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--------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
--------------------------------------------------
Commission fle number: 001-14001
CUMETRIX DATA SYSTEMS CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 5045 95-4574138
---------- ---- ----------
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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Max Toghraie, Chief Executive Officer
957 Lawson Street, Industry, California 91748
(626) 965-6899
(Address of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
-------------------------------------------------------------------------------------
Title of each class Name of each exchange on which registered
-------------------------------------------------------------------------------------
Common Stock, No Par Value OTC Bulletin Board
-------------------------------------------------------------------------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 past 90 days.
Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X
---
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on July 11, 2000, was $8,537,360 based on a $1.62 average of the high
and low sales prices for the Common Stock on such date. For the purpose of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such executive officers and directors are, in fact, affiliates of the
Registrant.
As of July 11, 2000, the Company had 7,392,500 shares of Common Stock
outstanding.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
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Page
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
Signatures
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2
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ITEM 1. BUSINESS.
Cumetrix Data Systems Corp. (the "Company") is a direct marketer and
supplier of computer systems and hardware components, and a provider of computer
configuration and assembly services, to online retailers, consumers, and small
office/home office marketplace. The Company markets its products through three
primary channels: vendor relationships with other Internet marketing companies,
an online store, "Suredeals.com" and an internal telemarketing sales force.
Computer Products Distribution
The Company's principal business during fiscal 2000, providing the majority
of the Company's revenues for the year, was the sale of fully configured
personal computers and a range of computer related products to online retailers.
These products include private label personal computers, CD-recorders, memory
chips, microprocessors and mother boards, modems, as well as other items for
personal computers.
The Company reduced its dependence on the computer products business at the
end of fiscal 1999 as a result of competitive market conditions and the
resulting inability to operate the business with gross margins sufficient enough
to avoid recurring losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company holds a 29% equity interest in Online Transaction Technologies,
Inc. ("OTT"), an Internet Application Service Provider focused on business to
business exchange software solutions. The Company also holds a minority interest
in Salescentrix.com, a Canadian based Internet Application Service Provider.
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. Its telephone number is 626-965-
6899, and its facsimile number is 626-965-8159.
Computer Sales
During fiscal 2000, the Company had more than 2,000 active customers. One
customer accounted for more than 10% of net sales. This customer accounted for
18% of net sales.
The Company previously marketed its wholesale computer products exclusively
via a direct sales staff, using telemarketing techniques to identify, qualify
and close business. In the middle of fiscal 1998, the Company began to develop
a channel program to sell its computer products through Original Equipment
Manufacturers, System Integrators, and Independent Software Vendors. 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. With the Company's shift to Internet computer and component sales, the
Company's sales staff has been assigned new functions and responsibilities. As
of March 31, 2000, the Company employed 5 sales representatives. This sales
staff now operates primarily as an Internet based marketing force focused on
generating VAR and reseller leads for the Company's e-commerce site,
3
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suredeals.com, as well as sales of additional configuration and upgrade services
to our web site's end-user and retail customers.
Internet Computer Sales
Since April, 1999, the Company's principal business focus has been the
electronic sale and marketing of computer systems and components through a
direct business to business and business to consumer model. The Company
currently offers computer hardware, peripherals, accessories, networking
products and software. The Company selects the products that it sells based
upon their technology and effectiveness, market demand, product features,
quality, price, margins and warranties.
The Company markets its products and services through its Internet Web
site, suredeals.com, other Internet marketing partners such as Egghead.com and
CNet.com., and its outside sales representatives and telemarketing sales
representatives. Through its e-commerce site, the Company provides its
customers product information and pricing, and enables its customers to place
electronic orders for a range of computers and computer related products as well
as perform online PC configuration and customization tasks. The Company also
operates an e-commerce auction site, sureauctions.com, which offers a select
range of computer products and peripherals through an auction format.
The goal of suredeals.com is to provide a broad array of fully configured
personal computers and related products to consumers and businesses. The
Company will attempt to leverage its knowledge of the computer industry and the
Internet, and its ability to deliver competitive levels of customer service.
The Company has focused primarily on sales of upgrades and additional
configuration services as a way to enhance its relatively low margins on entry
level personal computer systems sales. This strategy gives the Company the
ability to offer low cost and convenient custom configuration services to both
end user and corporate markets. The Company is currently evaluating the addition
of new product categories to Suredeals.com.
The Company offers a limited 30-day money back guarantee for most unopened
products and selected opened products, although some products are subject to
restocking fees. Substantially all of the products marketed by the Company are
warranted by the manufacturer. The Company generally accepts returns directly
from the customer and then either credits the customer's account or ships the
customer a similar product from the Company's inventory. The Company typically
offers a one-year limited parts and labor warranty on all computer systems it
markets through its various sales channels and Internet marketing partners. The
Company offers longer warranty terms at an additional cost.
Internet Computer Marketing Sales and Customers
In April 1999, the Company launched suredeals.com, it's commercial Internet
web site and began accepting electronic orders. Product descriptions and prices
are provided on-line, with full, updated information. The Company offers, and
continuously updates, selected product offerings and other special buys.
The Company's marketing and advertising programs has included advertising
on national radio and web sites as well as placement of evaluation systems for
review by leading magazines and websites designed to increase brand awareness
within the industry. During fiscal 2000, the
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Company launched a national advertising campaign aimed at boosting public-
awareness of its web site suredeals.com through banner and e-mail advertising on
other trade sites such as PCworld.com. The Company also launched a national
radio advertising campaign with the number one nationally syndicated radio
program targeted to computer savvy buyers.
Vendor Relationships and Procurement
During fiscal 2000, the Company had relationships with manufacturers and
distributors around the world as suppliers of its computer products business.
The Company was a reseller of selected product lines and single components from
major manufacturers, including Advanced Micro Devices, Inc., Adaptec Inc.,
Fujitsu Computer Products of America, Samsung Electronics Co. Ltd., Quantum
Corporation, Maxtor Corporation, Matrox Electronics Systems, Ltd., Intel
Corporation, Toshiba Corporation and Pioneer Electronics Corp. For the fiscal
year ending March 31, 1999, DSS, a distributor of hard drives to the Company
accounted for 55% of the Company's purchases and for the fiscal year ending
March 31, 2000, Advanced Micro Devices, Inc., a computer chip manufacturer
accounted for 50% of the Company's purchases. As a result of the Company's
substantial exit from the computer products business, the Company's vendor mix
has changed significantly.
The Company's Internet computer and computer products sales business
procures products from major manufacturers, including Advanced Micro Devices,
Inc. ("AMD"), Intel Corp., Diamond Multimedia, Inc., Teac, Inc., Adaptec and
others. The Company believes that its relationships with its vendors are
satisfactory and does not believe that the loss of its relationship with any
other of its vendors would materially adversely affect its business. See
"Cautionary Statements and Risk Factors-Dependence Upon Relationships with
Vendors".
Inventory Management
The Company's vendor relationships enable it to receive generally prompt
and consistent deliveries. The Company attempts to maintain a limited
inventory, and as a result avoid certain 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.
Competition
Internet retailing and electronic commerce in general is a rapidly evolving
and intensely competitive environment. There are few barriers to entry and
current or new competitors can launch new sites quickly and inexpensively. In
addition, the computer products industry as a whole is intensely competitive.
Our current competitors include: mass merchants and traditional retailers such
as CompUSA, mail-order retailers such as CDW, Micro Warehouse, Insight and
Creative Computers, Internet-only computer retailers such as Buy.com, and
manufacturers that sell directly over the Internet or by telephone such as Dell
and Gateway, as well as many other computer manufacturers.
Many of the Company's competitors have longer operating histories, larger
customer bases, greater brand recognition, and significantly greater financial,
marketing and other resources. The Company believes that the principal
competitive factors in its market include: brand recognition,
5
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customer service, selection, convenience and price. Many of the Company's
competitors have adopted aggressive pricing policies in order to gain market
share and build brand recognition. In addition, as use of the Internet and other
online services increases, the Company believes that competition may increase as
online retailers are acquired by, receive investments from, or enter into other
commercial relationships with, large, well-established and well-financed
companies. Such increased competition may result in reduced operating margins,
loss of market share and a diminished brand franchise. This could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Government Regulation
The Company's business is or will be subject to a number of regulations
relating to the Internet and auctioneering. Several states have laws that
regulate auctions and auction companies within their jurisdiction. The burdens
of complying with auctioneering laws in other states could materially increase
the Company's cost of doing business. Similarly, other states may construe
their existing laws governing issues such as property ownership, sales tax,
libel and personal privacy to apply to Internet companies servicing consumers
within their boundaries. Resolution of whether or how such laws will be applied
is uncertain.
Tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by certain foreign governments that would impose taxes on the sale of
goods and services and certain other Internet activities. The Company's business
may be harmed by the passage of laws in the future imposing taxes or other
burdensome regulations on Internet commerce.
Employees
As of March 31, 2000, the Company had 37 full time employees. At that time,
the Company employed 5 sales, 2 purchasing, 14 technical support and assembly, 7
administrative and finance, and 9 warehousing and delivery related personnel.
The Company does not have any unionized employees and believes its relationship
with its employees is satisfactory.
The Company believes its future success will depend in large part on its
ability to recruit and retain qualified employees. There can be no assurances
that the Company will be successful in retaining or recruiting key personnel.
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located in a leased facility in the
City of Industry, California comprised of approximately 21,900 square feet of
office and warehouse space.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is periodically engaged in certain routine legal
proceedings, the Company is not aware of any legal proceedings or claims that it
believes will have a material adverse effect on the Company or its financial
condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock commenced trading on April 8, 1998 on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "CDSC" and the Boston Stock Exchange under
the symbol "CDS". Prior to that time, there was no public market for the
Company's Common Stock. The Company's stock was delisted from Nasdaq and the
Boston Stock Exchange on August 30, 1999 for failure to meet their standards,
primarily due to the Company's failure to keep current its reports to the
Securities Exchange Commission pursuant to the Securities Exchange Act of 1934.
The Common Stock presently trades on the Over-the-Counter Electronic Bulletin
Board.
The following table sets forth, for the period indicated, the high and low
closing or bid prices per share of the Common Stock.
<TABLE>
<CAPTION>
PRICE RANGE
HIGH LOW
<S> <C> <C>
Quarter ended June 30, 1998 $7.125 $ 6.00
(from April 8, to June 30, 1998)
Quarter ended September 30, 1998 $ 7.25 $ 4.00
Quarter ended December 31, 1998 $6.562 $ 3.75
Quarter ended March 31, 1999 $9.625 $3.562
Quarter ended June 30, 1999 $ 7.00 $2.375
Quarter ended September 30, 1999 $3.437 $ 0.75
Quarter ended December 31, 1999 $ 2.00 $0.687
Quarter ended March 31, 2000 $4.968 $1.062
</TABLE>
The closing sale price of the Common Stock on July 11, 2000 was $1.50 per
share (see "Cautionary Statements and Risk Factors - Delisting"). Because the
Common Stock is delisted from trading on Nasdaq and the Boston Stock Exchange
and the trading price is less than $5.00 per share, trading in it is subject to
the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934. Under this rule, broker/dealers who recommend these 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 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 with the penny stock market. These
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requirements would likely severely limit the market liquidity of our Common
Stock and the ability of our shareholders to dispose of their shares,
particularly in a declining market.
Dividends
The Company has not paid any cash dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance its
development and expansion and therefore does not anticipate the payment of any
cash dividends in the foreseeable future. Payment of future dividends, if any,
will depend upon future earnings and capital requirements of the Company and
other factors which the Board of Directors considers appropriate.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating data of the
Company for the periods indicated. The following selected statement of
operations data for the years ended March 31, 1999 and March 31, 1998, and the
balance sheet data as of March 31, 1999 and March 31, 1998 are derived from the
financial statements and the notes thereto included elsewhere herein audited by
Arthur Andersen LLP, independent public accountants, as set forth in their
report also included elsewhere herein. The following selected statement of
operations data for the year ended March 31, 2000, and the balance sheet data as
of March 31, 2000 are derived from the financial statements and the notes
thereto included elsewhere herein audited by Singer, Lewak, Greenbaum &
Goldstein, LLP, independent public accountants, as set forth in their report
also included elsewhere herein. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and notes
thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Statements of Operations Data:
Net Sales
Nonaffiliates $18,629,566 $62,633,340 $70,154,439
Affiliate (1) - - 1,391,300
Other (2) - 1,180,010 949,735
----------- ----------- -----------
18,629,566 63,813,350 72,495,474
Cost of Products:
Nonaffiliates 18,087,762 61,763,312 67,422,362
Affiliate (1) - - 1,314,408
Other (2) - 1,148,321 731,727
----------- ----------- -----------
18,087,762 62,911,633 69,468,497
Gross profit:
Nonaffiliates 541,804 870,028 2,732,077
Affiliate (1) - - 76,892
Other (2) - 31,689 218,008
----------- ----------- -----------
541,804 901,717 3,026,977
</TABLE>
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<TABLE>
<CAPTION>
Year ended Year ended Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Statements of Operations Data:
Net Sales
Selling, general and
administrative expenses 4,211,141 3,292,569 1,542,294
Write-off of capitalized
purchased software - 1,100,000 -
----------- ----------- -----------
Income (loss) from operations (3,669,337) (3,490,852) 1,484,683
Interest income (316,434) (514,345) (68,158)
Interest expense 1,746 4,652 239,791
Loss on Equity investment 896,157 122,000 -
Other (income) expense, net - (1,365) 10,160
----------- ----------- -----------
Income (loss) before provision
for income taxes (4,250,806) (3,101,794) 1,302,890
Provision (benefit) for income
taxes (278,871) (102,228) 579,738
----------- ----------- -----------
Net income (loss) $(3,971,935) $(2,999,566) $ 723,152
=========== =========== ===========
Basic earnings (loss) per share $ (0.54) $ (0.41) $ 0.16
Diluted earnings (loss) per $ (0.54) $ (0.41) $ 0.16
share
Weighted average number of
common shares outstanding
-Basic (3) 7,392,500 7,364,828 4,544,759
-Diluted (3) 7,392,500 7,364,828 4,639,041
Balance Sheet Data:
Working capital $ 5,234,224 $ 8,420,382 $ 97,504
Total assets 7,754,624 14,323,787 12,185,185
Total liabilities 1,789,195 4,511,423 10,394,080
Retained earnings
(deficit) (6,222,985) (2,251,050) 748,516
Shareholders' equity 5,965,429 9,812,364 1,791,105
</TABLE>
(1) Relates to sales at fair market value made to Samax Technology Inc., a
company controlled by the mother of Mr. Max Toghraie.
(2) Relates to unauthorized sales to customers which management believes are on
terms more favorable than given to other customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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(3) See Note 2 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing basic and
diluted earnings (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company and should
be read in conjunction with "Selected Financial Data" and the financial
statements and the notes thereto, each of which is included elsewhere in this
Form 10-K. Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond the Company's control. Actual results could differ materially from those
projected in the forward looking statements as a result of, among other factors,
the factors set forth under the caption "Cautionary Statements and Risk Factors"
below.
Overview
The Company was founded in April 1996, and until December 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 entered the system configuration business.
The Company substantially reduced its dependence on its Computer Products
Business at the end of fiscal 1999 as a result of the inability of the Company
to operate the business with gross margins sufficient to avoid recurring losses.
The industry has come to be characterized by aggressive price cutting which
intensified in the first quarter of fiscal 1999 as a result of industry wide
pricing pressures resulting from excess supplies from major manufacturers and
reduced overall demand in the personal computer industry. The Company did not
fully anticipate the severity of this issue or react adequately. As a result of
these pricing pressures, the Company's margins were pressured and the Company
attempted to shift to higher margin wholesale computer product sales. The
Company was unable to be competitive in this area, and business and operating
results were adversely affected.
Due to increased anticipated costs (and other factors discussed elsewhere),
the Company has written off its investment in capitalized software related to
ACSA as of March 31, 1999, and the Company will not generate any revenues from
the ACSA Solution.
Results of Investigation
On July 13, 1999 the Company announced the preliminary results of an
internal investigation into certain improprieties and record-keeping
irregularities. In connection with this investigation, James Ung, the President
of the Company and a director, and Mei Yang, the Secretary, Treasurer and a
director of the Company, were relieved from all executive officer and employment
responsibilities held by them. The Company did not nominate Mr. Ung and Ms.
Yang for election as directors at the Company's annual meeting.
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Additionally, the Audit Committee of the Company's Board of Directors
directed counsel to retain a special investigative unit of the Company's outside
auditors, Arthur Andersen LLP, to assist it in the investigation.
Since the audit committee was still in the process of completing their
investigation, the Company was not able to timely file its March 31, 1999 Annual
Report on Form 10-K. The Company contacted the staff of the Securities and
Exchange Commission to provide complete details of the preliminary results of
the internal investigation.
The Company took appropriate actions to mitigate any damages to the Company
resulting from events giving rise to the investigation. At the conclusion of the
investigation, the following actions were taken: the Company dismissed James
Ung, the President of the Company and a director and Mei Yang, the Secretary,
Treasurer and a director of the Company, the revenues, cost of products and net
income for the second and third quarters of fiscal 1999 were restated in the
financial statements set forth in its Quarterly Reports on Form 10-Q to properly
disclose the unauthorized transactions.
The record-keeping irregularities and other improprieties reported in the
conclusions of the investigation resulted in a reduction of reported revenues
and cost of products during the second and third quarters of fiscal 1999 of
$166,000 and $240,000, respectively, from previously reported revenues of
$19,418,109 and $16,251,491, respectively. Other record-keeping errors also
resulted in a reduction of reported net income during the second and third
quarters of fiscal 1999 of $14,873 and $109,776 respectively, from previously
reported net income (loss) of $86,493 and ($110,006), respectively. As a
result, the Company has restated and re-filed the financial statements set forth
in its Quarterly Reports on Form 10-Q for the applicable periods.
Results of Operations
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company for the
years ended March 31, 2000, 1999 and 1998.
Year ended March 31, 2000 and 1999
Net Sales. Net sales for the year ended March 31, 2000 were $18,629,566
compared to $63,813,350 for the year ended March 31, 1999. This decrease of
$45,183,784 in net sales is attributable to continued industry oversupply,
resulting pricing pressures, the Company's unwillingness to compete for lower
margin business and a significant decrease in sales as the Company discontinued
its emphasis as a distributor of hard drives.
Cost of Products. Cost of products decreased $44,823,871 from $62,911,633
to $18,087,762 for the year ended March 31, 1999 and 2000 respectively. This
decrease is mainly attributable to the decrease in net sales previously
discussed. In fiscal year 1999, as a result of the internal investigation, the
Company accrued $150,000 for anticipated expenses related to the unauthorized
sales of software. In fiscal year 2000, the Company determined that these
amounts would not be paid and therefore reversed this accrual.
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Gross Profit. Gross profit for the year ended March 31, 2000 was $541,804
compared to $901,717 for the year ended March 31, 1999. Gross profit as a
percentage of net sales was 2.9% for the year ended March 31, 2000 compared to
1.4% for the year ended March 31, 1999. This represents a 107% increase in gross
profit ratios, and is mainly attributable to sales of higher margin products and
the accrual reversal of $150,000 for anticipated expenses related to the
unauthorized sales of software.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for year ended March 31, 2000 were $4,211,141 compared
to $3,292,569 for the year ended March 31, 1999.
The major components of selling, general and administrative expenses for
the periods include the following:
<TABLE>
<CAPTION>
Year ended Year ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Payroll (including commissions) $1,835,000 $1,488,000
Rent 135,000 74,000
Insurance 119,000 84,000
Advertising 90,000 145,000
Legal, accounting and other 440,000 490,000
Credit and collection (including bad debt
expense) 452,000 433,000
Outside services 329,000 26,000
Internet Development & Support 37,000 65,000
Depreciation & amortization 166,000 89,800
Other (under 5%) 608,141 397,769
---------- ----------
Total $4,211,141 $3,292,569
========== ==========
</TABLE>
The increase of $918,572 in selling, general and administrative expenses is
attributable to increased management costs and overhead and increased use of
outside consultants. Although staffing levels have decreased, higher management
costs relate to higher salaries and wages for executive level employees. SG&A
costs in the period included rent, director and officer's insurance costs, legal
and accounting costs and other costs related to being a public company.
Write-Off of Capitalized Purchased Software
The Company attempted to implement its ACSA automated custom software
configuration assembly line solution. In this regard, the Company invested in
fixed assets comprising an assembly line and related computer equipment. The
Company also 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 the
Company's ACSA Solution. The Company paid CASI a onetime license fee of $1.1
million. The payments under the CASI Note were initially capitalized. The
Company has written off its investment in capitalized software related to ACSA
as of March 31, 1999. While certain
12
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hardware and assets related to the ACSA solution are currently being used by the
Company, the CASI software is not being used and the Company does not intend to
generate any significant revenue from this software.
Interest Income
Interest income of $316,434 for the year ended March 31, 2000 is primarily
due to interest income earned on the investment of proceeds from the April 8,
1998 Initial Public Offering. The interest income decrease of $197,911 in
fiscal year 2000 compared to fiscal year 1999 is primarily due to increased
investment activities and the funding of losses from operations.
Interest Expense
Interest expense for the year ended March 31, 2000 was $1,746 compared to
$4,652 for the year ended March 31, 1999.
Loss on Equity Investment
Loss on equity investment for the year ended March 31, 2000 was $896,157
which relates to the Company's investment in Online Transaction Technologies.
The Company's investment provided substantially all of Online Transaction
Technologies working capital.
Net Loss
Net loss for the year ended March 31, 2000 was $3,971,935 compared to a net
loss of $2,999,566 for the year ended March 31, 1999. The increase of $972,369
is mainly attributable to the decrease in gross profit, the loss on equity
investment, and higher selling, general and administrative expenses.
Year ended March 31, 1999 and 1998
Net Sales. Net sales for the year ended March 31, 1999 were $63,813,350
compared to $72,495,474 for the year ended March 31, 1998. This decrease of
$8,682,124 in net sales is attributable to continued industry oversupply,
resulting pricing pressures, the Company's unwillingness to compete for lower
margin business and a significant decrease in sales during the fourth quarter as
the Company discontinued its emphasis as a distributor of hard drives.
Cost of Products. Cost of products decreased $6,556,864 from $69,468,497 to
$62,911,633 for the year ended March 31, 1998 and 1999 respectively. This
decrease is mainly attributable to the decrease in net sales and was offset by
increases in inventory reserves of approximately $516,000 recorded during the
fourth quarter. In connection with the fraud investigation, the Company has also
accrued a liability of $150,000 for the unauthorized sales of software.
Gross Profit. Gross profit for the year ended March 31, 1999 was $901,717
compared to $3,026,977 for the year ended March 31, 1998. Gross profit as a
percentage of net sales was 1.4% for the year ended March 31, 1999 compared to
4.2% for the year ended March 31, 1998. This represents a 67% decrease in gross
profit ratios, and is mainly attributable to industry oversupply, the resulting
pricing pressures facing the industry as a whole and additional
13
<PAGE>
inventory reserves required to reduce inventory levels to net realizable values
based upon the continuing drop in prices of acquired product in the fourth
quarter and subsequent to year end along with the impact of the reserve for
unauthorized sales of software.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for year ended March 31, 1999 were $3,292,569 compared
to $1,542,294 for the year ended March 31, 1998.
The major components of selling, general and administrative expenses for
the periods include the following:
<TABLE>
<CAPTION>
Year ended Year ended
March 31, 1999 March 31, 1998
<S> <C> <C>
Payroll (including commissions) $1,488,000 $ 987,443
Write-off of related party receivable - 100,000
Rent 74,000 35,000
Insurance 84,000 24,000
Advertising 145,000 3,000
Legal, accounting and other 490,000 58,000
Credit and collection (including bad debt
expense) 433,000 154,000
Internet Development & Support 65,000 -
Depreciation & amortization 89,800 9,000
Other (under 5%) 423,769 171,851
---------- ----------
Total $3,292,569 $1,542,294
========== ==========
</TABLE>
The increase of $1,750,275 in selling, general and administrative expenses
is attributable to increased staff and overhead to support the marketing
activity of the Company. In addition, the Company hired additional personnel in
all areas to facilitate growth of the Company's infrastructure and expansion.
SG&A costs in the period included rent in a larger facility, D&O insurance
costs, legal and accounting costs and other costs related to being a public
company. The Company also recorded reserves related to litigation described
elsewhere herein (see Item 3, legal proceedings). In addition, in accordance
with FAS No. 123, included in SG&A is a non-cash charge of $117,000 for options
given to outside advertising consultants.
Interest Expense
Interest expense for the year ended March 31, 1999 was $4,652 compared to
$239,791 for the year ended March 31, 1998. This decrease was due to the
amortization of deferred financing costs related to the Bridge Financing raised
in November and December of 1997, which was repaid in April 1998 from the
Initial Public Offering proceeds.
14
<PAGE>
Interest Income
Interest income of $514,345 for the year ended March 31, 1999 is primarily due
to interest income earned on the investment of proceeds from the Initial Public
Offering.
Net Loss
Net loss for the year ended March 31, 1999 was $2,999,566 compared to net
income of $723,152 for the year ended March 31, 1998. The decrease of $3,722,718
is mainly attributable to the decrease in gross profit, the write-off of
capitalized purchase software costs, the loss on equity investment, and higher
selling, general and administrative expenses, offset by interest income.
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,
described below.
On April 8, 1998, the Company's initial public offering (the "Initial Public
Offering") of 2,702,500 shares of Common Stock at $5 per share including
overallotment of 352,500 shares provided net proceeds (after deducting issuance
costs) of $11,200,000.
In the third quarter of fiscal year 1998, the Company completed a financing
(the "Bridge Financing") consisting of the sale of 20 units which generated
gross proceeds of $1 million (net proceeds of approximately $678,000). Each unit
was comprised of: (i) an unsecured promissory note of the Company in the
principal amount of $20,000 (ii) 15,000 shares of Common Stock of the Company,
and (iii) 5,000 warrants of the Company, each to purchase one share of Common
Stock of the Company, 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. 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 paid the remainder of its indebtedness under the
CASI note and the Datatec Note from proceeds of the Initial Public Offering.
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation ("Finova"). In September 1998, the Company entered
into a new credit facility with 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. Due to the company's substantially reduced volume of distribution
business, the company terminated its relationship with Finova as of January
2000.
Net cash used by operating activities during the year ended March 31, 2000 was
primarily attributable to a loss from operations and decreases in accounts
payable. Net cash provided by financing activities for the year ended March 31,
2000 was due primarily to proceeds from a long-term note, offset by payments on
notes. Net cash used in investing activities was due to purchases of fixed
assets, investment in a time deposit, and the investment in OTT.
15
<PAGE>
Bridge Loan
-----------
On June 16, 2000, the Company signed a letter of intent to borrow $1,500,000
in the form of a bridge loan. As part of the letter of intent, the Company will
pay at closing $150,000 in fees and issue a warrant giving the lender the right
to purchase 100,000 shares of the Company's common stock at an exercise price
equal to 125% of the average closing bid price of the common shares for the five
trading days immediately prior to the closing date, exercisable within four
years from the closing date.
The bridge loan is payable or convertible into the Company's common stock no
earlier than 181 days after the closing date. The note will bear interest at 8%
per annum and will be collateralized by the Company's stock, upon the occurrence
of an Event of Default (as defined) and/or if the note remains unpaid on the
date that is 180 days after the closing date, the note shall thereafter carry an
interest rate of 12% per annum. The Company can redeem the note within 180 days
at a redemption premium as defined. The holder has an option to convert the note
at any time within 180 days of the closing into common stock of the Company on
terms as defined. In addition, the Company will issue to each holder a repricing
warrant which entitles the holder to acquire additional shares of common stock
at exercise prices as defined. The Company has the option to pay the cash value
of the repricing warrants in lieu of shares of common stock.
In addition, the holders shall also receive from the Company four-year
warrants exercisable for such number of shares of common stock that equals 20%
of the initial principal amount of the loan divided by the closing price. The
warrants shall have an exercise price equaling 110% of the closing price.
Acquisition
-----------
On May 22, 2000, the Company initially purchased 125,000 shares of common
stock in Salescentrix.com, Inc., a Canadian based provider of e-business
solutions to small and medium-sized businesses, for $250,000. The Company's
initial investment of $250,000 represents less than 2% of the equity interest in
the investee.
Under the terms of the stock purchase agreement between the Company and
Salescentrix.com, the Company has acquired the rights to purchase Common Stock
and Warrants in three separate stages, each stage is contingent on the previous
stage. In Stage One, the Company has the right to purchase up to 925,000
additional shares of Common Stock at $2.00 per share at any time until June 30,
2000. In addition, the Company shall be issued warrants to purchase
210,000 shares of Common Stock at $2.00 per share at any time until June 1,
2004 (`Stage One"). As of July 11, 2000, the Company had not exercised it's
right to purchase Common Stock under Stage One. As a result, Salescentrix.com
has extended the expiration date of Stage One from June 30, 2000 to July 20,
2000.
If all shares are purchased in Stage One, the Company may purchase up to
822,222 additional Common Stock at $2.25 per share at any time until September
30, 2000 and the Company shall be issued warrants to purchase up to 111,111
shares of Common Stock at $2.25 per share at any time until August 31, 2000.
("Stage Two") In addition, the Company shall be issued a Bonus Warrant to
purchase up to 210,000 shares of Common Stock at a price of $2.25 per share at
any time until September 30, 2004. The Bonus Warrant shall be exercisable in
proportion to the number of shares of Common Stock purchased in Stage Two.
16
<PAGE>
If all shares are purchased in Stage One and Stage Two, the Company may
purchase up to 740,000 additional Common Stock at $2.50 per share at any time
until January 31, 2001 and the Company shall be issued warrants to purchase up
to 100,000 shares of Common Stock at $2.50 per share at any time until December
31, 2000. ("Stage Three") In addition, the Company shall be issued a Bonus
Warrant to purchase up to 210,000 shares of Common Stock at a price of $2.50 per
share at any time until March 31, 2005. The Bonus Warrant shall be exercisable
in proportion to the number of shares of Common Stock purchased in Stage Three
The Company believes that current funds are sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the next
year.
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.
CAUTIONARY STATEMENTS AND RISK FACTORS
Delisting
The Company's common stock has been delisted from Nasdaq and the Boston Stock
Exchange for failure to meet their standards--primarily due to the Company's
failure to keep current its reports to the Securities Exchange Commission,
pursuant to the Securities Exchange Act of 1934.
Delisting could materially adversely affect the trading market for the Common
Stock and the Company's access to the capital markets. It will be necessary for
the Company to re-apply for initial listing once it determines that it can meet
the initial listing requirements. The Company currently cannot qualify for
initial listing with Nasdaq, and it may never meet those qualifications.
The closing sale price of our Common Stock on March 31, 2000 was $3.00 per
share. Because the Common Stock is delisted from trading on Nasdaq and the
Boston Stock Exchange and the trading price is less than $5.00 per share,
trading in it is subject to the requirements of Rule 15g-9 promulgated under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these 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 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 with the penny stock market. These requirements
would likely severely limit the market liquidity of our Common Stock and the
ability of our shareholders to dispose of their shares, particularly in a
declining market.
17
<PAGE>
We face litigation risks resulting from our internal investigation.
In connection with the Audit Committee's investigation into certain
improprieties and record-keeping irregularities, James Ung, the Company's
President, a director and a significant shareholder, and Mei Yang, the Company's
Secretary, Treasurer, director and a significant shareholder, were relieved of
all executive officer and employment responsibilities. During the course of the
investigation, the Company's Audit Committee uncovered evidence of the
unauthorized resale of certain software.
Mr. Ung and Ms. Yang each were party to employment agreements with the
Company. A termination of James Ung without "cause" (as defined in the
employment agreement), would require the payment to Mr. Ung of an amount equal
to 6 months of his then current base salary. Ms. Yang was not entitled to any
payments upon a termination without cause. Based on the information uncovered
during the investigation, the Company elected to treat Mr. Ung's and Ms. Yang's
relief of their executive officer and employment responsibilities as
terminations for "cause" (as defined in the employment agreements). Mr. Ung and
Ms. Yang may allege breach of their employment agreements or other injury
resulting from alleged wrongful termination of employment, libel, slander, or
other alleged wrongful or tortious acts.
Mr. Ung and Ms. Yang are still significant shareholders and their votes could
have a significant impact on the Company.
We operated at a loss during the year ended March 31, 2000, and we anticipate
continuing to operate at a loss for the foreseeable future.
For the year ended March 31, 2000, our net loss was $3,971,935 compared to a
net loss of $2,999,566 for the year ended March 31, 1999. Further, due to the
significant development and marketing costs we have and will incur in the
implementation of our internet strategy, we foresee operating at a loss for the
foreseeable future.
We have only limited experience with Internet and e-commerce operations.
We have only been selling products via our suredeals.com website since April
1999 and have not yet provided products via sureauctions.com, our auctions
website. While we have attempted to consult with experienced Internet
professionals in the development of these websites, we have only limited
knowledge and experience with Internet and e-commerce operations. We can give
no assurance that our Internet strategy will achieve market acceptance, or that
our Internet websites will ever achieve profitability.
We face intense competition in the Internet e-commerce industry from other e-
commerce businesses, many of whom have significantly greater access to capital,
significantly greater name or brand recognition in the market, and greater
experience in the Internet e-commerce industry. In the computer products e-
commerce business, these competitors include Value America, Buy.com,
Egghead.com, Dell, Gateway, etc. We can give no assurance that we will be able
to compete successfully against these or other Internet e-commerce competitors.
Further, due to the relatively low cost of developing and implementing an e-
commerce website, we are likely to encounter competition from additional
companies other than those set forth above.
18
<PAGE>
Our limited operating history and the recent change in the focus of our
business make it difficult to forecast accurately our revenues, operating
expenses and operating results. As a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
We may also be unable to increase our spending and expand our operations in a
timely manner to meet customer demand should it exceed our expectations.
Our future operating results may fluctuate significantly due to a variety of
factors, many of which are outside of our control. These factors include, but
are not limited to:
. our ability to retain existing customers, attract new customers and maintain
customer satisfaction;
. the introduction of new or enhanced Web pages, services and products; price
competition or higher wholesale prices; our ability to manage inventory
levels;
. decreases in the number of visitors to our Web sites or our inability to
convert visitors to our Web sites into customers;
. the termination of existing, or failure to develop new, strategic marketing
relationships through which we receive exposure to traffic on third-party
Websites; increases in the cost of online or offline advertising;
. our ability to attract new personnel in a timely and effective manner or
retain existing personnel; unexpected increases in shipping costs or delivery
times; government regulations related to use of the Internet for commerce;
. our ability to maintain, upgrade and develop our Web sites, transaction
processing systems or network infrastructure; technical difficulties, system
downtime or Internet brownouts;
. the amount and timing of operating costs and capital expenditures relating to
expansion of our business, operations and infrastructure;
. and the timing of promotions and sales programs.
As a result of the factors listed above, our quarterly or annual results of
operations in future periods may not meet the expectations of securities
analysts or investors. This could result in a decline in the value of our
common stock.
We face risks related to a shift in our business strategy.
As described in the section entitled "Business," above, we have shifted away
from the computer products distribution business to an Internet e-commerce and
system configuration business, and we intend to focus our marketing and
development efforts into the Internet e-commerce and systems configuration
business in the future. However, if we are not successful in our efforts to
generate significant revenues from our Internet e-commerce and system
configuration business, our revenues will decrease significantly. There can be
no assurance that we will be successful in our efforts to generate significant
revenues from our Internet e-commerce and system configuration business.
19
<PAGE>
We are dependent upon key personnel.
We are dependent upon the services of Max Toghraie, our Chief Executive
Officer, and Jeff Toghraie, our Vice President of Sales and Marketing,
respectively. Our success to date has been in part dependent upon their efforts
and abilities, and the loss of their services for any reason could have a
material adverse effect. In addition, while we have historically employed
executives and employees with knowledge and experience in the computer products
distribution industry, we are attempting to employ executives and employees with
significant knowledge and abilities in the Internet e-commerce and system
configuration industries. Our future success will be strongly influenced by our
ability to continue to recruit, train and retain a skilled work force. While we
believe that we would be able to locate suitable replacements for our executives
or other personnel if their services were lost to us, there can be no assurance
that we would be able to do so on terms acceptable to us.
We face risks of product returns.
As is typical of Internet e-commerce retailers, we incur expenses as a result
of the return of products by customers. Further, we may continue to incur
expenses from the return of products sold through our computer products
distribution business. Returns may result from defective goods, inadequate
performance relative to customer expectations, shipping errors and other causes,
many of which are outside our control.
We face risks from rapidly changing technology.
The market for ACSA technology is characterized by rapidly changing
technology and frequent new product introductions. Even if ACSA gains initial
market acceptance, our long term success will depend, among other things, upon
our ability to enhance ACSA services and to develop and introduce new products
and services that keep pace with technological developments.
We face risks arising from seasonality.
A significant portion of our business is expected to be derived from the
consumer market, which is characterized by seasonality. Sales tend to be higher
in the back-to-school period and pre-holiday period. As a result, sales tend to
be lower in other periods, particularly in the summer months. Because our
expenses are to a large extent fixed, this results in generally weaker operating
results in the summer months.
We face risks arising from industry cyclicality.
The personal computer industry has been affected historically by general
economic downturns, which have had an adverse economic effect upon resellers and
manufacturers of personal computers 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 personal computers. Any
downturns in the personal computer component distribution industry, or the
personal computer industry in general, could adversely affect our business and
results of operations.
20
<PAGE>
We do not anticipate declaring dividends in the foreseeable future.
We have never declared or paid dividends on our Common Stock and we do not
intend for the foreseeable future to declare or pay any cash dividends.
Instead, we intend to retain earnings, if any, for the future operation and
expansion of our business.
Disclosure regarding forward-looking statements.
This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. Such statements
appear in a number of places in this filing and include statements regarding the
intent, belief or current expectations of the Company, its Directors or Officers
with respect to, among other things (a) trends effecting the financial condition
of results of operations of the Company and (b) the business and growth
strategies of the Company. The shareholders of the Company are cautioned not to
put undue reliance on such forward-looking statements. Such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those projected in this
Filing, for the reasons, among others, discussed in "Future Operating Results"
below and under the caption, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors" in the Company's Annual
Report on Form 10-K for Fiscal 1999, filed with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors referred to
above and the other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the fiscal year 1999, the quarterly filings on Form 10-Q filed by
the Company during the remainder of fiscal 2000, and any current filings on Form
8-K filed by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CUMETRIX DATA SYSTEMS CORP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Index to Financial Statements ............................................................... F-1
Reports of Independent Public Accountants..................................................... F-2
Balance Sheets as of March 31, 2000 and March 31, 1999 ....................................... F-4
Statements of Operations for the years ended March 31, 2000, 1999 and 1998 ................... F-6
Statements of Shareholders' Equity for the years ended March 31, 2000, 1999
and 1998 ..................................................................................... F-7
Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998.................... F-8
Notes to the Financial Statements............................................................. F-10
</TABLE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 19, 1999, the Company decided to replace Arthur Andersen LLP
("Andersen") as its principal accountants and terminated the relationship.
Andersen's report on the Company's financial statements for each of the last two
fiscal years did not contain an adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was approved by the Board of
Directors. During the Company's two most recent fiscal years and in the period
since March 31, 1999, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the satisfaction of
Andersen, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. Andersen initially expressed
unwillingness to rely on management's representations with respect to the
Company's financial statements at March 31, 1999, and for the year then ended
(the "1999 Annual Statements"). After the Company responded to issues raised by
Andersen (see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Investigation" in the Company's
Annual Report on Form 10--K for the year ended March 31, 1999), Andersen
rendered its unqualified opinion on the 1999 Annual Statements.
On January 6, 2000, the Company engaged Singer, Lewak, Greenbaum & Goldstein,
LLP ("SLGG") as its certifying accountant. Management has not previously
consulted with SLGG on any accounting or financial reporting matter.
22
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Officer or
Name Position with Company Age Director Since
<S> <C> <C> <C>
Max Toghraie Chief Executive 37 1997
Officer, Secretary
and Director
Jeff Toghraie Vice President - 32 1998
Sales and Marketing
and Director
Nancy Hundt Director 30 1996
</TABLE>
DIRECTORS
MAX TOGHRAIE served as the Chief Executive Officer of the Company from
September 1997 through August 1999, and from October 1999 to present. He has
also served as a director from April 1997 and 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 consultant. Max
Toghraie and Jeff Toghraie, the Vice President of Sales and Marketing and a
director of the Company, are brothers.
JEFF TOGHRAIE served as the Chief Operating Officer of the Company from June
1998 until May 1999, and has served as Vice President-Marketing since July 1999
to November, 1999. In November, 1999 Jeff Toghraie assumed the responsibilities
and title of Vice President - Sales and Marketing. Jeff Toghraie has also
served as a director since March, 2000. Mr. Toghraie has been an advisor to the
Company since its inception in April 1996. From 1992 to 1996, Mr. Toghraie was
a private investor and a financial consultant with Strafford Group, a privately
held investment firm. Jeff Toghraie is also responsible for day to day
Operations. Jeff Toghraie and Max Toghraie, Chief Executive Officer and also a
director of the Company, are brothers.
NANCY 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 and compensation committees of the Board of Directors.
23
<PAGE>
EXECUTIVE OFFICER
HERBERT TOM has served as the Chief Financial Officer of the Company since
1999. Mr. Tom's background includes extensive experience in operations as well
as finance and accounting. Prior to joining the Company, Mr. Tom served as Chief
Financial Officer and Chief Operating Officer with profit and loss
responsibility for a privately held manufacturing company. Mr. Tom subsequently
turned that company around by taking the company from the verge of bankruptcy to
record profits. Mr. Tom is a Certified Public Accountant and holds a Master's
Degree in Business Administration.
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who beneficially own more than 10% of a registered class of the
Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("Commission").
Such officers, directors, and stockholders are required by Commission
regulations to furnish the Company with copies of all such reports that they
file.
Based solely upon a review of copies of reports furnished to the Company and
written representations received by the Company from the officers, directors and
beneficial owners of more than 10% of the Company's Common Stock ("reporting
persons"), the Company believes that all Section 16(a) filing requirements
applicable to the Company's reporting persons have been complied with for the
year ended March 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation for the Chief Executive
Officer and each of the most highly compensated executive officers whose
individual remuneration exceeded $100,000 for the year ended March 31, 2000 (the
"Named Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards/Securities
Name and Principal Salary Other Annual Underlying
Position Year ($) Compensation Bonus Total Options (#)
------------------- ---- -------- ------------ -------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Max Toghraie,
Director and
Chief Executive
Officer (1) 2000 $180,474 $1,950 $291,500 $473,924 300,000
1999 $ 93,000 - 0 - - 0 - $ 93,000 126,046
Jeff Toghraie,
Director and Vice
President - Sales,
Marketing (2) 2000 $136,812 $8,752 $106,000 $251,564 150,000
1999 $ 79,423 - 0 - - 0 - $ 79,423
</TABLE>
24
<PAGE>
(1) Max Toghraie's stock options were granted as follows 126,046 options in
July 1997 under the Company's 1997 Stock Option Plan, 150,000 options in
January, 2000 with his Employment Agreement dated January, 2000 and
150,000 options in February, 2000 under the Company's Year 2000 Restated
and Amended Stock Option Plan.
(2) Jeff Toghraie's stock options were all granted in February, 2000 under the
Company's Year 2000 Restated and Amended Stock Option Plan.
STOCK OPTION GRANTS
The Company granted the following Named Executives stock options during the
year ended March 31, 2000.
Option Grants in Current Fiscal Year
(Individual Grants)
<TABLE>
<CAPTION>
Percent of Total
Number of Common Options Granted
Stock Underlying to Employees in Exercise Price
Name Options Granted Fiscal Year ($/Share) Expiration Date
---- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Max Toghraie 150,000 28.6% $1.1250 1 / 2005
150,000 28.6% $1.1875 7 / 2009
Jeff Toghraie 150,000 28.6% $1.1875 7 / 2009
</TABLE>
YEAR END OPTIONS
The following table sets forth information regarding unexercised options held
by the Named Executives. No options were exercised during the year ended March
31, 2000:
Aggregated Option Exercises in Current Fiscal Year
and Fiscal Year-end Option Values
25
<PAGE>
YEAR END OPTIONS (continued)
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options at Fiscal
On Realized Fiscal Year-end (#) Year-end ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ -------- -------------------------- -------------------------------
<S> <C> <C> <C> <C>
Max Toghraie - 0 - - 0 - 185,717 / 240,330 $557,151 / $720,990
Jeff Toghraie - 0 - - 0 - 44,531 / 105,469 $133,593 / $316,407
</TABLE>
(1) Based upon a closing sale price of the Company's common stock of $3.00 per
Share on March 31, 2000.
EMPLOYMENT AND OTHER COMPENSATORY AGREEMENTS
The Company entered into an employment agreement with Max Toghraie to serve
as Chief Executive Officer for an initial term of five years commencing July 1,
1997 at annual compensation after September 30, 1997 of $192,000 plus benefits.
Mr. Toghraie voluntarily reduced his compensation by an aggregate of $114,000 in
fiscal 1999. Mr. Toghraie's employment agreement was terminated effective
August 23, 1999. Pursuant to an Employment Agreement and General Release dated
September 17, 1999, the Company paid Mr. Toghraie a Retention Bonus of $71,250
and agreed to pay an additional $71,250 if certain conditions of the Agreement
are met or if his employment is involuntarily terminated. Mr. Toghraie entered
into a new employment agreement dated January 1, 2000 to serve as Chief
Executive Officer for an initial term of four years commencing January 1, 2000
and terminating January 1, 2004 at an annual compensation of $192,000 plus
benefits. Mr. Toghraie is entitled to a Company purchased or leased car for Mr.
Toghraie's exclusive use for the duration of his employment.
The Company entered into an employment agreement with Jeff Toghraie to serve
as Vice President of Sales and Marketing for an initial term of three years
commencing November 15, 1999 at an annual compensation of $180,000 plus benefits
and bonus. This salary may be increased annually at the discretion of the
Company's Board of Directors. Per the agreement, upon execution of the agreement
on November 15, 1999, Jeff Toghraie received a retention fee of $37,500. The
Company may terminate Mr. Toghraie's employment without cause provided that the
Company pays Mr. Toghraie a lump sum payment equivalent to the compensation for
the remainder of his Employment Term. Pursuant to an Amendment to Jeff
Toghraie's Employment Contract dated December 20, 1999, Mr. Toghraie is entitled
to a Company purchased or leased car for Mr. Toghraie's exclusive use for the
duration of his employment. In addition, the Company will provide Mr. Toghraie
the exclusive use of an apartment for the duration of his employment.
26
<PAGE>
DIRECTOR COMPENSATION
All directors are reimbursed for out-of-pocket expenses in connection with
attendance at Board of Director's and/or committee meetings and all directors
who are not executive officers or employees of the Company currently receive a
director's fee of $500 per meeting personally attended and $250 per meeting
telephonically attended for service as a director. The directors have also
received nonstatutory stock options, which, to date, have been approved by the
entire Board of Directors. Future grants of stock options will be administered
by the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to (i) each
director and nominee for director of the Company, (ii) the named executive
officers in the Summary Compensation Table on page 31, (iii) all directors and
executive officers of the Company as a group at March 31, 2000, including the
number of shares of Common Stock beneficially owned by each of them, and (iv)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of the Company's Common Stock. Unless otherwise indicated
below, the business address of each individual is the same as the address of the
Company's principal executive offices.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL CLASS OF
OWNERSHIP OF COMMON
COMMON STOCK (1) STOCK
<S> <C> <C>
EXECUTIVE OFFICERS
Max Toghraie (2) 185,717 2.51%
Jeff Toghraie (3) 44,531 .06%
DIRECTORS
Nancy Hundt (4) 2,122,525 28.71%
All other Directors and Executive
Officers as a group (2 person) (7) 8,750 - 0 -
5% HOLDERS
James Ung (5) and Mei Yang (6) 2,128,823 28.80%
</TABLE>
27
<PAGE>
(1) Includes shares issuable upon the exercise of options or warrants that are
exercisable within 60 days of the date of this filing. The shares
underlying such options or warrants are deemed to be outstanding for the
purpose of computing the percentage of outstanding stock owned by such
persons individually and by each group of which they are a member, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Director and Chief Executive Officer of the Company. Consists of 205,834
shares issuable upon exercise of options. Mr. Toghraie's address is 957
Lawson Street, Industry, California 91748.
(3) Director and Vice President - Sales and Marketing of the Company. Consists
of 37,500 shares, issuable upon exercise of options. Mr. Toghraie's
address is 957 Lawson Street, Industry, California 91748.
(4) Includes 4,379 shares issuable upon exercise of options. Ms. Hundt's
address is 957 Lawson Street, Industry, California 91748.
(5) Former President and Director of the Company. Mr. Ung and Ms. Yang are
married. Includes 64,727 shares issuable upon exercise of options. Mr.
Ung's address is 957 Lawson Street, Industry, California 91748.
(6) Former Secretary, Treasurer and Director of the Company. Ms. Yang and Mr.
Ung are married. Includes 17,978 shares issuable upon exercise of options.
Ms. Yang's address is 957 Lawson Street, Industry, Califonria 91748.
(7) Includes 8,750 shares issuable upon exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with an internal investigation into certain improprieties and
record-keeping irregularities, the Audit Committee of the Board of Directors of
the Company uncovered evidence of transactions with certain entities it believes
to be related to James Ung, the former President and a director of the Company,
and his wife Mei Yang, the former Secretary and Treasurer and a director of the
Company, as described more fully below. The Company believes that these certain
entities, EM Technology, Inc., ESI Resources, Inc., FYI International, Link
3000, Q&Y Technology and Caltex Technology, Inc. (the "Related Entities"), were
related, either directly or indirectly to James Ung and/or Mei Yang.
From June 1998 through March 1999, the Company sold 17,967 units of a product
the Company believes to be unauthorized OEM versions of certain software to the
Related Entities at a price the Company believes was less than the fair market
value for such software. During the same time period, the Company believes that
it repurchased from the Related Entities 10,877 units of this product at a
higher price than the same units were purchased by the Related Entities. The
Company believes that the aggregate benefit received from the related entities
by virtue of the sale and subsequent repurchase of the 10,877 units was $17,512.
Of the 7,090 units sold by the Company to the Related Entities that were not
subsequently repurchased by the Company, the Company has not been able to
determine at what price these units were sold by the Related Entities, to whom
these units were sold, and whether these units
28
<PAGE>
were sold to customers who purchased units from the Related Entities in lieu of
purchasing units from the Company. The Company estimates lost profits on these
7,090 units to be approximately $48,000.
In 1997, the Company employed Sam Toghraie, brother of Max Toghraie and Jeff
Toghraie, as a Department Head on an at-will basis for an annual salary of
$60,000. Sam Toghraie is currently employed as of July 11, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of documents filed as part of this Report:
(1) Financial Statements included in Item 8:
Reports of Independent Public Accountants
Balance Sheets as of March 31, 2000 and 1999
Statements of Operations for the years ended March 31, 2000, 1999 and
1998
Statements of Changes in Shareholders' Equity for the years ended
March 31, 2000, 1999 and 1998
Statements of Cash Flows for the years ended March 31, 2000, 1999
and 1998
Notes to Financial Statements
No other schedules are included because the required
information is inapplicable or is presented in the financial
statements or related notes thereto.
(2) Exhibits
The exhibits listed on the accompanying Index of Exhibits are
filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
29
<PAGE>
CUMETRIX DATA SYSTEMS CORP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Index to Financial Statements ...................................................................................... F-1
Reports of Independent Public Accountants........................................................................... F-2
Balance Sheets as of March 31, 2000 and March 31, 1999 ............................................................. F-4
Statements of Operations for the years ended March 31, 2000, 1999 and 1998 ......................................... F-6
Statements of Shareholders' Equity for the years ended March 31, 2000, 1999
and 1998 ........................................................................................................... F-7
Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998.......................................... F-8
Notes to the Financial Statements................................................................................... F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Cumetrix Data Systems Corp.
We have audited the accompanying balance sheet of Cumetrix Data Systems Corp. as
of March 31, 2000, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. 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, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 1, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED 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, 1999 and the related statements of operations, shareholders' equity and cash
flows for the years ended March 31, 1999 and 1998. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide 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, 1999, and the results of its operations and its cash flows for the
years ended March 31, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 31, 1999
F-3
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEETS
March 31,
ASSETS
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $3,769,174 $ 6,743,198
Time deposits, of which $100,000 is restricted 1,600,000 1,500,000
Trade receivables, net of allowance for doubtful accounts
of $150,000 and $280,000 336,854 1,864,685
Receivables from unauthorized parties - 87,000
Inventories 698,226 2,320,127
Income taxes receivable 541,301 262,430
Prepaid expenses - 149,555
---------- -----------
Total current assets 6,945,555 12,926,995
Property and equipment, net 516,057 504,363
Investment in affiliate 281,843 878,000
Other 11,169 14,429
---------- -----------
Total assets $7,754,624 $14,323,787
========== ===========
</TABLE>
F-4
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEETS
March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current liabilities
Book overdraft $ 906,566 $ -
Accounts payable 152,116 3,945,595
Accrued expenses 635,067 114,964
Accrued legal and other - 442,000
Current portion of long-term debt 17,582 4,054
----------- -----------
Total current liabilities 1,711,331 4,506,613
Long-term debt, net of current portion 77,864 4,810
----------- -----------
Total liabilities 1,789,195 4,511,423
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value
2,000,000 shares authorized
none issued and outstanding - -
Common stock, no par value
20,000,000 shares authorized
7,392,500 and 7,392,500 shares issued and outstanding 12,188,414 12,063,414
Accumulated deficit (6,222,985) (2,251,050)
----------- -----------
Total shareholders' equity 5,965,429 9,812,364
----------- -----------
Total liabilities and shareholders' equity $ 7,754,624 $14,323,787
=========== ===========
</TABLE>
F-5
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
For the Years Ended March 31,
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $18,629,566 $63,813,350 $72,495,474
Cost of sales 18,087,762 62,911,633 69,468,497
----------- ----------- -----------
Gross profit 541,804 901,717 3,026,977
Selling, general, and administrative expenses 4,211,141 3,292,569 1,542,294
Write-off of capitalized purchased software - 1,100,000 -
----------- ----------- -----------
Income (loss) from operations (3,669,337) (3,490,852) 1,484,683
----------- ----------- -----------
Other income (expense)
Interest income 316,434 514,345 68,158
Interest expense (1,746) (4,652) (239,791)
Loss on equity investment (896,157) (122,000) -
Other income (expense) - 1,365 (10,160)
----------- ----------- -----------
Total other income (expense) (581,469) (389,058) 181,793
----------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes (4,250,806) (3,101,794) 1,302,890
Provision for (benefit from) income taxes (278,871) (102,228) 579,738
----------- ----------- -----------
Net income (loss) $(3,971,935) $(2,999,566) $ 723,152
=========== =========== ===========
Basic and diluted earnings (loss) per share $(0.54) $(0.41) $0.16
=========== =========== ===========
Weighted-average basic shares outstanding 7,392,500 7,364,828 4,544,759
=========== =========== ===========
Weighted-average diluted shares outstanding 7,392,500 7,364,828 4,639,041
=========== =========== ===========
</TABLE>
F-6
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31,
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
------------------------- (Accumulated
Shares Amount Deficit) Total
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 4,384,236 $ 250,000 $ 25,364 $ 275,364
Sale of common stock, net of offering
expenses of $233,641 365,764 717,589 - 717,589
Issuance of warrants in connection
with private placement, net of
offering expenses of $21,287 - 38,047 - 38,047
Issuance of warrants in exchange
for services - 36,953 - 36,953
Net income - - 723,152 723,152
--------- ----------- ------------ -----------
Balance, March 31, 1998 4,750,000 1,042,589 748,516 1,791,105
Sale of common stock, net of
offering expenses of $2,309,028 2,702,500 11,203,472 - 11,203,472
Repurchase of common stock (60,000) (300,000) - (300,000)
Issuance of warrants and options
in exchange for services - 117,353 - 117,353
Net loss - - (2,999,566) (2,999,566)
--------- ----------- ------------ -----------
Balance, March 31, 1999 7,392,500 12,063,414 (2,251,050) 9,812,364
Issuance of warrants and options
in exchange for consulting
services - 125,000 - 125,000
Net loss - - (3,971,935) (3,971,935)
--------- ----------- ------------ -----------
Balance, March 31, 2000 7,392,500 $12,188,414 $(6,222,985) $ 5,965,429
========= =========== ============ ===========
</TABLE>
F-7
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(3,971,935) $(2,999,566) $ 723,152
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 166,252 89,800 8,934
Amortization of deferred financing costs - - 214,405
Provision for doubtful accounts - 345,598 91,310
Loss on equity investment in affiliate 896,157 122,000 -
Write-off of capitalized purchase software - 1,100,000 -
Loss on receivable from director - - 100,000
Issuance of warrants and options for services 125,000 117,353 36,953
Deferred taxes - 133,647 (121,647)
(Increase) decrease in
Trade receivables 1,527,831 1,675,520 (3,124,023)
Receivables from unauthorized parties 87,000 (87,000) -
Inventories 1,621,901 (393,530) (1,670,038)
Income tax receivable (278,871) (262,430) -
Prepaid expenses 149,555 (103,572) (11,684)
Other assets 3,260 (14,429) (28,981)
Increase (decrease) in
Book overdraft 906,566 - -
Accounts payable (3,793,479) (3,877,057) 6,367,513
Accrued expenses 78,103 430,047 39,643
Income taxes payable - (717,013) 695,513
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,482,660) (4,440,632) 3,321,050
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment (177,946) (431,625) (62,694)
Investment in time deposits (100,000) (1,500,000) -
Investment in affiliate (300,000) (1,000,000) -
Receivables from related parties - - 39,700
----------- ----------- -----------
Net cash used in investing activities (577,946) (2,931,625) (22,994)
----------- ----------- -----------
</TABLE>
F-8
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from long-term debt $ 100,000 $ - $ 185,595
Payments on long-term debt (13,418) (1,203,707) (303,393)
Proceeds from stock and warrant issuances, net - 11,203,472 755,636
Repurchase of common stock - (300,000) -
----------- ----------- ----------
Net cash provided by financing activities 86,582 9,699,765 637,838
----------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents (2,974,024) 2,327,508 3,935,894
Cash and cash equivalents, beginning of year 6,743,198 4,415,690 479,796
----------- ----------- ----------
Cash and cash equivalents, end of year $ 3,769,174 $ 6,743,198 $4,415,690
=========== =========== ==========
Supplemental disclosures of cash flow
information
Interest paid $ 1,746 $ 17,652 $ 26,720
=========== =========== ==========
Income taxes paid $ - $ 730,000 $ 20,000
=========== =========== ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities
During the year ended March 31, 2000, the Company issued 620,000 stock warrants
and options in exchange for consulting services. The costs associated with
these warrants and options were valued at $125,000.
During the year ended March 31, 1999, the Company transferred approximately
$75,000 of inventories to property and equipment.
During the year ended March 31, 1998, the Company issued warrants in exchange
for professional services in connection with the private placement. The costs
associated with these warrants of $36,953 were calculated using the Black-
Scholes model and were allocated to debt ($10,696), common stock ($24,065), and
warrants ($2,192) in accordance with Accounting Principles Board Opinion No. 14,
"Accounting for Convertible Debt Issued with Stock Purchase Warrants."
F-9
<PAGE>
CUMETRIX DATA SYSTEMS CORP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - LINE OF BUSINESS
Cumetrix Data Systems Corp. (the "Company") was incorporated on April 2,
1996 in the State of California. The Company distributes computer
peripherals, components, and accessories and assembles computer systems.
The Company currently sells a majority of its products to distributors,
systems integrators, and retail stores. Since April 1999, the Company's
principal business has been the electronic sales and marketing of computer
systems and components through a direct business to business and business
to consumer model. The Company markets its products and services through
its Internet website, suredeals.com, other Internet marketing partners such
as Egghead.com, and its outside sales representatives and telemarketing
sales representatives.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents and Time Deposits
-------------------------------------------
Cash includes currency on hand and deposit accounts to which funds may be
deposited or withdrawn at any time without prior notice or penalty. The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates fair value. At times, cash balances in the
Company's accounts may exceed federally insured limits.
At March 31, 2000, the Company had time deposits of $1,600,000 with an
original maturity of one year which are not considered cash equivalents,
$100,000 which is used as collateral to secure a note with a bank.
Trade Receivables
-----------------
Trade receivables represent unsecured balances due from the Company's
customers. 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.
Inventories
-----------
Inventories consist primarily of purchased finished goods and components
and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
F-10
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the estimated useful lives of
the assets as follows:
Furniture and fixtures 7 years
Machinery and equipment 3 to 5 years
Software 2 years
Vehicles 5 years
Leasehold improvements 5 years
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.
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, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Risk
---------------------
During the years ended March 31, 2000, 1999, and 1998, one vendor accounted
for 50%, 55%, and 64% of purchases, respectively. There are many vendors in
this industry, and management believes that 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 the year ended March 31, 2000, one customer accounted for 18% of net
sales. During the year ended March 31, 1999, no customer accounted for more
than 10% of net sales. During the year ended March 31, 1998, one customer
accounted for 11% of net sales.
Revenue Recognition
-------------------
Net sales are generated from the sale of systems and components. Systems
include ready-to-use computers that have been assembled and have software
already installed. Component sales consist of individual hardware items.
Revenue is recorded at the time of shipment, net of allowances for
estimated sales returns.
F-11
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred income tax assets or liabilities are computed based on the
temporary difference between the financial statement and income tax basis
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.
Earnings (Loss) per Share
-------------------------
Earnings (loss) per common share is based on the weighted-average number of
shares of common stock and common stock equivalents outstanding during the
related periods.
Options to purchase 1,322,789 shares of common stock at prices ranging from
$1.13 to $5.00 were outstanding at March 31, 2000, but were not included in
the computation of diluted earnings (loss) per share as the impact would be
anti-dilutive.
Options and warrants to purchase 604,401 shares of Common Stock at prices
ranging from $2.70 to $5.00 were outstanding at March 31, 1999, but were
not included in the computation of diluted earnings (loss) per share, as
the impact would be antidilutive.
Options to purchase 64,257 shares of Common Stock and warrants to purchase
30,025 shares of Common Stock were outstanding at March 31, 1998 and
included in the computation of diluted earnings per share.
Risk Factors
------------
NASDAQ and Boston Stock Exchange delisting - The Company's stock has been
delisted from NASDAQ and the Boston Stock Exchange for failure to meet
their standards, primarily due to the Company's failure to keep current its
reports to the Securities and Exchange Commission, pursuant to the
Securities Exchange Act of 1934.
Delisting will have a material adverse affect on the trading market for the
Company's common stock and the Company's access to capital markets. It
will be necessary for the Company to re-apply for initial listing once it
determines that it can meet the initial listing requirements. The Company
currently cannot qualify for initial listing with NASDAQ, and it may never
meet those qualifications.
The closing sale price of the Company's common stock on June 1, 2000 was
$1.50 per share. Because the Company's common stock is delisted from
trading on
F-12
<PAGE>
NASDAQ and the Boston Stock Exchange and the trading price is less than
$5.00 per share, trading in it is subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934. Under this rule,
broker/dealers who recommend these 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 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 with it. These requirements
will severely limit the market liquidity of the Company's common stock and
the ability of its shareholders to dispose of their shares, particularly in
a declining market.
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 business and results of operations. While
the Company does not believe that any of these factors adversely impact its
business significantly at the 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 United States dollars.
Investment in Affiliate
-----------------------
Investment in affiliate at March 31, 2000 consists of a 29% interest in
Online Transaction Technologies, Inc. ("OTT") with an option to acquire an
additional 21%. OTT is a development stage enterprise and is developing
Internet auction software. The Company accounts for this investment under
the equity method of accounting. The Company's investment provided
substantially all of OTT's working capital.
In February 2000, the Company purchased an additional 52,174 shares of
OTT's common stock for $300,000.
F-13
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Furniture and fixtures $103,165 $ 93,070
Machinery and equipment 339,966 338,967
Software 159,412 116,648
Vehicles 153,636 29,548
Leasehold improvements 29,998 29,998
-------- --------
786,177 608,231
Less accumulated depreciation and amortization 270,120 103,868
-------- --------
Total $516,057 $504,363
======== ========
</TABLE>
Depreciation and amortization expense was $166,253, $89,800, and $8,934 for
the years ended March 31, 2000, 1999, and 1998, respectively.
NOTE 4 - FINANCING ARRANGEMENT
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation ("Finova"). Purchases are collateralized by
substantially all of the assets of the Company.
In October 1998, the Company updated its credit facility with Finova. This
facility includes a flooring line limit of $20,000,000 for inventory
purchases and a revolving credit line of $5,000,000 and expires in October
2000.
Unless the Company fails to pay Finova within the agreed-upon period, all
finance costs associated with the flooring line of credit are charged by
Finova to the Company's vendors. The Company had a payable of $1,285,659
outstanding at March 31, 1999 to Finova.
During the year ended March 31, 2000, the Company repaid the amounts owed
to Finova and terminated the credit agreement.
F-14
<PAGE>
NOTE 5 - LONG-TERM DEBT
Long-term debt at March 31 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Note payable to a bank with interest at 8.9% per
annum. The note was paid in full during the
year ended March 31, 2000. $ - $8,864
Note payable to a bank with interest at 6.7% per
annum. Monthly installments of principal
and interest of $1,963 are due through
December 2004. The note is secured by a
$100,000 certificate of deposit. 95,446 -
------- ------
95,446 8,864
Less current portion 17,582 4,054
------- ------
Long-term portion $77,864 $4,810
======= ======
</TABLE>
Future annual maturities of long-term debt consisted of the following as of
March 31, 2000:
<TABLE>
<CAPTION>
Year Ending
March 31,
-----------
<S> <C>
2001 $17,582
2002 18,984
2003 20,278
2004 21,659
2005 16,943
-------
Total $95,446
=======
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
------
In October 1997, the Company entered into a new facility lease agreement
commencing on February 1, 1998 and expiring on January 31, 2001. The
Company has a current commitment of $111,690 related to this lease.
Total rent expense for the year ended March 31, 2000, 1999, and 1998 was
approximately $205,000, $144,000, and $70,000, respectively.
F-15
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
---------------------
The Company has employment agreements with certain key executives. These
agreements have terms of five years and annual salaries of $192,000 and
$180,000.
Litigation
----------
The Company is involved in various legal matters in the normal course of
its business. Management believes, based in part upon consultation with
legal counsel, that the ultimate outcome of such matters will not have a
material adverse effect on the Company's financial condition or its results
of operations.
Potential Litigation
--------------------
The Company's former President and Secretary/Treasurer each were parties to
employment agreements with the Company. In the event of the President's
termination without "cause" (as defined in his employment agreement), the
Company was liable for payment to him of an amount equal to six months of
his then current base salary. The Secretary/Treasurer was not entitled to
any payments upon termination without cause. Based on the information
uncovered during the investigation, (see Note 10) the Company elected to
treat both of these individuals' relief of their executive officer and
employment responsibilities as terminations for "cause" (as defined in the
employment agreements). There can be no assurance that these former
officers will not allege breach of their employment agreements or other
injury resulting from alleged wrongful termination of employment, libel,
slander, or other alleged wrongful or tortious acts, or, if alleged in
litigation against the Company, there can be no assurance that the former
officers will not prevail on some or all such claims.
NOTE 7 - SHAREHOLDERS' EQUITY
Preferred Stock
---------------
In October 1997, the Company authorized 2,000,000 shares of preferred
stock. As of March 31, 2000, there were no shares of preferred stock
issued and outstanding.
Common Stock
------------
On April 8, 1998, the Company completed an initial public offering of
2,702,500 shares of common stock. The Company received net proceeds (after
deducting issuance costs) of approximately $11,200,000. The Company has
used the proceeds to pay down debt, fund operations, and expand into new
markets related to computer hardware and software. In connection with the
initial public offering, the
F-16
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY (continued)
Placement Agent received 235,000 warrants for nominal consideration. Each
warrant may be exercised for one common share, subject to certain anti-
dilution provisions, at a price of $8.25 per share from April 8, 1999 to
April 8, 2003. The Company also entered into a two-year financial
consulting agreement with the placement agent for $48,000, which was fully
paid out of proceeds from the initial public offering. Each officer and
director of the Company and all of the holders of the issued and
outstanding shares of common stock as of the effective date of the initial
public offering have agreed to a lock-up period of 18 months from the date
of the initial public offering.
Stock Options
-------------
In July 1997 and February 2000, the Company established the 1997 and the
2000 Stock Incentive Plans (the "Plans"). Under the Plans, 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 1,000,000 shares of the Company's common stock for issuance under
each of the Plans. The 1997 Plan terminates in 2007, and the 2000 Plan
terminates in 2009.
Information regarding the Company's stock options is as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise
Option Price
-------- ---------
<S> <C> <C>
Outstanding, March 31, 1997 - $ -
Granted 383,717 $ 3.06
Expired - $ -
--------
Outstanding, March 31, 1998 383,717 $ 3.06
Granted 105,000 $ 5.22
Expired (29,316) $ 5.04
--------
Outstanding, March 31, 1999 459,401 $ 3.42
Granted 519,000 $ 1.17
Expired (275,612) $ 3.45
--------
Outstanding, March 31, 2000 702,789 $ 1.68
========
Exercisable, March 31, 2000 288,604 $ 2.07
========
</TABLE>
F-17
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY (continued)
Stock Options (continued)
-------------------------
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Options Stock Options Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ------------- ------------- ----------------
<S> <C> <C> <C>
$ 1.13 150,000 44,681 4.75 years
$ 1.19 369,000 109,546 4.76 years
$ 2.70 148,789 110,629 7.26 years
$ 5.00 35,000 23,748 8.76 years
------- -------
702,789 288,604
======= =======
</TABLE>
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for
its stock-based compensation plans other than for restricted stock and
options issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income (loss) for the years ended March 31,
2000, 1999, and 1998 would be as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss)
As reported $ (3,971,935) $ (2,999,566) $ 723,152
Pro forma $ (4,111,591) $ (3,068,317) $ 674,239
Basic and diluted earnings (loss)
per share
As reported $ (0.54) $ (0.41) $ 0.16
Pro forma $ (0.56) $ (0.42) $ 0.15
</TABLE>
As permitted by SFAS No. 123, the fair value of these options was estimated
at the date of grant using the minimum value method with the following
weighted-average assumptions for the years ended March 31, 2000, 1999, and
1998: volatility of 100%, 69.2%, and 0%, respectively; dividend yields of
0%, 0%, and 0%, respectively; risk-free interest rates of 6.4%, 4.9%, and
6.2%, respectively; exercise
F-18
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY (continued)
Stock Options (continued)
-------------------------
prices of $1.17, $3.42, and $3.06, respectively; and expected lives of
five, 3.1, and five years, respectively. The weighted-average fair value
of options granted during the year ended March 31, 2000 was $0.91 per
share.
In May 1998, the Company issued to an officer of the Company options to
purchase 20,000 shares of common stock at an exercise price of $6.125 per
share. This officer resigned in December 1998, and his options were
subsequently cancelled.
NOTE 8 - INCOME TAXES
The provision for (benefit from) income taxes is comprised of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal $(278,871) $(235,875) $ 550,986
State - - 150,399
--------- --------- ---------
(278,871) (235,875) 701,385
--------- --------- ---------
Deferred
Federal - 102,680 (93,460)
State - 30,967 (28,187)
--------- --------- ---------
- 133,647 (121,647)
--------- --------- ---------
Total $(278,871) $(102,228) $ 579,738
========= ========= =========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax asset
Depreciation and amortization $ (5,000) $ (12,183)
Reserves 120,000 971,282
Unicap - 66,523
Accrued liabilities 20,000 12,745
Net operating loss carryforward 1,630,000 36,065
Valuation allowance (1,765,000) (1,074,432)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
F-19
<PAGE>
NOTE 8 - INCOME TAXES (Continued)
The reconciliations between the provision for (benefit from) income taxes
and the amounts computed by applying the federal statutory rate of 34% to
pre-tax income (loss) consists of the following:
<TABLE>
2000 1999 1998
----------- ----------- --------
<S> <C> <C> <C>
Rate reconciliation
Federal (benefit) provision at
statutory rate $(1,403,000) $(1,054,610) $442,983
State, net of federal benefit (233,000) (180,971) 99,263
Benefit of net operating losses (278,871) - -
Valuation allowance 1,636,000 1,074,432 -
Other - 58,921 37,492
----------- ----------- --------
Total $ (278,871) $ (102,228) $579,738
=========== =========== ========
</TABLE>
The Company has recorded a valuation allowance for temporary differences
and net operating loss carryforwards where it is more likely than not that
the Company will receive future tax benefits.
As of March 31, 2000, the Company has approximately $4,074,000 in federal
net operating losses carryforwards, which expire through 2020.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the years ended March 31, 1998 and 1997, the Company had sales of
approximately $1,391,300 and $532,800 to, respectively, and purchases of
approximately $598,200 and $804,300 from, respectively, Samax Technologies,
Inc., a corporation owned by a related party. During the year ended March
31, 1999, the Company had no sales or purchases from this related party. At
March 31, 1999 and 1998, the Company had gross trade receivables of $86,000
and $92,000, respectively. At March 31, 1999, the Company reserved $71,000
related to these receivables.
In December 1998, the Company entered into a three-month service agreement
with a company owned by a relative of an officer of the Company. During the
year ended March 31, 1999, the Company paid approximately $10,000 under
this agreement.
F-20
<PAGE>
NOTE 10 - UNAUTHORIZED TRANSACTIONS
In connection with the investigation into certain improprieties and record
keeping irregularities, the Audit Committee uncovered evidence of certain
unauthorized transactions with certain entities that management believes
may be on more favorable terms than otherwise given. During the years
ended March 31, 1999, 1998, and 1997, the Company had net sales of
approximately $1,180,000, $950,000, and $0, respectively, to these
entities. In addition, sales for the year ended March 31, 1999 are net of
purchases for the same products of approximately $800,000. The Company had
purchases of approximately $80,000 and $0 during the years ended March 31,
1998 and 1997, respectively. At March 31, 1999 and 1998, the Company had
receivables of approximately $87,000 and $0, respectively. At March 31,
1999 and 1998, the Company had payables of $2,000 and $1,000 to these
entities, respectively.
NOTE 11 - YEAR 2000 ISSUE
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by ongoing Year 2000 problems.
Upgrades to systems judged critical to business operations have been
successfully installed. To date, no significant costs have been incurred
in the Company's systems related to the Year 2000.
Based on the review of the computer systems, management believes all action
necessary to prevent significant additional problems has been taken. While
the Company has taken steps to communicate with outside suppliers, it
cannot guarantee that the suppliers have all taken the necessary steps to
prevent any service interruption that may affect the Company.
NOTE 12 - SUBSEQUENT EVENTS
Bridge Loan
-----------
On June 16, 2000, the Company signed a letter of intent to borrow
$1,500,000 in the form of a bridge loan. As part of the letter of intent,
the Company will pay at closing $150,000 in fees and issue a warrant giving
the lender the right to purchase 100,000 shares of the Company's common
stock at an exercise price equal to 125% of the average closing bid price
of the common shares of five trading days prior to the closing, exercisable
within four years from the closing date.
F-21
<PAGE>
NOTE 12 - SUBSEQUENT EVENTS (Continued)
Bridge Loan (Continued)
-----------
The bridge loan is payable or convertible into the Company's common stock
in 181 days after closing. The note will bear interest at 8% per annum and
will be collateralized by the Company's stock. The Company can redeem the
note within 180 days at a redemption premium as defined. The holder has an
option to convert the note at any time within 180 days of the closing into
common stock of the Company on terms as defined. In addition, the Company
will issue to each holder a repricing warrant which entitles the holder to
acquire additional shares of common stock at exercise prices as defined.
The Company has the option to pay the cash value of the repricing warrants
in lieu of shares of common stock.
In addition, the holders shall also receive from the Company four-year
warrants exercisable for such number of shares of common stock that equals
20% of the initial principal amount of the loan divided by the closing
price. The warrants shall have an exercise price equaling 110% of the
closing price.
The agreement also calls for the registration of common stock which will be
issued upon conversion to become effective on or before 150 days from the
closing date. In the event the Company is unable to register such shares
within 180 days from the closing date, the Company shall pay a cash fee to
the holders equal to 2% of the outstanding principal for every 30-day
period after the deadline of 180 days.
Consulting Agreement
--------------------
On April 5, 2000, the Company entered into a consulting agreement with its
Chairman, which provides that the Company will pay $150,000 annually,
payable in 12 monthly installments, and will issue an option to purchase
450,000 shares, vesting over a three-year period, in equal quarterly
installments. The options expire in seven years and are exercisable as
follows: 225,000 at $3.25 per share and 225,000 at $6.75 per share. The
consulting agreement is "at will," and if the agreement is terminated by
the Company without cause, the vesting provisions will accelerate.
Acquisition
-----------
On May 22, 2000, the Company initially purchased 125,000 shares of common
stock in Salescentrix.com, Inc., a Canadian based provider of e-business
solutions to small and medium-sized businesses, for $250,000. The Company's
initial investment of $250,000 represents less than 2% of the equity
interest in the investee.
Under the terms of the stock purchase agreement between the Company and
Salescentrix.com, the Company has acquired the rights to purchase Common
Stock and Warrants in three separate stages, each stage is contingent on
the previous stage. In Stage One, the Company has the right to purchase up
to 925,000 additional
F-22
<PAGE>
Acquisition (continued)
-----------------------
shares of Common Stock at $2.00 per share at any time until June 30, 2000.
In addition, the Company shall be issued warrants to purchase 210,000
shares of Common Stock at $2.00 per share at any time until June 1, 2004
(`Stage One"). As of July 11, 2000, the Company had not exercised it's
right to purchase Common Stock under Stage One. As a result,
Salescentrix.com has extended the expiration date of Stage One from June
30, 2000 to July 20, 2000.
If all shares are purchased in Stage One, the Company may purchase up to
822,222 additional Common Stock at $2.25 per share at any time until
September 30, 2000 and the Company shall be issued warrants to purchase up
to 111,111 shares of Common Stock at $2.25 per share at any time until
August 31, 2000. ("Stage Two") In addition, the Company shall be issued a
Bonus Warrant to purchase up to 210,000 shares of Common Stock at a price
of $2.25 per share at any time until September 30, 2004. The Bonus Warrant
shall be exercisable in proportion to the number of shares of Common Stock
purchased in Stage Two.
If all shares are purchased in Stage One and Stage Two, the Company may
purchase up to 740,000 additional Common Stock at $2.50 per share at any
time until January 31, 2001 and the Company shall be issued warrants to
purchase up to 100,000 shares of Common Stock at $2.50 per share at any
time until December 31, 2000. ("Stage Three") In addition, the Company
shall be issued a Bonus Warrant to purchase up to 210,000 shares of Common
Stock at a price of $2.50 per share at any time until March 31, 2005. The
Bonus Warrant shall be exercisable in proportion to the number of shares of
Common Stock purchased in Stage Three
TMA Consulting Agreement
------------------------
In January, 2000, the Company entered into a consulting agreement with a
company based in California to provide Internet/website and e-commerce
consulting services, which include a Cyberspace Network Marketing program.
The agreement was originally for two months at $25,000 per month plus
expenses of $1,000 per month. The contract was amended on March 5, 2000 to
extend the term of the agreement for an indefinite period of time. For the
year ended March 31, 2000, the Company paid $42,700. From April 1, 2000 to
July 11, 2000, the Company paid TMA an additional $84,900.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUMETRIX DATA SYSTEMS CORP.
---------------------------
(Registrant)
Date: July 11, 2000 By: /s/ Max Toghraie
--------------------
Max Toghraie,
Chief Executive Officer
SIGNATURES
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Max Toghraie Chief Executive Officer, July 11, 2000
---------------- Secretary and Director
Max Toghraie (Principal Executive Officer)
/s/ Jeff Toghraie Vice President - Sales and July 11, 2000
----------------- Marketing and Director
Jeff Tohghraie
/s/ Nancy Hundt Director July 11, 2000
-----------------
Nancy Hundt
/s/ Herbert Tom Chief Financial Officer July 11, 2000
----------------- (Principal Financial and
Herbert Tom Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------- -------------------
3.1 Articles of Incorporation of Registrant. Incorporated by reference to
Exhibit 3.1 to Form S-1 filed on December 23, 1997, and amendments
thereto.
3.2 Certificate of Amendment to Articles of Incorporation, as filed on
December 22, 1997. Incorporated by reference to Exhibit 3.2 to Form S-1
filed on December 23, 1997, and amendments thereto.
3.2.1 Certificate of Amendment of the Articles of Incorporation, as filed on
January 6, 1998. Incorporated by reference to Exhibit 3.2.1 to Form S-1
filed on December 23, 1997, and amendments thereto.
3.3 Amended and Restated Bylaws of the Registrant. Incorporated by reference
to Exhibit 3.3 to Form S-1 filed on December 23, 1997, and amendments
thereto.
4.1 Specimen Stock Certificate of Registrant. Incorporated by reference to
Exhibit 4.1 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.1 Employment Agreement, dated May 1, 1997, between the Company and James
Ung. Incorporated by reference to Exhibit 10.2 to Form S-1 filed on
December 23, 1997, and amendments thereto.
10.2 Employment Agreement, dated July 1, 1997, between the Company and Mei
Yoon Yang. Incorporated by reference to Exhibit 10.3 to Form S-1 filed
on December 23, 1997, and amendments thereto.
10.3 Executive Employment Agreement, dated July 1, 1997, between the Company
and Max Toghraie. Incorporated by reference to Exhibit 10.4 to Form S-1
filed on December 23, 1997, and amendments thereto.
10.4 Amended and Restated License Agreement, dated July 1, 1997, between
Computer-Aided Software Integration, Inc. and the Company. Incorporated
by reference to Exhibit 10.5 to Form S-1 filed on December 23, 1997, and
amendments thereto.
10.5 Reseller Agreement, made effective as of September 15, 1997, between
Computer-Aided Software Integration, Inc. and the Company. Incorporated
by reference to Exhibit 10.6 to Form S-1 filed on December 23, 1997, and
amendments thereto. Specified portions of this Exhibit have been omitted
and filed separately with the United States Securities and Exchange
Commission pursuant to an Order granting
<PAGE>
confidential treatment pursuant to Rule 406 of the General Rules and
Regulations under the Securities Act of 1933.
10.6 Lease Agreement, dated for reference purposes October 28, 1997, between
the Company and Fortune Dynamics, Inc. Incorporated by reference to
Exhibit 10.10 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.7 Guaranty, dated December 3, 1997, given by James Ung to Fortune Dynamics,
Inc. Incorporated by reference to Exhibit 10.11 to Form S-1 filed on
December 23, 1997, and amendments thereto.
10.8 Amended and Restated 1997 Stock Plan. Incorporated by reference to
Exhibit 10.14 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.9 Form of Nonstatutory Stock Option Agreement. Incorporated by reference to
Exhibit 10.15 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.10 Warrant Agreement, dated December 23, 1997, between the Company and Troop
Meisinger Steuber & Pasich, LLP. Incorporated by reference to Exhibit
10.16 to Form S-1 filed on December 23, 1997, and amendments thereto.
10.11 Loan and Security Agreement, dated as of October 22, 1998, by and between
the Company and Finova Capital Corporation. Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1998.
10.12 Schedule to Loan and Security Agreement, dated October 22, 1998.
Incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1998.
10.13 Secured Revolving Credit Note, dated as of October 22, 1998, in favor of
Finova Capital Corporation. Incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1998.
10.14 Preferred Stock Purchase Agreement, dated as of December 15, 1998, by and
between the Company and Online Transaction Technologies, Inc.
Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1998.
10.15 First Stock Option Agreement, dated as of December 30, 1998, by and
between the Company and Online Transaction Technologies, Inc.
Incorporated by reference to Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1998.
10.16 Employment Agreement, dated January 1, 2000, between the Company and
Max Toghraie.
<PAGE>
10.17 Amended and Restated 2000 Stock Plan dated January 7, 2000.
10.18 Employment Agreement, dated November 15, 1999, between the Company and
Jeff Toghraie.
10.19 Amended Employment Agreement, dated December 20, 1999, between the
Company and Jeff Toghraie.
27.1 Financial Data Schedule
