 100, Alpharetta, GA 30005 ------------------------------------------------------------ (Address of principal executive offices) Issuer's telephone number, including area code: (770) 625-0000 N/A --- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 8,471,674 shares of common stock on August 11, 1999. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] COMPUTONE CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: Consolidated Balance Sheets as of June 30, 1999 and April 2, 1999 3 Consolidated Statements of Operations for the three months ended June 30, 1999 and July 3, 1998 4 Consolidated Statements of Cash Flows for the three months ended June 30, 1999 and July 3, 1998 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis or Plan of Operations for the three months ended June 30, 1999 compared to three months ended July 3, 1998 8 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 10 ITEM 2. Changes in Securities 10 ITEM 3. Defaults Upon Senior Securities 10 ITEM 4. Submission of Matters to a Vote of Security Holders 10 ITEM 5. Other Information 10 ITEM 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Computone Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) June 30, 1999 April 2, 1999 ------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 61 $ 18 Receivables, net of allowance for doubtful accounts of $468 at June 30, 1999 and $489 at April 2, 1999 2,878 1,963 Inventories, net 2,224 2,197 Prepaid expenses and other 48 63 ------------ ------------ Total current assets 5,211 4,241 Property, equipment and improvements, net 600 591 Intangible assets, net 408 438 Other 27 38 ------------ ------------ TOTAL ASSETS $ 6,246 $ 5,308 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 2,770 $ 2,143 Accrued liabilities: Payroll 60 83 Deferred sales 433 229 Professional fees 62 109 Other 733 520 Line of credit 440 1,049 Notes payable to stockholders 590 590 Current maturities of long-term debt 132 132 ------------ ------------ Total current liabilities 5,220 4,855 Long-term debt, less current maturities 322 347 ------------ ------------ Total liabilities 5,542 5,202 ------------ ------------ Stockholders' equity: Convertible redeemable preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 8,471,674 and 8,321,674 shares outstanding 85 83 Additional paid-in capital 47,536 47,369 Accumulated deficit (46,917) (47,346) ------------ ------------ Total stockholders' equity 704 106 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,246 $ 5,308 ============ ============ See accompanying notes to the consolidated financial statements. 3 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Computone Corporation and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data) Three Months Ended ----------------------------- June 30, 1999 July 3, 1998 ------------- ------------ (unaudited) Revenues: Product sales $ 4,733 $ 2,844 ---------- ---------- Expenses: Cost of products sold 2,849 1,998 Selling, general and administrative 942 1,329 Product development 459 436 ---------- ---------- 4,250 3,763 ---------- ---------- Operating income (loss) 483 (919) Other expense: Interest expense - affiliates 20 10 Interest expense - other 34 21 ---------- ---------- Income (loss) before income taxes 429 (950) Provision for income taxes -- -- ---------- ---------- Net income (loss) $ 429 $ (950) ========== ========== Income (loss) per common share: Basic $ 0.05 $ (0.13) ========== ========== Diluted $ 0.05 $ (0.13) ========== ========== See accompanying notes to the consolidated financial statements. 4 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Computone Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Three Months Ended -------------------------------- June 30, 1999 July 3, 1998 ------------- ------------ (unaudited) Cash flows from operating activities: Net income (loss) from operations $ 429 $ (950) Adjustments to reconcile income (loss) from operations to net cash provided by (used in) operations: Depreciation and amortization 117 117 Provision for uncollectible accounts 38 139 Provision for inventory reserve 70 30 Changes in current assets and current liabilities: Accounts receivable (953) 1,083 Inventories (97) 584 Prepaid expenses and other 15 (35) Accounts payable and accrued liabilities 974 (195) ------------ ------------ Net cash provided by operations 593 773 ------------ ------------ Cash flows from investing activities: Decrease in other assets 11 -- Capitalization of software costs (31) (48) Capital expenditures (65) (45) ------------ ------------ Net cash used in investing activities (85) (93) ------------ ------------ Cash flows from financing activities: Repayment of debt - net (25) (13) Net repayments under lines of credit - others (609) (890) Exercise of common stock options 169 2 Issuance of common stock -- 572 ------------ ------------ Net cash used in financing activities (465) (329) ------------ ------------ Net increase in cash and cash equivalents 43 351 Cash and cash equivalents, beginning of period 18 146 ------------ ------------ Cash and cash equivalents, end of period $ 61 $ 497 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 34 $ 21 See accompanying notes to the consolidated financial statements. 5 COMPUTONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) All statements contained in this Form-10QSB Quarterly Report that are not historical facts are based on current expectations. Such statements are forward-looking (as defined in the Private Securities Litigation Reform Act of 1995) in nature and involve a number of risks and uncertainties. Actual results could vary materially. The factors that could cause actual results to vary materially include: the ability of the Company to obtain and maintain adequate working capital, future supply and demand for the Company's products, the outcome of a Securities and Exchange Commission ("SEC") investigation, changes in business and economic conditions, availability of raw materials and parts, possible disruptions of normal business activity from year 2000 issues, and other risks that may be described from time to time in reports the Company files with the SEC. Undue reliance should not be placed on any such forward-looking statements. 1. BASIS OF PRESENTATION --------------------- The financial statements included in this Form 10-QSB Quarterly Report have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed, or omitted, pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-KSB for its fiscal year ended April 2, 1999. The financial statements presented herein as of June 30, 1999 reflect, in the opinion of management, all adjustments necessary for a fair presentation of financial position and the results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for the full year. 2. REVENUE RECOGNITION ------------------- Product sales are generally recognized, net of an allowance for estimated sales returns and allowances, when the related products are shipped. Beginning with the fourth quarter of the fiscal year ended April 3, 1998, the Company modified the application of its revenue recognition policy to defer recognition of revenue on sales to customers who are not end users of the Company's products until such time as the product has been sold through to the end user. A warranty reserve of less than one percent of sales is accrued at the date of shipment. The Company generally provides a warranty of five years on all of its products sold. 3. INVENTORIES ----------- Inventories are valued at the lower of cost or market, with cost determined on the first-in, first-out method. Raw materials that have no planned production life or exceed 18 months of anticipated supply are deemed excess and are fully reserved. Reserves are also established, as management deems appropriate, for obsolete, excess and non-salable inventories, including finished goods inventories. Inventories are net of a reserve for obsolete, excess and non-salable items of $978,000 and $908,000 at June 30, 1999 and April 2, 1999, respectively. 7 COMPUTONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (UNAUDITED) 3. INVENTORIES, CONTINUED ---------------------- Inventories, net of a reserve for obsolete, excess and non-salable items, consisted of the following at June 30, 1999 and April 2, 1999 (in thousands): June 30, 1999 April 2, 1999 ------------- ------------- Finished goods $ 185 $ 165 Work in progress 934 877 Raw materials 1,105 1,155 ---------- ---------- $ 2,224 $ 2,197 ========== ========== 4. INCOME (LOSS) PER SHARE ----------------------- Basic EPS excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of computing basic and diluted EPS, the net income (loss) for each period presented (the numerator) ($429,000 for the three month period ended June 30, 1999 and $(950,000) for the three months ended July 3, 1998) is divided by the weighted average number of common shares outstanding (the denominator). Basic EPS were $0.05 for the three months ended June 30, 1999 and a loss of ($0.13) for the three months ended July 3, 1998. The weighted average number of common shares outstanding used in the basic EPS calculation are 8,464,932 and 7,468,000 for the 1999 and 1998 periods, respectively. The weighted average number of common shares outstanding used in the diluted EPS calculation is 8,751,363 for the 1999 period. For purposes of computing diluted EPS, the Company excluded the effects of outstanding common stock options and warrants in the 1998 period because they were anti-dilutive. 5. INCOME TAXES ------------ The Company has available net operating and capital loss carryforwards amounting to approximately $50 million at April 2, 1999, including operating loss carryforwards which relate to a predecessor company, which expire in 2014. As a result of several ownership changes which have occurred since the losses started to accumulate, statutory provisions will substantially limit the Company's future use of the loss carryforwards. 6. DEBT ---- On November 17, 1998, the Company entered into a financing arrangement which provides for a line of credit up to $1,650,000 ($440,000 outstanding at June 30, 1999) and is based on the available borrowing base, at an interest rate of prime plus 2.00%. A portion of the proceeds from this line of credit was used to retire the debt borrowed under a previous financing agreement. The line of credit is primarily collateralized by the Company's accounts receivable and inventory. This financing arrangement expires in November 1999. The agreement can be renewed for an additional year with the mutual consent of both parties. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 3, 1998. RESULTS OF OPERATIONS - --------------------- The Company reported net income for the three month period ended June 30, 1999 of $429,000 compared to a net loss of $950,000 for the comparable three month period of the prior fiscal year. The Company's operating results for the three months ended June 30, 1999 were favorably affected by increased sales to major customers, higher gross margins, and decreased general and administrative expenses. Product sales revenue for the three month period ended June 30, 1999 totaled approximately $4,733,000 compared to $2,844,000 for the comparable three month period of the prior fiscal year, an increase of $1,889,000, or 66%. This increase is attributable to higher sales to the Company's two major customers. Cost of products sold for the three month period ended June 30, 1999 amounted to $2,849,000, or 60% of product sales revenues versus $1,998,000, or 70%, for the comparable three month period of the prior year. The decrease in cost of products sold as a percentage of revenues is due to pricing improvements and increased sales volumes. Selling, general and administrative expenses amounted to $942,000, or 20% of product sales revenue, for the three months ended June 30, 1999 versus $1,329,000, or 47%, for the comparable three months of the prior fiscal year. The decrease in selling, general and administrative expenses during the three month period ended June 30, 1999 versus the same period of the prior fiscal year is attributable to decreases in compensation costs due to staff reductions, reduced legal costs due to settlement of litigation in the prior fiscal year, and the successful implementation of other cost reduction efforts. Product development expenses amounted to $459,000, or 10% of product sales revenue, for the three months ended June 30, 1999 versus $436,000, or 15%, for the comparable three month period of the prior fiscal year. The Company expects that product development expenses will continue at the current level for the remainder of the fiscal year. LIQUIDITY - --------- On November 17, 1998, the Company entered into a financing arrangement which provides for a line of credit up to $1,650,000 ($440,000 outstanding at June 30, 1999) and is based on the available borrowing base, at an interest rate of prime plus 2.00%. The line of credit is primarily collateralized by the Company's accounts receivable and inventory. At June 30, 1999, the borrowing availability under this line of credit was $589,000. The Company's primary cash commitments in fiscal 2000 include payments under non-cancelable operating leases ($293,000), short-term debt ($722,000) and investments in research and development ($459,000 in the first three months of fiscal year 2000). With respect to notes payable and current maturities of long-term debt, approximately $590,000 of the $722,000 is due to related parties, the payment terms of which the Company believes can be extended as needed. Cash provided by operations amounted to $593,000 for the three months ended June 30, 1999 compared to $773,000 for the three months ended July 3, 1998. The decrease in cash provided by operations compared to the prior year fiscal period primarily reflects the increase in accounts receivable and inventories. Cash used in investing activities amounted to $85,000 for the three months ended June 30, 1999 compared with $93,000 for the three months ended July 3, 1998. This slight decrease from the same period of the prior fiscal year is attributable the decrease in other long-term assets. The Company does not anticipate a significant increase in the level of capital expenditures. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 3, 1998, CONTINUED. LIQUIDITY, CONTINUED - ---------- Cash used in financing activities during the three months ended June 30, 1999 was $465,000 versus $329,000 for the three months ended July 3, 1998. This increase is primarily due to repayments on the Company's line of credit which were partially offset by a decrease in cash received from the issuance of common stock. Working capital was a deficit of $9,000 at June 30, 1999 versus a deficit of $614,000 at April 2, 1999, an improvement of $605,000. The ratio of current assets to current liabilities at June 30, 1999 was 1.00 to 1.00 compared to .87 to 1.00 at April 2, 1999. YEAR 2000 RISKS - --------------- The year 2000 issue relates to computer programs and systems that recognize dates using two digit year data rather than four digit year data. As a result, such programs and systems may fail or provide incorrect information when using dates after December 31, 1999. The Company believes that its current product line, including its Value Port, Intelliport II, Intelliport Plus, Intelliport II Expandable, Intelliport III and IntelliServer product families, does not create, access, or depend upon absolute date information and is, therefore, year 2000 compliant. The Company is continuing a comprehensive program designed to identify internal computer and information systems, manufacturing and delivery equipment, and facilities equipment to determine their year 2000 readiness. The process includes replacing equipment that does not meet year 2000 readiness standards. In order to improve operating efficiencies, the Company is in the process of implementing a new financial and manufacturing software package. The Company believes the functions of this software package relating to critical operations such as accounting, order entry, purchasing, inventory, production, shipping and billing are year 2000 compliant. This implementation is expected to be completed by September 1999. The Company is currently contacting its suppliers, service providers and other business associates to evaluate their year 2000 readiness. In the event any of these businesses are unlikely to resolve their year 2000 issues, the Company's contingency plans include seeking alternative sources of supply for products and services. The Company cannot reasonably estimate the cost or related contingencies that could be incurred if the year 2000 issue results in significant operational difficulties. Many of the factors that would guarantee year 2000 compliance are beyond the control of the Company. These factors include the availability of vendor compliant products and services, interface system partner compliance, government activity and suppliers in areas such as utilities, communications, transportation and other services. Because of the technological interdependence of commercial activities, the Company cannot realistically offer any certifications, representations or guarantees of total year 2000 compliance. Although the Company is optimistic that it will be able to timely address any year 2000 issues that it identifies, there can be no assurance that certain factors relating to year 2000 compliance issues, including litigation, will not have a material adverse effect on the Company's business, financial condition, cash flows or results of operations. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 3, 1998, CONTINUED. OUTLOOK FOR REMAINDER OF FISCAL YEAR 1999 - ----------------------------------------- Management believes that new or redesigned products will enhance the Company's ability to increase its sales in fiscal 2000. The Total Access DCS-5000 combines the features of a high performance Ethernet digital remote access server with up to 12 DSP 24-channel modem cards. The DCS-5000 is intended for use by internet service providers and medium to large companies that require high-density connectivity, allowing remote users and locations access to the Internet and corporate Intranets. The new "Gold" card family of products are high performance, cost effective PCI controller products specifically designed to meet the needs of the remote access market. The Intelliserver RAS-2000 Powerrack is a redesign of the Powerrack family with enhanced performance, remote access server features and configurations added. During the first quarter of fiscal 2000, the Company's backlog decreased from $2,573,000 at April 2, 1999 to $1,485,000 at June 30, 1999. The backlog at April 2, 1999 was significantly higher than would normally be expected. During the fourth quarter of fiscal year 1999, the Company resolved a payment issue with its principal contract manufacturing supplier. However, due to long lead times for certain components the supplier was unable to make significant deliveries during the later portion of fiscal year 1999. The Company anticipates that substantially all of its backlog at June 30, 1999 will be shipped during the second quarter of fiscal year 2000. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None, other than those matters described in Item 3 to the Company's Annual Report on Form 10-KSB for the year ended April 2, 1999. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Not Applicable. 11 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTONE CORPORATION Date: August 11, 1999 By: /s/ Perry J. Pickerign ---------------------- Perry J. Pickerign President and Chief Executive Officer (Principal Executive Officer) By: /s/ Keith H. Daniel ------------------- Keith H. Daniel Chief Financial Officer (Principal Financial and Accounting Officer) 12 -----END PRIVACY-ENHANCED MESSAGE----