<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Transition Period From ________to ________.
COMMISSION FILE NUMBER: 001-14001
CUMETRIX DATA SYSTEMS CORP.
(Exact Name of Registrant as Specified in its Charter)
California 95-4574138
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
957 Lawson Street, Industry, California 91748
(Address, Including Zip Code, Of Registrant's Principal Executive Offices)
(626) 965-6899
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days. Yes [X] No [ ]
As of November 15, 1999, the Registrant had 7,392,500 shares of Common
Stock, without par value, issued and outstanding.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - September 30, 1999 and March 31,1999
Condensed Statements of Operations - Three Months Ended September 30,
1999 and 1998; and, Six Months Ended September 30, 1999 and 1998.
Condensed Statements of Cash Flow - Six Months Ended September 30, 1999
and 1998
Notes to Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
CUMETRIX DATA SYSTEMS CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,810,813 $ 6,743,198
Time deposits 1,500,000 1,500,000
Trade receivables, net of allowance for doubtful
accounts of $300,000 and $280,000 at September 30, 1999
and March 31, 1999, respectively 1,010,276 1,951,685
Inventories 560,535 2,320,127
Income tax receivable 262,430 262,430
Prepaid expenses and other current assets 118,122 149,555
----------- -----------
Total current assets 8,262,176 12,926,995
FIXED ASSETS, net 423,956 504,363
OTHER ASSETS 527,822 892,429
----------- -----------
Total Assets $ 9,213,954 $14,323,787
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 709,421 $ 3,945,595
Accrued expenses and other current liabilities 604,011 561,018
----------- -----------
Total current liabilities 1,313,432 4,506,613
LONG-TERM DEBT, net of current portion 2,068 4,810
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 12,063,414 12,063,414
shares; issued and outstanding, 7,392,500 shares
Retained earnings (deficit) (4,164,960) (2,251,050)
----------- -----------
Total shareholders' equity 7,898,454 9,812,364
----------- -----------
Total liabilities and shareholders' equity $ 9,213,954 $14,323,787
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 4,055,896 $19,418,109 $11,112,570 $37,832,635
COST OF SALES 3,920,060 18,868,874 10,829,998 36,851,490
----------- ----------- ----------- -----------
GROSS PROFIT 135,836 549,235 282,572 981,145
OPERATING EXPENSES 1,136,391 572,843 1,998,394 1,101,695
----------- ----------- ----------- -----------
OPERATING LOSS (1,000,555) (23,608) (1,715,822) (120,550)
OTHER INCOME (LOSS)
Interest expense (166) 323 (359) 2,203
Interest income 94,233 172,695 166,878 320,666
Loss on equity investment (215,375) - (364,607) -
----------- ----------- ----------- -----------
(121,308) 173,018 (198,088) 322,869
INCOME (LOSS) BEFORE INCOME TAXES (1,121,863) 148,764 (1,913,910) 197,913
PROVISION FOR INCOME TAXES - 62,271 - 82,771
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,121,863) $ 86,493 $(1,913,910) $ 115,142
=========== =========== =========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ (0.15) $ 0.01 $ (0.26) $ 0.02
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,913,910) $ 115,142
Adjustments to reconcile net income to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 108,000 4,500
Provision for doubtful accounts 20,000 52,000
Loss on equity investment in subsidiary 364,607 -
Changes in assets and liabilities:
Trade receivables 921,409 301,523
Inventories 1,759,592 (2,095,109)
Prepaid expenses and other current assets 31,433 (69,819)
Accounts payable (3,236,174) 216,884
Accrued expenses 42,193 (528,362)
Income taxes payable 800 (695,468)
----------- -----------
Net cash used by operating activities (1,902,050) (2,698,709)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (27,593) (267,485)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from initial public offering - 11,203,472
Payments on long-term debt (2,742) (1,201,812)
Deferred offering costs - 514,927
----------- -----------
Net cash provided by financing activities (2,742) 10,516,587
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,932,385) 7,550,393
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,743,198 4,415,690
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,810,813 $11,966,083
=========== ===========
SUPPLEMENTAL INFORMATION ON CASH FLOW
Cash paid for interest $ 359 $ 2,203
Cash paid for income taxes $ - $ 730,000
</TABLE>
See notes to financial statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (which comprise only
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the periods ended September 30, 1999 are
not necessarily indicative of results to be expected for the year ending March
31, 2000. For further information, refer to the financial statements and notes
thereto for the year ended March 31, 1999.
NOTE B - EARNINGS PER SHARE
Earnings per share calculations are in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share. Basic earnings per
share are computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share are
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding for each period presented. Common
equivalent shares include stock options assuming conversion under the treasury
stock method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS
Net Income (Loss) $(1,121,863) $ 86,493 $(1,913,910) $ 115,142
=========== ========== =========== ==========
BASIC AND DILUTED SHARES
Weighted average common shares 7,392,500 7,452,500 7,392,500 7,304,822
Dilutive effect of outstanding options 252,021 - 233,043
----------- ---------- ----------- ----------
Diluted shares 7,392,500 7,704,521 7,392,500 7,537,865
=========== ========== =========== ==========
</TABLE>
NOTE C - SEGMENT INFORMATION
The Company has two business segments, Computer Products and Computer System
Assembly. The Company evaluates performance based on revenue only and does not
separate operating income or assets between segments. E-Commerce sales and
distribution, an emerging sales channel initiated in April 1999 which supports
both these business segments, represents less than 10% of revenues for the
periods presented.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 (the "Computer Products business"). In
December 1996, the Company began offering end-users custom computer
configuration and assembly (the "Computer System Assembly" business), through
resellers, third-party E-commerce sites, and its own system configuration E-
commerce web site. The Company has substantially reduced its dependence on the
distribution of Computer Products in response to industry-wide price declines,
resulting partly from excess manufacturer inventories and a slow-down in demand
in the personal computer industry. Consequently, the Company has substantially
reduced inventory levels necessary to support sales, and significantly lowered
the Company's working capital requirements and finance costs. The Company
continues to sell Computer Products in selected product categories and where
periodic market opportunities exist, using its established supplier base while
principally acting as a broker for critical computer components. Sales
opportunities in Computer System Assembly, particularly through E-commerce,
are the focus of the Company's current sales and marketing efforts.
Results of Operations
- ---------------------
Sales for the six months ended September 30, 1999 were $11,112,570 as compared
with sales of $37,832,635 for the same period in the prior year. Sales for the
three months ended September 30, 1999 were $4,055,896 as compared with sales of
$19,418,109 for the three months ended September 30, 1998. Sales for the six
months and three months ended September 30, 1999 include Computer System
Assembly sales of $2,326,676 and $1,485,046, respectively. Computer System
Assembly sales did not exist in the same periods in the prior year. Excluding
the Computer System Assembly sales, sales for the six months ended September 30,
1999 declined $29,046,741, or 77%, and sales for the three months ended
September 30, 1999 declined $16,847,259, or 87%. The decline in sales is the
result of the Company's decision to reduce its dependence on the Computer
Products business (in particular the distribution of computer hard-drives) in
response to changes in the market conditions within this segment of the
business, and unacceptably low profit margins.
Gross profit for the six months ended September 30, 1999 was $282,572, or 2.5%
of sales, as compared with gross profit of $981,145, or 2.6% of sales for the
six months ended September 30, 1998. Gross profit for the three months ended
September 30, 1999 was $135,836, or 3.3% of sales as compared with gross profit
of $549,235, or 2.8% of sales for the quarter ended September 30, 1998. The
decline in gross profit for the periods is attributable to the lower sales
volumes. The increase in gross profit as a percent of sales for the three
months ended September 30, 1999, as compared with the same period in the prior
year is principally attributable to higher margins achieved from Computer
System Assembly sales.
Operating expenses for six months ended September 30, 1999 were $1,998,394 as
compared with $1,101,695 for the six months ended September 30, 1998. Operating
expenses for three months ended September 30, 1999 were $1,136,391 as compared
with $572,843 for the three months ended September 30, 1998. The increase in
operating expenses for the periods is principally attributable to legal,
auditing, investigative, and management consulting fees incurred during the
periods in connection with a special investigation of allegations of
improprieties and record-keeping irregularities initiated by the Board of
Directors. A brief summary of the principle components of operating expense for
the periods is presented below.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Expenses
------------------
Salaries & wages $ 390,000 $332,000 $ 820,000 $ 674,000
Rent 32,000 18,000 55,000 36,000
Legal, accounting & consulting 349,000 57,000 449,000 94,000
Management consulting & settlement fees 126,000 - 126,000 -
Credit & Collection 79,000 39,000 127,000 91,000
Advertising 61,000 3,000 67,000 6,000
Other 99,391 123,843 354,394 200,695
---------- -------- ---------- ----------
$1,136,391 $572,843 $1,998,394 $1,101,695
========== ======== ========== ==========
</TABLE>
Interest income, primarily from the investment of the proceeds of the Company's
initial public offering of the Company's stock, was $166,878 for the six months
ended September 30, 1999, and $94,233 for the three months ended September 30,
1999. Interest income for the six months and three months ended September 30,
1998, was $320,666 and $172,695, respectively. The decline in interest earnings
is associated with lower available funds for investment.
For the six months ended September 30, 1999, the Company incurred a net loss of
$1,913,910, as compared to net income of $115,142 for the six months ended
September 30, 1998. The Company reported a net loss of $1,121,863 for the three
months ended September 30, 1999, as compared to net income of $86,493 for the
three months ended September 30, 1998. The decrease in net earnings for the six
months and three months ended September 30, 1999, of $2,029,052 and $1,208,356,
respectively, as compared with the same periods in the prior year is
attributable to the decrease in sales volume and higher operating expenses
associated with the investigative matters previously noted.
Liquidity and Sources of Capital
For the six months ended September 30, 1999, net cash used by operating
activities was $1,902,050 as compared to net cash used by operating activities
of $2,698,709 for the same period in the prior year. The net use of cash for
the six months ended September 30, 1999 was principally the result of net
operating losses. For the six months ended September 30, 1998, the principal
use of cash by operating activities was the increase in inventory, the payment
of operating expenses incurred during the IPO, and the payment of income taxes.
Capital expenditures of $27,593 and $267,485 for the six months ended September
30, 1999 and 1998, respectively, constitute the principle use of cash from
investing activities.
Cash flows from financing activities for the six months ended September 30, 1998
are principally associated with funds generated by the Company's initial public
offering, net of long-term debt liquidated with those proceeds.
As of September 30, 1999 the Company had $6,310,813 in cash, cash equivalents,
and investment deposits, and working capital of $6,948,744, with a ratio of
current assets to current liabilities of approximately 6.3 : 1. This compares
with cash, cash equivalents, and investment deposits, of $8,243,198, and working
capital of $8,420,382, with a ratio of current assets to current liabilities of
2.9 : 1 as of March 31, 1999.
To insure the availability of funds to meet its various needs, the Company has a
credit facility with Finova Capital Corporation ("Finova"), which consists of a
$20 million flooring line of credit, secured by certain inventory and equipment,
as well as an additional $5 million revolving line of credit secured by accounts
receivables and inventory. At September 30, 1999 the Company had an outstanding
balance on this credit line of $148,300. The Company believes it has adequate
resources to achieve its operating plans for at least the next twelve months.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Subsequent Events and Management Restructuring
During the first quarter of fiscal year 2000, allegations of certain
improprieties and record-keeping irregularities in fiscal year 1999 were brought
to the attention of the Board of Directors. Under the direction of the Audit
Committee of the Board of Directors a special investigation was initiated. As a
result of this investigation, the Company's former President and its Secretary-
Treasurer were terminated from employment.
The Company failed to file timely its Annual Report on form 10-K for the fiscal
year ended March 31, 1999, and its Quarterly Report on form 10-Q for the first
quarter ended June 30, 1999, consequently the Company's stock was delisted from
the Boston Stock Exchange and from Nasdaq on August 27, 1999 and August 30,
1999, respectively. The Company employed an independent management consultant
as Chief Executive Officer in early September, principally to oversee the filing
of the delinquent SEC reports.
The special investigation was completed to the satisfaction of the Company's
Board of Directors and its outside auditors. On October 15, 1999, the Company's
fiscal year 1999 Annual Report and first Quarterly Report for fiscal year 2000
were filed with the SEC.
On October 22, 1999, the Company ended its contract with the independent
consultant, and Mr. Max Toghraie was appointed as the Company's Chief Executive
Officer.
In late October, a restructuring plan to reduce the company's operating overhead
and improve operating efficiencies was adopted, which to date has resulted in
the elimination of approximately 20% of the Company's workforce, including
certain management positions.
In October and November 1999, Directors Mr. James Ung (formerly President), Mr.
Philip Alford, and Mr. David Tobey, resigned from the Board of Directors.
Year 2000 Update
In 1998 the Company began a Year 2000 Project to address the issue of whether
computer programs and imbedded computer chips within the Company's processes and
products will be able to distinguish between the years 1900 and 2000. The
Company evaluated its Year 2000 readiness for both information technology ("IT")
and non-information technology ("non-IT") systems. Non-IT systems typically
include embedded technology in electronic equipment, such as microprocessors,
and are more difficult to assess and repair than IT systems. The Company
believes it has implemented the changes necessary to materially insure the
Company's readiness for the year 2000. Programs to evaluate the readiness of
the Company's major vendors and customers to determine what impact, if any,
their readiness will have on the Company, continue. The Company does not
anticipate that the evaluation will reveal significant potential problems or
require the Company to incur substantial costs.
Forward-looking Statements
Certain statements in this Form 10-Q contain "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933, as amended) that involve
risks and uncertainties that may cause actual results to differ materially from
those predicted in the forward-looking statements. Forward-looking statements
can be identified by their use of such verbs as expects, anticipates, believes
or similar verbs or conjugations of such verbs. If any of the Company's
assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, the Company's actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including but not limited to, the risks detailed in the Company's Securities and
Exchange Commission filings, including the Company's Form 10-K for the fiscal
year ended March 31, 1999; the possibility that the Company may not be able to
market effectively Computer System Assembly products, the narrow margins
available in the brokering of Computer Products, and the risks of fluctuation in
the prices of Computer Products.
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.16 - Executive employment Agreement and General Release,
dated August 23, 1999, between the Company and Max
Toghraie
Exhibit 10.17 - Executive employment Agreement and addendum, dated
September 8, 1999, and Amendment dated November 8,
1999, between the Company and Inverness Partners,
Inc.
Exhibit 10.18 - Settlement Agreement and General Release, dated
October 22, 1999, between the Company and Inverness
Partners, Inc.
Exhibit 27 Financial Data Schedule
(b) Form 8-K Dated July 13, 1999, Item 5 - Other Events.
Announcing preliminary results of Audit Committee
investigation, management changes and delay in
filing Annual Report on Form 10-K.
Form 8-K Dated July 15, 1999, Item 5 - Other Events.
Announcing receipt of Nasdaq letter regarding
potential change of listing status and change of
Nasdaq trading symbol.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CUMETRIX DATA SYSTEMS CORP. (REGISTRANT)
Date: November 15, 1999 /s/ Max Toghraie
----------------- -----------------------------------
Max Toghraie
President & Chief Executive Officer
and Principle Accounting Officer
<PAGE>
EXHIBIT 10.16
Executive Employment Agreement & General Release, dated August 23, 1999,
between the Company and Max Toghraie. Incorporated by Reference to
Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999.
<PAGE>
EMPLOYMENT AGREEMENT AND GENERAL RELEASE
THIS Employment Agreement and General Release (this "Agreement") is entered into
by Max Toghraie (hereinafter referred to as "Employee") and Cumetrix Data
Systems Corp. (hereinafter referred to as "Company").
Recitals:
--------
A. Employee was employed by Company since July 1, 1997 as Chief Executive
Officer. Company now desires that Employee's duties and responsibilities change
to those of Executive Vice President.
B. Employee contends that Employee is entitled to $142,500 as compensation,
which Employee deferred. Company contends that Employee is entitled to no
deferred compensation.
C. Employee and Company wish to enter into an agreement to memorialize
Employee's change in position and to clarify and resolve any disputes which may
exist between them arising out of the previous employment relationship or
otherwise.
Agreements:
----------
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained below, it is agreed as follows:
1. Employee's Position. Effective August 23, 1999, Employee will be employed by
-------------------
Company in the position of Executive Vice President. Employee shall report to
the Chief Executive Officer of the Company and shall perform such duties and
responsibilities as may be assigned to him from time to time by the Chief
Executive Officer.
<PAGE>
2. Compensation.
2.1 Salary. Effective July 1, 1999, Employee's salary shall be One Hundred
------
Ninety-Two Thousand Dollars ($192,000) per year, subject to legally required
withholding and deductions, to be paid on a biweekly basis, in the same manner
as other employees of the Company.
2.2 Expenses. Employee shall have access to an expense account in the sum
--------
of $20,400 per year. Employee shall be entitled to withdraw from the expense
account to pay for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
2.3 Vacation. Employee shall be entitled to two weeks paid vacation per
--------
year, in accordance with the plans, policies, programs and practices as in
effect generally with respect to other peer executives of the Company.
2.4 Car Allowance. Employee shall be entitled to a car allowance in the
-------------
sum of $500 per month.
3. Stock Options. The non-statutory stock option granted Employee on July 1,
-------------
1997 shall continue to be governed by the terms of the 1997 Stock Plan and the
Option Certificate dated July 1, 1997.
4. Retention Bonus. In order to induce Employee to assist in facilitating an
---------------
orderly management transition, Company will pay to Employee a Transition and
Retention Bonus as follows: the sum of $71,250 immediately upon execution of
this Agreement, and an additional sum of $71,250 if (i) Employee is employed by
the Company on the date a permanent chief executive officer replaces John
Davidson as Chief Executive Officer or (ii) his employment is terminated by the
Company.
5. Employment At-Will. Employee and Company affirm, acknowledge, and agree
------------------
that Employee's employment with the Company is at-will, which means that it may
be terminated by Employee or Company at any time, with or without notice, and
with or without cause or reason. Employee and Company further agree that this
at-will nature of Employee's employment can only be changed by a written
agreement signed by Employee and the President of Company which specifically
refers to the at-will nature of Employee's employment.
6. General Release of Claims. Employee expressly waives any claims against
-------------------------
Company and releases Company (including its officers, directors, stockholders,
managers, agents, and representatives) from any claims that Employee may have in
any way connected with Employee's employment with Company or Employee's change
in position, whether or not such claims are currently known or unknown to
Employee. It is under-stood that this release includes, but is not limited to,
any claims for wages, bonuses, employment benefits, or damages of any kind
whatsoever, arising out of any contracts, express or implied, any covenant of
good faith and fair dealing, express or implied, any theory of unlawful
discharge, any legal restriction an Company's right to terminate employees, or
any federal, state or other governmental statute or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, the federal Age
<PAGE>
Discrimination Employment Act of 1967 (29 U.S.C. (S) 21, et seq.), any state
laws concerning discrimination or harassment, or any other legal limitation on
the employment relationship.
This waiver and release shall not waive or release claims where the events in
dispute first arise after execution of this Agreement, nor shall it preclude
Employee or Company from filing a lawsuit for the exclusive purpose of enforcing
rights under this Agreement.
7. Release of Unknown Claims. It is the intention of Employee and Company that
-------------------------
this Agreement is a General Release which shall be effective as a bar to each
and every claim, demand, or cause of action it releases. Employee recognizes
that Employee may have some claim, demand, or cause of action against Company of
which Employee is totally unaware and unsuspecting which Employee is giving up
by execution of the General Release. It is the intention of Employee in
executing this Agreement that it will deprive Employee of each such claim,
demand or cause of action and prevent Employee from asserting it against
Company. In furtherance of this intention, Employee expressly waives any rights
or benefits conferred by the provisions of Section 1542 of the Civil Code of the
State of California, which provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor. "
8. Confidential Information.
------------------------
A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including but in no way limited to, development, marketing,
organizational, financial, management, administrative, production, distribution
and sales information, data, specifications and processes presently owned or at
any time in the future in the course of its business that is not otherwise in
the public domain (collectively, the "Confidential Material"). All such
Confidential Material is considered secret and will be available to Employee in
confidence. Except in the performance of duties on behalf of the Company,
Employee shall not disclose or use any such Confidential Material, unless such
Confidential Material ceases (through no fault of Employee) to be confidential
because it has become part of the public domain. All records, files, drawings,
documents, equipment and other tangible items, wherever located, relating in any
way to the Confidential Material or otherwise to the Company's business, which
Employee prepares, uses or encounters, shall be and remain the Company's sole
and exclusive property and shall be included in the Confidential Material. Upon
termination of this Agreement by any means, or whenever requested by the
Company, Employee shall promptly deliver to the Company any and all of the
Confidential Material, not previously delivered to the Company, that may be or
at any previous time has been in Employee's possession or under Employee's
control.
B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential material by any means whatsoever
and any time before, during or after Executive's employment with the Company
shall constitute unfair Competition. Employee agrees that Employee shall not
engage in Unfair Competition either during the time employed by the Company or
any time thereafter.
<PAGE>
9. Severability. The provisions of this Agreement are severable, and if any
------------
part of it is found to be unlawful or unenforceable, the other provisions of
this Agreement shall remain fully valid and enforceable to the maximum extent
consistent with applicable law.
10. Knowing and Voluntary Agreement. Employee represents and agrees that
-------------------------------
Employee has read this Agreement, understands its terms and the fact that it
releases any claim Employee might have against Company and its agents, that
Company has provided Employee with sufficient time to consider this agreement
and seek legal counsel, that Employee understands that he has the right to
consult counsel of choice and has either done so or knowingly waived the right
to do so, and enters into this Agreement without duress or coercion from any
source.
11. Entire Agreement. This Agreement sets forth the entire under-standing
----------------
between Employee and Company and supersedes any prior agreements or
understandings, express or implied, pertaining to the terms Employee's
employment with Company and the termination of the employment relationship.
Employee acknowledges that in executing this Agreement, Employee does not rely
upon any representation or statement by any representative of Company concerning
the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates
indicated below.
CUMETRIX DATA SYSTEMS CORP.
By /s/ John Davidson
--------------------------------
Its President
Dated: August 23, 1999
MAX TOGHRAIE
By /s/ Max Toghraie
--------------------------------
Dated: August 23, 1999
<PAGE>
EXHIBIT 10.17
Executive Employment Agreement and Addendum, dated September 8, 1999,
and Amendment dated November 8, 1999, between the Company
and Inverness Partners, Inc. Incorporated by Reference to
Exhibit 10.17 of the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999.
<PAGE>
[INVERNESS PARTNERS, INC. LETTERHEAD]
AGREEMENT
1. Parties: CUMETRIX DATA SYSTEMS CORP. ("CUMETRIX")
INVERNESS PARTNERS, INC. ("Inverness")
2. Effective Date: September 8, 1999
3. This Agreement provides for services requested by CUMETRIX and agreed by
Inverness in support of the business review, turnaround program, and Board-
approved management requirements at CUMETRIX. The scope of the engagement
consists of two phases, as outlined in the Addendum to this Agreement, which
is an integral part thereof.
4. Inverness shall receive a retainer equal to one month's fee upon execution
of this Agreement. Such retainer shall remain with Inverness during the
course of the engagement. Upon expiry of this Agreement and/or cancellation
of this Agreement by either party, the retainer shall be returned to
CUMETRIX after applying such retainer against any final amounts due
Inverness.
5. CUMETRIX shall retain Inverness at the following rates: Managing Partner
(John L. Davidson), $6,250 per week based on 40-60 per hours per week. In
addition to the weekly fees, CUMETRIX will reimburse Inverness for
reasonable out-of-pocket expenses for travel and living between Portland and
Los Angeles, which shall not exceed a total of $750 per week.
In addition to the fee for services as above, Inverness shall receive a
Performance Incentive, as agreed with CUMETRIX and specified in the
Addendum. Such incentive to be received by Inverness only to the extent
that measurable success is achieved against business plan targets as
provided in the Addendum.
Within the scope of the engagement contemplated by this Agreement, John L.
Davidson, at the level of Managing Partner, will direct the engagement and
serve in the interim management capacity as specified in the Addendum.
Other Inverness staff will be involved only upon written approval of
CUMETRIX's Board.
Travel time between Portland, Oregon and Los Angeles, California will not
be charged.
6. Inverness will provide detailed statements to CUMETRIX, at the end of each
week, accounting for all time and expenses charged. Payment will be due
promptly upon presentation of the statements, and the retainer balance shall
be maintained at all times during the engagement.
<PAGE>
Agreement (September 8, 1999)
Page 2
7. CUMETRIX and Inverness shall not employ personnel of the other party during
the period of this Agreement, nor for a period of 12 months following
termination of the Agreement without the written agreement of the other
party.
8. CUMETRIX shall indemnify Inverness, its shareholders, directors, officers,
employees and agents from and against any and all claims, liabilities,
loss, costs, damages or expenses (including reasonable attorneys' fees)
asserted against, or incurred by Inverness or any such shareholder,
director, officer, employee or agent by reason of, or arising out of this
Agreement or performance of this Agreement. Excluded from this
indemnification are those claims, liabilities, loss, costs, damages or
expenses resulting from the willful misconduct, dishonesty, fraudulent act
or omission, or gross negligence of Inverness or any such shareholder,
director, officer, employee or agent.
9. Confidentiality
Both parties acknowledge the confidential nature of all non-publicly
obtainable information on the administrative and financial operations of
CUMETRIX. Accordingly, Inverness agrees not to disclose financial,
operations, or marketing documents or other information to any third party,
without the prior approval of CUMETRIX. Excepted are documents or
information requested under Court order.
10. This Agreement may be terminated by either CUMETRIX or Inverness at any
time subject to the provisions of the Addendum. Termination by CUMETRIX
will be accompanied by payment for all outstanding amounts due Inverness.
CUMETRIX DATA SYSTEMS CORP.
/s/ Max Toghraie
- ----------------------------------------
by: Max Toghraie, Board of Directors
INVERNESS PARTNERS, INC.
/s/ John L. Davidson
- ----------------------------------------
John L. Davidson, Managing Partner
<PAGE>
Addendum to Agreement
dated September 8, 1999
Between CUMETRIX DATA SYSTEMS CORP.
and Inverness Partners, Inc.
Per Paragraph 3:
The scope of this engagement provides for a two-phase program to:
. Conduct a comprehensive review of the CUMETRIX business
segments and provide specific reporting and recommendations to
the Board with regard to turnaround steps to be incorporated
into the revised 1999/2000 Business Plan ("BUSINESS PLAN"), and
. Phase 2: Undertake direction of the CUMETRIX management team,
as President and Chief Executive Officer, responsible to the
Board, for a total period of one year, during which
implementation of the BUSINESS PLAN will be completed and the
Board will conduct a search for a permanent CEO to direct the
management team within the medium-and long-range objectives of
the BUSINESS PLAN.
Within the scope of this engagement, Inverness to perform the following
specific duties to achieve the objectives of each phase. Both phases are
to be undertaken within the provisions of the appointment by the Board of
Inverness/Davidson as President and CEO, subject to the terms noted under
"Compensation / Term" below.
Specific duties to include:
Phase 1:
(i) Direct the immediate financial and organizational steps
required to complete and maintain timely filing of SEC
reporting; Assume responsibilities for directing outside
accounting resources to complete the 1998/99 reporting
consistent with SEC reporting procedures
(ii) Outline current problem areas and develop prioritized
strategies for immediate turnaround steps for resolution to be
proposed for approval by the Board
(iii) Draft a preliminary outline of the 1999/2000 BUSINESS PLAN
objectives and steps, to be presented to the Board within 7
days of the effective date of this Agreement; to include:
. Mission Statement / Goals
. Objectives
. Management / Organization - Responsibilities &
Accountabilities
. Turnaround Program - 1999
. Marketing Program
. Product Development / CapEx Program and Introduction
Timetable
. P&L and Cashflow Forecast
. Evaluation of Results / Corrective Steps
. Strategic Planning
(iv) Review and complete revisions to the 1999/2000 BUSINESS PLAN,
for presentation to and recommendation of approval by the Board
within 30 days of the effective date of this Agreement
<PAGE>
Addendum to Agreement
dated September 8, 1999
Between CUMETRIX DATA SYSTEMS CORP.
and Inverness Partners, Inc.
Page 2
(v) Develop standard internal reporting of operating and
financial results against BUSINESS PLAN targets
(vi) Direct key managers in the completion of the 1999/2000
operating budgets, by Department.
(vii) Develop / revise internal cash and budget controls and
Department authorities to insure compliance with CUMETRIX
Policies and Procedures with regard to expense, capital
expenditures and third party commitments
(viii) Review / revise financial reporting to insure ongoing
compliance with outside reporting requirements
(ix) Other tasks as directed by the Board
Phase 2 (to run concurrent with Phase 1):
2 - (i) Assume direct responsibilities as interim President and
Chief Executive Officer for all aspects of CUMETRIX
performance to meet or exceed BUSINESS PLAN targets
2 - (ii) Develop and complete timely, accurate and comprehensive
reporting to the Board and to outside agencies, to meet
standard regulatory and financial reporting requirements
2 - (iii) Direct the use of outside professional resources within
approved budget guidelines
2 - (iv) Direct the immediate implementation of Board-approved
turnaround steps developed under Phase 1 recommendations
2 - (v) Implement approved organization changes and develop
position description and individual manager
accountabilities; Perform and direct staff evaluations by
managers on a regular basis and within approved Policies &
Procedures
2 - (vi) Develop management and staff incentive programs based on
performance and results against approved BUSINESS PLAN
targets 2 - (vii) Develop Strategic Planning objectives
with the Board and outline capitalization alternatives to
meet objectives
2 - (viii) Other tasks as directed by the Board
Compensation/Term:
-----------------
As provided under Paragraph 5 of the Agreement, subject to the following
provisions:
(i) "Performance Incentive", as described in the Agreement to
include the following:
. Participation in the appreciation of CUMETRIX shares'
------------
market value through an options agreement to be
developed with and agreed between the Board and
Inverness by not later than September 30, 1999.
Specifics to include rights to purchase CUMETRIX shares
at a price to be determined based on average trading
value during the six month period prior to the
effective date of the Agreement.
. In the event that no appreciation in the shares' value,
as quoted, occurs then no Performance Incentive is due
Inverness
. CUMETRIX performance at or above targets set by the
approved BUSINESS PLAN to be considered in the
determination of the performance Incentive
<PAGE>
Addendum to Agreement
dated September 8, 1999
Between CUMETRIX DATA SYSTEMS CORP.
and Inverness Partners, Inc.
Page 3
Phase 1 provision:
. At the end of the Phase 1 "period" (30 days from the effective date
of the Agreement), CUMETRIX and Inverness shall have the right to
terminate the Agreement without penalty or Performance Incentive
and with payment of fees through the 30-day period only.
. Assuming that CUMETRIX and Inverness agree not to terminate the
Agreement at the end of the 30-day period, then the Agreement shall
continue as specified above for the balance of the 12 month
contract period ("Agreement Period") and CUMETRIX shall be
responsible for compensation to Inverness under Paragraph 5. In the
event that termination by CUMETRIX occurs for any reason after the
Phase 1 period, then Inverness shall receive the lesser of: fees
per Paragraph 5 through the end of the Agreement Period, or for a
period of three months.
. In the event that termination by CUMETRIX occurs within the
Agreement Period, then Inverness to receive the Performance
Incentive benefit, if earned within the 12 month period following
termination, in addition to its weekly fees above.
CUMETRIX DATA SYSTEMS CORP. INVERNESS PARTNERS, INC.
/s/ Max Toghraie /s/ John L. Davidson
- ------------------------------------ -----------------------------------
by: Max Toghraie, Board of Directors John L. Davidson, Managing Partner
<PAGE>
November 8, 1999
Mr. John L. Davidson
Managing Partner
Inverness Partners, Inc.
P.O. Box 861
Lake Oswego, OR 97034
Dear John:
Pursuant to the Agreement (the "Agreement") effective September 8, 1999,
between Cumetrix Data Systems Corp. ("Company") and Inverness Partners, Inc.
("Inverness"), either party has the right to terminate the agreement without
penalty or payment of Performance Incentive at the end of the Phase 1 Period.
Capitalized terms used in this letter without definition have the meanings
ascribed in the Agreement. This will confirm that the parties have agreed to
modify the Agreement as follows:
1. Cumetrix may terminate the Agreement without penalty or payment of
Performance Incentive on November 8, 1999, if Inverness fails to meet
any of the following milestones:
(a) filing of the Company's 1999 10-K and first quarter 10-Q for
Fiscal 2000 with the Securities and Exchange Commission on or before
November 8, 1999;
(b) delivery to the Board of Directors of a proposed Cumetrix
Business Plan (Fiscal Year 2000/2001) on or before November 8, 1999;
and
(c) engagement of a suitable executive search firm, on or before
November 8, 1999, to search for a permanent chief executive officer
for the Company.
2. The Performance Incentive to be agreed upon between Inverness and the
Board of Directors will include rights to purchase Cumetrix shares at
a
<PAGE>
Mr. John L. Davidson
November 8, 1999
Page 2
price tied to the average trading price of Cumetrix stock for the week
following July 15, 1999.
3. The Company authorizes Inverness to lease an apartment at the
approximate rent of $1,300 per month for a term not to exceed six
months from October 23, 1999. These payments will be part of the
expenses contemplated by paragraph 5 of the Agreement. Cumetrix shall
be liable for the lease payment, regardless of whether the Agreement
is terminated by Cumetrix pursuant to paragraph 1 of this letter.
If the foregoing meets your approval, please sign the enclosed copy at the
place provided.
Very truly yours,
CUMETRIX DATA SYSTEMS CORP.
By: /s/ Max Toghraie
--------------------------------------
Board of Directors
APPROVED BY:
INVERNESS PARTNERS, INC.
By: /s/ John L. Davidson
--------------------------
John L. Davidson
Managing Partner
<PAGE>
EXHIBIT 10.18
Settlement Agreement and General Release, dated October 22, 1999, between
the Company and Inverness Partners, Inc. Incorporated by Reference to
Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999.
<PAGE>
SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS Settlement Agreement and General Release (this "Agreement") is entered
into among John Davidson ("Davidson"), Inverness Partners, Inc. ("Inverness")
and Cumetrix Data Systems Corp. (hereinafter referred to as "Company").
Recitals:
--------
A. Davidson was employed by Company as Chief Executive Officer, pursuant
to an agreement between the Company and Inverness dated September 8, 1999, as
amended October 8, 1999 (the "Services Agreement"). Company now desires that
Davidson's duties and responsibilities be terminated and that the Services
Agreement be terminated.
B. Davidson, Inverness and Company wish to enter into an agreement to
clarify and resolve any disputes which may exist between them arising out of the
Services Agreement or otherwise.
Agreements:
----------
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained below, it is agreed as follows:
1. Davidson's Position. Effective October 22, 1999, all of Davidson's
-------------------
positions with Company are terminated.
2. Cash Payments by the Company. The Company will pay to Inverness the
----------------------------
amount of $7,000 for services for the week ending October 22, 1999.
3. Contract Termination. In settlement of all amounts due under the
--------------------
Services Agreement, the Company will pay the following amounts:
(a) $55,357.14 representing the termination charge less the retainer
already paid; and
(b) $1,400 representing the purchase of airline tickets to be kept by
the company.
4. Cumetrix Apartment. Inverness and Davidson shall have the use of the
------------------
Cumetrix leased apartment for a period not to exceed 30 days.
PAGE 1
<PAGE>
5. General Release of Claims. Davidson, Inverness and the Company each
-------------------------
expressly waives any claims against any other party hereto and releases each
other party (including officers, directors, stockholders, managers, agents, and
representatives) from any claims that any of them may have in any way connected
with Davidson's employment with Company or the Services Agreement, whether or
not such claims are currently known or unknown. It is understood that this
release includes, but is not limited to, any claims for wages, bonuses,
employment benefits, or damages of any kind whatsoever, arising out of any
contracts, express or implied, any covenant of good faith and fair dealing,
express or implied, any theory of unlawful discharge, any legal restriction an
Company's right to terminate employees, or any federal, state or other
governmental statute or ordinance, including, without limitation, Title VII of
the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act
of 1967 (29 U.S.C. (S) 21, et seq.), any state laws concerning discrimination or
harassment, or any other legal limitation on the employment relationship.
This waiver and release shall not waive or release claims where the
events in dispute first arise after execution of this Agreement, nor shall it
preclude Davidson, Inverness or Company from filing a lawsuit for the exclusive
purpose of enforcing rights under this Agreement.
6. Release of Unknown Claims. It is the intention of Davidson, Inverness
-------------------------
and Company that this Agreement is a General Release which shall be effective as
a bar to each and every claim, demand, or cause of action it releases. Each
party recognizes that he or it may have some claim, demand, or cause of action
against another party of which he or it is totally unaware and unsuspecting
which he or it is giving up by execution of the General Release. It is the
intention of the parties in executing this Agreement that it will deprive each
of them of each such claim, demand or cause of action and prevent any of them
from asserting it against any other party. In furtherance of this intention,
each of the parties expressly waives any rights or benefits conferred by the
provisions of Section 1542 of the Civil Code of the State of California, which
provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
7. Confidential Information. Davidson, in the performance of Davidson's
------------------------
duties on behalf of the Company, had access to, received and was entrusted with
confidential information, including but in no way limited to, development,
marketing,
PAGE 2
<PAGE>
organizational, financial, management, administrative, production, distribution
and sales information, data, specifications and processes presently owned or at
any time in the future in the course of its business that is not otherwise in
the public domain (collectively, the "Confidential Material"). All such
Confidential Material is considered secret and was available to Davidson in
confidence. Except in the performance of duties on behalf of the Company,
Davidson shall not disclose or use any such Confidential Material, unless such
Confidential Material ceases (through no fault of Davidson) to be confidential
because it has become part of the public domain. All records, files, drawings,
documents, equipment and other tangible items, wherever located, relating in any
way to the Confidential Material or otherwise to the Company's business, which
Davidson prepares, uses or encounters, shall be and remain the Company's sole
and exclusive property and shall be included in the Confidential Material.
Whenever requested by the Company, Davidson shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Davidson's
possession or under Davidson's control.
8. Severability. The provisions of this Agreement are severable, and if
------------
any part of it is found to be unlawful or unenforceable, the other provisions of
this Agreement shall remain fully valid and enforceable to the maximum extent
consistent with applicable law.
9. Knowing and Voluntary Agreement. Each party hereto represents and
-------------------------------
agrees that he or it has read this Agreement, understands its terms and the fact
that it releases any claim he or it might have against another party, and each
has had sufficient time to consider this Agreement and seek legal counsel.
10. Entire Agreement. This Agreement sets forth the entire understanding
----------------
between the parties and supersedes any prior agreements or understandings,
express or implied, pertaining to the terms of Davidson's employment with
Company and the termination of the employment relationship and the Services
Agreement. Each party acknowledges that in executing this Agreement, he or it
does not rely upon any representation or statement by any representative of any
other party concerning the subject matter of this Agreement.
[this space intentionally left blank]
PAGE 3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates indicated below.
CUMETRIX DATA SYSTEMS CORP.
By /s/ Max Toghraie
-----------------------------------------
Its President
Dated: Oct. 22, 1999
/s/ John Davidson
-------------------------------------------
John Davidson
Dated: Oct. 22, 1999
INVERNESS PARTNERS, INC.
By /s/ John Davidson
-----------------------------------------
John Davidson
Dated: Oct. 22, 1999
PAGE 4
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,310,813
<SECURITIES> 0
<RECEIVABLES> 1,310,276
<ALLOWANCES> (300,000)
<INVENTORY> 560,535
<CURRENT-ASSETS> 8,262,176
<PP&E> 635,824
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0
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<COMMON> 12,063,414
<OTHER-SE> (4,164,960)
<TOTAL-LIABILITY-AND-EQUITY> 9,213,954
<SALES> 11,112,570
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<TOTAL-COSTS> 1,998,394
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