<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 December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Security 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 February 7, 2000, 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
1. Condensed Balance Sheets - December 31, 1999 and September
30, 1999
2. Condensed Statements of Operations - Three Months Ended
December 31, 1999 and 1998
3. Condensed Statements of Operations - Nine Months Ended December
31, 1999 and 1998
4. Condensed Statements of Cash Flows - Nine Months Ended December
31, 1999 and 1998
5. Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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>
ASSETS December 31, March 31,
1999 1999
------------ -------------
(unaudited) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 4,379,142 $ 6,743,198
Time deposits......................................................... 1,500,000 1,500,000
Trade receivables, net of allowance for doubtful accounts of $50,000
and $280,000 at December 31, 1999 and March 31, 1999, respectively... 1,034,269 1,864,685
Inventories........................................................... 560,535 2,320,127
Income tax receivable................................................. 262,430 262,430
Prepaid expenses and other current assets........................... 155,446 236,555
------------ -------------
Total current assets............................................... 7,891,822 12,926,995
------------ -------------
FIXED ASSETS, net 373,456 504,363
OTHER ASSETS........................................................... 527,822 892,429
============ =============
Total Assets....................................................... $ 8,793,100 $14,323,787
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 728,427 $ 3,945,595
Accrued expenses and other current liabilities...................... 522,061 561,018
------------ -------------
Total current liabilities.......................................... 1,250,488 4,506,613
------------ -------------
LONG-TERM DEBT, net of current portion................................. - 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 shares; issued and
outstanding, 7,392,500 and 7,392,500 at December 31, 1999 and March
31, 1999, respectively............................................... 12,063,414 12,063,414
Retained earnings..................................................... (4,520,802) (2,251,050)
------------ -------------
Total shareholders' equity......................................... 7,542,612 9,812,364
------------ -------------
Total liabilities and shareholders' equity......................... $ 8,793,100 $14,323,787
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
NET SALES....................................................... $3,951,045 $16,251,491
COST OF PRODUCTS................................................ 3,453,308 15,740,845
------------ ------------
Gross profit.............................................. 497,737 510,646
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 933,226 796,548
------------ ------------
Income (Loss) from operations............................. (435,489) (285,902)
INTEREST EXPENSE................................................ 51 1,894
INTEREST INCOME................................................. 79,698 101,071
------------ ------------
Income (loss) before provision for income taxes........... (355,842) (186,725)
PROVISION FOR INCOME TAXES...................................... - (76,719)
------------ ------------
NET INCOME...................................................... (355,842) (110,006)
============ ============
BASIC AND DILUTED EARNINGS PER SHARE............................ $ (0.05) $ (0.01)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
NET SALES....................................................... $15,063,615 $54,084,126
COST OF PRODUCTS................................................ 14,283,306 52,592,335
------------ ------------
Gross profit.............................................. 780,309 1,491,791
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 2,931,620 1,898,243
------------ ------------
Income (Loss) from operations............................. (2,151,311) (406,452)
INTEREST EXPENSE................................................ 410 4,098
INTEREST INCOME................................................. 246,576 421,738
GAIN (LOSS) ON EQUITY INVESTMENT (364,607) -
------------ ------------
Income (loss) before provision for income taxes........... (2,269,752) 11,188
PROVISION FOR INCOME TAXES...................................... - 6,052
------------ ------------
NET INCOME...................................................... (2,269,752) 5,136
============ ============
BASIC AND DILUTED EARNINGS PER SHARE............................ $ (0.31) $ 0.00
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
-------------- -------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $(2,269,752) $ 5,136
Adjustments to reconcile net income to
cash and cash equivalents used in
operating activities:
Depreciation and amortization............................ 162,000 18,900
Provision for doubtful accounts.......................... (230,000) 128,000
Loss on equity investment in subsidiary.................. 364,607 -
Options issued for services.............................. - 21,000
Changes in assets and liabilities:
Trade receivables........................................ 1,060,416 (193,632)
Inventories.............................................. 1,759,592 (1,578,759)
Deferred taxes........................................... - (25,878)
Prepaid expenses......................................... 81,109 (174,488)
Other.................................................... 34,299
Accounts payable......................................... (3,217,168) (1,809,765)
Accrued expenses......................................... (39,757) (526,832)
Income taxes payable..................................... 800 (710,911)
------------- ------------
Net cash provided (used) by operating
activities........................................... (2,328,153) (4,812,930)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets..................................... (31,093) (278,985)
Cash paid for investment...................................... - (100,000)
------------- ------------
Net cash provided (used) in investing
activities........................................... (31,093) (378,985)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net.................... - 11,203,472
Payments on long-term debt.................................... (4,810) (1,202,749)
Deferred offering costs....................................... - 514,927
Purchase of Stock from Shareholder............................ - (300,000)
------------- ------------
Net cash provided (used) in financing
activities........................................... (4,810) 10,215,650
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,364,056) 5,023,735
CASH AND CASH EQUIVALENTS, beginning of period.................. 6,743,198 4,415,690
------------- ------------
CASH AND CASH EQUIVALENTS, end of period........................ $ 4,379,142 $ 9,439,425
============= ============
CASH PAID FOR INTEREST 410 1,894
CASH PAID FOR INCOME TAXES - 730,000
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in conformity 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) necessary for a fair presentation have
been included. Operating results for the period ended December 31, 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 SFAS No. 128,
"Earnings per Share". Accordingly, "basic" earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. "Diluted" earnings per share is computed by dividing net income
by the total of the weighted average number of common shares outstanding 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 Nine Months Ended
December 31, December 31,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding-Basic 7,392,500 7,432,087 7,392,500 7,355,773
Dilutive effect of outstanding
stock options and warrants - - - 226,200
----------- ---------- ---------- ----------
Weighted average number of common
shares outstanding-Diluted 7,392,500 7,432,087 7,392,500 7,581,973
=========== ========== ========== ==========
</TABLE>
NOTE C - SEGMENT INFORMATION
The Company has two business segments. Computer Products and Computer
System Assembly and Configuration. 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 approximately 40%
of total revenues for the nine month period ended December 31, 1999 and
approximately 70% of total revenues for the quarter ended December 31, 1999.
<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 systems (the "Computer System Assembly" business),
through resellers, third-party E-commerce sites and its own system configuration
E-commerce web site, suredeals.com and sureauctions.com. The Company has reduced
its dependence on the distribution of Computer Products in response to industry-
wide price declines, resulting partly from excess manufacturer inventories and
intense price competition from overseas manufacturers. 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 the Computer System Assembly segment,
particularly through E-commerce, are the focus of the Company's current sales
and marketing efforts.
Results of Operations
- ---------------------
Sales for the nine months ended December 31, 1999 were $15,063,615 compared
to $54,084,126 in the previous year. Sales for the three months ended December
31, 1999 were $3,951,045 compared with sales of $16,251,491 for the three months
ended December 31, 1998. Sales for the nine months and three months ended
December 31, 1999 include Computer System Assembly and Configuration sales of
$6,885,000 or 46% and $1,874,000 or 48% respectively. Computer System Assembly
and Configuration sales did not exist in the same periods in the prior year.
Excluding the Computer System Assembly and Configuration sales, sales for the
nine months ended December 31, 1999 declined $45,905,511 or 85% and sales for
the three months ended December 31, 1999 declined $14,174,446 or 88%. The
decline in sales is the result of the Company's decision to substantially reduce
its dependence on the Computer Products business (in particular the distribution
of computer hard-drives) in response to changes in market conditions within this
segment of the business, and unacceptably low profit margins.
Gross profit for the nine months ended December 31, 1999 was $780,309 or
5.2% of sales, as compared with gross profit of $1,491,791 or 2.8% of sales for
the nine months ended December 31, 1998. Gross profit for the three months ended
December 31, 1999 was $497,737 or 12.6% of sales as compared with gross profit
of $510,646 or 3.1% of sales for the quarter ended December 31, 1998. The
increase in gross profit as a percent of sales for the periods is principally
attributable to higher margins from Computer System Assembly and Configuration
sales and two price increases.
Selling, general and administrative expenses for the nine months ended
December 31, 1999 were $2,931,620 as compared with $1,898,243 for the nine
months ended December 31, 1998. Selling, general and administrative expenses
<PAGE>
for the three months ended December 31, 1999 were $933,226 as compared with
$796,548 for the three months ended December 31, 1998. The increase in selling,
general and administrative 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 selling, general and
administrative expenses for the periods is presented below.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
------------ -----------
<S> <C> <C>
Salaries and wages 562,000 395,000
Rent 25,000 18,000
Insurance 16,000 27,000
Advertising/Brochure 18,000 45,000
Legal, Accounting and other professional services 101,000 53,000
Credit and Collection 87,000 100,000
Other 124,226 158,548
------------ -----------
Total 933,226 796,548
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
------------ -----------
<S> <C> <C>
Salaries and wages 1,382,000 1,069,000
Rent 80,000 54,000
Insurance 71,000 72,000
Advertising/Brochure 85,000 51,000
Legal, Accounting and other professional services 550,000 147,000
Credit and Collection 214,000 190,000
Other 549,620 315,243
------------ -----------
Total 2,931,620 1,898,243
============ ===========
</TABLE>
Interest income, primarily from the investment of the proceeds of the
Company's public offering of the Company's stock was $246,576 for the nine
months ended December 31, 1999 and $79,698 for the three months ended December
31, 1999. Interest income for the nine months ended and three months ended
December 31, 1998 was $421,738 and $101,071 respectively.
For the nine months ended December 31, 1999 the Company incurred a net loss
of $2,269,752 as compared to net income of $5,136 for the nine months ended
December 31, 1998. The Company reported a net loss of $355,842 for the three
months ended December 31, 1999 as compared to a net loss of $110,006 for the
three months ended December 31, 1998. The decrease in net earnings for the nine
months and three months ended December, 31, 1999, of $2,274,888 and $245,836,
respectively, as compared with the same periods in the prior year is
attributable to the decrease in sales volume and higher selling, general and
administrative expenses associated with the investigative matters previously
noted.
<PAGE>
Liquidity and Sources of Capital
- --------------------------------
For the nine months ended December 31, 1999 net cash used by operating
activities was $2,328,153 as compared to net cash used by operating activities
of $4,812,930 for the same period in the prior year. The net use of cash for the
nine months ended December 31, 1999 was principally the result of net operating
losses and a decrease in accounts payable. For the nine months ended December
31, 1998, the principal use of cash by operating activities was the increase in
inventories, prepaid expenses, trade receivables, deferred taxes and decreases
in accounts payable, accrued expenses and income taxes payable.
Capital expenditures of $31,093 and $278,985 for the nine months December
31, 1999 and 1998, respectively, constitute the principle use of cash from
investing activities.
Cash flows from financing activities for the nine months December 31, 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 December 31, 1999 the Company had $5,879,142 in cash, cash
equivalents and investment deposits and working capital of $6,641,334 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 December 31, 1999 the Company had an
outstanding balance on this credit line of $462,551.
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 and disciplinary actions were taken
with certain other non-management employees.
The Company failed to file timely its Annual 10-K Report for the fiscal
year ended March 31, 1999 and its Quarterly 10-Q Report 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, respectively. The
Company employed an independent management consultant as Chief Executive Officer
in early September, 1999 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
<PAGE>
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 resulted in the
elimination of approximately 25% 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.
In December, 1999, Mr. Herbert Tom was appointed as the Company's new Chief
Financial Officer. Mr. Tom's background includes extensive experience in
operations as well as finance and accounting. Mr. Tom is a certified public
accountant and holds a master's degree in business administration.
On January 31, 2000, the Company's agreement with Finova Capital
Corporation to insure the availability of funds to meet the Company's various
cash flow needs was terminated. The Company believes it has adequate resources
to achieve its operating plans for at least the next twelve months.
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. As of February 7, 2000 the
Company has experienced no major problems related to its Year 2000 readiness.
Forward-Looking Statements
- --------------------------
Certain statements in this Form 10-Q contain "forward-looking statements"
(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. 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
<PAGE>
Securities and Exchange Commission filings, including the Company's Form 10-K
for the fiscal year ended March 31, 1999.
PART II. OTHER INFORMATION
- --------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
(b) Form 8-K - Dated November 19, 1999, Item 4 - Changes in Registrants
Certifying Accountants. Announcing termination of Arthur
Andersen LLP as the Company's principal accountants.
Form 8-K - Dated January 27, 2000, Item 4 - Changes in Registrants
Certifying Accountants. Announcing Singer, Lewak,
Greenbaum & Goldstein, LLP as the Company's new principal
accountants.
SIGNATURE
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.
Date: February 7, 2000 CUMETRIX DATA SYSTEMS CORP.
/s/ Herbert H. Tom
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,879,142
<SECURITIES> 0
<RECEIVABLES> 1,084,269
<ALLOWANCES> (50,000)
<INVENTORY> 560,535
<CURRENT-ASSETS> 7,891,822
<PP&E> 639,324
<DEPRECIATION> (265,868)
<TOTAL-ASSETS> 8,793,100
<CURRENT-LIABILITIES> 1,250,488
<BONDS> 0
0
0
<COMMON> 12,063,414
<OTHER-SE> (4,520,802)
<TOTAL-LIABILITY-AND-EQUITY> 8,793,100
<SALES> 15,063,615
<TOTAL-REVENUES> 15,063,615
<CGS> 14,283,306
<TOTAL-COSTS> 2,931,620
<OTHER-EXPENSES> 364,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 410
<INCOME-PRETAX> (2,269,752)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,269,752)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,269,752)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
