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[LOGO]
2,350,000 SHARES
CUMETRIX DATA SYSTEMS CORP.
COMMON STOCK
--------------------
Cumetrix Data Systems Corp., a California corporation ("CUMETRIX" or the
"Company"), is hereby offering (the "Offering") 2,350,000 shares of common
stock, no par value per share (the "Common Stock"). Prior to the Offering, there
has been no public market for the Common Stock and there can be no assurance
that a trading market will develop or, if developed, that it will be sustained
after the Offering. For information relating to the factors considered in
determining the initial offering price to the public, see "Underwriting."
The Common Stock has been approved for quotation on The Nasdaq SmallCap
Market ("Nasdaq") under the trading symbol "CDSC" and approved for listing on
the Boston Stock Exchange ("BSE") under the trading symbol "CDS."
-------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON PAGE 6 AND "DILUTION."
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per share....................................... $5.00 $.46 $4.54
Total(3)........................................ $11,750,000 $1,086,875 $10,663,125
</TABLE>
(1) Does not include additional compensation payable to Joseph Stevens &
Company, Inc. ("Joseph Stevens" or the "Representative") in the form of a 3%
non-accountable expense allowance or the Company's agreement to sell to the
Representative five year warrants to purchase 235,000 shares of Common Stock
at 165% of the initial public offering price per share of Common Stock (the
"Representative's Warrants"). See "Underwriting" for information concerning
indemnification and contribution arrangements and other compensation payable
to the Underwriters.
(2) Before deducting expenses estimated at $809,500 payable by the Company
including the Representative's non-accountable expense allowance. Of the
Proceeds to the Company, $400,000 is being distributed to certain of the
Company's existing shareholders in payment of notes issued. See "Use of
Proceeds."
(3) The Company has granted the Underwriters an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
prospectus, to purchase up to 352,500 additional shares of Common Stock at
the Price to the Public less Underwriting Discounts and Commissions, solely
to cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $13,512,500, $1,249,906 and $12,262,593,
respectively. See "Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if issued by the Company, delivered to and accepted by the
Underwriters and subject to approval of certain legal matters by its counsel and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of the certificates representing the Common
Stock offered hereby will be made against payment therefor at the offices of
Joseph Stevens & Company, Inc., 33 Maiden Lane, New York, New York 10038 on or
about April 14, 1998.
-------------------
JOSEPH STEVENS & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS APRIL 8, 1998.
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[Graphic depicting schematically ACSA Solution and Distribution Services in the
center with four arrows pointing outward:
-- System Configuration Services is written on the arrow pointing to
System Integrators
-- Hardware configuration is written on the arrow pointing to Value
Added Resellers
-- Built to order process is written on the arrow pointing to Original
Equipment Manufacturers
-- Software configuration is written on the arrow pointing toward
Independent Software Vendors.]
[Photo of a hard drive]
[Caption: HIGH CAPACITY STORAGE The Company is a distributor of hard drives and
integrates hard drives as components into systems the Company assembles.]
[Graphic depicting three arrows in circular form around the caption, ACSA
Solution
- Customized End-user configuration requirement.
- Automated Mass Custom configuration
- Assembly]
[Caption: Using data gathered by manufacturers, Value Added Resellers and
Systems Integrators, the ACSA Center integrated assembly line will automatically
mass configure hardware and software to each end user's custom requirements.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE MARKET PRICE, PURCHASES OF
THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITER IN THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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NOTICE TO CALIFORNIA RESIDENTS ONLY
THE COMMON STOCK OF THE COMPANY MAY ONLY BE OFFERED AND SOLD TO (I) PERSONS
WITH A NET WORTH, INDIVIDUALLY OR JOINTLY WITH HIS OR HER SPOUSE, OF AT LEAST
$250,000 (EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES) AND AN ANNUAL
INCOME OF AT LEAST $65,000 OR (II) PERSONS WITH A NET WORTH, INDIVIDUALLY OR
JOINTLY WITH HIS OR HER SPOUSE, OF AT LEAST $500,000 (EXCLUSIVE OF HOME, HOME
FURNISHINGS AND AUTOMOBILES). THE COMMON STOCK OFFERED HEREBY HAS BEEN
REGISTERED BY A LIMITED QUALIFICATION. THE EXEMPTION AFFORDED BY SECTION
25104(H) OF THE CALIFORNIA SECURITIES LAW SHALL BE WITHHELD BY THE COMMISSIONER
OF CORPORATIONS.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH ARE NOT
HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER "RISK
FACTORS." PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED BY THIS PROSPECTUS
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" SECTION, AS WELL AS THE OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 10.960591-FOR-1 STOCK SPLIT (THE "STOCK SPLIT") OF
THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED IN OCTOBER 1997, AND ASSUMES (I)
THE EXPIRATION OF A CONTINGENT WARRANT (THE "CASI WARRANT") TO PURCHASE SHARES
OF THE COMPANY'S COMMON STOCK, SEE "CERTAIN TRANSACTIONS," (II) NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (III) NO GRANT OF ADDITIONAL OPTIONS
UNDER THE COMPANY'S 1997 STOCK PLAN (THE "STOCK INCENTIVE PLAN"), (IV) NO
EXERCISE OF 100,000 WARRANTS (THE "BRIDGE WARRANTS") OF THE COMPANY, EACH
WARRANT EXERCISABLE DURING THE 36-MONTH PERIOD COMMENCING ONE YEAR FROM THE DATE
THE WARRANTS WERE ISSUED TO PURCHASE ONE SHARE OF COMMON STOCK AT AN INITIAL
EXERCISE PRICE OF $3.00 PER SHARE, SUBJECT TO ADJUSTMENT, ISSUED TO THE
PURCHASERS OF 18 MONTH MATURITY PROMISSORY NOTES (THE "BRIDGES NOTES") OF THE
COMPANY BEARING INTEREST AT A RATE OF 10% PER ANNUM ORIGINALLY ISSUED IN A
FINANCING (THE "BRIDGE FINANCING"), SEE "RECENT BRIDGE FINANCING," AND (V) NO
EXERCISE OF THE REPRESENTATIVE'S WARRANTS, EACH EXERCISABLE TO PURCHASE ONE
SHARE OF COMMON STOCK AT AN INITIAL EXERCISE PRICE EQUAL TO 165% OF THE INITIAL
PUBLIC OFFERING PRICE OF THE COMMON STOCK. SEE "MANAGEMENT--STOCK OPTION PLAN,"
"CERTAIN TRANSACTIONS" AND "UNDERWRITING."
THE COMPANY
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), systems
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products business and the system configuration business to become a leading
provider of software-enabled custom configuration to its target markets both
domestically and internationally. The Company intends to implement a fully
automated systems integration and configuration process, referred to as the
Automated Custom System Assembly Solution, or "ACSA Solution," incorporating
licensed proprietary software. The Company believes the ACSA Solution will
enable the Company to assemble multiple computer systems and custom configure
the software loaded on these systems to each customer's end user's unique
specifications at a fraction of the cost and time required by other commercially
available configuration processes. See "Business--ACSA Growth Strategy--THE ACSA
SOLUTION." The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
The Company's first ACSA Center is expected to be completed and the Company is
expected to commence offering the ACSA Solution by mid-1998. Future ACSA Centers
may be located at the facilities of its customers. This technology is intended
to enable the Company's customers to outsource their procurement, warehousing,
assembly, staging, and shipping processes. The Company will use a portion of the
proceeds of the Offering to complete the construction of and operate its first
ACSA Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include
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components such as high capacity storage devices, CD-ROMs and CD Recorders,
network adapters, hubs, small computer systems interface components ("SCSIs"),
integrated device enhancement components ("IDEs") and ZIP drives as well as
memory and central processing units ("CPUs") for desktop and notebook computer
products. The Company also assembles built-to-order computer systems for its
target markets.
The Company's net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to $49,267,491 for the first
nine months of fiscal 1998 primarily because of development of an experienced
sales management team with strong customer relationships, expansion of the sales
force, quick delivery of a broad selection of Computer Products and competitive
pricing offered by the Company. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ending
December 31, 1996 and the year ended March 31, 1997, respectively, to 4.2% for
the nine month period ending December 31, 1997 due to a number of factors
including strong product demand, more favorable direct manufacturer pricing and
an improved sales mix achieved by the Company which favors components with
higher profit margins and computer system sales. The Company expects that
implementation of the ACSA Centers will increase sales of higher margin
built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners identified in Asia,
but is not currently negotiating any acquisition opportunities. There can be no
assurance that the Company will successfully establish any joint ventures or
identify any acquisition opportunities or that if such opportunities are
presented that they will be on terms and conditions acceptable to the Company.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. The Company's executive offices are located at 957
Lawson Street, Industry, California, 91748; and its telephone number is (626)
965-6899, and its facsimile number is (626) 965-0415.
THE OFFERING
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<S> <C>
Common Stock offered...................... 2,350,000 shares
Common Stock outstanding before the
Offering................................ 4,750,000 shares(1)
Common Stock outstanding after the
Offering................................ 7,100,000 shares(1)
Repayment of Bridge Notes and other indebtedness; construction of
first ACSA Center; marketing and sales for the ACSA Solution;
development of additional ACSA Centers; expansion of Computer
Products sales and marketing capability; and for working capital and
general corporate purposes. See "Use of Proceeds."
Use of proceeds...........................
Nasdaq SmallCap Market Symbol............. CDSC
Boston Stock Exchange Symbol.............. CDS
</TABLE>
- ------------------------------
(1) Does not include (i) 383,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's 1997 Stock Option Plan
(the "Stock Option Plan"), which have a weighted average exercise price of
$3.06 per share, (ii) 45,000 shares of Common Stock issuable pursuant to the
exercise of outstanding warrants at an exercise price of $3.00 per share,
(iii) 100,000 shares of Common Stock issuable upon the exercise of the
Bridge Warrants which have an exercise price of $3.00 per share, and (iv)
116,283 shares reserved for issuance upon the exercise of options which may
be granted under the Stock Option Plan.
4
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SUMMARY FINANCIAL DATA
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<CAPTION>
PERIOD FROM
APRIL 2, 1996 NINE MONTHS ENDED
(INCEPTION) DECEMBER 31
TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
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STATEMENTS OF OPERATIONS DATA:
Net sales............................................................. $ 25,940,203 $17,175,071 $49,267,491
Cost of products...................................................... 25,139,001 16,604,294 47,192,956
-------------- ---------- ----------
Gross profit........................................................ 801,202 570,777 2,074,535
Selling, general and administrative expenses.......................... 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations................................................ 50,069 68,854 1,045,031
Interest expense...................................................... 9,334 4,500 13,908
Other income (expense), net........................................... (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes.............................. 34,864 64,364 1,041,846
Provision for income taxes............................................ 9,500 25,745 416,738
-------------- ---------- ----------
Net income.......................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................. $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
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</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------
AT MARCH 31, ACTUAL AS ADJUSTED(1)
1997 ----------- --------------
------------ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ 154,160 $ 232,529 $ 10,252,205
Total assets........................................................ 1,855,241 10,272,214 18,673,539
Total liabilities................................................... 1,579,877 8,622,542 7,267,342
Retained earnings................................................... 25,364 650,472 553,372(2)
Shareholders' equity................................................ 275,364 1,649,672 11,406,197
</TABLE>
- ------------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,350,000 shares of
Common Stock offered by the Company at an initial public offering price of
$5.00 per share after deducting commissions and estimated offering expenses
(estimated at $1,896,375); and (ii) the application of the net proceeds of
the Offering, including payment of $400,000, $700,000 and $100,000 due under
the Bridge Notes, the CASI Note and the the Datatec Note, respectively.
(2) As adjusted to reflect a non-recurring interest expense of $97,100 for the
unamortized portion of the original issue discount and financing costs
related to the Bridge Financing.
5
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
LIMITED OPERATING HISTORY. The Company commenced operations in April 1996;
therefore, there is only limited financial information in existence upon which
an investment decision may be based. Although the Company has achieved
profitability, the ability of the Company to sustain profitability will depend
in part upon the successful and timely introduction and operation of its ACSA
Centers, continuation of the Company's close relationships with its vendors and
customers, successful marketing of existing products and the Company's ability
to finance inventories and growth and to collect trade receivables in a timely
manner. The likelihood of the success of the Company in implementing its ACSA
Centers must be considered in light of the difficulties and risks inherent in a
new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations for the ACSA Center business. There can be no assurance that the
Company will be able to generate and sustain profitability in the future. See
"Business--ACSA Growth Strategy."
BROAD DISCRETION OF MANAGEMENT AND THE BOARD OF DIRECTORS IN USE OF
PROCEEDS. Although the Company intends to apply the net proceeds of the
Offering in the manner described herein under "Use of Proceeds," the Company's
management and its Board of Directors have broad discretion within such proposed
uses as to the precise allocation of the net proceeds, the timing of
expenditures and all other aspects of the use thereof. In addition,
approximately 21% of the net proceeds of the Offering will be allocated and used
for working capital and other general corporate purposes. The Company reserves
the right to reallocate the net proceeds of the Offering among the various
categories set forth under "Use of Proceeds" as it, in its sole discretion,
deems necessary or advisable based upon prevailing business conditions and
circumstances. See "Use of Proceeds."
CONTROL BY INSIDERS. Upon completion of the Offering, the executive
officers and directors will beneficially own approximately 62.32% of the
outstanding Common Stock and will be able to elect all the Company's directors
and thereby direct the policies of the Company. See "Principal Shareholders" and
"Management."
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon the
services of Max Toghraie and James Ung, its Chief Executive Officer and
President, respectively. Both James Ung and Max Toghraie are employed pursuant
to five year employment agreements. See "Management--Employment Agreements." The
success of the Company to date has been in part dependent upon their efforts and
abilities, and the loss of the services of either of them for any reason could
have a material adverse effect upon the Company. In addition, the Company's work
force includes executives and employees with significant knowledge and
experience in the Computer Products distribution industry. The Company's future
success will be strongly influenced by its ability to continue to recruit, train
and retain a skilled work force. While the Company believes that it would be
able to locate suitable replacements for its executives or other personnel if
their services were lost to the Company, there can be no assurance that the
Company would be able to do so on terms acceptable to the Company. In
particular, the location and hiring of suitable replacements for Mr. Toghraie
and Mr. Ung could be very difficult. The Company maintains a key-man life
insurance policy on the lives of Messrs. Toghraie and Ung with benefits of
$1,000,000 each, payable to the Company in the event of their death. The
benefits received under these policies would not be sufficient to compensate the
Company for the loss of the services of Mr. Toghraie or Mr. Ung should suitable
replacements not be employed. See "Management."
DEPENDENCE UPON RELATIONSHIPS WITH VENDORS. A key element of the Company's
past success and future business strategy involves the establishment of
relationships with certain major distributors and Computer Product
manufacturers. Purchases from these vendors account for the majority of the
Company's aggregate purchases for fiscal 1997 and for the nine month period
ended December 31, 1997. For the nine months ended December 31, 1997, DSS
Technology Distribution Partners, Inc. ("DSS"), a master distributor of hard
drives to the Company, accounted for 58.3% of the Company's purchases. Certain
of
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these vendors provide the Company with substantial incentives in the form of
rebates passed through from the manufacturer, discounts, credits and cooperative
advertising. There can be no assurance that the Company will continue to receive
such incentives in the future. Other than ordinary purchase orders, the Company
does not have written supply, distribution or franchise agreements with any of
its Computer Product vendors. Although the Company believes that it has
established close working relationships with its principal vendors, the
Company's success will depend, in large part, on maintaining these relationships
and developing new vendor relationships for its existing and future product and
service lines. Because the Company does not have written contracts with any of
its vendors, there can be no assurance that the Company will be able to maintain
these relationships. Periodically, Computer Product suppliers consolidate their
distribution networks and otherwise restructure or limit their distribution
channels. There can be no assurance that the Company will continue to be
selected to resell products by its principal vendors. Termination or
interruption of such relationships or modification of the terms the Company
receives from these vendors would materially adversely affect the Company's
financial position, operating results, and cash flows. See "--Asian Market
Instability" and "Business--Vendor Relationships and Procurement."
Certain of the products offered by the Company are subject to manufacturer
allocations, which limit the number of units of such products available to the
Company's vendors, which in turn may limit the number of units available to the
Company. In order to offer the products of most manufacturers, the Company is
required to obtain authorizations from the manufacturers to act as a reseller of
such products, which authorizations may be terminated at the discretion of the
manufacturers at any time. There can be no assurance that the Company will be
able to obtain or maintain authorizations to offer products, directly or
indirectly, from new or existing manufacturers. Termination of the Company's
rights to act as a reseller of the products of one or more significant
manufacturers would have a material adverse effect on the Company's financial
position, operating results, and cash flows.
POSSIBLE ADDITIONAL FINANCING REQUIRED. The Company's business is capital
intensive in that the Company is required to finance the purchase of Computer
Products in order to fill sales orders. In order to obtain necessary capital,
the Company relies primarily on unsecured vendor credit lines and a line of
credit provided by Finova Capital Corporation ("Finova") that is collateralized
by accounts receivable and inventory. As a result, the amount of credit
available to the Company may be adversely affected by factors such as delays in
collection or deterioration in the quality of the Company's accounts receivable,
economic trends in the computer industry, interest rate fluctuations and the
lending or credit policies of the Company's lenders and vendors. Many of these
factors are beyond the Company's control. Further, the Company must obtain
Finova's written permission prior to arranging other financing, and Finova may
require certain acknowledgments and undertakings from other lenders. There can
be no assurance that Finova will permit additional financing or that other
lenders will provide the acknowledgments and undertakings Finova may require.
Any decrease or material limitation on the amount of capital available to the
Company under its financing arrangements or vendor credit lines will limit the
ability of the Company to fill existing sales orders or expand its sales levels
and, therefore, would have a material adverse effect on the Company's financial
position, operating results, and cash flows. In addition, while the Company does
not have significant exposure to interest rate fluctuations under its current
financing, any significant increases in interest rates will increase the cost of
possible future financing to the Company which would have a material adverse
effect on the Company's financial position, operating results, and cash flows.
The Company is dependent on the availability of accounts receivable financing on
reasonable terms and at levels that are high relative to its equity base in
order to maintain and increase its sales. There can be no assurance that such
financing will be available to the Company in the future. The inability of the
Company to have continuous access to such financing at reasonable costs would
severely and adversely impact the Company's financial position, operating
results, and cash flows. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RISK OF PRODUCT RETURNS. As is typical of the computer industry, the
Company incurs expenses as a result of the return of products by customers. Such
returns may result from defective goods, inadequate performance relative to
customer expectations, distributor shipping errors and other causes which are
7
<PAGE>
outside the Company's control. Although the Company's distributors and
manufacturers have specific return policies that enable the Company to return
certain types of goods for credit, to the extent that the Company's customers
return products which are not accepted for return by the distributor or
manufacturer of such products, the Company will be forced to bear the cost of
such returns. Any significant increase in the rate of product returns coupled
with the unwillingness by the Company's distributors or manufacturers to accept
goods for return could have a material adverse effect on the Company's financial
position, operating results, and cash flows. See "Business--Inventory
Management."
PRODUCT MIX; RISK OF DECLINING PRODUCT MARGINS. The Company's gross profit
margins have increased from 3.3% to 4.2% in the nine months ending December 31,
1996 and 1997, respectively, due to a number of factors, including strong
product demand, the ability of the Company to obtain favorable pricing, and a
sales mix of products with higher profit margins. However, given the significant
levels of competition that characterize the Computer Products market, there can
be no assurance that the Company will maintain the current gross profit margins
or be able to achieve further increases in profit margins. From time to time,
product margins will also be reduced as a result of marketing strategies
implemented by the Company. For instance, introductory pricing implemented by
the Company to develop market awareness of product lines, particularly disk
drives, of vendors new to the Company will have an adverse effect upon gross
profit margins and, potentially, earnings during the period promotional pricing
is offered. Moreover, in order to attract and retain many of its larger
customers, the Company frequently must agree to volume discounts and maximum
allowable mark-ups that serve to limit the profitability of sales to such
customers. Accordingly, to the extent that the Company's sales to such customers
increase, the Company's gross profit margins may be reduced, and therefore any
future increases in net income will have to be derived from continued sales
growth or effective expansion into higher margin business segments, neither of
which can be assured. Furthermore, low margins increase the sensitivity of the
business to increases in costs of financing, because financing costs to carry a
receivable can be very high compared to the low amount of gross profit on the
sale underlying the receivable itself. Any failure by the Company to maintain or
increase its profit margins and sales levels could have a material adverse
effect on the Company's results of operations and prospects for future growth.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION; IMPORTANCE OF ACSA TO
GROWTH. The Company's ability to successfully implement, market and introduce
the ACSA Solution services on a timely basis will be a significant factor in the
Company's ability to improve its operating margins and remain competitive. The
Company's ability to market the ACSA Solution successfully will depend on the
Company convincing potential customers of the benefits of the ACSA Solution. The
Company has only recently commenced marketing the ACSA Solution. The Company is
currently constructing its first ACSA Center located in Industry, California. No
ACSA Center is currently in operation and the Company currently has no sales
revenue attributable to the ACSA Solution or an ACSA Center. Although the
Company is engaged in negotiations and discussions with a number of potential
customers, there can be no assurance that any such discussions will lead to
significant sales of the ACSA Solution, or that the ACSA Solution will attain
market acceptance. Although the Company intends to devote a substantial portion
of the proceeds of this Offering to implementation and marketing of ACSA
Solution services, there can be no assurance that the commitment and use of such
funds will result in successful implementation, marketing and sales of ACSA
Solution services. Any failure by the Company to anticipate or respond in a
cost-effective and timely manner to market trends or customer requirements, or
any significant delays in introduction of ACSA services, could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--ACSA Growth Strategy."
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR ACSA. The Company believes that
the purchase of the Company's ACSA Solution services will entail an
enterprise-wide decision by prospective customers and require the Company to
engage in a lengthy sales cycle, estimated at between three and twelve months,
as the Company will be required to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's ACSA
Solution services and products. Also, the purchase
8
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of ACSA Solution services will often depend upon the successful coordination of
marketing, system design and installation efforts by the Company, end-user
customers and others with influence over the purchase decisions of the Company's
customers such as consultants, VARs and SIs. Purchase decisions will generally
occur only after significant internal analysis by each customer and will be
subject to competition with other capital spending priorities of certain
customers. As a result, the sales and customer implementation cycles will be
subject to a number of significant delays over which the Company has little or
no control. Delay in the sale or customer implementation of a limited number of
transactions could have a material adverse effect on the Company's business and
results of operations and could cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
DEPENDENCE ON CASI FOR DEVELOPMENT AND ENHANCEMENT OF CONFIGURATION
SOFTWARE. Under the Company's non-exclusive license and reseller agreements
with Computer-Aided Software Integration, Inc. ("CASI"), CASI retains the source
code of the Configurator software required to operate the automated software
configuration functions of the Company's planned ACSA Solution and ACSA Centers,
and retains all rights to modify and enhance the Configurator-TM- software. CASI
has agreed to provide the Company with all enhancements and upgrades to the
Configurator software used internally or distributed by CASI to its customers,
and to develop additional enhancements requested by the Company at the Company's
sole expense. Any enhancements requested by the Company and implemented by CASI
at CASI's expense may be incorporated in the generally distributed version of
CASI's software. If CASI determines not to fund development of an enhancement
then CASI must prepare the enhancement at pre-agreed rates and ownership of the
requested enhancement will belong to the Company. Failure by CASI to promptly
and adequately perform its obligations under its license agreement with the
Company would have a material adverse effect on the Company. Furthermore, there
can be no assurance that CASI will fully comply with its contractual obligations
to the Company, that CASI will dedicate sufficient software development capacity
to satisfy the Company's requirements, or that the Company's remedies in the
event CASI does not perform its obligations will be adequate. The Company has no
capability to internally develop any enhancements or upgrades. Failure or delay
by CASI to fulfill the Company's anticipated needs for enhancement and upgrading
of the Configurator software would adversely affect the Company's ability to
market ACSA services and to become and remain competitive in the software
configuration market. In the event that CASI fails to meet its obligations under
the license, the Company has, among other rights, the contractual right to the
source code underlying the software, but there can be no assurance that the
Company will be able to obtain the source code in a timely manner, if at all,
because CASI is in possession of the only copies of the source code. Even if the
Company is able to obtain the source code under such circumstances, internal
maintenance and enhancement of the source code could place a significant
financial burden on the Company. See "Business--ACSA Growth Strategy" and
"Certain Transactions."
LIMITED MARKETING CAPABILITIES. The Company's operating results will depend
to a large extent on its ability to successfully market the ACSA Solution
services to personal computer manufacturers and multi-user system buyers. The
Company currently has limited marketing capability. The Company intends to use a
portion of the proceeds of the Offering to hire additional sales and marketing
personnel and outside consultants to market the ACSA Solution. There can be no
assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the ACSA Solution. See
"Business--ACSA Growth Strategy."
MANAGEMENT OF GROWTH. The Company has grown rapidly since inception in
April 1996, with net sales reaching $25,940,203 in the Company's first fiscal
year and reaching $49,267,491 for the nine months ended December 31, 1997, and
employees increasing from 3 at inception to 23 at January 31, 1998.
Implementation of the Company's business plan, including implementation of ACSA
Solution services and the general strains of the Company's growth will require
that the Company significantly expand its operations in all areas. This growth
in the Company's operations and activities will place a significant strain on
the Company's management, operational, financial and accounting resources.
Successful management of the
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Company's operations will require the Company to continue to implement and
improve its financial and management information systems. The Company's ability
to manage its future growth, if any, will also require it to hire and train new
employees, including management and technical personnel, and motivate and manage
its new employees and integrate them into its overall operations and culture.
The Company recently has made additions to its management team, including
appointing Max Toghraie as Chief Executive Officer in September 1997 and Carl L.
Wood as Chief Financial Officer in February 1998 and is in the process of
expanding its accounting staff and modifying its internal procedures to prepare
to function as a public company, a process which is expected to continue
following the Offering. The Company's failure to manage implementation of its
business plan would have a material adverse effect on the Company's business,
operating results and financial condition.
RISK OF POTENTIAL JOINT VENTURES OR ACQUISITIONS. In the future, the
Company may acquire complementary companies, products or technologies, although
no specific acquisitions currently are pending or under negotiation.
Acquisitions involve numerous risks, including adverse short-term effects on the
combined business' reported operating results, impairments of goodwill and other
intangible assets, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of intangible
assets and risks associated with unanticipated problems or legal liabilities. A
portion of the net proceeds of this Offering may be used to fund such
acquisitions at the broad discretion of the Board of Directors. The Board of
Directors may consummate such acquisitions, if any, without permitting
shareholders to review or vote on such transactions, unless required under
applicable law. See "Use of Proceeds." and "Business--ACSA Growth Strategy."
CONSTRUCTION OF FIRST ACSA CENTER. The Company intends to use approximately
$0.3 million of the net proceeds from the Offering to complete construction of
and to equip its first ACSA Center. It is expected that the construction will
require a substantial time commitment of certain members of management. The
first ACSA Center is expected to be completed by mid-1998. Any delay in
completion of the first ACSA Center could result in delays in the commencement
of sales of assembly and custom software configuration services and adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company will be able to complete the ACSA Center at
the budgeted price. Additionally, there can be no assurance that the ACSA Center
will be available on time or that the Company will be successful in timely
hiring and training engineers and technicians necessary to commence operations
of the ACSA Center. Any such delay would delay the Company's ability to commence
offering the ACSA Solution and have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business--Facilities."
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS. The market for the
Company's ACSA technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's ACSA Solution services
using its licensed Configurator software gains initial market acceptance, the
Company's success will depend, among other things, upon its ability to enhance
the ACSA Solution services and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or offer new services successfully, that such new
products or services will gain market acceptance, or that the Company will be
able to respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a loss of market share
or revenues. See "Business--ACSA Growth Strategy."
INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS OF
DISTRIBUTION. The personal computer industry is undergoing significant change.
The industry has become more accepting of large volume, cost-effective channels
of distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer resellers are consolidating operations and acquiring
or merging with other resellers to increase efficiency.
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This current industry reconfiguration has resulted in increased pricing
pressures. Decreasing prices of Computer Products require the Company to sell a
greater number of products to achieve the same level of net sales and gross
profit. The continuation of such trend would make it more difficult for the
Company to maintain or to increase its net sales and net income. In addition, it
is possible that the historically high rate of growth of the personal computer
industry may slow at some point in the future. If the growth rate of the
personal computer industry were to decrease, the Company's financial position,
operating results, and cash flows could be materially adversely affected.
Furthermore, new methods of distribution and sales of Computer Products, such as
on-line shopping services and catalogs published on CD-ROM, may emerge in the
future. Computer Products and software manufacturers have sold, and may in the
future intensify their efforts to sell, their products directly to end users.
From time to time, certain vendors have instituted programs for the direct sale
of large orders of Computer Products and software to certain major corporate
accounts. These types of programs may continue to be developed and used by
various vendors. While the Company attempts to anticipate future distribution
trends, any of these distribution methods or competitive programs, if expanded,
could have a material adverse effect on the Company's financial position,
operating results, and cash flows.
AVAILABILITY OF COMPONENTS. The computer component and computer assembly
businesses have from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend either to slow down shipments or
place their customers "on allocation," reducing the number of units sold to each
customer. While the Company believes that it has well-established relationships
with vendors and that it has not been adversely affected by recent shortages in
certain storage and other computer components, no assurance can be given that
future shortages will not adversely impact the Company. See "Business--Vendor
Relationships and Procurement."
COMPETITION. The Company faces intense competition, both in its selling
efforts and purchasing efforts, from the significant number of companies that
configure and/or assemble personal computers, manufacture or distribute disk
drives and offer software configuration services. Many of these companies, such
as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom,
Inc. in the Computer Products distribution market, large computer manufacturers
such as IBM Corp. and Compaq Computer Corporation, which provide custom
configuration and automated software configuration for standardized systems,
large distributors such as Ingram Micro Inc., Vanstar Corp., En Point
Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the
systems integration and network services market, have substantially greater
assets and possess substantially greater financial and personnel resources than
those of the Company and may develop software, or services or products which are
comparable to the ACSA Solution. Many competing distributors also carry or offer
brands or product lines which the Company does not carry. Generally, large disk
drive and personal computer component manufacturers and large distributors do
not focus their direct selling efforts on small to medium sized OEMs and
distributors, which constitute the vast majority of the Company's customers;
however, as the Company's customers increase in size, disk drive and component
manufacturers may find it cost effective to focus direct selling efforts on
those customers, which could result in the loss of customers or pressure on
margins. In addition, CASI and/or Datatec Systems Inc. ("Datatec"), formerly
known as Glasgal Communications, Inc., the parent corporation of CASI, may
directly enter into the Company's integration and configuration markets using
the software the Company has licensed from CASI. While no operating division or
subsidiary of Datatec is currently competing in the Company's markets, there can
be no assurance that Datatec will not decide to directly compete with the
Company in the future. Further, the terms of the Company's license agreement
with CASI allows CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. There can be
no assurance that the Company will be able to continue to compete effectively
with existing or potential competitors. See "Business--Competition" and "Certain
Transactions."
ELECTRONICS INDUSTRY CYCLICALITY. The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon
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manufacturers and corporate end users of personal computers, as well as
component distributors such as the Company. In addition, the life cycle of
existing personal computer products and the timing of new product development
and introduction can affect demand for disk drives and other personal computer
components. Any downturns in the personal computer component distribution
industry, or the personal computer industry in general, could adversely affect
the Company's business and results of operations.
ASIAN MARKET INSTABILITY. Economies and financial markets in Asia have
recently experienced significant turmoil. A non-material portion of the
Company's revenues are derived from sales to businesses which primarily export
Computer Products to Asian customers, and certain of the Company's vendors are
based in Korea, Japan and other Asian countries. The recent turmoil in the Asian
financial markets has not had a material impact on the Company's sales orders or
the Company's ability to obtain products from its Asian vendors. However, the
financial instability in these regions may have an adverse impact on the
financial position of end-users in the region which could impact future orders
from the Company's customers and/or the ability of such end users to pay the
Company's customers, which could also impact the ability of such customers to
pay the Company. If the Company's customers who export into Asia are unable to
maintain export sales or current margins on such export sales, the Company's
sales and/or sales margins may be adversely affected. Additionally, if the
Company's vendors in these regions are unable to continue to supply the Company,
the Company may be adversely impacted.
FOREIGN TRADE REGULATION. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea, Japan and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations. The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation,
fluctuation in currency and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. For
example, it is possible that political or economic developments in China, or
with respect to the United States' relationship with China, could have an
adverse effect on the Company's business. The Company's ability to remain
competitive could also be affected by other governmental actions related to,
among other things, anti-dumping legislation and international currency
fluctuations. While the Company does not believe that any of these factors
adversely impact its business at present, there can be no assurance that these
factors will not materially adversely affect the Company in the future. Any
significant disruption in the delivery of merchandise from the Company's
suppliers, substantially all of whom are foreign, would also have a material
adverse impact on the Company's business and results of operations. See
"Business--Vendor Relationships and Procurement."
FLUCTUATIONS IN QUARTERLY EARNINGS. The Company's business is subject to
certain quarterly influences. Net sales and operating profits are generally
higher in the third quarter due to the purchasing patterns of personal computer
integrators and resellers and are generally lower in the second quarter due
primarily to lower industry shipments. Quarterly results may also be adversely
affected by a variety of other factors, including the timing of acquisitions and
related costs, the release of new products, promotions, and component pricing
and availability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONFLICTS OF INTERESTS. Until March 9, 1998, David Tobey, a director of the
Company, was President, Chief Executive Officer and a significant stockholder of
CASI and an employee of CASI's parent, Datatec. CASI is a vendor and licensor of
the Company. Until March 9, 1998 Mr. Tobey had an employment agreement with CASI
whereby Mr. Tobey was obligated to assign to CASI all ideas, inventions and
designs created or developed by Mr. Tobey (alone or with others) relating to
computer integration and development tools. On March 9, 1998, Mr. Tobey resigned
from his positions at CASI and Datatec, and his entire equity interest in CASI
was acquired by Datatec. Although the Company believes that Mr. Tobey's
departure from CASI and Datatec will have no adverse effect on the Company's
relationship with CASI
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and Datatec, there can be no assurance that Mr. Tobey's resignation will not
adversely effect the Company's working relationship with CASI and Datatec.
During Mr. Tobey's employment at CASI and Datatec, the Company entered into a
licensing agreement (the "CASI License") and a reseller agreement (the "CASI
Reseller Agreement") with CASI relating to the Company's non-exclusive license
to use and resell CASI's Configurator software. As a result, although the
Company believes that the CASI License and the CASI Reseller Agreement were
negotiated on an arms-length basis, conflicts existed between Mr. Tobey's
interests and obligations to CASI and Datatec and his obligations as a Director
of the Company during the period in which the Company negotiated and concluded
the CASI License and the CASI Reseller Agreement. The license fee for the CASI
Configurator software was $1.1 million, of which $150,000 was advanced on the
Company's behalf by an officer of CASI's parent, Datatec and is evidenced by a
promissory note (the "Datatec Note"), and $950,000 was paid by delivery to CASI
of a non-interest bearing promissory note (the "CASI Note"). The Company repaid
$250,000 principal amount of the CASI Note and $50,000 of the principal amount
of the Datatec Note out of the proceeds of the Company's Bridge Financing in
December 1997. The Company intends to repay the outstanding $100,000 principal
amount of the Datatec Note and the $700,000 principal amount of the CASI Note
out of the proceeds of this Offering. The CASI Note provides that the Company
has also issued CASI a contingent warrant (the "CASI Warrant") pursuant to which
CASI may apply any amount then due and unpaid under the CASI Note to the
purchase of the Company's Common Stock at a price of $4.50 per share if the
Company defaults under the CASI Note. The CASI Warrant will expire upon full
payment of the CASI Note. The Company believes that all of these transactions
were on terms no less favorable than were available from unaffiliated third
parties. There can be no assurance that the Company will not enter into
transactions with affiliated parties in the future. See "Certain Transactions."
IMMEDIATE AND SUBSTANTIAL DILUTION. The proposed initial public offering
price is substantially higher than the book value per outstanding share of
Common Stock. Specifically, investors will sustain immediate dilution of $3.39
per share (68%) based on the net tangible book value of the Company at December
31, 1997 of $0.35 per share. Investors in the Offering therefore will bear a
disproportionate part of the financial risk associated with the Company's
business while effective control will remain with the Company's directors and
executive officers. See "Dilution."
REPAYMENT OF INDEBTEDNESS. Approximately twelve (12%) percent, or an
aggregate of $1,200,000, of the net proceeds of the Offering has been allocated
for the repayment of the Bridge Notes, the CASI Note, and the Datatec Note, and
therefore will not be available for future operations. Approximately seven (7%)
percent, or $700,000, of such net proceeds will be paid to CASI in connection
with the repayment of the CASI Note. See "Use of Proceeds." Until March 9, 1998
David Tobey, a director of the Company, was President, Chief Executive Officer
and a significant stockholder of CASI and an employee of CASI's parent, Datatec.
On March 9, 1998, Mr. Tobey resigned from his positions at CASI and Datatec, and
his entire equity interest in CASI was acquired by Datatec. See "Certain
Transactions."
POTENTIAL BENEFIT TO CERTAIN INVESTORS. The investors who participated in
the Bridge Financing (the "Bridge Holders") acquired an aggregate of 300,000
shares of Common Stock at a stated purchase price of $2.00 per share and 100,000
Bridge Warrants exercisable for the purchase of an aggregate of 100,000 shares
of Common Stock at an exercise price of $3.00 per share. If after the expiration
of the transfer restrictions applicable to the securities sold in the Bridge
Financing the market price for the Common Stock is equal to or exceeds the
initial offering price of the Common Stock, the Bridge Holders will realize a
return which could significantly exceed that which would be realized by the
purchasers of Common Stock in this Offering. See "Shares Eligible for Future
Sale."
POSSIBLE ISSUANCE OF PREFERRED STOCK; BARRIERS TO TAKEOVER. The Company's
Articles of Incorporation authorize the issuance of up to 2,000,000 shares of
Preferred Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, because the rights and preferences for
any series of Preferred Stock may be set by the Company's Board of Directors in
its sole discretion, the rights and preferences of any such Preferred Stock are
likely to be superior to those of the Common Stock and thus could adversely
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affect the rights of the holders of Common Stock. The Company currently has no
commitments or contracts to issue any additional securities. Any securities
issuances might result in a reduction in the book value or market price of the
outstanding shares. Further, any new issuances could be used for anti-takeover
purposes or might be used as a method of discouraging, delaying or preventing a
change of control of the Company. Additionally, certain provisions of the
Company's Articles of Incorporation and Bylaws could delay or make more
difficult a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock."
NO DIVIDENDS ANTICIPATED. The Company has never declared or paid dividends
on its Common Stock. After the consummation of this Offering, the Company does
not intend for the foreseeable future to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE;
ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been
no public market for the Common Stock. Although the Company's Common Stock has
been approved for inclusion on The Nasdaq SmallCap Market ("Nasdaq") and for
listing on the Boston Stock Exchange, there can be no assurance that an active
trading market for the Common Stock will develop as a result of the Offering or,
if a trading market does develop, that it will continue. In the absence of such
a market, investors may be unable readily to liquidate their investment in the
Common Stock. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements relating to the Company's business (including new product
introductions by the Company or its competitors), changes in financial estimates
by securities analysts, the operating and stock price performance of other
companies that investors may deem comparable to the Company as well as other
developments affecting the Company or its competitors. In addition, the market
for equity securities in general has been volatile and the trading price of the
Common Stock could be subject to wide fluctuations in response to general market
trends, changes in general conditions in the economy, the financial markets or
the manufacturing or retail industries and other factors which may be unrelated
to the Company's performance. The public offering price of the shares of Common
Stock has been determined by negotiations between the Company and the
Underwriters and does not necessarily bear any relationship to the Company's
book value, assets, past operating results, financial condition or any other
established criteria of value. There can be no assurance that the shares offered
by this Prospectus will trade at market prices in excess of the initial public
offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock by existing
shareholders could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital. Upon completion of the
Offering, the Company will have 7,100,000 shares of Common Stock outstanding. Of
those shares, the 2,350,000 shares of Common Stock offered by this Prospectus
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
4,750,000 shares of Common Stock outstanding are "restricted securities," as
that term is defined by Rule 144. Under lock-up agreements with Joseph Stevens &
Company, Inc. ("Joseph Stevens"), each existing shareholder has agreed that he
or it will not, directly or indirectly, sell, assign or otherwise transfer any
shares of Common Stock owned by it for a period of (a) in the case of management
and founding shareholders of the Company who collectively hold 4,450,000 shares
of Common Stock, a period of 18 months after the effective date of the
Registration Statement of which this Prospectus is a part (the "Management
Lock-Up Period") except with Joseph Stevens' prior written consent and (b) in
the case of the holders of 300,000 shares of Common Stock issued in the
Company's Bridge Financing, a period of 12 months after the effective date of
the Registration Statement of which this Prospectus is a part, and thereafter
for an additional six (6) months, without the written consent of Joseph Stevens
(the "Bridge Holder Lock-Up Period"); provided, however, that (i) the Management
Lock-Up Period shall immediately terminate if the Common Stock is quoted on The
Nasdaq SmallCap Market or The Nasdaq National Market and the average closing bid
price of the Common Stock equals or exceeds $10.00 per share (subject
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to customary adjustments for stocksplits, combinations, consolidations and
similar transactions) for any 30 consecutive calendar days, and (ii) for
twenty-four (24) months following the effective date of the Registration
Statement any sales of the Company's securities subject to the lock-up
agreements shall be made through Joseph Stevens in accordance with its customary
brokerage practices either on a principal or agency basis. Once the lock-up
agreements expire, all of the 4,750,000 shares of Common Stock will become
eligible for immediate sale, subject to compliance with the volume limitations
of Rule 144 by the holders of these shares. See "Shares Eligible for Future
Sale" and "Underwriting."
DELISTING FROM THE NASDAQ SMALLCAP MARKET; POTENTIAL PENNY STOCK
CLASSIFICATION. The Company has been approved for quotation of the Common Stock
on The Nasdaq SmallCap Market and for listing of the Common Stock on the Boston
Stock Exchange. However, there can be no assurance that a trading market for the
Common Stock will develop, or if developed, that it will be maintained. No
assurance can be given that the Company will be able to satisfy the criteria for
continued quotation on The Nasdaq SmallCap Market or the criteria for continued
listing on the Boston Stock Exchange following this Offering. Failure to meet
the maintenance criteria in the future may result in the Common Stock not being
eligible for quotation or listing. If the Company were removed from The Nasdaq
SmallCap Market and the Boston Stock Exchange, trading, if any, in the Common
Stock would thereafter have to be conducted in the over-the-counter market in
so-called "pink sheets" or, if then available, the OTC Bulletin Board. As a
result, holders of the Common Stock would find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, the Common Stock.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
Boston Stock Exchange and the trading price of the Common Stock is less than
$5.00 per share, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
regulations adopted by the Securities Exchange Commission (the "Commission"),
any equity security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
ELIMINATION OF CUMULATIVE VOTING. The Articles of Incorporation of the
Company provide that at such time as the Company has (i) shares listed on the
New York Stock Exchange or the American Stock Exchange, or (ii) securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the Company has at least 800 or more holders of its Common
Stock as of the record date of the Company's most recent annual meeting of
shareholders, the cumulative voting rights of shareholders will cease. Upon
closing of this Offering the Company believes that it will have more than 800
holders. If the Company has shares listed on the New York Stock Exchange or the
American Stock Exchange, or designated for trading as national market securities
on The Nasdaq National Market System, cumulative voting rights of shareholders
will cease. Elimination of cumulative voting will have the effect of making it
more difficult for minority shareholders to obtain representation on the Board
of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation, as amended, (the "Articles") include a provision that eliminates
the personal liability of its directors to the Company for monetary damages for
breach of their fiduciary duties (subject to certain limitations) as a director
to the fullest extent permissible under California law. The Company's Articles
and Bylaws allow the Company to
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provide for indemnification of its Directors the fullest extent permitted by
law. The Bylaws allow the Company to enter into indemnity agreements with
individual directors, officers, employees and other agents. The Company has
entered into indemnification agreements designed to provide the maximum
indemnification permitted by law with all the directors of the Company. These
agreements, together with the Company's Bylaws and Articles, may require the
Company, among other things, to indemnify these directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable nature),
to advance expenses to them as they are incurred, provided that they undertake
to repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification, and to obtain directors' and officers'
insurance if available on reasonable terms. The Company intends to purchase and
maintain directors' and officers' liability insurance. As a result of the
provisions in the Company's Articles and in the indemnification agreements, it
may be more difficult for shareholders to obtain relief against a director for
breaches of such director's fiduciary duty than if these provisions were not
included in the Company's Articles and Bylaws. See "Management--Limitation of
Liability and Indemnification Matters."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that
a significant portion of the Common Stock offered hereby will be sold to
customers of the Representative. Although the Representative has advised the
Company that it intends to make a market in the Common Stock, it will have no
legal obligation to do so. The price and the liquidity of the Common Stock may
be significantly affected by the degree, if any, of the Representative's
participation in the market. Moreover, if the Representative sells the
securities issuable upon exercise of the Representative's Warrants, they may be
required under the Exchange Act, as amended, to temporarily suspend their
market-making activities. No assurance can be given that any market-making
activities of the Representative, if commenced, will be continued. See
"Underwriting."
NO EARTHQUAKE INSURANCE. The Company's executive office, warehouse and
assembly facility is located in a Company-leased facility in Industry,
California, an area which experienced damage in the 1994 Northridge, California
earthquake. The Company does not currently carry insurance against earthquake-
related risks.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes
"forward-looking statements." All statements other than statements of historical
fact included in this Prospectus, including, without limitation, the statements
under "Offering Summary," "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," regarding the
Company's strategies, plans, objectives and expectations; the Company's ability
to provide custom assembly, configuration and distribution services of computer
equipment and peripherals to technology companies; the ability of the Company to
establish and operate an ACSA Center and to automate its custom configuration
process and systems integration solutions for its customers; the ability of the
Company to successfully market the ACSA Solution; the ability of the Company to
develop processes to position itself as a low-cost leader for outsourcing system
assembly and distribution services; the Company's future operating results; and
other matters are all forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that those expectations will
prove to be correct. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in these "Risk
Factors," as well as elsewhere in this Prospectus. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by these "Risk Factors."
16
<PAGE>
RECENT BRIDGE FINANCING
On December 23, 1997, the Company completed a financing (the "Bridge
Financing") consisting of the sale of 20 units, each comprised of: (i) an
unsecured promissory note (each a "Bridge Note") of the Company in the principal
amount of $20,000, bearing interest at a rate of 10% per annum payable upon the
earlier of the closing of the Offering or 18 months from the date of issuance;
(ii) 15,000 shares of Common Stock of the Company, and (iii) 5,000 warrants of
the Company, each warrant exercisable to purchase one share of Common Stock at
an initial exercise price of $3.00 per share, subject to adjustment, during the
36-month period commencing one year from the date the warrants were issued (the
"Bridge Warrants"). Each unit was sold for $50,000 generating gross proceeds to
the Company of $1,000,000 and net proceeds of $740,000. The investors in the
Bridge Financing were brokerage customers of Joseph Stevens, who acted as
placement agent for the Bridge Financing, but were not otherwise related to or
affiliated with the Company or the Underwriters. The Company repaid $250,000 of
the principal amount of the CASI Note and $50,000 of the Datatec Note out of the
proceeds of the Bridge Financing. The Company intends to repay the remainder of
its indebtedness under the CASI Note and the Datatec Note with the proceeds of
this Offering. See "Risk Factors--Repayment of Indebtedness" and "--Potential
Benefit to Certain Investors" and "Use of Proceeds."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of the 2,350,000 shares of
Common Stock offered by this Prospectus, after deducting the estimated
underwriting discounts and offering expenses, are estimated to be approximately
$9,853,625 ($11,400,219 if the Over-Allotment Option is exercised in full).
The Company anticipates allocating the net proceeds of the Offering among
the foregoing uses approximately as follows:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
APPLICATION NET PROCEEDS NET PROCEEDS
- -------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Repayment of the Bridge Notes, Datatec Note and CASI Note........... $ 1,200,000 12%
Construction of first ACSA Center................................... 300,000 3
Sales and marketing of ACSA Solution for first ACSA Center.......... 1,000,000 10
Construction, sales and marketing of additional ACSA Centers........ 2,550,000 26
Expansion of Computer Products sales and marketing capability....... 2,700,000 28
Working capital..................................................... 2,103,625 21
------------ ---
------------ ---
Total........................................................... $ 9,853,625 100%
------------ ---
------------ ---
</TABLE>
The Company is also conducting the Offering to create a market for its
Common Stock, to facilitate future access by the Company to the public equity
markets and to enhance the Company's public image and credibility to support its
marketing efforts.
The CASI Note is non-interest bearing and is due and payable on February 28,
1998, or the closing of the Offering, whichever is sooner. Until March 9, 1998,
David Tobey, a director of the Company, was the President, Chief Executive
Officer and a significant stockholder of CASI and an employee of CASI's parent
Datatec. The Datatec Note bears interest at the rate of 10% per annum, and is
required to be repaid on February 28, 1998, or the closing of the Offering,
whichever is sooner. The Bridge Notes bear interest at a rate of 10% per annum
and are payable upon the earlier of the closing of the Offering or 18 months
from the date of issuance. As of December 31, 1997 (excluding interest), the
balance of the CASI Note was $700,000, the balance of the Datatec Note was
$100,000 and the aggregate balance of the Bridge Notes was $400,000.
The Company believes that the proceeds of the Offering, funds from
operations and available lines of credit will be sufficient to support the
Company's capital needs for the next 12 months. The Company intends to maintain
flexibility in the use of the proceeds of the Offering (other than amounts to
retire the Bridge Notes, the Datatec Note and the CASI Note). The amounts
actually expended for each use of the proceeds, if any, are at the discretion of
the Company and may vary significantly depending upon a number of factors,
including requirements for launching new product lines, marketing, advertising
and working capital to support growth. Accordingly, management reserves the
right to reallocate the proceeds of the Offering as it deems appropriate. The
Company may also use a portion of the net proceeds to acquire businesses,
products or proprietary rights, or to enter into joint ventures; however, the
Company currently has no commitments or agreements relating to any of these
types of transactions other than those disclosed in this Prospectus. Until the
net proceeds of the Offering are used, the Company intends to invest them in
United States government securities, short-term certificates of deposit, money
market funds or other short-term interest bearing investments.
18
<PAGE>
DIVIDEND POLICY
The Company has not and does not currently intend to pay dividends on its
Common Stock following the Offering and plans to follow a policy of retaining
earnings to finance the growth of its business. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, contractual
and legal restrictions and other factors deemed relevant by the Board of
Directors at that time.
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1997 was $1,649,672, or $0.35 per share. Net tangible book value per common
share represents the book value of the Company's tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the amount
per share paid by purchasers of Common Stock of the Company pursuant to the
Offering and the as adjusted net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale of
the 2,350,000 shares of Common Stock offered hereby and the application of the
net proceeds therefrom, the as adjusted net tangible book value of the Common
Stock at December 31, 1997 would have been $11,406,197 or $1.61 per share. This
represents an immediate increase in pro forma net tangible book value of $1.26
per share of Common Stock to existing shareholders and an immediate dilution of
$3.39 (68%) per share of Common Stock to new investors purchasing Common Stock
pursuant to this Offering. The following table illustrates the per share effect
of this dilution on an investor's purchase of shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price................................................ $ 5.00
Net tangible book value per share as of December 31, 1997.................. $ 0.35
Increase in net tangible book value per share attributable to new
investors................................................................ $ 1.26
---------
As adjusted net tangible book value per share................................ $ 1.61
---------
Dilution per share to new investors.......................................... $ 3.39
---------
---------
</TABLE>
The following table summarizes, as of December 31, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid, and the average price per share paid by existing
shareholders and by new investors purchasing shares of Common Stock pursuant to
this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 4,750,000 66.9% $ 1,150,000 8.9% $ 0.24
New investors..................... 2,350,000 33.1 11,750,000 91.1 5.00
---------- ----- ------------- ----- -----
Total......................... 7,100,000 100.0% $ 12,900,000 100.0% $ 1.82
---------- ----- ------------- ----- -----
---------- ----- ------------- ----- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At December 31, there were an aggregate of 452,717 shares
of Common Stock issuable upon exercise of outstanding options and warrants at a
weighted average exercise price of $2.80 per share comprised of (i) 307,717
shares of Common Stock issuable upon the exercise of stock options issued under
the Company's Stock Option Plan, which have an exercise price of $2.70 per
share, (ii) 45,000 shares of Common Stock issuable pursuant to the exercise of
outstanding warrants at an exercise price of $3.00 per share, (iii) 100,000
shares of Common Stock issuable upon the exercise of the Bridge Warrants which
have an exercise price of $3.00 per share.
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1997 (unaudited), and (ii) as adjusted to give effect to the
sale of the 2,350,000 shares of Common Stock offered by the Company hereby at
the initial public offering price of $5.00 per share, after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by the Company, and the application of the net proceeds thereof as set
forth in "Use of Proceeds." This table should be read in conjunction with the
Financial Statements and related notes contained therein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus. The following unaudited as adjusted
financial data may not represent the results of operations or financial position
which actually would have been obtained if the transactions described above had
been completed as of the date indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
(UNAUDITED)
---------------------------
AS
ACTUAL ADJUSTED(1)
------------ -------------
<S> <C> <C>
Debt.......................................................................... $ 1,213,448 $ 13,448
------------ -------------
Shareholders' equity
Preferred Stock, no par value:
Authorized--2,000,000 shares
Issued and outstanding: None.............................................. -- --
Common Stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding: (2)
Actual: 4,750,000
As adjusted: 7,100,000.................................................. 999,200 10,852,825
Retained earnings............................................................. 650,472 553,372(3)
------------ -------------
Total shareholders' equity.................................................... 1,649,672 11,406,197
------------ -------------
Total capitalization.......................................................... $ 2,863,120 $11,419,645
------------ -------------
------------ -------------
</TABLE>
- --------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,350,000 shares of
Common Stock offered by the Company at an initial public offering price of
$5.00 per share after deducting commissions and estimated offering expenses
(estimated at $1,896,375); and (ii) the application of the net proceeds of
the Offering, including payment of $400,000, $700,000 and $100,000 due under
the Bridge Notes, the CASI Note and the the Datatec Note, respectively.
(2) Does not include (i) 307,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's Stock Option Plan,
which have an exercise price of $2.70 per share, (ii) 45,000 shares of
Common Stock issuable pursuant to the exercise of outstanding warrants at an
exercise price of $3.00 per share, (iii) 100,000 shares of Common Stock
issuable upon the exercise of the Bridge Warrants which have an exercise
price of $3.00 per share, and (iv) 192,283 shares reserved for issuance upon
the exercise of options which may be granted under the Stock Option Plan.
(3) As adjusted to reflect a non-recurring interest expense of $97,100 for the
unamortized portion of the original issue discount and deferred financing
costs related to the Bridge Financing.
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the year
ended March 31, 1997 and the balance sheet data at March 31, 1997 are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in this Prospectus. The statement of operations data set
forth below with respect to the nine months ended December 31, 1996 and 1997 are
derived from the unaudited financial statements prepared on the same basis as
the audited financial statements. In the opinion of management, all unaudited
financial information includes all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information presented. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes and other financial information appearing elsewhere
in this Prospectus. The statement of operations data for the nine months ended
December 31, 1997 are not necessarily indicative of the results for the entire
year.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
APRIL 2, 1996 DECEMBER 31
(INCEPTION) TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Nonaffiliates......................................................... $ 25,407,403 $16,838,795 $47,876,191
Affiliate(1).......................................................... 532,800 336,276 1,391,300
-------------- ---------- ----------
25,940,203 17,175,071 49,267,491
Cost of products:
Nonaffiliates......................................................... 24,615,411 16,270,620 45,878,548
Affiliate(1).......................................................... 523,590 333,674 1,314,408
-------------- ---------- ----------
25,139,001 16,604,294 47,192,956
Gross profit:
Nonaffiliates....................................................... 791,992 568,175 1,997,643
Affiliate(1)........................................................ 9,210 2,602 76,892
-------------- ---------- ----------
801,202 570,777 2,074,535
Selling, general and administrative expenses............................ 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations.................................................. 50,069 68,854 1,045,031
Interest expense........................................................ 9,334 4,500 13,908
Other income (expense,) net............................................. (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes................................ 34,864 64,364 1,041,846
Provision for income taxes.............................................. 9,500 25,745 416,738
-------------- ---------- ----------
Net income ........................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................... $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
AT MARCH 31, 1997 1996 1997
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 154,160 $ 221,402 $ 232,529
Total assets......................................................... 1,855,241 1,636,743 10,272,214
Total liabilities.................................................... 1,579,877 1,398,124 8,622,542
Retained earnings.................................................... 25,364 38,619 650,472
Shareholders' equity................................................. 275,364 238,619 1,649,672
</TABLE>
- ------------------------------
(1) Relates to sales at fair market value made to Samax Technology Inc., a
company controlled by the mother of Mr. Max Toghraie. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. MOREOVER, THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS."
OVERVIEW
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software peripherals. In December of 1996, the
Company entered the system configuration business. This process required certain
organizational and operational changes to effectively position the Company as a
provider of configuration and integration solutions to various levels within the
distribution, integration and end-user markets. In February 1997, the Company
began negotiations on its first systems integration and configuration order and
by April 1997 had secured a non-binding (7,000 Unit PC systems) configuration
order on a twelve-month delivery schedule, under which approximately 2,500
systems have been shipped.
In order to enhance its competitive advantage in the systems integration
market, the Company has entered into a perpetual non-exclusive licensing
agreement with Computer Aided Software Integration, Inc. ("CASI") to license
CASI's Configurator software for use in the development and commercialization of
Company's ACSA Solution. The Company paid CASI a one-time license fee of $1.1
million. The license fee was paid (i) by delivering to CASI a non-interest
bearing promissory note in the principal amount of $950,000 (the "CASI Note"),
and (ii) a cash payment of $150,000 funded by the Datatec Note. The payments
under the CASI Note will be capitalized and amortized over the useful life of
the software, which, for accounting purposes, is currently estimated to be
between three and five years.
The Company believes that the ACSA Solution will operate as a fully
automated systems integration and configuration process. When operational, the
ACSA Solution will enable the Company to assemble systems and custom configure
the software loaded on the systems to each customer's varied end user
specifications. The Company anticipates that the ACSA Solution will enable it to
deliver multi-unit assembled hardware systems with pre-loaded software custom
configured to suit each end user at a lower cost and time required by other
commercially available configuration processes. The Company anticipates a
portion of the proceeds from this Offering will be used to finance construction
of the Company's initial ACSA Center and to fund ACSA Solution marketing
activities. Costs incurred in connection with the construction of the ACSA
Center will be capitalized and amortized over the useful life of the ACSA
Center, which is expected to be between three and five years for accounting
purposes.
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company for the
year ended March 31, 1997, and for the nine month periods ended December 31,
1996 and 1997. The Company has a limited history of operations.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997.
SALES. Sales are currently generated from the sale of components and
systems. Systems include ready-to-use computers that have been assembled and
have software already installed. Components sales consist of individual hardware
items. Net sales consists of gross sales (invoice price) less sales returns.
Sales are recognized upon product shipment. Net sales for the year ended March
31, 1997 were $25,940,203 (net of returns of $62,751) which consisted entirely
of components sales. Gross sales for the year ended March 31, 1997 were
$26,002,954. This revenue was achieved by growth of the Company's sales force
from
22
<PAGE>
2 persons at inception to 4 persons at the end of the first fiscal year and
financed by the initial capitalization and the Company's available vendor credit
of approximately $2.0 million at March 31, 1997. Net sales to an affiliate
represents sales at fair market value made to Samax Technology, Inc. ("Samax"),
a company controlled by the mother of Mr. Max Toghraie.
COST OF PRODUCTS. Cost of products consists primarily of product costs,
freight charges, and labor cost, and includes cost incurred at the time of
purchase, freight in and outside warehouse cost. Cost of products was
$25,139,001, representing 96.9% of net sales for the period. The cost of
products for the year ended March 31, 1997 is almost entirely attributable to
product purchase costs, with freight, labor and outside warehouse costs in the
aggregate representing less than 1% of the total cost of products.
Except for a limited inventory maintained to satisfy anticipated systems
assembly and integration orders, the Company generally does not place orders for
product purchases until it has received a customer purchase order for the
product. The merchandise is then shipped to either the customer or the Company's
warehouse. The distributor typically ships its products within one or two days
of receipt of a purchase order and consequently, substantially all of the
Company's revenues in any quarter result from orders received in that quarter.
The Company records as inventory merchandise being configured, its limited
inventory for the systems configuration business, and merchandise purchased from
vendors but not yet shipped to customers. As a result, the Company generally
reflects five to seven days of cost of products as inventory.
GROSS PROFITS. Gross profits for the year ended March 31, 1997 were
$801,202. Gross profits as a percentage of net sales was 3.1% for the period
ended March 31, 1997. The Company's gross profit ratio is mainly attributable to
strong product demand, the ability of the Company to purchase inventory at
favorable prices, and management's focus on a sales mix which favors products
with higher profit margins and computer system integration sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling expenses includes
costs for marketing activities to promote the Company's products and services
throughout its distribution channels, marketing personnel costs, advertising,
promotions, brochures, travel and trade shows. General and administrative
expenses include salaries of management and administrative personnel ($323,649),
commissions ($77,411) rent expense ($49,096), bad debt expense ($50,329) and
other costs. Selling, general and administrative expenses for the period ended
March 31, 1997 were $751,133 and are expected to increase as the Company expands
in anticipation of growth and commences focusing the business on marketing the
ACSA Solution.
NET INCOME. Net income for fiscal year ended March 31, 1997 was $25,364.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996.
NET SALES. Gross sales for the nine months ended December 31, 1997 were
$49,617,539 compared to $17,193,211 for the Company's first nine months of
operations from inception through December 31, 1996. Net sales for the nine
months ended December 31, 1997 were $49,267,491 (net of returns of $350,048)
compared to $17,175,071 (net of returns of $18,140) for the nine months ended
December 31, 1996. This increase of approximately $32,092,420 in net sales is
attributable to growth of the Company's sales force from 4 to 8 individuals at
the end of each period, and an increase in the Company's available combined
credit (including its vendor credit and the Finova Line), from $1.3 million to
$16.5 million (as a 90 day average available credit for the respective periods)
which allowed the Company to increase its ability to purchase product to fulfill
more sales orders. In addition, at the beginning of the nine month period ending
December 31, 1997, the Company retained new management and implemented a
commission structure concurrent with a significant increase in sales quotas and
minimum margin policies. During the same period, the Company also began
marketing its integration and configuration services, which resulted in net
system sales of approximately $1,395,439 for the nine month period ended
December 31, 1997. Net sales to an affiliate represents sales at fair market
value made to Samax. For the nine month period ended December 31, 1997, the
Company had sales of approximately $1.39 million to Samax. At December 31, 1997,
the Company had approximately $146,500 included in trade receivables attributed
to Samax.
23
<PAGE>
COST OF PRODUCTS. Cost of products increased $30,588,662 from $16,604,294
to $47,192,956 for the nine months ended December 31, 1996 and 1997,
respectively. This increase is mainly attributable to the increase in net sales.
Cost of products represented 96.7% and 95.8% of net sales for the nine months
ended December 31, 1996 and 1997, respectively. The decrease in cost of products
as a percentage of net sales is primarily due to management's focus on a sales
mix which favors products with higher profit margins and computer system
integration sales.
GROSS PROFITS. Gross profits for nine months ended December 31, 1997 were
$2,074,535 compared to $570,777 in the nine months ended December 31, 1996.
Gross profits as a percentage of net sales were 4.2% for the nine months ended
December 31, 1997 compared to 3.3% for the nine months ended December 31, 1996.
This represents a 27% increase in gross profit ratios, and is mainly
attributable to strong product demand, the ability of the Company to purchase
inventory at favorable prices, management's focus on a sales mix which favors
products with higher profit margins and computer system integration sales, a
more efficient shipping process implemented in the first quarter, tighter
control and management of labor costs and implementation of operational
objectives requiring management to focus on increasing efficiency. See "Risk
Factors--Product Mix; Risk of Declining Product Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for nine months ended December 31, 1997 were $1,029,504
compared to $501,923 for the nine months ended December 31, 1996, the Company's
first nine months of operations.
The major components of selling, general and administrative expenses for the
periods include the following:
<TABLE>
<CAPTION>
12/31/96 12/31/97
---------- ------------
<S> <C> <C>
Payroll............................................................. $ 227,754 $ 506,676
Commissions......................................................... 52,681 168,726
Rent................................................................ 39,469 35,712
Write off of related party receivable............................... -- 100,000
Bad debt............................................................ 17,000 56,310
Other (under 5%).................................................... 165,019 162,080
---------- ------------
Total............................................................. $ 501,923 $ 1,029,504
---------- ------------
---------- ------------
</TABLE>
The increase of $527,581 in selling, general and administrative expenses is
attributable primarily to the Receivable Write-Off of $100,000 incurred in the
first quarter and to increased staff and overhead to support the higher levels
of sales and marketing activity. The Company also increased the salaries of
executive officers during this period to levels the Company believes to be
commensurate with current market levels. These salary increases represent, in
the aggregate, an increase in expense to the Company of approximately $30,000
per quarter. Direct costs associated with increased marketing activities to
promote the Company's products and services throughout its distribution channels
as well as a significant increase in sales and marketing personnel costs account
for approximately $146,300 of this increase. The Company intends to continue its
sales force expansion and to increase its spending on advertising and joint
marketing promotions and trade shows for the remainder of the current fiscal
year. In addition, the Company hired additional personnel in finance and
administration to facilitate growth of the Company's infrastructure and revenue
expansion costing approximately $28,340, and incurred year-end audit and
printing and consulting fees of $23,700. Selling, general and administrative
expenses (excluding the Receivable Write-Off of $100,000) as a percentage of net
sales decreased by 34.5% from 2.9% for nine months ended December 31, 1996 to
1.9% for nine months ended December 31, 1997. This decrease is a result of
economies of scale achieved through significant increases in sales volume as
well as employment of various operational controls and organizational
efficiencies. The Company intends to continue strict monitoring of all its fixed
and variable cost structure to achieve optimum operational performance. See
"Certain Transactions" and Note 7 to the Financial Statements.
24
<PAGE>
NET INCOME
Net income for the nine-month period ended December 31, 1996 was $38,619
compared to $625,108 for the nine-month period ended December 31, 1997. The
increase of $586,489 is mainly attributable to an increase of net sales of
$32,092,420 and economies of scale.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital expenditure
requirements through a combination of cash flows from operations, bank
financing, vendor credit lines, the sale of equity and the Bridge Financing. At
February 2, 1998, the Company had vendor credit lines and a credit facility
aggregating $16.5 million, consisting of a $7.5 million credit line provided by
Finova (the "Finova Line") and approximately $9.0 million in unsecured vendor
credit. Under the Finova Line, the Company orders product from vendors approved
by Finova and agrees to pay Finova within 30 days of purchase of the ordered
products. Unless the Company fails to pay Finova within this 30 day period, all
finance costs associated with this line are charged by Finova to the Company's
vendor. The Finova Line is terminable at Finova's discretion at any time without
notice. The Company believes that it can currently obtain similar financing on
comparable terms from competitors of Finova. However, if Finova terminates the
Finova Line and the Company for any reason fails to replace the Finova Line with
comparable financing, the business of the Company would be materially adversely
effected. The Company also believes that expansion of its infrastructure to
accommodate its current expected growth rate will require a substantially higher
level of liquidity and capital. Specifically, the Company's planned ACSA
operations are expected to require significant capital expenditure over the next
twelve months. The Company believes that the proceeds of the Offering, and funds
from operations and available lines of credit, will be sufficient to support the
Company's short term capital needs for the next twelve (12) months. The Company
believes that if currently expected growth rates are achieved the Company may
require additional financing commencing in twelve to eighteen months from the
time of the Offering. The Company would seek to obtain additional funding
through additional vendor credit, expanded lines of credit and other sources.
Although the Company believes that it will be able to obtain sufficient
financing, no assurance can be given that such financing will be available. See
"Risk Factors--Possible Additional Financing Required."
On November 26, 1997, December 16, 1997 and December 23, 1997, the Company
sold 12.0, 7.5, and 0.5 units, respectively, each unit comprised of: (i) an
unsecured promissory Bridge Note of the Company in the principal amount of
$20,000, bearing interest at a rate of 10% per annum payable upon the earlier of
the closing of the Offering or 18 months from the date of issuance; (ii) 15,000
shares of Common Stock of the Company, and (iii) 5,000 Bridge Warrants of the
Company, each exercisable to purchase one share of Common Stock at an initial
exercise price of $3.00 per share, subject to adjustment, during the 36-month
period commencing one year from the date the Bridge Warrants were issued. Each
unit was sold for $50,000 generating gross proceeds to the Company of $1,000,000
and net proceeds of $740,000. The Company repaid $250,000 of the principal
amount of the CASI Note and $50,000 of the Datatec Note out of the proceeds of
the Bridge Financing. The Company intends to repay the remainder of its
indebtedness under the CASI Note and the Datatec Note using proceeds of the
Offering. See "Recent Bridge Financing" and "Use of Proceeds."
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business.
While the Company has no present plans, commitments or agreements with respect
to any potential acquisitions or joint ventures, the Company may consummate
acquisitions or enter into joint ventures, which may require the Company to make
additional capital expenditures. Such expenditures may be significant and
require external sources of funding.
INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109 entitled
"Accounting for Income Taxes." The Company provides for federal and state income
taxes based on statutory rates. The provision for income taxes differ
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from the amounts computed by applying the statutory federal income tax rate to
income before taxes primarily due to the effect of state income taxes net of the
related federal tax benefit.
Deferred income taxes are provided for income/expense items reported in
different periods for income tax and financial statement purposes. Deferred
income taxes are primarily attributable to temporary differences resulting from
depreciation, state income taxes and various accrued expenses. The Company has
no current "tax loss carry forwards."
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. There can be no assurance, however, that the Company's
business will not be affected by inflation in the future.
BACKLOG
The Company's backlog is not meaningful due to short turnaround cycles in
its core distribution operations and only one order received as of the date
hereof in its developing systems configuration business.
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BUSINESS
GENERAL
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), systems
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products and system configuration business to become a leading provider of
software-enabled custom configuration to its target markets both domestically
and internationally. The Company intends to implement a fully automated systems
integration and configuration process, referred to as the Automated Custom
System Assembly Solution, or "ACSA Solution," incorporating licensed proprietary
software. The Company believes the ACSA Solution will enable the Company to
assemble multiple computer systems and custom configure the software loaded on
these systems to each customer's end user's unique specifications at a fraction
of the cost and time required by other commercially available configuration
processes. See "--ACSA Growth Strategy--THE ACSA SOLUTION". The Company has
begun initial construction of the first of its ACSA Solution production lines
("ACSA Centers") located at the Company's facility. The Company's first ACSA
Center is expected to be completed and the Company is expected to commence
offering the ACSA Solution by mid-1998. Future ACSA Centers may be located at
the facilities of its customers. This technology is intended to enable the
Company's customers to outsource their procurement, warehousing, assembly,
staging, and shipping processes. The Company will use a portion of the proceeds
of the Offering to complete the construction of and operate its first ACSA
Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD-ROMs and CD Recorders, network adapters, hubs, small
computer systems interface components ("SCSIs"), integrated device enhancement
components ("IDEs") and ZIP drives as well as memory and central processing
units ("CPUs") for desktop and notebook computer products. The Company also
assembles built-to-order computer systems for its target markets.
The Company's net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to $49,267,491 for the first
nine months of fiscal 1998 primarily because of development of an experienced
sales management team with strong customer relationships, expansion of the sales
force, quick delivery of a broad selection of Computer Products and competitive
pricing offered by the Company. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ending
December 31, 1996 and the year ended March 31, 1997, respectively, to 4.2% for
the nine month period ending December 31, 1997 due to a number of factors
including strong product demand, more favorable direct manufacturer pricing and
an improved sales mix achieved by the Company which favors components with
higher profit margins and computer system sales. The Company expects that
implementation of the ACSA Centers will increase sales of higher margin
built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners
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identified in Asia, but is not currently negotiating any acquisition
opportunities. There can be no assurance that the Company will successfully
establish any joint ventures or identify any acquisition opportunities or that
if such opportunities are presented that they will be on terms and conditions
acceptable to the Company.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. The Company's executive offices are located at 957
Lawson Street, Industry, California 91748; and its telephone number is (626)
965-6899, and its facsimile number is (626) 965-0415.
COMPUTER PRODUCTS BUSINESS
The Company's principal business upon which its growth strategy is built is
the procurement and distribution of a broad and comprehensive range of Computer
Products. These products include, components such as high capacity storage
devices, CD-ROMs and CD Recorders, network adapters, hubs, SCSIs, IDEs and ZIP
drives as well as memory and CPU's for desktop and notebook products. The
Company also assembles built-to-order computer systems for its target market.
Two significant strengths of the Company are its well-developed vendor
relationships and its ability to effectively manage its cash and inventory.
COMPUTER PRODUCTS MARKET
The computer hardware and component market is heavily dependent on worldwide
personal computer demand and shipments. According to a Hambrecht & Quist
research report dated August 19, 1997 on the PC Hardware Market entitled, "VIEW
FROM THE CHANNEL," worldwide personal computer unit shipments have increased
from 47 million units in 1994 to 83 million scheduled shipments for the 1997
calendar year, and unit volume is expected to grow to an estimated 112 million
by the 1999 calendar year. The Computer Products market is generally segmented
between top-level warehousing master distributors, who distribute to VARs, OEMs,
SIs and other distributors. Master distributors are required to purchase
significant volumes of Computer Products to obtain their manufacturer
relationships and pricing. The Company generally procures its components from
these master distributors and distributes these products to medium sized VARs,
SIs, ISVs and OEMs. The Company believes that a valuable asset of the Company is
its position in the distribution channel, between that of master distributors
and lower level VARs, SIs and ISVs because unlike master distributors, the
Company, without maintaining large inventories, can focus its procurement on
only those components which it has expertise in marketing to its target markets.
COMPUTER PRODUCTS BUSINESS STRATEGY
The Company has structured its Computer Products business in a manner
designed to maximize net profit margins while competing on the basis of price
and service. The Company generated approximately 98.6% and 97.2% of net sales in
the fiscal year ended March 31, 1997 and the nine months ended December 31,
1997, respectively, from its Computer Product distribution and procurement
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The remainder of the Company's revenues in each period
were derived primarily from system assembly and sale. The Company's net sales
have grown from approximately $17,175,000, to approximately $49,267,500 for the
nine months ended December 31, 1996, and 1997, respectively, primarily because
of the development of an experienced sales management team with strong customer
relationships, expansion of the sales force, quick delivery of a broad selection
of Computer Products and competitive pricing offered by the Company.
Although the Company is seeking to expand into higher margin, value-added
services, the Company believes that the gross profit on its core distribution
operations will remain relatively stable. Therefore, management's primary
objective remains gross profit improvement through strategic implementation of
its planned ACSA operations. The Company's gross profit margins have improved
from approximately 3.3% and 3.1% of net sales in the nine month period ended
December 31, 1996 and the fiscal year ended
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March 31, 1997, respectively, to 4.2% for the nine month period ended December
31, 1997 due to a number of factors, including strong product demand, more
favorable direct manufacturing pricing, and an improved sales mix achieved by
the Company which favors components with higher profit margins and computer
system integration sales.
COMPUTER PRODUCT CUSTOMERS AND SALES
The Company has more than 700 active customers, including Alpha Computers,
East Gate Micro, Inc. and Data Impressions Inc. For the fiscal year ended March
31, 1997 no customer accounted for more than 10% of net sales. During the nine
months ended December 31, 1997, Alpha Systems Inc. accounted for 10.9% of net
sales. During fiscal 1997, the Company had net sales of approximately $532,800
to Samax, a company owned by the mother of Mr. Max Toghraie. For the nine month
period ended December 31, 1997, the Company had sales of approximately $1.39
million to Samax. At December 31, 1997, the Company had approximately $146,500
in trade receivables attributed to Samax. During the three month period
commencing September 30, 1997 and ending December 31, 1997, the Company had no
sales to Samax. Although the Company is not currently making sales to Samax, if
the Company determines that resuming sales to Samax in the future would be in
the best interests of the Company, any such future transactions would be
negotiated on an arms-length basis and on terms and conditions at least as
favorable to the Company as those which would be obtained from competitors of
Samax. See "Certain Transactions." The cessation of business with Samax has not
had a material adverse effect on the Company's business, and the Company does
not believe that the loss of Alpha Systems, Inc. or any other individual
customer would have a material adverse effect on the Company's business.
The Company currently markets its distribution services via a direct sales
staff, with use of telemarketing techniques to identify, qualify and close
business. At the beginning of the 1997 calendar year, the Company began an
aggressive campaign to develop a channel program to sell its Computer Products
through OEMs, SIs, and ISVs. As of December 31, 1997, 44% of the Company's
accounts have been originated through this channel program, and they provide the
majority of revenues to the Company.
As of January 31, 1998, the Company employed eight sales representatives.
All sales representatives are managed by the Company's President. The Company's
sales representatives have been highly effective in developing and maintaining
customer relationships, averaging approximately $8.2 million of sales per
representative on an annualized basis based on the nine months ended December
31, 1997. The Company believes that sales per representative of $8.2 million,
would, if achieved for fiscal 1998, compare very favorably with its competitors.
See "Risk Factors--Limited Operating History."
The Company's representatives compete for sales on the basis of product
knowledge, product selection targeted to the Company's customer base and
competitive pricing. The Company offers an aggressive return merchandise policy
("RMA") that is attractive to its customers. The Company is able to offer such a
policy because of RMA allowances it has negotiated from its vendors. The Company
experienced loss on returns of less than one percent of shipments in the fiscal
year ended March 31, 1997 and the nine months ended December 31, 1997,
respectively, because it was able to return substantially all of the returned
products to manufacturers for immediate cash refunds or credits. See "Risk
Factors--Risk of Product Returns."
VENDOR RELATIONSHIPS AND PROCUREMENT
The Company has relationships with a large number of manufacturers and
distributors around the world. The Company is a reseller of selected product
lines and single components from major manufacturers, including Western Digital
Corporation, Adaptec Inc., Fujitsu Computer Products of America, Samsung
Electronics Co. Ltd., Quantum Corporation, Maxtor Corporation, 3Com Corporation,
Creative Labs Corporation, Matrox Electronics Systems, Ltd., Goldstar L.G.
Electronics, Intel Corporation, Toshiba Corporation, Pioneer Electronics Corp.
and Sony Electronics. In the distribution channel, major suppliers include DSS
Technology Distribution Partners, Inc. ("DSS"), Maxtor Corporation, Canara
Technologies,
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Alpha Computers, DTK Computer, Tech Data Computer, Merisel Incorporated and
Toshiba Corporation. For the nine months ended December 31, 1997, DSS, a master
distributor of hard drives to the Company, accounted for 58.3%, of the Company's
purchases. For the nine month period ended December 31, 1997, the Company had
purchases of approximately $598,000 from Samax. Although the Company is not
currently making purchases from Samax, if the Company determines that resuming
purchases from Samax in the future would be in the best interests of the
Company, any such future transactions would be negotiated on an arms-length
basis and on terms and conditions at least as favorable to the Company as those
which would be obtained from competitors of Samax. See "Certain Transactions."
The Company believes that its relationships with DSS and its other vendors is
satisfactory and does not believe that the loss of its relationship with DSS or
any other of its vendors would materially adversely affect its business. See
"Risk Factors--Dependence Upon Relationships with Vendors."
The Company receives discounts from major Computer Product manufacturers and
master distributors as a result of its volume purchases. The Company routinely
negotiates stock rotation and price protection privileges with certain of its
major vendors. Additionally, DSS has featured the Company in its national
advertising campaigns.
The Company also benefits from its ability to effectively dispose of excess
inventory of major manufacturers and master distributors due to the Company's
well developed sales channel. In this way, major distributors and manufacturers
rely on the Company as a release valve for inventory when excess supplies must,
due to contractual commitments, be shipped by such manufacturers to the
Company's master distributor vendors. In return for the Company's willingness to
accept such excess inventory, the Company is afforded pricing concessions and
rebates by the vendor. As a result, the Company receives favorable pricing from
master distributors who desire to reduce inventory growth or to be assured of
satisfying volume purchase commitments to manufacturers without adversely
impacting downstream pricing. Also, because the Company is relied upon by its
vendors to take their excess inventory, the Company is rewarded with
preferential allocation, allowing the Company to maintain availability and
increase its margins during component shortages. These arrangements with respect
to purchases of excess inventory from vendors are informal, are not subject to
any written agreements and may be discontinued by the Company at the Company's
discretion. See "Risk Factors--Availability of Components," "--Foreign Trade
Regulation," and "--Dependence Upon Relationships with Vendors."
The Company promptly pays its vendors, typically paying within 30 days from
receipt of invoice. This policy also encourages the Company's vendors to
expedite shipments to the Company as these shipments can be quickly converted to
cash flow.
INVENTORY MANAGEMENT
The Company's strong vendor relationships enable it to receive prompt and
consistent deliveries. As a result, the Company, unlike many resellers of
Computer Products, maintains a very limited inventory, and avoids many of the
costs associated with the traditional distribution model, including capital
costs associated with the warehousing of products, obsolescence costs, inventory
finance costs, the costs of computer inventory and tracking systems, and the
costs associated with the need to employ personnel for stocking and shipping
duties.
Unlike master warehousing distributors who supply the Company, the Company
has the added flexibility of not being required to maintain large inventories to
achieve its favored pricing. The Company believes that although the pricing it
receives is not as favorable as the pricing received by master warehousing
distributors, the Company benefits by avoiding the need to stock and finance
often rapidly depreciating Computer Products. In the Company's judgment, it is
often more cost effective to purchase Computer Products from its vendors on an
as-needed basis than to stock the quantities of parts required to receive volume
discounts available to the Company's vendors.
The Company is leanly staffed and focuses on rapid inventory turns. Prior to
March 23, 1998 the Company's warehouse was 4,000 square feet and, as of December
31, 1997, employed 3 people. On
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March 23, 1998, the Company moved into a larger facility of approximately 21,900
square feet of office and warehouse space. In the nine months ended December 31,
1997, the Company shipped $47.2 million of Computer Products, turning inventory
at an annualized rate of approximately 41 times.
Rather than merely focusing on price discounts from vendors, the Company has
negotiated favorable RMA terms with its vendors permitting rapid replacement of
parts returned by customers. Rapid replacement of such parts, allows the Company
to reduce inventory costs (by increasing the speed of inventory turns) and
improves customer satisfaction. See "Risk Factors--Risk of Product Returns."
The Company also closely coordinates its sales efforts and procurement,
particularly in the area of high volume parts such as computer drives. In many
cases, entire shipments of products are already sold or under order by the
Company's customers prior to their purchase by the Company.
CASH MANAGEMENT
The Company has traditionally collected its receivables in 21 days or less
while generally paying its key vendors and the Company's Finova Line in 30 days,
thereby allowing the Company to finance its growth at low cost. At February 2,
1998, the Company had vendor credit lines and a credit facility aggregating
$16.5 million, consisting of a $7.5 million under the Finova Line and
approximately $9.0 million in unsecured vendor credit. Under the Finova Line,
the Company orders product from vendors approved by Finova and agrees to pay
Finova within 30 days of purchase of the ordered products. Unless the Company
fails to pay Finova within this 30 day period, all finance costs associated with
this line are charged by Finova to the Company's vendor. The Company also
maintains its margins by carefully screening the credit records of its new and
existing customers and by requiring check guarantees from almost all smaller
customers who pay by check.
ACSA GROWTH STRATEGY
The Company intends to create a new high volume, custom system and software
configuration solution attractive to major computer system sellers, installers
and end-users both domestically and internationally. The ACSA Solution is
intended to replace a manual process with an automated assembly line. The
Company intends to complete construction of and to equip its first ACSA Center
with a portion of proceeds of this Offering. The Company's planned ACSA Centers
will introduce its integrated, rapid, low-cost, automated custom software
configuration solution to a market burdened by slow, high-cost, labor-intensive
manual software configuration methods. The Company's first ACSA Center is
expected to be completed and the Company is expected to commence offering the
ACSA Solution by mid-1998.
The Company intends to market the ACSA Solution to the Company's base of
Computer Products customers and vendors and create strategic alliances with
joint venture partners and licensees in domestic and overseas markets.
Establishing joint ventures with well positioned partners is expected to benefit
the Company by reducing capital expenditures required from the Company for each
ACSA Center launch, as well as by providing the Company with market presence
established by the Company's selected partners. This initiative also is expected
to result in increased volume to the Company's systems sales, thereby providing
the Company's traditional business with a more favorable sales mix and improved
operating results. The Company also intends to utilize management's extensive
network of domestic and foreign contacts to explore possible acquisition
opportunities. The Company is exploring joint ventures with potential partners
identified in Asia, but is not currently negotiating any acquisition
opportunities. There can be no assurance that the Company will successfully
establish any joint ventures or identify any acquisition opportunities or that
if such opportunities are presented that they will be on terms and conditions
acceptable to the Company. In addition, recent economic and political
developments in Asia, may lead the Company to defer establishment of joint
ventures or partnerships with such potential partners. See "Risk Factors--Asian
Market Instability."
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THE ACSA MARKET
The market for fully-configured computer systems is both diverse and
expanding. Distribution channels are already established and include:
- VARs and SIs
VARs and SIs are the primary distribution channel for new PCs. An IDC
study cited in EDP Weekly on December 15, 1997 stated that the overall PC
market in the U.S. is expected to grow in 1998 by 17%, "outpacing the
worldwide rate of 13.5%." In addition, Computer Reseller News reported in
June of 1996 that the top ten domestic SIs generated revenues of over $40
billion dollars in 1995. VARs and SIs represent a major focus of the
Company's ongoing program in targeting potential configuration services
customers through its existing distribution and procurement operations.
- OEMs and ISVs
These vendors provide solutions to vertical markets and must provide
turnkey systems that are heavily customized to their marketplace
requirements. These vendors have historically provided integration
services in addition to their primary products to ensure delivery of the
complete product to their customer. However, due to their small size and
scope of services, these vendors find it very difficult to offer
cost-effective, quality integration services and often provide these
services at a loss. The Company intends to offer these vendors a more
profitable, higher quality alternative.
- International Emerging Markets
ASIA/PACIFIC REGIONAL MARKETS. A recent IDC study found that almost 17
million systems were shipped in the Asia/Pacific Region in 1996, "which
allowed the region to substantially outpace worldwide PC market growth by
16%." A January 27, 1998 report in Newsbytes, citing an IDC study, found
that, although a slowdown occurred in Southeast Asia in 1997, "three of
the five largest regional markets, China, India and Australia, buoyed the
region's growth." China, for example, "chalked up a 43% year-on-year
growth rate in the fourth quarter." EDP Weekly reported on December 15,
1997, however, that IDC had reduced its sales forecast for PC demand in
1998 in the region from 12.93 million to 12.36 million units. Recent
economic and political developments in Asia, however, may slow or
eliminate this growth potential. See "Risk Factors--Asian Market
Instability."
LATIN AMERICAN MARKETS. A recent study by Software Publishers Association
found that unit sales in Latin America grew by 78% in 1996, with growth in
the fourth quarter exceeding 110%. Another study by IDC confirmed that
Latin America is undergoing unprecedented growth in system demand.
According to this study, Latin American users are seeking lower-cost ways
to increase network capacity and flexibility. The study also found that
growth in the market is expected to remain in the double-digits through
the end of the millennium, stimulated from continued corporate network
re-engineering, the move to client/server and multimedia applications, and
with increasing impetus coming from the Internet. The strongest country in
both studies was Brazil, which accounted for approximately 35%-40% of all
unit sales.
THE ACSA OPPORTUNITY
The Company believes that ACSA Solution and the automated methodology it
represents will enable it to successfully expand on its existing systems and
Computer Products sales and achieve higher margin sales of the ACSA services as
an increasing percentage of total revenues. Currently, most SIs and VARs are
unable to offer, and most corporate and institutional buyers with large numbers
of networked servers, PCs or workstations are unable to procure, systems with
non-uniform preconfigured software. For instance, a hypothetical purchaser of
1,000 workstations cannot presently specify diverse software configurations for
each workstation without incurring the potentially prohibitive cost of
labor-intensive custom software installation and configuration. The Company
estimates that a typical manual assembly and software configuration process for
custom systems requires three to five hours per workstation, excluding
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time required for re-builds due to inexperienced labor or accidental
typographical errors. Consequently, these enterprises either specify uniform
software configurations for each workstation, thereby depriving some end users
of valuable software applications while unnecessarily purchasing licenses for
others, or bear the high cost of manual software configuration for each
non-standard setup. As a result, many computers are installed with less than
optimal software configuration and any necessary custom software configuration
is provided by high cost consultants or management information systems staff.
The Company believes that the ACSA Solution will enable the Company to
successfully offer the first single-sourced, high volume, fully automated
computer assembly and custom software configuration service that uniquely
configures each workstation.
In marketing system assembly and integration services to VARs, OEMs, SIs and
ISVs, the Company expects that the planned ACSA Solution will enable the Company
to enjoy a significant advantage over traditional system configurators who
currently offer automated software configuration for only a limited subset of
business software applications and who are presently unable to offer custom
software configuration services. See "Risk Factors--Lengthy Sales and
Implementation Cycles for ACSA" and "-- Competition."
The Company believes that its relationships with customers and vendors in
the Computer Products channel provide it with an ideal platform to aggressively
explore and successfully market the ACSA Solution to OEMs, ISVs, VARs and SIs.
Historically the systems integration market has been heavily dependent on these
vendors for its computer and software procurement needs. The Company expects
such dependence to increase as corporate and government information technology
departments are under increasing pressure to outsource their network and
personal computer configuration operations to shorten customer delivery time,
reduce labor cost, better manage the uncertainties of component pricing and
improve the quality control process.
THE ACSA SOLUTION
The Company is assembling technologies to automate the process of custom
configuration and integration in ACSA Centers of entire system solutions for its
customers. The technology to be employed by each ACSA Center is based upon
successful systems in use in flexible manufacturing environments. The ACSA
Center automation process will move components to each unskilled worker to be
assembled and loaded using the Integrator's Workbench Product Series ("IWPS")
software created by CASI and licensed by the Company. See "Risk
Factors--Dependence on CASI for Developments and Enhancement of Configuration
Software" "--Conflicts of Interests." The IWPS "Configurator" component
automates the loading and personalized setup of workstations, servers and
network devices, saving significant labor costs and ensuring accurate and
consistent installations. The Company believes, based on case studies published
by CASI, that units coming off the automated assembly line can be uniquely
configured at the rate of up to 18 units per hour. The ACSA Centers are expected
to enable the Company to:
- Meet customer demands for custom systems utilizing the latest technologies
where the assembly is outsourced but the customer closely controls the
design and software configuration.
- Shorten the time required to assemble complex, custom solutions.
- Eliminate up to 80% of the costs of manual labor normally associated with
custom software loading and configuration.
- Obtain ISO 9000 certification for systems assembly processes.
- Construct or have joint venture partners construct permanent or temporary
ACSA Centers for customers.
Even assuming that manual laborers are able to produce consistent,
error-free configurations, the ACSA Center is expected by the Company to be able
to provide significant increases in productivity. The Company believes that a
fully operational ACSA Center will be able to configure up to 72 machines in the
time a manual laborer takes to configure one. This technology is intended to
enable the Company's customers to outsource their procurement, warehousing,
assembly, staging, and shipping processes. By
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implementing manufacturing processes that automate the assembly of custom
systems, the Company intends to position itself as a low cost, high value
provider of outsourcing services to the systems distribution and end user
markets. The Company has commenced construction of two assembly lines at its
first ACSA Center located in Industry, California which can support up to 16
assembly lines. Construction of its first ACSA Center is expected to be
completed in mid-1998. See "Facilities," and "Risk Factors-- Construction of
First ACSA Center."
Each ACSA Center assembly line is modularly designed to enable the Company
and its customers to realize high productivity and profits from varying job lot
size and location. Highest optimization is reached in configurations of eight
assembly lines, however these may be combined to create larger facilities, or
scaled back to create smaller ones with corresponding increases or decreases in
labor and productivity. ACSA Centers can be located in a central facility, or be
constructed at a customer's location in a few weeks.
COMPETITION
The markets for the Company's products and services are extremely
competitive and is characterized by rapid and constantly changing market
conditions, price fluctuations and technological change. Pricing is very
aggressive and the Company expects pricing pressures to continue. The Company
competes with a large number and wide variety of resellers of Computer Products,
including traditional personal computer retailers, computer superstores,
consumer electronics and office supply superstores, mass merchandisers, national
direct marketers (including VARs and specialty retailers, distributors,
franchisers, manufacturers and national computer retailers which have commenced
their own direct marketing operations to end-users). Many of these companies
compete principally on the basis of price and may have lower costs than the
Company. Many of the Company's competitors are larger, have substantially
greater resources and offer a broader range of services than does the Company.
The Company competes with, among others, CompuCom Systems, Inc., En Point
Technologies, Inc. and Vanstar Corp. in the Computer Products distribution
market.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most if not all of these factors, there can be no assurance that it
will continue to do so in the future. The industry has come to be characterized
by aggressive price cutting, and the Company expects that pricing pressures will
continue to increase in the foreseeable future. In addition, the Computer
Products industry is characterized by rapid changes in technology and associated
inventory and product obsolescence, rapid changes in consumer preferences, short
product life cycles and evolving industry standards. The Company will need to
continually provide competitive prices, superior product selection and delivery
response time in order to remain competitive. If the Company were to fail to
compete favorably with respect to any of these factors, the Company's business
and operating results would be adversely affected.
CASI and/or Datatec may directly enter into the Company's integration and
configuration markets using the software the Company has licensed from CASI.
While no operating division or subsidiary of Datatec is currently competing in
the Company's markets, there can be no assurance that Datatec will not decide to
directly compete with the Company in the future. Further, the terms of CASI's
license allow CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. See "Risk
Factors--Conflicts of Interest."
The primary competition for the ACSA Centers will most likely be large
computer manufactures such as IBM Corp. and Compaq Computer, Inc. which provide
custom configuration and automated software configuration for standardized
systems, large distributors such as Ingram Micro Inc., Vanstar Corp., Tech Data
Computer and CompuCom Systems, Inc. in the systems integration and network
services market, network software and equipment providers such as Cisco Systems
Inc. that sell networking hardware and offer automated software configuration to
ensure compatibility between networks and hardware, and the
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internal departments within the target markets currently performing hardware
and/or software configuration, and consulting and integration companies which
offer manual software configuration services. There are also retail chains such
as Comp USA and MicroAge that offer configuration and distribution services.
These competitors currently offer configuration services primarily for
STANDARDIZED solutions, based upon generic configurations for limited numbers of
products. While some of these competitors offer the high level of customization
available from a ACSA Center, they do so at high hourly rates. Although no
assurance can be given, the Company believes that leveraging its manufacturing
process and licensed proprietary software will enable it to offer increased
variety and customization with significant improvements in response times at
prices below these competitors standardized solutions. There can be no assurance
that the Company will be able to compete successfully against existing
competitors or future entrants into the market. See "Risk Factors--Competition."
EMPLOYEES
As of January 31, 1998, the Company had 23 full time employees. At that
time, the Company employed eight sales, two technical support, five
administrative and finance, three customer service and four warehousing and
delivery related personnel. The Company does not have any unionized employees
and believes its relationship with its employees is satisfactory.
The Company's expansion may significantly strain the Company's management,
financial and other resources. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company's operating results.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurances that the
Company will be successful in retaining or recruiting key personnel. See "Risk
Factors--Management of Growth."
FACILITIES
The Company's corporate headquarters is located in Industry, California.
Until March 23, 1998 the Company was headquartered in a leased facility of
approximately 6,200 square feet of office and warehousing space, which lease
expires on April 30, 1998.
The Company has entered into a lease for approximately 21,900 square feet of
office and warehouse space, located in Industry. The Company began to move its
operations into its new premises on February 1, 1998 and completed the move on
March 23, 1998. The Company believes the increased space will more adequately
meet the Company's current needs. The Company believes that if needed,
additional office space will be available on acceptable terms in the future.
The Company intends to use approximately $300,000 of the net proceeds from
the Offering to complete construction of and to equip its first ACSA Center at
this facility. It is expected that the construction will require a substantial
time commitment of certain members of management. The Company expects to
complete the first ACSA Center in mid-1998. Any delays in completion of the
first ACSA Center could result in delays in the commencement of sales of
assembly and custom software configuration services. There can be no assurance
that the Company will be able to complete the ACSA Center at the budgeted price.
Additionally, there can be no assurance that the ACSA Center will be available
on time or that the Company will be successful in timely hiring and training
engineers and technicians necessary to commence operations of the ACSA Center.
Any such delays would have a material adverse effect upon the Company's
business, operating results and financial condition. See "Risk
Factors--Construction of First ACSA Center."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company, their ages and present
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------------------------ --- ---------------------------------
<S> <C> <C>
Max Toghraie.......................................... 35 Chief Executive Officer, Director
James Ung............................................. 36 President, Director
Mei Yang.............................................. 35 Secretary, Treasurer, Director
Carl L. Wood.......................................... 45 Chief Financial Officer
David Tobey........................................... 37 Director
Nancy Hundt........................................... 29 Director
Philip J. Alford...................................... 44 Director
</TABLE>
- --------------------------
MAX TOGHRAIE, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Toghraie has served
as the Chief Executive Officer of the Company since September 1997, and as a
director since April 1997. He has also served as a consultant to the Company
since its inception in April of 1996. Mr. Toghraie served as a trading group
manager for D'Argent Inc., an international trading company from 1992 through
December 1996. During the past 5 years, he has been involved with various
privately held development stage companies as a director and/or a consultant.
Mr. Toghraie is a member of the Audit Committee of the Board of Directors.
JAMES UNG, PRESIDENT AND DIRECTOR. Mr. Ung is a co-founder of the Company
and has served as its President since April 1997 and as a director since the
Company's inception in April of 1996. From February 1992 until joining the
Company, Mr. Ung was Director of Operations of American Systec Corporation, a
privately held systems distribution and configuration company in Brea,
California. From 1989 to 1992, Mr. Ung served as Vice President of Marketing at
PC Systems Design, a California based systems integration and distribution
company. James Ung is married to Mei Yang.
MEI YANG, SECRETARY, TREASURER AND DIRECTOR. Ms. Yang has served as a
director of the Company since its inception in April of 1996. Ms. Yang has
served as Secretary and Treasurer of the Company since March 1997. From 1990 to
1996, Ms. Yang was the Chief Operating Officer of American Systec Corporation.
At American Systec Corporation, she was responsible for the accounting
department and the development of the domestic sales and marketing
infrastructure. Ms. Yang was the accounting manager at the Business Integration
Group from 1987 to 1990. Mei Yang is married to James Ung.
CARL L. WOOD, CHIEF FINANCIAL OFFICER. Mr. Wood has served as the Chief
Financial Officer since February 6, 1998. From September 1996 to June 1997, Mr.
Wood served as Corporate Controller and Director of Management Information
Systems at Murad, Inc. in El Segundo, California, a cosmetic retail business
specializing in high-end skin care products. From 1989 to September 1996, Mr.
Wood was Corporate Controller and Vice President, Finance, and subsequently the
Chief Financial Officer of 99 Cents Only Stores in Los Angeles, California, a
deep discount retailer of general merchandise, which is listed on the New York
Stock Exchange.
DAVID TOBEY, DIRECTOR. Mr. Tobey has served as a director of the Company
since July 1997. Mr. Tobey was the founder and served as President and CEO of
CASI from February 1995 to March 9, 1998 and was a significant stockholder of
CASI, a subsidiary of Datatec Systems, Inc. ("Datatec") (formerly known as
Glasgal Communications, Inc.), a Nasdaq traded company. CASI is a supplier of
configuration management software for system deployment and customization. On
March 9, 1998, Mr. Tobey sold his entire equity interest in CASI to Datatec. He
also founded and served as the Executive Director of the Integrating Technology
Consortium, an integration standards, certification, and education organization
focused on the hospitality industry from June 1994 to October 1997. Prior to
founding CASI in February 1995, Mr. Tobey was the Senior Vice President of
Corporate Services from April 1993 to April 1995 for Hotel Information Systems
where he was responsible for articulating and managing the development of
strategic initiatives and corporate operations in marketing, product
development, and professional services. From September 1986 to April 1993, Mr.
Tobey was the founder and served as Chairman/CEO of
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Stratcon, a systems integration company in the legal market and later as CTO of
Automation Partners, into which Stratcon merged in 1990. Mr. Tobey has also
consulted with numerous technology and service companies and is a frequent
speaker at international conferences on technology and management topics.
NANCY HUNDT, DIRECTOR. Ms. Hundt has served as a director of the Company
since its inception in April of 1996. Ms. Hundt is a co-founder of the Company.
She has a background in the optical industry and has served as a representative
of the American Board of Opticianery, an optical industry retail group. Ms.
Hundt acts as a consultant to the optical industry and has served over the last
five years as Chief Operating Officer of Academy Optical, Inc. Ms. Hundt is a
member of the Audit Committee of the Board of Directors.
PHILIP J. ALFORD, DIRECTOR. Mr. Alford has served as a director of the
Company since February, 1998. Mr. Alford is the co-founder and Chairman and
acting Chief Financial Officer of Verix Software, a position he has held since
July, 1997. Prior to joining Verix Software, a business software developer, Mr.
Alford was employed by Tekelec, a publicly traded company, from 1985 to December
1996, where he served primarily as its Chief Financial Officer and from 1994 to
1996 as its President, Chief Executive Officer and Director. Tekelec is a
supplier of diagnostic and switching systems to the communications industry.
After leaving Tekelec, Mr. Alford served as an independent management
consultant. Mr. Alford is a member of the Audit Committee of the Board of
Directors.
INDEPENDENT DIRECTORS
Directors are elected for one year terms which expire at the next annual
meeting of Shareholders. Officers are elected annually by the Board of Directors
to hold office until the first meeting of the Board following the next annual
meeting of shareholders and until their successors have been elected and
qualified. If, following consummation of the Offering the Company's has shares
listed on the New York Stock Exchange or the American Stock Exchange or
designated for trading as national market securities on The Nasdaq National
Market System, the Company's Bylaws provide that the Board of Directors will be
divided into two classes, Class 1 and Class 2, Class 1 to be comprised of three
directors, and Class 2 to be comprised of four directors. If the Board of
Directors is divided into two classes, at each annual meeting of shareholders,
successors of the class of directors whose term expires at that annual meeting
would be elected for a two-year term or until their successors have been elected
and qualified.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal year
ended March 31, 1997, to the Company's former President and Vice President of
Operations. No other officer, director, or employee earned more than $100,000
for the fiscal year ended March 31, 1997. The Company operated without a Chief
Executive Officer in the fiscal year ended March 31, 1997. In September 1997,
the Company hired Max Toghraie to serve as Chief Executive Officer at an annual
salary of $192,000. See "--Employment Agreements."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
------------------------------------------------------------
ANNUAL COMPENSATION
FISCAL YEAR ---------------------------------------------
ENDED OTHER ANNUAL
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------------------- ------------- --------- ----------- ---------------------
<S> <C> <C> <C> <C>
Tommy Tang(2), President........................................ 1997 $ 132,000 $ 0 $ 0
Sherry Haynes(3), Vice President-Operations..................... 1997 $ 70,000 $ 0 $ 0
</TABLE>
- --------------------------
(1) The named executive officers did not receive any annual compensation not
properly categorized as salary or bonus, including stock options, restricted
stock awards, stock appreciation rights, long term incentive plan payouts,
or any perquisites or other personal benefits, securities or property that
exceeded the lesser of $50,000 or 10% of the salary and bonus for such
officer during the fiscal year ended March 31, 1997.
(2) Mr. Tang resigned from the Company in May 1997 and his position was assumed
by Mr. Ung, who is being compensated at a rate of $192,000 per annum. See
"--Employment Agreements"
(3) Ms. Haynes resigned from the Company in June 1997 and her duties were
assumed by Mei Yang, who is being compensated at a rate of $72,000 per
annum. See "--Employment Agreements."
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<PAGE>
BOARD COMMITTEES
AUDIT COMMITTEE. Mr. Toghraie, Ms. Hundt and Mr. Alford are members of the
Audit Committee of the Board of Directors. The Audit Committee's functions
include recommending to the Board of Directors the engagement of the Company's
independent certified public accountants, reviewing with those accountants the
plan and results of their audit of the financial statements and determining the
independence of the accountants.
COMPENSATION. Following the Offering, the Company's Board of Directors
intends to establish a Compensation Committee. The Compensation Committee will
review and make recommendations with respect to compensation of officers and key
employees, and will be responsible for the grant of options and other awards
under the Company's Stock Option Plan. The current executive's salaries were set
by the Board. See "--Stock Option Plan."
DIRECTOR COMPENSATION
Nonemployee directors of the Company currently are paid $500 for their
personal attendance at any meeting of the Board and $100 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Max Toghraie to
serve as Chief Executive Officer. The agreement is for an initial term of five
years commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Mr.
Toghraie is entitled to an annual base salary of $192,000 and has been issued
options to to purchase 126,046 shares of the Company's Common Stock at $2.70 per
share pursuant to the Company's Stock Option Plan. The Company will also provide
Mr. Toghraie with other customary benefits, including health, life and
disability insurance, an automobile allowance and reimbursement for ordinary
business expenses. If Mr. Toghraie's employment is terminated "without cause,"
all of his options immediately vest, and he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement, and 24 months.
The Company has entered into an employment agreement with James Ung to serve
as President. The agreement is for an initial term of five years commencing July
1, 1997 and will automatically be extended for consecutive periods of one year
unless the Company elects to terminate the agreement. Mr. Ung's base salary from
July 1, 1997 until September 30, 1997 was $144,000 per annum, and effective
September 30, 1997 increased to $192,000. Mr. Ung has been issued options to
purchase 98,645 shares of the Company's Common Stock at $2.70 per share pursuant
to the Company's Stock Option Plan. The Company will also provide Mr. Ung
customary benefits, including health, life and disability insurance, an
automobile allowance and reimbursement for ordinary business expenses. If Mr.
Ung's employment is terminated "without cause" he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement and six (6) months.
The Company has entered into an employment agreement with Mei Yang to serve
as Secretary and Treasurer. The agreement is for an initial term of five years
commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Ms.
Yang's base salary from June 1, 1997 until September 30, 1997 was $40,000 per
annum, and, effective September 30, 1997 increased to $72,000. Ms. Yang has been
issued options to purchase 27,404 shares of the Company's Common Stock at $2.70
per share pursuant to the Company's Stock Option Plan. The Company will also
provide Ms. Yang customary benefits, including health, life and disability
insurance, an automobile allowance and reimbursement for ordinary business
expenses.
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STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Stock Option Plan") in
July 1997. Each officer, other employee, director or consultant of the Company
or any of its future subsidiaries is eligible to be considered for the grant of
awards under the Stock Option Plan. A maximum of 500,000 shares of Common Stock
may be issued pursuant to awards granted under the Stock Option Plan, subject to
certain adjustments to prevent dilution. Any shares of Common Stock subject to
an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Option Plan. The Stock Option Plan
terminates in 2007 and no option may be granted under the Stock Option Plan
after July 1, 2007, although options previously granted may be thereafter
amended consistent with the Stock Option Plan.
ADMINISTRATION. The Stock Option Plan will be administered by the Company's
Board of Directors or by a committee whose members serve at the pleasure of the
Board. The Board intends to appoint the Company's Compensation Committee to
administer the Plan after the Offering. Subject to the provisions of the Stock
Option Plan, the Board has full and final authority to select to whom awards
will be granted, to grant the awards and to determine the terms and conditions
of the awards and the number of shares to be issued pursuant thereto.
The Stock Option Plan authorizes the Board to enter into any type of
arrangement with an eligible award and recipient that, by its terms, involves or
might involve the issuance of (i) shares of Common Stock, (ii) an option,
warrant, convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(iii) any similar security or benefit with a value derived from the value of the
Common Stock. No person may receive awards representing more than 40% of the
number of shares of Common Stock covered by the Stock Option Plan (i.e., 200,000
shares).
EXERCISE AND PAYMENT. The Board shall determine the extent to which awards
shall be payable in cash, shares of Common Stock or any combination thereof. The
exercise price of future options will be at least 85% of the fair market value
of the Common Stock on the date of grant.
AWARDS. Stock awards under the Stock Option Plan are not restricted to any
specified form or structure and may include arrangements such as sales, bonuses
and other transfers of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock for
any lawful consideration, including cash payment, services rendered, or the
cancellation of indebtedness.
The Board may amend or terminate the Stock Option Plan at any time and in
any manner, subject to the following: (i) no recipient of any award may, without
his or her consent, be deprived of the award or of any of his or her rights
under or relating to the award as a result of the amendment or termination; and
(ii) if any rule or regulation promulgated by the Securities and Exchange
Commission (the "Commission"), the Internal Revenue Service, other applicable
law, or any national securities exchange or quotation system upon which any of
the Company's securities are listed requires that the amendment be approved by
the Company's shareholders, then the amendment will not be effective until it
has been approved by the Company's shareholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation, as amended, (the "Articles")
include a provision that eliminates the personal liability of its directors to
the Company and its shareholders for monetary damages to the fullest extent
permissible under California law. This limitation has no effect on a director's
liability
39
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(i) for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derives an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Corporations Code (the
"California Code") (concerning contracts or transactions between the Company and
a director) or (vii) under Section 316 of the California Code (concerning
directors' liability for improper dividends, loans and guarantees). The
provision does not extend to acts or omissions of a director in his capacity as
an officer. Further, the provision will not affect the availability of
injunctions and other equitable remedies available to the Company's shareholders
for any violation of a director's fiduciary duty to the Company or its
shareholders.
The Company's Articles also include an authorization for the Company to
indemnify its agents (as defined in Section 317 of the California Code), through
bylaw provisions, by agreement or otherwise, to the fullest extent permitted by
law. Pursuant to this provision, the Company's Bylaws, as amended, provide for
indemnification of the Company's directors, officers, employees and other
agents. In addition, the Company, at its discretion, may indemnify persons whom
the Company is not obligated to indemnify. The Bylaws also allow the Company to
enter into indemnity agreements with individual directors, officers, employees
and other agents. The Company has entered into indemnification agreements
designed to provide the maximum indemnification permitted by law with all the
directors and executive officers of the Company. These agreements, together with
the Company's Bylaws and Articles, may require the Company, among other things,
to indemnify these directors and executive officers against certain liabilities
that may arise by reason of their status or service as directors or executive
officers (other than liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification, and to obtain directors' and
officers' insurance if available on reasonable terms. The Company intends to
purchase and maintain directors' and officers' liability insurance.
Section 317 of the California Code, the Company's Bylaws and the Company's
indemnification agreements with its directors and executive officers make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify those persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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CERTAIN TRANSACTIONS
Until March 9, 1998 David Tobey, a director of the Company, was the founder,
and the President, Chief Executive Officer and a principal stockholder of CASI.
CASI is a subsidiary of Datatec Systems, Inc. ("Datatec"), formerly known as
Glasgal Communications, Inc. On March 9, 1998, Mr. Tobey resigned all positions
with CASI and Datatec and sold his entire equity interest in CASI to Datatec.
Although the Company believes that Mr. Tobey's departure from CASI and Datatec
will have no adverse effect on the Company's relationship with CASI and Datatec,
there can be no assurance that Mr. Tobey's resignation will not adversely effect
the Company's working relationship with CASI and Datatec. During his employment
at CASI and Datatec during which Mr. Tobey was a principal stockholder of CASI,
the Company and CASI entered into (i) a license agreement (the "CASI License")
pursuant to which the Company received a worldwide, perpetual, royalty-free,
nonexclusive (except as to the countries comprising South America (excluding
Central America) and Malaysia where the license is exclusive for a term of five
years) and non-transferable license to reproduce and use CASI's IWPS software
including CASI's Configurator and router software products, and (ii) a reseller
agreement (the "Reseller Agreement") pursuant to which the Company may market,
distribute and support CASI's products throughout the world. The Company paid
CASI a one-time license fee of $1,100,000. The license fee was paid (i) by
delivering to CASI a non-interest bearing promissory note in the principal
amount of $950,000 (the "CASI Note"), and (ii) a cash payment of $150,000 funded
by a loan to the Company in such amount by an officer of Datatec (the "Datatec
Loan") described below. In connection with its license of the Configurator
software from CASI, the Company issued to CASI a contingent warrant (the "CASI
Warrant") exercisable if the Company defaults on payment of the $950,000
principal amount due under the CASI Note. Under the CASI Note, CASI's sole
remedy for a payment default is to apply any amount then due and unpaid under
the CASI Note to the purchase of the Company's Common Stock at a price of $4.50
per share. The CASI Note bears default interest at a rate of 5% per annum. The
exercise price of the CASI Warrant was determined by negotiation between the
Company and CASI and should not be construed to be predictive of or to imply
that any price increases in the Company's securities will occur. The CASI
Warrant does not confer upon the Warrant holder any voting or other rights of a
shareholder of the Company. The Company will fully repay the Datatec Loan and
the CASI Note, out of the proceeds of this Offering. Upon delivery to CASI of
the CASI Note, the CASI License was fully paid and the Company has no further
license fee obligations. Under the CASI License, the Company is entitled to
receive maintenance for the Configurator software for a fee of $25,000 per
annum, payable in equal quarterly installments. Maintenance is limited to
debugging and delivery to the Company of any enhancements or upgrades to the
Configurator software used internally by CASI or released by CASI to its
customer base. The Company is also entitled to request that CASI provide
enhancements and additional features on CASI's licensed Configurator system
specified by the Company. CASI may develop such enhancements and features at
CASI's expense and incorporate them as part of CASI's generally released
Configurator software, or, if CASI declines to develop the enhancements and
features at its own expense, the Company is able to require CASI to perform such
development services at preferential rates and any resulting work product of
CASI will be owned by the Company. If CASI ceases to provide support or
enhancements or otherwise fails to perform its obligations to the Company, the
Company's remedies include access to CASI's source code for the Configurator
software. The Company's license to the Configurator software includes a license
to modify and maintain the source code from and after such time, if any, as the
Company receives access to the Configurator software source code. See "Risk
Factors--Conflicts of Interests."
In connection with the Datatec Loan, the Company executed a promissory note
(the "Datatec Note") in favor of the officer of Datatec who made the Datatec
Loan. The Datatec Note provides that the Company is obligated to pay $50,000 on
November 31, 1997 and $100,000 on February 28, 1998; provided, however, that if
the Company consummates an initial public offering (an "IPO") of its securities
pursuant to a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, $100,000 of the proceeds of such
IPO shall be immediately applied to prepayment of the $100,000 due to be paid on
February 28, 1998. The Datatec Note bears interest at a rate of 10% per annum,
and
41
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accrued interest is due with the payments indicated above. In the event that the
Company completes an IPO prior to February 28, 1998 and fails to pay the Datatec
Note in full by that date, or, the Datatec Note is not paid in full on or prior
to February 28, 1998, in any event, the Datatec Note shall be converted into
such number of shares of Common Stock of the Company as shall equal the
principal amount then outstanding plus accrued interest divided by a fraction,
the numerator of which shall equal the greater of $20,000,000 or the fair market
value of the Company, and the denominator of which shall be the number of shares
of Common Stock of the Company outstanding immediately prior to such conversion.
Under the Reseller Agreement, the Company has an exclusive right for a
period of five years to resell CASI's licensed software in South America
(excluding Central America) and Malaysia and a non-exclusive worldwide right (i)
to market, distribute, license and support the CASI's Configurator software in
object-code form, and (ii) to use CASI's Configurator software to provide
services to the Company's customers and sublicensees. CASI has agreed that it
will not enter into any agreement with a third party which provides for the
right to license or resell the CASI's Configurator software products in the
countries comprising Asia, the Pacific Rim, Japan or Australia without allowing
the Company a first right of refusal to create an agreement with such third
party as a distributor and/or sub-licensee and/or first offering the Company the
right to license or resell on terms and conditions, including price, equivalent
to those contained in the proposed third party agreement. CASI has retained the
right to use its software in Malaysia and South America only for CASI's own
configuration centers.
The Company loaned approximately $40,000 aggregate principal amount to Mr.
Max Toghraie, the Chief Executive Officer of the Company and a director, in
exchange for a promissory note dated February 12, 1997, at a rate of 5.7% per
annum. The loan was fully repaid on June 16, 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,300 from Samax, a company owned by the mother of
Mr. Max Toghraie. For the nine month period ended December 31, 1997, the Company
had sales of approximately $1.39 million to and purchases of approximately
$598,200 from Samax. At December 31, 1997, the Company had approximately
$146,500 and $0 included in trade receivables and accounts payable,
respectively, attributed to Samax. Although the Company is not currently making
purchases from or sales to Samax, if the Company determines that resuming
purchases from or sales to Samax in the future would be in the best interests of
the Company, any such future transactions would be negotiated on an arms-length
basis and on terms and conditions at least as favorable to the Company as those
which would be obtained from competitors of Samax.
The Company purchased 200,000 shares and 100,000 warrants in Evolutions,
Inc. ("Evolutions") for $100,000 which, at March 31, 1997, was personally
guaranteed by Max Toghraie. This guarantee was recorded as a receivable from a
director, Max Toghraie. Subsequent to June 13, 1997, the Board of Directors and
shareholders voted to release Max Toghraie from this guarantee as partial
inducement for Max Toghraie to accept additional management responsibilities at
the Company, including agreeing to become the chief executive officer. The
Company has determined, due to significant cash flow difficulties encountered by
Evolutions, that its investment is worthless. Accordingly, the Company has
recognized a one-time loss of $100,000 during the first quarter of 1997 which is
included in selling, general and administrative expenses.
In June 1997, Mr. James Ung and Ms. Mei Yang signed individual guarantees of
the Company's Finova Line.
On December 3, 1997, the Company executed a lease for approximately 21,900
square feet of office and warehouse space in Industry, California. The lease
term is three years, and the base rent is $11,169 per month. On December 3,
1997, James Ung and Mei Yang signed an individual guarantee (the "Guarantee") of
the Company's obligations under the lease, which Guarantee shall terminate upon
the earlier occurrence of (i) the date upon which the Company's net worth
exceeds 50% of the Company's net worth on the date of the Guarantee or (ii) the
date the Company becomes a public company.
42
<PAGE>
The Company believes that, with the exception of the determination to
release Mr. Toghraie from his guarantee, the transactions described above were
on terms no less favorable to the Company than could have been obtained in arm's
length transactions from unaffiliated third parties. All future transactions
between the Company and its officers, directors and 5% (or greater) shareholders
will be on terms no less favorable than could be obtained from unaffiliated
third parties and will be approved by a majority of the disinterested directors.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 1, 1998, certain information
concerning the beneficial ownership of Common Stock, by (i) each stockholder
known by the Company to own beneficially five percent or more of the outstanding
Common Stock, (ii) each director, (iii) each executive officer named in this
Prospectus (a "Named Executive Officer"), and (iv) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------
PERCENT OF TOTAL
------------------------
NAME AND ADDRESS OF DIRECTORS, NAMED BEFORE AFTER
EXECUTIVE OFFICERS AND 5% SHAREHOLDERS NUMBER OFFERING OFFERING
- ---------------------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Max Toghraie(2) .................................................................. 49,237 1.03% *
2062 Sapra St.
Thousand Oaks, CA 91362
James Ung and Mei Yang(3) ........................................................ 2,241,355 46.70% 31.35%
2010 E. Roundtree Court
Walnut, CA 91789
Nancy Hundt(4) ................................................................... 2,194,152 46.17% 30.89%
450 Belcaro
Agoura, CA 91301
Carl Wood(5) ..................................................................... 0 * *
1105 Harkness Lane
Redondo Beach, CA 90278
Philip Alford(6) ................................................................. 0 * *
746 West Adams Blvd Suite 109
Los Angeles, CA 90089
David Tobey(7) ................................................................... 5,994 * *
1545 Shadowtree Ct.
Colorado Springs, CO 80921
All Executive Officers and Directors as a group (7 persons)(8).................... 4,490,738 92.47% 62.32%
</TABLE>
- --------------------------
* less than one (1) percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days. Except as otherwise
noted, each individual or entity has sole voting and investment power over
the securities listed.
(2) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
February 1, 1998.
(3) Mr. Ung and Ms. Yang are married. Includes 38,533 shares issuable upon the
exercise of options granted under the Stock Option Plan to Mr. Ung on July
1, 1997 exercisable at $2.70 per share within 60 days of February 1, 1998,
and 10,704 shares issuable upon the exercise of options granted under the
Stock Option Plan to Ms. Yang on July 1, 1997 exercisable at $2.70 per share
within 60 days of February 1, 1998, 1,096,059 shares owned by Mr. Ung, and
1,096,059 shares owned by Ms. Yang.
(4) Includes 2,034 shares issuable upon the exercise of options granted under
the Stock Option Plan on July 1, 1997 exercisable at $2.70 per share within
60 days of February 1, 1998.
(5) Mr. Wood was granted options to purchase 40,000 shares of Common Stock under
the Stock Option Plan on February 6, 1998, exercisable at $4.50 per share,
none of which were exercisable within 60 days of February 1, 1998.
(6) Mr. Alford was granted options to purchase 36,000 shares under the Stock
Option Plan on February 2, 1998, exercisable at $4.50 per share, none of
which were exercisable within 60 days of February 1, 1998.
(7) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
February 1, 1998.
(8) Includes an aggregate of 106,502 shares issuable upon the exercise of
options granted under the Stock Option Plan on July 1, 1997 exercisable at
$2.70 per share within 60 days of February 1, 1998.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
without par value, and 2,000,000 shares of Preferred Stock, without par value.
At February 2, 1998, the Company had 27 holders of record of the Common Stock.
The following statements are brief summaries of certain provisions relating to
the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to vote
and have cumulative voting rights for the election of directors. The Articles of
Incorporation of the Company provide that at such time as the Company has (i)
shares listed on the New York Stock Exchange or the American Stock Exchange, or
(ii) securities designated for trading as a national market security on the
National Association of Securities Dealers Automatic Quotation System (or any
successor national market system) if the Company has at least 800 or more
holders of its Common Stock as of the record date of the Company's most recent
annual meeting of shareholders, the cumulative voting rights of shareholders
will cease. The holders of Common Stock are entitled to receive dividends
ratably when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled, subject to the rights of
holders of Preferred Stock issued by the Company, if any, to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision is made for each class of stock, if any, having
preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the shares of Common Stock issuable
pursuant to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
BRIDGE WARRANTS
On December 23, 1997, the Company completed the Bridge Financing, which
included the sale of an aggregate of 100,000 Bridge Warrants for the purchase of
one share of Common Stock per warrant at an exercise price of $3.00 per share.
The Bridge Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock. The exercise price of the Bridge Warrants
was arbitrarily determined by the Company and the purchasers thereof and should
not be construed to be predictive of or to imply that any price increases in the
Company's securities will occur. The Bridge Warrants do not confer upon the
Bridge Warrant holder any voting or other rights of a shareholder of the
Company. See "Risk Factors--Repayment of Indebtedness" and "--Potential Benefit
to Certain Investors."
45
<PAGE>
REGISTRATION RIGHTS
The 300,000 shares of Common Stock issued in the Bridge Financing and the
100,000 shares of Common Stock issuable upon exercise of the Bridge Warrants are
entitled to demand registration rights on one occasion, at the expense of the
Company, as well as "piggyback" registration rights with respect to any
registration of equity securities of the Company for a period of five (5) years,
commencing November 26, 1998 (unless the Company files a Form S-8, S-4 or
comparable registration statement).
TRANSFER AGENT AND REGISTRATION
Continental Stock Transfer and Trust Company, New York, New York, is the
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering the Company will have outstanding 7,100,000
shares of Common Stock (7,452,500 if the Underwriters' over allotment option is
exercised in full) not including shares issuable upon exercise of outstanding
options and warrants. Of such shares 4,750,000 are subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act. In
general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated), with respect to restricted securities that satisfy a
one-year holding period, may sell within any three-month period a number of
restricted shares which does not exceed the greater of 1% of the then
outstanding shares of such class of securities or the average weekly trading
volume during the four calendar weeks prior to such sale. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
the availability of current public information about the Company. Rule 144 also
permits, under certain circumstances, a person who is not an affiliate of the
Company, to sell restricted securities that satisfy a two-year holding period,
without regard to the volume or other resale limitations. The above is a brief
summary of Rule 144 and is not intended to be a complete description of the
Rule.
The "restricted" shares of Common Stock may in the future be eligible for
sale pursuant to Rule 144. Under lock-up agreements with Joseph Stevens, each
existing shareholder has agreed that he or it will not, directly or indirectly,
sell, assign or otherwise transfer any shares of Common Stock owned by it for a
period of (a) in the case of management and founding shareholders of the Company
who collectively hold 4,450,000 shares of Common Stock, a period of 18 months
after the effective date of the Registration Statement of which this Prospectus
is a part (the "Management Lock-Up Period") except with Joseph Stevens' prior
written consent, and (b) in the case of the holders of 300,000 shares of Common
Stock issued in the Company's Bridge Financing, a period of 12 months after the
effective date of the Registration Statement of which this Prospectus is a part,
and thereafter for an additional six (6) months, without the written consent of
Joseph Stevens (the "Bridge Holder Lock-Up Period"); provided, however, that (i)
the Management Lock-Up Period shall immediately terminate if the Common Stock is
quoted on The Nasdaq SmallCap Market or The Nasdaq National Market and the
average closing bid price of the Common Stock equals or exceeds $10.00 per share
(subject to customary adjustments for stock splits, combinations, consolidations
and similar transactions) for any 30 consecutive calendar days, and (ii) that,
for twenty-four (24) months following the effective date of the Registration
Statement any sales of the Company's securities subject to the lock-up
agreements shall be made through Joseph Stevens in accordance with its customary
brokerage practices either on a principal or agency basis. Once the lock-up
agreements expire, all of the 4,750,000 shares of Common Stock will become
eligible for immediate sale, subject to compliance with the volume limitations
of Rule 144 by the holders of these shares.
46
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") for whom Joseph Stevens &
Company, Inc. is acting as the Representative (the "Representative") have
entered into an Underwriting Agreement with the Company pursuant to which, and
subject to the terms and conditions thereof, they have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, on a firm commitment basis, the number of shares of Common Stock
set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- -------------------------------------------------------------------------------------- -----------------
<S> <C>
Joseph Stevens & Company, Inc......................................................... 1,665,000
Royce Investment Group, Inc........................................................... 685,000
</TABLE>
The Company has been advised by the Representative that the Underwriters
initially propose to offer the Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and that the Underwriters
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $.15 per share of
Common Stock, of which amount a sum not in excess of $.05 per share of Common
Stock may in turn be reallowed by such dealers to other dealers. After the
initial distribution of the shares of Common Stock offered hereby has been
completed, the public offering price, concessions and reallowances may be
changed by the Representative. The Representative has informed the Company that
it does not expect sales to discretionary accounts by the Underwriters to exceed
five percent of the securities offered by the Company hereby.
The Company has granted to Underwriters an option, exercisable within 45
days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 352,500 shares of Common Stock on the
same terms and conditions of this Offering for the sole purpose of covering
over-allotments, if any (the "Over-Allotment Option"). To the extent such option
is exercised in whole or in part, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase the number of the additional shares
of Common Stock proportionate to its initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Common
Stock underwritten, $30,000 of which has been paid to date.
In connection with this offering, the Underwriters and certain selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this Offering than
it is committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 352,500 shares of Common Stock, by
exercising the Over-Allotment Option. In addition, the Underwriters may impose
"penalty bids" under contractual arrangements whereby it may reclaim from a
dealer participating in this Offering for the account of the Underwriters, the
selling concession with respect to shares of Common Stock that are distributed
in this Offering but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the prices of the Common Stock at levels above that
which might otherwise prevail in the open market. None of the transactions
described in the paragraph is required, and if they are undertaken, they may be
discontinued at any time.
Each officer and director of the Company and all of the holders of the
issued and outstanding shares of Common Stock, other than the investors in the
Bridge Financing, have agreed (i) not to directly or indirectly, issue, offer to
sell, sell, grant an option for the sale of transfer, pledge, assign,
hypothecate, or otherwise
47
<PAGE>
encumber or dispose of (collectively, "Transfer"), any securities issued by the
Company, including shares of Common Stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for any shares of Common Stock for a period of eighteen (18) months from the
effective date of the Registration Statement (the Lock-Up Period), without the
prior written consent of Joseph Stevens provided, however, that the Lock-Up
Period shall immediately terminate if the Common Stock is quoted on The Nasdaq
SmallCap Market or The Nasdaq National Market and the average closing bid price
of the Common Stock equals or exceeds $10.00 per share (subject to customary
adjustments for stocksplits, combinations, consolidations and similar
transactions) for any 30 consecutive calendar days, and (ii) that, for
twenty-four (24) months following the effective date of the Registration
Statement any sales of the Company's securities shall be made through Joseph
Stevens in accordance with its customary brokerage practices either on a
principal or agency basis. An appropriate legend shall be marked on the face of
certificates representing all such securities.
Each purchaser in the Bridge Financing has agreed (i) not to Transfer any
securities purchased by the investor in the Bridge Financing for a period of
twelve (12) months from the effective date of the Registration Statement and
thereafter for an additional period of six (6) months, without the consent of
Joseph Stevens, and (ii) that, for a period of twenty-four (24) months following
the effective date of the Registration Statement, any sales of the securities
purchased in the Bridge Financing shall be made through Joseph Stevens in
accordance with its customary brokerage practices either on a principal or
agency basis. An appropriate legend shall be marked on the face of the
certificates representing all such securities.
In connection with this Offering, the company has agreed to issue and sell
to the Representative
and/or its designees, at the closing of the proposed underwriting, for $23.50,
five (5) year Representative's Warrants (the "Representative's Warrants") to
purchase 235,000 shares of Common Stock. The Representative's Warrants are
exercisable at any time during a period of four (4) years commencing twelve
months after the effective date of the Registration Statement at a price equal
to 165% of the public offering price per share and are restricted from sale,
transfer, assignment or hypothecation for a period of twelve months from the
date hereof, except to officers of the Underwriters. The shares of Common Stock
issuable upon exercise of the Representative's Warrants are identical to those
offered to the public. The Representative's Warrants contain anti-dilution
provisions providing for adjustment of the number of warrants and exercise price
under certain circumstances. The Representative's Warrants grant to the holders
thereof and to the holders of the underlying securities certain rights of
registration of the securities underlying the Representative's Warrants.
In connection with the Bridge Financing, the Company paid to Joseph Stevens,
as placement agent, $100,000 in cash as commissions and a non-accountable
expense allowance of $30,000. The Company also paid certain expenses of the
placement agent including the placement agent's legal counsel fees and issued to
the placement agent warrants (the "Placement Agent's Warrants") to purchase
35,000 shares of Common Stock at an exercise price of $3.00 per share commencing
November 26, 1998. The Placement Agent's Warrants were canceled on March 6, 1998
.
The Company has also agreed that for five (5) years from the effective date
of the Registration Statement, Joseph Stevens may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that Joseph Stevens elects not to exercise the Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five (5) years. The Company has agreed to reimburse
Joseph Stevens' designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings of the Board of Directors. The
Company has also agreed to retain Jospeh Stevens as the Company's financial
consultant for a period of twenty-four (24) months from the date hereof and to
pay Joseph Stevens a monthly retainer of $2,000 all of which is payable in
advance on the closing date set forth in the Underwriting Agreement.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Representative. Among the
factors considered in determining such price, in addition to the prevailing
market conditions, included the history of and the prospects for the industry in
which the Company competes, the market price of the Common Stock, an assessment
of the Company's management, the prospects of the
48
<PAGE>
Company, its capital structure and such other factors that were deemed relevant.
The offering price does not necessarily bear any relationship to the assets,
results of operations or net worth of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each agreement which are filed as exhibits to the Registration Statement. See
"Additional Information."
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock offered
by the Company upon sale will be duly and validly issued, fully paid and
non-assessable. Troop Meisinger Steuber & Pasich, LLP holds warrants to purchase
45,000 shares of Common Stock of the Company. Orrick, Herrington & Sutcliffe
LLP, New York, has acted as counsel to the Underwriters in connection with
certain legal matters relating to this Offering.
EXPERTS
The financial statements of the Company at March 31, 1997 and for the year
then ended, included in this Prospectus and Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits included
with the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by this reference. For further information about
the Company and the shares offered by this Prospectus, reference is hereby made
to the Registration Statement and exhibits included with the Registration
Statement. A copy of the Registration Statement, including exhibits, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N .W. Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file reports and other information with the Securities, and Exchange Commission
in accordance with its rules. These reports and other information concerning the
Company may be inspected and copied at the public reference facilities referred
to above as well as certain regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, 13th Floor, New York, New York,
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661-2511.
The Securities and Exchange Commission also maintains a Web Site which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission (such as the Company) at http:\\www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited consolidated financial statements for each of the first
three quarters of each fiscal year.
49
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of March 31, 1997 and December 31, 1997 (unaudited)...................................... F-3
Statements of Operations for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 1996 and 1997 (unaudited)..................................................... F-4
Statements of Changes in Shareholders' equity for the period from April 2, 1996 (inception) to March 31,
1997 and the nine month period ended December 31, 1997 (unaudited)....................................... F-5
Statements of Cash Flows for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 1996 and 1997 (unaudited)..................................................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix Data Systems Corp.:
We have audited the accompanying balance sheet of Cumetrix Data Systems
Corp. (a California corporation--formerly Data Net International, Inc.) as of
March 31, 1997, and the related statements of operations, shareholders' equity
and cash flows for the period from April 2, 1996 (inception) to March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cumetrix Data Systems Corp.
as of March 31, 1997 and the results of its operations and its cash flows for
the period from April 2, 1996 (inception) to March 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 13, 1997
F-2
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, -------------
ASSETS 1997
----------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 479,796 $ 2,962,821
Trade receivables, net of allowance for doubtful accounts of $2,000 at March 31,
1997 and $39,800 at December 31, 1997............................................. 853,090 3,081,217
Receivables from related party...................................................... 39,700 --
Inventories......................................................................... 331,559 2,723,275
Deferred taxes...................................................................... 12,000 53,788
Prepaid expenses.................................................................... 5,318 24,148
----------- -------------
Total current assets............................................................ 1,721,463 8,845,249
----------- -------------
FIXED ASSETS, net 32,278 38,115
----------- -------------
OTHER ASSETS:
Capitalized purchased software costs................................................ -- 1,100,000
Receivable from director............................................................ 100,000 --
Other............................................................................... 1,500 288,850
----------- -------------
Total Assets.................................................................... $ 1,855,241 $10,272,214
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $1,455,139 $6,713,957
Accrued expenses................................................... 87,274 279,924
Income taxes payable............................................... 21,500 415,213
Current portion of long-term debt.................................. 3,390 1,203,626
--------- -----------
Total current liabilities...................................... 1,567,303 8,612,720
--------- -----------
LONG-TERM DEBT, net of current portion............................... 12,574 9,822
--------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 shares
Issued and outstanding, none..................................... -- --
Common stock, no par value: Authorized, 20,000,000 shares
Issued and outstanding, 4,384,236 at March 31, 1997 and 4,750,000
at December 31, 1997............................................. 250,000 999,200
Retained earnings.................................................. 25,364 650,472
--------- -----------
Total shareholders' equity..................................... 275,364 1,649,672
--------- -----------
Total liabilities and shareholders' equity..................... $1,855,241 1$0,272,214
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................................... $ 25,940,203 $ 17,175,071 $ 49,267,491
COST OF PRODUCTS................................................ 25,139,001 16,604,294 47,192,956
----------------- ------------- -------------
Gross profit................................................ 801,202 570,777 2,074,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 751,133 501,923 1,029,504
----------------- ------------- -------------
Income from operations...................................... 50,069 68,854 1,045,031
INTEREST EXPENSE................................................ 9,334 4,500 13,908
OTHER INCOME (EXPENSE), net..................................... (5,871) 10 10,723
----------------- ------------- -------------
Income before provision for income taxes.................... 34,864 64,364 1,041,846
PROVISION FOR INCOME TAXES...................................... 9,500 25,745 416,738
----------------- ------------- -------------
NET INCOME...................................................... $ 25,364 $ 38,619 $ 625,108
----------------- ------------- -------------
----------------- ------------- -------------
BASIC AND DILUTED EARNINGS PER SHARE............................ $ 0.01 $ 0.01 $ 0.14
----------------- ------------- -------------
----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, April 2, 1996 (inception)............................ -- $ -- $ -- $ --
Sale of common stock........................................ 4,384,236 250,000 -- 250,000
Net income.................................................. -- -- 25,364 25,364
---------- ---------- ---------- ------------
Balance, March 31, 1997....................................... 4,384,236 250,000 25,364 275,364
Sale of common stock, net of offering expenses of $150,800
(unaudited)............................................... 365,764 745,500 -- 745,500
Issuance of warrants in connection with Private Placement,
net of offering expenses of $1,300........................ -- 3,700 -- 3,700
Net income (unaudited)...................................... -- -- 625,108 625,108
---------- ---------- ---------- ------------
Balance, December 31, 1997 (unaudited)........................ 4,750,000 $ 999,200 $ 650,472 $ 1,649,672
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE-MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ---------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 25,364 $ 38,619 $ 625,108
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,634 5,528 2,847
Amortization of deferred financing costs.................. -- -- 12,100
Provision for doubtful accounts........................... 50,329 17,000 56,310
Loss on receivable from director.......................... -- -- 100,000
Changes in assets and liabilities:
Trade receivables......................................... (903,419) (790,284) (2,284,437)
Inventories............................................... (331,559) (313,700) (2,391,716)
Deferred taxes............................................ (12,000) (10,000) (41,788)
Prepaid expenses.......................................... (5,318) (5,318) (18,830)
Other..................................................... (1,500) (60,000) (129,250)
Accounts payable.......................................... 1,455,139 1,313,967 5,258,818
Accrued expenses.......................................... 87,274 31,647 22,450
Income taxes payable...................................... 21,500 35,745 393,713
----------------- ------------ -------------
Net cash provided by operating activities............... 392,444 263,204 1,605,325
----------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets....................................... (38,912) (36,192) (8,684)
Purchase of investment guaranteed by director................... (100,000) (100,000) --
Receivables from related parties................................ (39,700) -- 39,700
Purchase of Capitalized Software Costs.......................... -- -- (150,000)
----------------- ------------ -------------
Net cash used in investing activities................... (178,612) (136,192) (118,984)
----------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................................... 18,820 18,820 --
Payments on bank borrowings..................................... (2,856) (2,055) (2,516)
Proceeds from Notes............................................. -- -- 550,000
Payments on Notes............................................... -- -- (300,000)
Proceeds from stock issuance.................................... 250,000 200,000 749,200
----------------- ------------ -------------
Net cash provided by financing activities............... 265,964 216,765 996,684
----------------- ------------ -------------
NET INCREASE IN CASH.............................................. 479,796 343,777 2,483,025
CASH, beginning of period......................................... -- -- 479,796
----------------- ------------ -------------
CASH, end of period............................................... $ 479,796 $ 343,777 $ 2,962,821
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(INFORMATION AS OF DECEMBER 31, 1997 AND 1996 IS UNAUDITED)
1. LINE OF BUSINESS
Cumetrix Data Systems Corp., formerly Data Net International, Inc. (the
Company) was incorporated on April 2, 1996 in the state of California. The
Company distributes computer peripherals, components, accessories and assembles
computer systems. The Company currently sells a majority of its products to
distributors, systems integrators, and retail stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
a. CASH
Cash includes currency on hand and deposit accounts to which funds may be
deposited or withdrawn at any time without prior notice or penalty. At times,
cash balances in the Company's accounts may exceed federally insured limits.
b. TRADE RECEIVABLES
Trade receivables represent unsecured balances due from its customers with
the Company at risk to the extent such amounts become uncollectible. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
c. INVENTORIES
Inventories consist primarily of purchased finished goods and are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method of accounting.
d. FIXED ASSETS
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures 7 years
Office equipment 5 years
Vehicles 5 years
Leasehold improvements 5 years
</TABLE>
The Company's fixed assets are recorded at cost and includes significant
expenditures that increase the asset lives. Ordinary maintenance and repairs are
charged to operations as incurred
When assets are sold or otherwise disposed of, the recorded cost and related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is recognized.
e. DEFERRED OFFERING COSTS
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. Offering costs of $166,000 are
capitalized as of December 31, 1997 and included in other long-term assets.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
f. DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs
and amortized over the terms of the notes using the effective interest rate
method. In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. Debt issuance costs of $109,200, net amortization of $12,100, have
been capitalized as of December 31, 1997 and included in other long-term assets.
g. CAPITALIZED PURCHASED SOFTWARE COSTS
Capitalized purchased software costs represents the license fee paid to
Computer-Aided Software Integration, Inc. (CASI) for certain configuration
software (see Note 9). The Company will amortize these costs on a straight-line
basis over the estimated life of the configuration software (currently estimated
to be between 3-5 years) commencing at the date that the configuration software
is first placed into service.
h. STATEMENT OF CASH FLOWS
The Company prepares its statement of cash flows using the indirect method
as defined under Statement of Financial Accounting Standards No. 95 (SFAS No.
95). In July 1997, the Company licensed software for $1,100,000 by issuing a
note and obtaining a loan from a related party (see Note 9). Supplemental
disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash paid for interest........................................ $ 1,431 $ 4,500 $ 1,808
Cash paid for income taxes.................................... $ -- $ -- $ 13,000
</TABLE>
i. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. CONCENTRATION OF RISK
During the period from April 2, 1996 (inception) to March 31, 1997, one
vendor accounted for 43 percent of purchases. There are many vendors in this
industry and management believes that the other vendors could provide similar
products on comparable terms. Management believes that a change in suppliers
would not cause any material effect to the Company's operations or loss of
sales.
During fiscal 1997, no customer accounted for more than 10 percent of net
sales.
k. REVENUE RECOGNITION
Net sales are currently generated from the sales of components and systems.
Systems include ready-to-use computers that have been assembled and have
software already installed. Components sales consist of individual hardware
items.
Revenue is recorded at the time of shipment net of allowances for estimated
sales returns.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
l. UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The unaudited financial statements for the nine-month periods ended December
31, 1997 and 1996, have been prepared in conformity with generally accepted
accounting principles. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. These unaudited financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.
m. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets or
liabilities are computed based on the temporary difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate in effect for the year in which the differences are expected
to reverse. Deferred income tax expenses or credits are based on the changes in
the deferred income tax assets or liabilities from period to period.
n. NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. SFAS No. 128 was adopted for the
period ended December 31, 1997 and SFAS No. 129 will be adopted for the year
ending March 31, 1998.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards and additional quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.
F-9
<PAGE>
o. INCOME PER COMMON SHARE
Income per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the related
periods. For all periods presented, per share information was computed pursuant
to the provisions of SFAS No.128.
A summary of the shares used to compute earnings per share is as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
FOR THE PERIOD ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------
TO MARCH 31, 1997 1996 1997
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Weighted average common shares used to compute
basic earnings per share....................... 3,310,574 3,132,569 4,477,590
Effect of Dilutive Securities:
Stock options................................ -- -- 56,826
Warrants..................................... -- -- 21,568
----------------- ---------- ----------
Weighted average common shares used to compute
diluted earnings per share 3,310,574 3,132,569 4,555,984
----------------- ---------- ----------
----------------- ---------- ----------
</TABLE>
The adoption of SFAS No. 128 did not have any impact on basic or diluted
earnings per share for the periods from April 2, 1996 (inception) to March 31,
1997 or the nine-month period ended December 31, 1997.
p. RISK FACTORS
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION--The Company's ability
to successfully implement, market and introduce the ACSA Solution services on a
timely basis will be a significant factor in the Company's ability to improve
its operating margins and remain competitive. The Company's ability to market
the ACSA Solution successfully will depend on the Company convincing potential
customers of the benefits of the ACSA Solution. The Company has only recently
commenced marketing the ACSA Solution. The Company is currently constructing its
first ACSA Center located in the City of Industry. No ACSA Center is currently
in operation and the Company currently has no sales revenue attributable to the
ACSA Solution or a ACSA Center. Although the Company is engaged in negotiations
and discussions with a number of potential customers, there can be no assurance
that any such discussions will lead to significant sales of the ACSA Solution,
or that the ACSA Solution will attain market acceptance. Any failure by the
Company to anticipate or respond in a cost-effective and timely manner to market
trends or customer requirements, or any significant delays in introduction of
ACSA services, could have a material adverse effect on the Company's business,
operating results and financial condition.
ELECTRONICS INDUSTRY CYCLICALITY--The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
end-users of personal computers, as well as component distributors such as the
Company. In addition, the life-cycle of existing personal computer products and
the timing of new product development and introduction can affect demand for
disk drives and other personal computer components. Any downturns in the
personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
FOREIGN SUPPLIERS REGULATION--A significant number of the products
distributed by the Company are manufactured in Taiwan, China, Korea and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs, import
and export controls and changes in governmental policies, any of which could
have a material adverse effect on the Company's
F-10
<PAGE>
business and results of operations. While the Company does not believe that any
of these factors adversely impact its business significantly at present, there
can be no assurance that these factors will not materially adversely affect the
Company in the future. Any significant disruption in the delivery of merchandise
from the Company's suppliers, substantially all of whom are foreign, would also
have a material adverse impact on the Company's business and results of
operations. Currently all purchases are made in U.S. dollars.
3. FIXED ASSETS, NET
Fixed assets, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997
----------- DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures.............................................. $ 8,260 $ 8,260
Office equipment.................................................... 9,039 17,723
Vehicles............................................................ 21,320 21,320
Leasehold improvements.............................................. 293 293
----------- ------------
38,912 47,596
Less--Accumulated depreciation and amortization..................... (6,634) (9,481)
----------- ------------
$ 32,278 $ 38,115
----------- ------------
----------- ------------
</TABLE>
4. INCOME TAXES
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal........................................................ $ 14,500 $ 389,747
State.......................................................... 7,000 68,779
Deferred:
Federal........................................................ (8,700) (35,520)
State.......................................................... (3,300) (6,268)
------------ -------------
Provision for income taxes....................................... $ 9,500 $ 416,738
------------ -------------
------------ -------------
</TABLE>
The approximate tax effect of temporary differences which gave rise to
significant deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Depreciation and amortization.................................... $ (434) $ (4,195)
Reserves......................................................... 2,408 32,623
Accrued liabilities.............................................. 4,006 5,299
Unicap........................................................... 6,020 20,061
------------ ------------
$ 12,000 $ 53,788
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
4. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed at
the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Federal income tax provision at the statutory rate........ $ 11,854 $ 21,884 $ 354,228
State taxes, net of federal benefit....................... 2,092 3,861 62,510
Other items, net.......................................... (4,446) -- --
----------- ---------- ----------
Provision for income taxes................................ $ 9,500 $ 25,745 $ 416,738
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
5. RELATED PARTY TRANSACTIONS
In February 1997, a director borrowed $39,700 from the Company. The
receivable is evidenced by an unsecured note due in 120 days on June 15, 1997,
with interest at 5.75 percent. The note was repaid in June 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,300 from a corporation owned by a related party.
At March 31, 1997, the Company had $12,400 and $132,700 included in trade
receivables and accounts payable, respectively, related to these transactions.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases a facility under a lease agreement which expires on April
30, 1998. The following is a schedule of future minimum lease payments required
under this operating lease as of March 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 47,616
1999......................................................................... 3,968
---------
$ 51,584
---------
---------
</TABLE>
Total rental expense for the year ended March 31, 1997 was approximately
$49,000.
LONG-TERM DEBT
The Company has borrowed from a bank for its delivery van. The loan bears
interest at 8.9 percent per annum with monthly installments of principal and
interest of approximately $400. The following is a schedule of future minimum
required payments:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 3,390
1999......................................................................... 3,707
2000......................................................................... 4,054
2001......................................................................... 4,426
2002......................................................................... 387
---------
$ 15,964
---------
---------
</TABLE>
F-12
<PAGE>
7. RECEIVABLE FROM DIRECTOR
The receivable from director at March 31, 1997 resulted from the purchase by
the Company of 200,000 shares and 100,000 warrants for $100,000 in Evolutions,
Inc. (Evolutions) which at March 31, 1997, was personally guaranteed by a
director of the Company. Subsequent to June 13, 1997, the board of directors and
shareholders voted to release this director from this guarantee as partial
inducement for this individual to accept additional management responsibilities
at the Company, including agreeing to become the chief executive officer. The
Company has determined, due to significant cash flow difficulties encountered by
Evolutions, that its investment is worthless. Accordingly, the Company has
recorded a $100,000 loss during the first quarter of 1997 which is included in
selling, general and administrative expenses.
8. SUBSEQUENT EVENTS
COMMON STOCK
On April 7, 1997, a relative of a shareholder purchased 65,764 shares of
common stock for $300,000. In addition, the Company granted to this party an
option to acquire up to an additional 372,659 common shares at $4.56 per share.
The options expired on October 7, 1997 unexercised.
FINANCING ARRANGEMENT
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation. The terms for purchases are net 30 and are
collateralized by inventory and accounts receivable. Unless the Company fails to
pay Finova within this 30 day period, all finance costs associated with this
line are charged by Finova to the Company's vendors. This arrangement is
personally guaranteed by two officers of the company. At December 31, 1997, the
Company had a payable to Finova Capital Corporation of approximately $3,400,460
included in accounts payable.
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
RELATED PARTY TRANSACTIONS
For the nine-month period ended December 31, 1997, the Company had sales of
approximately $1,391,300 to and purchases of approximately $598,200 from a
corporation owned by a related party. At December 31, 1997, the Company had
$146,500 and $0 included in trade receivables and accounts payable,
respectively, from this related party.
CONCENTRATION OF RISK
During the nine-month period ended December 31, 1997, one vendor accounted
for 58.3 percent of purchases. During the nine-month period ended December 31,
1997, one customer accounted for 10.9 percent of net sales.
SOFTWARE LICENSE
In September 1997, the Company signed a software license and a reseller
agreement with Computer Aided Software Integration, Inc. (CASI), a subsidiary of
Datatec Systems, Inc. (Datatec), formerly known as Glasgal Communications, Inc.
A director of the Company is also the founder, president, C.E.O., and a
principal shareholder of CASI. The Company paid CASI a one-time license fee of
$1,100,000 for the configuration software. The license agreement is generally a
worldwide royalty-free and nonexclusive license to reproduce and use the
software. The Company has capitalized this amount and will start to amortize
these costs' once the Company puts the software into use. The license fee was
paid in the form of a non-interest bearing promissory note for $950,000 and a
cash payment of $150,000 loaned to the Company by an officer of Datatec (Datatec
Note) with interest at 10 percent. The Datatec Note provides
F-13
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
that the Company is obligated to pay $50,000 (amount paid prior to December 31,
1997) and $100,000 on or before February 28, 1998; provided, however, that if
the Company consummates an initial public offering (an "IPO") of its securities
pursuant to a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, $100,000 of the proceeds of such
IPO shall be immediately applied to prepayment of the $100,000 due to be paid on
February 28, 1998. In the event that the Company completes an IPO prior to
February 28, 1998 and fails to pay the Datatec Note in full by that date, or,
the Datatec Note is not paid in full on or prior to February 28, 1998, in any
event, the Datatec Note shall be converted into such number of shares of Common
Stock of the Company as shall equal the principal amount then outstanding plus
accrued interest divided by a fraction, the numerator of which shall equal the
greater of $20,000,000 or the fair market value of the Company, and the
denominator of which shall be the number of shares of Common Stock of the
Company outstanding immediately prior to such conversion. The CASI note is due
in installments of $250,000 (paid prior to December 31, 1997) and $700,000 due
on or before February 28, 1998, respectively. The aggregate principal balance on
these Notes of $800,000 is included in current portion of long-term debt in the
December 31, 1997 Balance Sheet. In addition, the Company has a maintenance fee
of $25,000 per year, payable in equal quarterly installments. The Company also
issued CASI a contingent warrant exercisable in the event of default of the note
at $4.50 per share. This warrant is convertible into 155,902 shares of common
stock.
STOCK SPLIT
In October 1997, the Company effected a 10.960591 for one common stock split
and increased the number of authorized shares of common stock to 20,000,000. All
information in the accompanying financial statements has been retroactively
restated to reflect these changes.
PREFERRED STOCK
In October 1997, the Company authorized 2,000,000 shares of preferred stock.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key executives. These
agreements have terms of five years.
STOCK OPTIONS
In July 1997, the Company established the 1997 Stock Incentive Plan (the
"Plan"). Under the Plan, options are generally granted to employees and
directors at an exercise price equal to fair market value, as determined by the
board of directors. The Company has reserved 500,000 shares of the Company's
common stock for issuance under the Plan. On July 1, 1997, the Company granted
options to purchase up to 307,717 shares of common stock with an exercise price
of $2.70 per share. The plan terminates in 2007.
Information regarding the Company's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE WEIGHTED
UNDER EXERCISE AVERAGE AGGREGATE
OPTION PRICE FAIR VALUE PRICE
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1997.............................................. -- $ -- $ -- $ --
Granted............................................................ 307,717 2.70 0.72 830,836
Canceled........................................................... -- -- -- --
Exercised.......................................................... -- -- -- --
--------- ----- ----- ----------
BALANCE, December 31, 1997........................................... 307,717 $ 2.70 $ 0.72 $ 830,836
--------- ----- ----- ----------
--------- ----- ----- ----------
</TABLE>
F-14
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
Information about the Company's options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE NUMBER OF SHARES OUTSTANDING CONTRACTUAL LIFE
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
$2.70 307,717 9.50 years
</TABLE>
The Company accounts for stock options granted to non-employees in
accordance with SFAS No. 123 which requires non-cash compensation expense be
recognized over the expected period of benefit. The Company accounts for its
stock options granted to employees and directors under Accounting Principles
Board No. 25 (APB 25), under which no compensation cost has been recognized. As
of December 31, 1997, options for 93,721 shares were exercisable.
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income would
have decreased as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED
DECEMBER 31, 1997
-----------------------
AS REPORTED PRO FORMA
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net income..................................................................... $ 625,108 $ 582,672
Basic and diluted earnings per share........................................... $ 0.14 $ 0.13
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants: risk-free interest rate of 6.31 percent; expected lives of five
years; no expected volatility and no dividends would be issued during the option
terms.
Subsequent to December 31, 1997, the Company granted additional options
under the Plan to purchase up to 76,000 shares of Common Stock with an exercise
price of $4.50 per share.
PRIVATE PLACEMENT
In December 1997, the Company completed a private placement for $1,000,000
with net proceeds of approximately $740,000. The Company sold 20 units for
$50,000 per unit. Each unit consisted of (i) an unsecured promissory note for
$20,000, bearing interest at 10 percent due eighteen months from the date of
issue or upon closing of a $2,000,000 financing, (ii) 15,000 shares of common
stock and (iii) 5,000 warrants exercisable at $3.00 per share into common stock
for three years, commencing one year after of issuance. The proceeds were used,
in part, to pay $250,000 of the CASI note and $50,000 of the Datatec Note. In
connection with the private placement the Placement Agent and the Company's
legal counsel received 35,000 warrants and 45,000 warrants, respectively for
nominal consideration. The warrants are excercisable at $3.00 per share. The
Placement Agent Warrants were cancelled on March 6, 1998.
F-15
<PAGE>
Back Inside Cover Page
[Graphic depicting schematically: File & Print Services, Client Server
Applications, Workstation Setup, and Connectivity Devices]
Caption: The ACSA solution will enable automated custom software and hardware
configuration of computers at the point of assembly to permit operation with
each individual end user's specific network and software applications including
file and print services, workstation applications and communication devices.
[Photo of motherboard]
[Caption: The Company assembles custom systems from individual components
such as 'motherboards.']
Collage of Products sold by the Company.
No Caption
<PAGE>
- -------------------------------------------
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NO UNDERWRITER, DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Recent Bridge Financing........................ 17
Use of Proceeds................................ 18
Dividend Policy................................ 19
Dilution....................................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 27
Management..................................... 36
Certain Transactions........................... 41
Principal Shareholders......................... 44
Description of Capital Stock................... 45
Shares Eligible for Future Sale................ 46
Underwriting................................... 47
Legal Matters.................................. 49
Experts........................................ 49
Additional Information......................... 49
Index to Financial Statements.................. F-1
</TABLE>
UNTIL MAY 3, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
2,350,000 SHARES
OF
COMMON STOCK
--------------
PROSPECTUS
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JOSEPH STEVENS & COMPANY, INC.
APRIL 8, 1998
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