<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-14001
CUMETRIX DATA SYSTEMS CORP.
(Exact Name of Registrant as Specified in its Charter)
California 95-4574138
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
957 Lawson Street, Industry, California 91748
(Address, Including Zip Code, Of Registrant's Principal Executive Offices)
(626) 965-6899
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the last 90 days. Yes [X] No [_]
As of November 13, 2000, the Registrant had 7,392,500 shares of Common
Stock, without par value, issued and outstanding.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1. Condensed Balance Sheets - September 30, 2000 (unaudited) and
March 31, 2000
2. Condensed Statements of Operations - Three Months Ended
September 30, 2000 (unaudited) and 1999 (unaudited)and Six
Months Ended September 30, 2000 (unaudited) and 1999 (unaudited)
3. Condensed Statements of Cash Flows - Six Months Ended
September 30, 2000 (unaudited) and 1999 (unaudited)
4. Notes to Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUMETRIX DATA SYSTEMS CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 2,419,849 $ 3,769,174
Time deposits.......................................................... 1,147,811 1,600,000
Trade receivables, net of allowance for doubtful accounts of $50,000
and $150,000.......................................................... 311,131 336,854
Inventories, net of reserve of $200,000 and $150,000................... 413,799 698,226
Income tax receivable.................................................. 541,301 541,301
Loans receivable- officers............................................. - -
Prepaid expenses....................................................... 11,495 -
------------ ------------
Total current assets................................................ 4,845,386 6,945,555
------------ ------------
FIXED ASSETS, net 212,711 516,057
OTHER ASSETS............................................................ 11,169 293,012
============ ============
Total Assets........................................................ $ 5,069,266 $ 7,754,624
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable........................................................... $ 1,142,531 $ -
Accounts payable....................................................... 721,089 152,116
Accrued expenses and other current liabilities......................... 601,980 1,559,215
------------ ------------
Total current liabilities........................................... 2,465,600 1,711,331
------------ ------------
LONG-TERM DEBT, net of current portion.................................. 68,595 77,864
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 shares; issued
and outstanding, none................................................. - -
Common stock, no par value: Authorized, 20,000,000 shares; issued and
outstanding, 7,392,500 and 7,392,500 at September 30, 2000 and March
31, 2000, respectively................................................ 12,248,414 12,188,414
Retained earnings...................................................... (9,713,343) (6,222,985)
------------ ------------
Total shareholders' equity.......................................... 2,535,071 5,965,429
------------ ------------
Total liabilities and shareholders' equity.......................... $ 5,069,266 $ 7,754,624
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
----------- -----------
b (unaudited)
<S> <C> <C>
NET SALES........................................... $ 3,032,239 $ 4,055,896
COST OF PRODUCTS.................................... 2,917,339 3,920,060
----------- -----------
Gross profit...................................... 114,900 135,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 977,379 1,136,391
IMPAIRMENT LOSS - LOANS RECEIVABLE FROM OFFICERS.... 500,000 -
----------- -----------
Income (Loss) from operations..................... (1,362,479) (1,000,555)
INTEREST EXPENSE.................................... (19,271) (166)
INTEREST INCOME..................................... 28,409 94,233
LOSS ON EQUITY INVESTMENT........................... 884,843 215,375
----------- -----------
Income (loss) before provision for income taxes... (2,238,184) (1,121,863)
PROVISION FOR INCOME TAXES.......................... - -
----------- -----------
NET LOSS............................................ $(2,238,184) $(1,121,863)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE.................... $ (0.30) $ (0.15)
=========== ===========
Weighted average shares used in computation of
basic and diluted loss per share................... 7,392,500 7,392,500
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
NET SALES........................................... $ 6,008,522 $11,112,570
COST OF PRODUCTS.................................... 5,720,344 10,829,998
----------- -----------
Gross profit...................................... 288,178 282,572
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 1,836,284 1,998,394
IMPAIRMENT LOSS - LOANS RECEIVABLE FROM OFFICERS.... 500,000 -
IMPAIRMENT LOSS - LONG-LIVED ASSETS................. 207,740 -
----------- -----------
Income (Loss) from operations..................... (2,255,846) (1,715,822)
INTEREST EXPENSE.................................... (20,708) (359)
INTEREST INCOME..................................... 68,039 166,878
LOSS ON EQUITY INVESTMENT........................... 1,281,843 364,607
----------- -----------
Income (loss) before provision for income taxes... (3,490,358) (1,913,910)
PROVISION FOR INCOME TAXES.......................... - -
----------- -----------
NET LOSS............................................ $(3,490,358) $(1,913,910)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE.................... $ (0.47) $ (0.26)
=========== ===========
Weighted average shares used in computation of
basic and diluted loss per share................... 7,392,500 7,392,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
2000 1999
----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(3,490,358) $(1,913,910)
Adjustments to reconcile net income to
cash and cash equivalents used in
operating activities:
Depreciation and amortization................ 95,606 108,000
Provision for doubtful accounts.............. - 20,000
Loss on equity investment in affiliate....... 1,281,843 364,607
Impairment loss - long-lived assets.......... 207,740 -
Issuance of warrants......................... 60,000 -
Changes in assets and liabilities:
Trade receivables............................ 25,723 921,409
Inventories.................................. 284,427 1,759,592
Prepaid expenses............................. (11,495) 31,433
Accounts payable............................. 568,974 (3,236,174)
Accrued expenses............................. (957,236) 42,193
Income taxes payable......................... - 800
----------- -----------
Net cash provided (used) by operating
activities................................. (1,934,776) (1,902,050)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets...................... - (27,593)
Investment in affiliate........................ (1,000,000) -
Proceeds from time deposit..................... 452,189 -
----------- -----------
Net cash provided (used) in investing
activities................................. (547,811) (27,593)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt..................... (9,269) (2,742)
Increase in note payable....................... 1,142,531 -
----------- -----------
Net cash provided (used) in financing
activities................................. 1,133,262 (2,742)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,349,325) (1,932,385)
CASH AND CASH EQUIVALENTS, beginning of period.. 3,769,174 6,743,198
----------- -----------
CASH AND CASH EQUIVALENTS, end of period........ $ 2,419,849 $ 4,810,813
=========== ===========
CASH PAID FOR INTEREST 3,177 359
CASH PAID FOR INCOME TAXES 1,600 -
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (which
comprise only normal recurring accruals) necessary for a fair presentation have
been included. Operating results for the period ended September 30, 2000 are not
necessarily indicative of results to be expected for the year ending March 31,
2001. For further information, refer to the financial statements and notes
thereto for the year ended March 31, 2000.
NOTE B - EARNINGS PER SHARE
Earnings per share calculations are in accordance with SFAS No.
128,"Earnings per Share". Accordingly, "basic" earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. "Diluted" earnings per share is computed by dividing net income
by the total of the weighted average number of common shares outstanding and
common equivalent shares outstanding for each period presented. Common
equivalent shares include stock options assuming conversion under the treasury
stock method.
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Weighted average number of common
shares outstanding-Basic 7,392,500 7,392,500 7,392,500 7,392,500
Dilutive effect of outstanding
stock options and warrants - - - -
--------- --------- --------- ---------
Weighted average number of common
shares outstanding-Diluted 7,392,500 7,392,500 7,392,500 7,392,500
========= ========= ========= =========
NOTE C - 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. 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 currently sells a majority of its
products to end-users through its Internet marketing partner Egghead.com. The
Company markets its products and services through its Internet marketing
partners such as Egghead.com and Cnet.com and its own Internet website,
suredeals.com.
NOTE D - INVESTMENT IN AFFILIATES
Investment in affiliates at September 30, 2000 consists of Online
Transaction Technologies, Inc. and Salescentrix.com.
Online Transaction Technologies, Inc.
The Company holds a 29% interest in Online
<PAGE>
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.
For the three months ended September 30, 2000, Cumetrix's share of losses
from OTT totalled $134,843 compared to a loss of $215,375 for the three months
ended September 30, 1999.
In October 2000, the Company purchased an additional 114,286 shares of
OTT's common stock for $100,000. The subscription price is based on a 50%
discount to the price proposed to be paid in a transaction in which Vsource,
Inc. (NASDAQ:VSRC) has offered to acquire OTT for a price of $1.75 per share for
the outstanding common stock. As of November 13, 2000, OTT and Vsource have not
entered into a definitive acquisition agreement.
If OTT should enter into a definitive acquisition agreement with Vsource
that provides for an acquisition price per share of less than $1.75, then OTT
shall, prior to the closing, issue to the Company a number of additional shares
of Common Stock determined as follows. The Company first shall determine the
price per share that represents a 50% discount to the price per share payable by
the buyer (the Adjusted Price). The Company shall then determine the number of
shares of Common Stock that would have been issued to the Investor had the
Subscription Price equaled the adjusted price. The Company shall then issue to
the Investor a number of shares equal to the difference between the Adjusted
Number and 100,000.
If OTT enters into a definitive acquisition agreement with OTT that
provides for an acquisition price per share greater than $1.75, then there shall
be no adjustment to the number of shares issuable under the Agreement.
Salescentrix.com
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 a 2% equity interest in
Salescentrix.com.
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"). Pertaining to the rights to purchase 925,000 additional shares of Common
Stock in Stage One, Salescentrix.com has extended the expiration date from June
30, 2000 to August 10, 2000. On August 10, 2000, the Company purchased 375,000
shares of Salescentrix.com at $2.00 per share, totalling $750,000. In the
quarter ended September 30, 2000, this $750,000 investment was written off due
to recurring losses of the investee.
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
<PAGE>
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.
On August 10, 2000, $750,000 of the $858,000 proceeds from the Bridge Note
was used to increase the Company's investment in Salescentrix.com.
For the quarter ended June 30, 2000, the Company wrote-off its initial
investment of $250,000 in Salescentrix.com due to recurring losses by
Salescentrix.com. In addition, for the quarter ended September 30, 2000, the
Company wrote-off its additional $750,000 investment, invested on August 10,
2000, due to recurring losses by the investee and the investee's minimum
shareholders equity.
NOTE E - BRIDGE NOTES
On August 9, 2000, the Company signed and executed an "Agreement" to issue,
sell and deliver up to $1,500,000 of the Company's Series 1 Secured Convertible
Bridge Financing Notes (the "Bridge Notes") with attached repricing warrants and
accompanied by certain additional warrants (collectively "the Securities"). The
Company has agreed to grant to the Purchaser of these Notes certain registration
rights with respect to the Company's common stock issuable upon conversion
and/or exercise of the Securities and to secure the Company's obligation under
the Bridge Notes.
The Company and the Purchasers have determined that it is necessary to
register the Securities for sale under the California "blue sky" law, which
registration could delay the closing of the purchase and sale of the Bridge
Notes.
The Purchasers have agreed to advance to the Company a portion of the
proceeds that it would have received upon the issuance of the Bridge Notes on
agreed upon terms and conditions and in connection therewith have loaned the
Company the sum of $1,125,000, evidenced by a series of 11% demand notes (the
"Demand Notes"). Net proceeds totalled $858,000. The Demand Notes are payable
upon demand unless certain agreed upon conditions have occurred, in which case,
the demand notes are payable on demand after September 23, 2000. The Demand
Notes are secured pursuant to a pledge agreement dated August 9, 2000.
The difference in the Demand Note of $1,125,000 and net proceeds of
$858,000 represents fees and expenses of $267,000 associated with obtaining the
Bridge Note, primarily $109,982 in fees paid to Sovereign and $110,000 in fees
paid to Benz Consulting Corp.
No later than five (5) business days after August 9, 2000, the Company
agreed to file for a "permit" from the California Department of Corporations to
represent and warrant to the Purchasers that upon issuance of the permit, the
Securities will be exempt from any California usury law.
No later than three (3) business days after issuance of the permit, the
Company shall issue to each of the Purchasers, in exchange for the Demand Note
issued to each Purchaser, a Bridge Note equal to the principal amount of the
Demand Note plus accrued interest.
In connection with the Bridge Financing, on June 15, 2000, the Company
entered into a Consulting Agreement with Sovereign Capital Advisors, LLC
("Sovereign") appointing Sovereign as its non-exclusive agent to issue and sell
the Company's securities. The appointment terminated on August 15, 2000 and was
not subsequently extended. As part of the Consulting Agreement, the Company paid
at closing $109,982 in fees to Sovereign, to be deducted from the $1,125,000
proceeds.
In addition, on August 9, 2000, Sovereign received 75,000 warrants giving
Sovereign, the right to purchase 75,000 shares of the Company's common stock at
an exercise price equal to 125% of the average closing bid price of the common
shares
<PAGE>
for the five trading days immediately prior to the closing date, August 9, 2000,
exercisable within four years from the closing date. The calculated exercise
price is $1.4844 per share.
In connection with the Bridge Financing, the Company on August 9, 2000,
entered into a Pledge Agreement with SovCap Equity Partners, Ltd. ("SovCap")
granting SovCap a security interest in (a) 1,800,000 shares of the capital stock
of the Company (the "pledged stock"), and (b) all proceeds from the pledged
stock. The Company will issue 1,800,000 shares of its Common Stock, registered
in the name of the Company (Cumetrix Data Systems Corp, as collateral for the
Demand Notes, with an aggregate value of at least 200% of the principal amount
of the Bridge Notes. The 1,800,000 shares is calculated as $1,125,000 divided by
the closing price of the Company's stock on the closing date, August 9, 2000
($1.25) multiplied by 200%.
Effective September 29, 2000, the Company issued an aggregate of
$1,142,531.26 principal amount of Series 1 Bridge Financing Notes to three
Purchasers. The Bridge Notes are convertible into shares of the Company's common
stock at an initial conversion price of $2.00 per share (the "Conversion
Shares"). The conversion price of $2.00 per share was changed from an initial
conversion price of $1.25 per share on August 9, 2000, however, to partly offset
this increase in the conversion price, each Purchaser also received Repricing
Warrants and Purchaser Warrants. Each Purchaser received a Repricing Warrant
which effectively reduces the conversion price of the Bridge Notes (the
"Repricing Warrants"). In addition, for each $100,000 loaned to the Company, the
Purchaser received a Warrant to purchase 10,000 shares of the Company's common
stock, exercisable for a period of four years at an exercise price of $.6668 per
share (the "Purchaser Warrants"). The Warrants may also be exercised on a
cashless basis, assuming the market price of the Company's common stock is in
excess of $.6668.
In addition to the 75,000 warrants received by Sovereign Capital Advisors,
LLC on August 9, 2000, exercisable at $1.4844 per share, Sovereign Capital
Advisors, LLC on September 29, 2000, also received a Warrant to purchase 10,000
shares of the Company's common stock, exercisable for a period of four years at
an exercise price of $1.4375 per share (the "Sovereign Warrant"). Such Warrant
may also be exercised on a cashless basis, assuming the market price of the
Company's stock is in excess of $1.4375.
The following table identifies each Purchaser and the amount of securities
purchased:
Purchaser Name Note Principal Purchaser Warrants
-------------- -------------- ------------------
SovCap Equity Partners Ltd $ 507,791.67 50,000
EIG Capital Investments Ltd. $ 507,791.67 50,000
Arab Commerce Bank Ltd. $ 126,947.92 12,500
------------- -------
$1,142,531.26 112,500
============= =======
Bridge Notes
The Bridge Financing Notes are due and payable on demand on or after March
28, 2001 (180 days from September 29, 2000). The Bridge Financing Notes bear
interest at the rate of 8% until proper demand for repayment is made, after
which the Notes accrue interest at the rate of 12% per year. The Bridge Notes
are secured by a pledge of the Company's newly issued common stock having a
value of approximately 200% of the aggregate principal value of all outstanding
Bridge Notes. The Bridge Notes are redeemable for cash or shares of the
Company's common stock, based upon the following redemption premiums:
Redemption Date Redemption Premium
--------------- ------------------
Date of issuance through 45 days thereafter 105%
46th through 90th day after issuance 110%
91st through 135th day after issuance 115%
after 135 days from date of issuance 120%
<PAGE>
At any time prior to the date when a holder demands repayment of a Bridge
Note, the Company may prepay the Bridge Notes, in cash, for an amount equal to
the outstanding principal amount of the Bridge Note, multiplied by the
redemption premium, plus all accrued interest on the Bridge Note through the
date of repayment. At any time after a registration statement covering the
common stock issuable upon conversion of the Bridge Notes is effective under the
Securities Act of 1933, either the holder or the Company may require that the
Bridge Notes be converted into shares of the Company's common stock. The number
of shares of common stock shall equal the outstanding principal amount of the
Bridge Note, multiplied by the redemption premium, plus all accrued interest on
the Bridge Note through the date of repayment, divided by $2.00. The following
chart reflects the number of shares of common stock to be issued to each
purchaser, assuming the conversion occurs on the 180th day after the original
issuance of the Bridge Notes (approximately $1,400,000 calculated as follows
($1,125,000 x 120%) plus $50,000 interest):
Purchaser Shares
--------- ------
Sovcap Equity Partners Ltd 314,831
EIG Capital Investments Ltd 314,831
Arab Commerce Bank Ltd. 78,708
--------
708,370
========
Repricing Warrants
Upon the issuance of shares of common stock to a holder of a Bridge Note,
the Holder will receive a repricing warrant which is exercisable at $.001 per
share, for a period of one year from the date of issuance. However, if the
holders of the Bridge Notes choose not to convert the Bridge Notes into shares
of the Company's common stock then the holders of the Bridge Notes would not
receive repricing warrants. By exercising the repricing warrant, the effective
conversion price of the Bridge Note is reduced to the average closing bid price
of the Company's common stock for the twenty trading days commencing on the date
the Bridge Note is actually converted. The following table illustrates the
number of additional shares of the Company's common stock which each holder
would be entitled to receive, if the average closing bid price of the common
stock for the twenty trading days immediately prior to and subsequent to the
conversion date were $.50 per share:
Repricing
Purchaser Shares
--------- ------
Sovcap Equity Partners Ltd 944,491
EIG Capital Investments Ltd 944,491
Arab Commerce Bank Ltd. 236,122
--------
2,125,104
=========
The following formula for determining the number of shares issuable upon
exercise of a repricing warrant or any portion thereof, is as follow:
# of shares = $2.40 minus the arithmetic mean of the closing bid price
of the common stock for each of the 20 trading days
commencing on the date the Bridge Note is converted
divided by
the arithmetic mean of the closing bid price of the common
stock for each trading day during the 20 trading days
commencing on the date the Bridge Note is converted
<PAGE>
Given the recent price of the Company's stock, the Company reserved an
additional 2,200,000 shares of common stock to be issued according to the
repricing warrants. Obviously, the number of shares to be issued under the
repricing warrants is directly linked to the Company's stock price on the
conversion date of the Bridge Notes. As the stock price decreases, the number of
shares to be issued pursuant to the repricing warrants increase. In fact, a
potentially unlimited number of shares could be issued under the repricing
warrants should the Company's stock near a price of $0.00 per share. Given the
current reserve of 4,000,000 shares, (1,800,000 shares, August 9, 2000 and
2,200,000 shares, September 29, 2000), the Company may need to register
additional shares in order to satisfy the Company's obligation under the
repricing warrants if the price of the Company's stock drops significantly below
$.50 per share.
Redemption by Conversion at the Option of the Company
At any time and from time to time on or prior to the Demand Date and
--------------
provided that on the Redemption Date a registration statement is effective
covering the resale by Holder of all of the Conversion Shares, the Company may
at it's option, redeem the then outstanding principal amount of the Series 1
Bridge Note at the Demand Date Redemption Price by conversion of the Series 1
Bridge Note into shares of Common Stock at $2.00 per share (the "Conversion
Price"). The "Demand Date Redemption Price" shall be equal to 120.0% of the then
outstanding principal amount of the Series 1 Bridge Note plus accrued and unpaid
interest through and including the date the payment is disbursed
Cash Redemption at the Option of the Company
At any time and from time to time on or prior to the Demand Date, the
--------------
Company may, at its option, redeem all or a portion of the Series 1 Bridge Note
for cash according to the Redemption Premium schedule.
Redemption at the Option of the Holder
At any time and from time to time after the Demand Date, the Holder may, at
-----
its option, make demand to the Company to redeem, all or any part of the then
outstanding principal at a price equal to the Demand Date Redemption Price. Such
demand shall specify Holder's election to accept payment of the redemption price
in cash or by conversion of the Series 1 Bridge Note into shares of Common
Stock.
Registration Rights Agreement
To induce Purchasers to execute and deliver the Purchase Agreement, the
Company has agreed to file a Registration Statement covering the Conversion
Shares, the Purchaser Warrant Shares and the Repricing Warrant Shares under the
Securities Act of 1933. No later than forty five (45) days after the First
Closing Date (September 29, 2000), the Company is to file with the SEC a
Registration Statement on Form S-3, covering the resale of all of the
Registrable Securities ("Mandatory Registration"). The Company shall use its
best efforts to have the Registration Statement declared effective by the SEC
within one hundred fifty (150) days after the First Closing Date, which would be
February 26, 2001 (the "Registration Deadline"). The Company shall permit the
registration statement to become effective within five (5) business days after
receipt (whether orally or in writing) of a "no review" notice from the SEC. The
Registration Rights Agreement calls for damages to be paid to Holders if the
Registration Deadline is not met.
Registration Statement Default
The Company as of November 13, 2000 has not filed with the SEC a
Registration Statement on Form S-3, covering the resale of all of the
Registrable Securities, no later than forty five (45) days after the First
Closing Date (September 29, 2000) and is therefore, in default with respect to
this Mandatory Registration. The Company is continuing the process of filing the
Registration Statement on form S-3 with the SEC.
Right of First Refusal
For a period of 1 (one) year after the closing Date of the last Additional
Closing, the Purchasers shall have a right of first refusal to purchase any
Private Securities that the Company proposes to issue and sell after the date of
the Agreement, with each Purchaser being entitled to purchase its pro rata
share. If the
<PAGE>
Company proposes to issue any Private Securities, it shall give each Purchaser
written notice of its intention, describing the Private Securities in detail and
the price and the terms and conditions upon which the Company proposes to issue
the same.
Bridge Note Proceeds
The proceeds from the Bridge Note are intended to provide additional
funding for existing investments. On August 10, 2000, $750,000 of the $858,000
net proceeds from the Bridge Note was used to provide additional working capital
for Salescentrix.com, an existing investment. For the quarter ended September
30, 2000, the entire $750,000 investment in Salescentrix.com was written-off due
to recurring losses and the investee's minimum amount of shareholders equity.
Cash versus Stock Conversion
On or about March 28, 2001 if the price of the Company's stock has not
increased to a price high enough to induce the Holders of the Bridge Notes to
convert the Bridge Notes to Company stock, the Company would need to pay to the
Holders cash of approximately $1,400,000. If the price of the Company's stock
was to remain at current levels ($.3750 per share at November 13, 2000) or
decrease, the Company would be forced to pay the Holders of the Bridge Notes
cash of approximately $1,400,000 since it would be prohibitive to issue the
amount of Company shares necessary to satisfy conversion of the Bridge Notes. If
the $1,400,000 cash is paid to the Bridge Note Holders, the net proceeds of
$858,000 would end up costing the Company $1,667,000 a cost of $809,000 for
$858,000. The $1,400,000 potential cash payment has not been reserved by the
Company.
NOTE F - CONSULTING AGREEMENT
On April 5, 2000, the Company entered into a consulting agreement with its
Chairman, John Botdorf, which provides that the Company will pay Mr. Botdorf
$150,000 annually, payable in 12 monthly installments plus expenses, and will
issue options 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.
On October 4, 2000, the Board of Directors cancelled Mr. Botdorf's options
to purchase 450,000 shares, vesting over a three-year period and replaced the
450,000 options with 500,000 options, of which 200,000 options vested
immediately and 300,000 options over a two year period, vesting monthly. The
200,000 options has an exercise price of $1.00 per share and of the 300,000
options, 240,000 options are exercisable at $2.00 a share with the remaining
60,000 options exercisable at $3.00 a share.
NOTE G - TMA CONSULTING AGREEMENT
In January 2000, the Company entered into a consulting agreement with TMA,
a company based in California to provide Internet/website and e-commerce
consulting services, which include a Cyberspace Network Marketing program. The
agreement was
<PAGE>
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 fiscal year ended March 31,
2000, the Company paid TMA $42,700. From April 1, 2000 to November 13, 2000, the
Company paid TMA an additional $239,400, to total $282,100.
NOTE H - 2000 LOAN PLAN
On August 18, 2000, the Board of Directors approved and adopted the
"Cumetrix Data Systems Corp. 2000 Loan Plan"(2000 Loan Plan). The purpose of the
2000 Loan Plan is to attract, retain and motivate employees and other key
personnel who provide valuable services to Cumetrix Data Systems Corp. by
providing them with the opportunity to obtain loan financing on affordable
terms.
The Board of Directors selected Max Toghraie as the plan's sole
administrator. Max Toghraie as the "Plan Administrator" shall have the
authority, in his discretion, to determine all matters relating to loans granted
under the Plan, including selection of the individuals to be granted loans, the
principal amount of such loans, and any and all other terms, conditions,
restrictions, and limitations of a loan. Furthermore, the Plan Administrator
shall have the authority and discretion to interpret the Plan, to establish,
amend, and rescind any rules and regulations relating to the Plan, to determine
the terms and provisions of any loan made pursuant to the Plan, and to make all
other determinations that may be necessary or advisable for the administration
of the Plan. All decisions made by the Plan Administrator prior to the Plan's
execution and related orders and resolutions shall be final, conclusive, and
binding on all persons.
The Plan sets a maximum loan amount to Max Toghraie of $275,000. The Plan
was effective for a one week period beginning August 22, 2000 and terminating on
August 31, 2000. After the plan is terminated on August 31, 2000, no future
loans may be granted.
Repayment of the loan is collateralized by the individual's current and
future stock or stock option holdings in the Company. The Plan states that under
no circumstances is any participant in the plan personally liable for repayment
of his loan beyond the pledge of his current and future stocks or stock option
holdings in the Company. Repayment of the participant's loan includes principal,
accrued interest, or other charges or fees incurred by the plan in administering
the plan.
The Company's sole remedy, for repayment of a participant's loan, is
limited to the exercise of its rights as sole beneficiary of the Company's stock
or stock option proceeds, whether or not the stocks or stock options are of any
value. The Company's security in said collateral remains the company's sole and
only recourse for repayment of the individual's loan.
The aggregate dollar amount of all loans outstanding under the Plan at any
time shall not exceed Five Hundred Thousand Dollars ($500,000.00). The principal
balance outstanding shall bear interest, until fully paid, at 5% per annum.
Repayment is to be made in twenty (20) equal quarterly installments of principal
and interest due and payable on the last day of March, June, September and
December of each year beginning December 31, 2001.
On August 22, 2000 the following loan amounts in excess of $60,000.00 were
wired to the following individuals as per the Board approved loan documents:
Max Toghraie, CEO and Board of Director $275,000.00
Jeff Toghraie, VP and Board of Director $182,500.00
-----------
$457,500.00
===========
For the quarter ended September 30, 2000, the Company wrote-off the total
amount of $500,000 Loans to Officers due to the small number of Officers vested
stock options and the lack of any value in the Officers stock options used as
collateral.
On October 4, 2000, the Board of Directors cancelled certain management
stock options and issued and repriced new stock options. Stock options cancelled
ranged from an exercise price of $1.1875 to $6.75 per share (see NOTE I) and
were replaced with stock options priced at $1.00 to $3.00 per share. As of
November 13, 2000 the
<PAGE>
stock options were not-in-the-money and therefore of no value as the Company's
stock price was $.3750 per share.
NOTE I - IMPAIRMENT LOSS - LOANS TO OFFICERS
On August 22, 2000 the Company wired cash of $500,000 to Company Officers
related to the Company's "2000 Loan Plan". For the quarter ended September 30,
2000, the Company wrote-off the $500,000 Loans to Officers and recorded an
Impairment Loss of $500,000 due to the lack of value of the underlying Officers
stock options used as collateral for the loans (See NOTE H and NOTE J).
NOTE J - REPRICED MANAGEMENT STOCK OPTIONS
On October 4, 2000, the Board of Directors, citing it would be in the best
interest of the Company, approved a repricing and issuance of additional stock
options for certain outstanding management stock options and warrants for Max
Toghraie, CEO and a Director, Jeff Toghraie, VP of Sales & Marketing and a
Director, John Botdorf, Chairman of the Board and Herbert Tom, CFO.
Max Toghraie's 426,046 stock options with exercise prices as follows:
126,046 at $2.70 per share, 150,000 stock options at $1.1875 per share and
150,000 stock options at $1.125 per share were cancelled and replaced with
500,000 stock options with an exercise price of $1.00 per share. Jeff Toghraie's
150,000 stock options exercisable at $1.1875 per share were cancelled and
replaced with 400,000 stock options exercisable at $1.00 per share. John
Botdorf's 450,000 stock options exercisable as follows: 225,000 at $3.25 per
share and 225,000 at $6.75 per share were cancelled and replaced with 500,000
stock options exercisable as follows: 200,000 at $1.00 per share, 240,000 at
$2.00 per share and 60,000 at $3.00 per share. Herbert Tom's 35,000 stock
options exercisable at $1.1875 per share were cancelled and replaced with
175,000 stock options exercisable at $1.00 per share.
The number of options, exercise price and vesting are as follows:
Individual # of options Exercise Price Vesting
---------- ------------ -------------- ----------------
Max Toghraie 500,000 $1.00/share 2 years, monthly
Jeff Toghraie 400,000 $1.00/share 2 years, monthly
John Botdorf 200,000 $1.00/share Immediate
John Botdorf 240,000 $2.00/share 2 years, monthly
John Botdorf 60,000 $3.00/share 2 years, monthly
Herbert Tom 175,000 $1.00/share 2 years, monthly
At November 13, 2000 the following individuals had vested stock options as
follows: Max Toghraie, 20,833, Jeff Toghraie, 16,667, John Botdorf, 212,500 and
Herbert Tom, 7,292.
On October 4, 2000 the vesting period for all stock options were 3 years
determined quarterly. On October 20, 2000 the Board of Directors changed the
vesting period to 2 years, determined monthly, except for 200,000 stock options
for John Botdorf which would vest immediately.
On November 13, 2000 the stock price closed at $.3750 per share. As of
November 13, 2000, none of the options were in-the-money and none of the options
were exercised.
NOTE K - PROPOSED AFFILIATE ACQUISITION
On October 5, 2000, Vsource, Inc. developer of Virtual Source Network
(VSN), a pure Internet eProcurement application, announced that it had reached
preliminary agreement to acquire Online Transaction Technologies, Inc. (OTT) for
Vsource stock with a market value of $7 million. As of November 13, 2000, no
definitive acquisition agreement had been reached. The Company holds a 29%
interest in OTT and is OTT's largest shareholder.
<PAGE>
NOTE L - AMENDED AND RESTATED 2000 STOCK PLAN
On October 4, 2000 the Board of Directors approved an increase in the
number of aggregate number of shares of Common Stock that may be issued under
the Amended and Restated 2000 Stock Plan from 1,000,000 shares to 10,000,000
(Ten Million) shares.
NOTE M - SHAREHOLDERS EQUITY
For the quarter ended September 30, 2000 the Company recorded an investment
expense of $60,000 and a corresponding increase in additional paid-in-capital of
$60,000 related to the 75,000 warrants issued to Sovereign on August 9, 2000 in
connection with the Bridge Note.
The Company would have recorded additional investment expenses related to
the Purchaser Warrants, Repricing Warrants and additional Sovereign Warrants
issued with the Bridge Notes dated September 29, 2000, however, the Company
considered the investment expenses for one day (September 29, 2000 to September
30, 2000) to be immaterial.
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
--------
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software (The "Computer Products business"). In
December 1996, the Company began offering end-users custom computer
configuration and assembly systems (the "Computer System Assembly" business),
through resellers, third-party E-commerce sites and its own system configuration
E-commerce web site, suredeals.com and sureauctions.com. As a result, the
majority of sales was derived from sales of computer systems, with a smaller
percentage of sales from computer products or components.
Currently the Company derives approximately 70% of its sales from computer
components and approximately 30% of sales from Computer Systems Assembly. The
Company reduced its emphasis on Computer Systems due partly to low margins and
the high rate of computer system returns, thereby further eroding margins on
sales of Computer Systems Assembly. The Company's current emphasis on selling
computer products and components may further decrease in the future already low
margins.
The Company is experimenting with sales of products unrelated to Computer
Systems Assembly or Computer Components in an effort to increase margins and
total sales.
Risk Factors
------------
"Going-Concern" Issue
The Company may not be able to continue as a going concern for the next
twelve months. The Financial Statements do not contain any adjustments that
might be necessary in such a case. The uncertainty stems from anticipated
continuing operating losses, the possibility of a $1,400,000 repayment to the
Bridge Note Holders, the lack of a definitive agreement for the sale of our
investment Online Transaction Technologies, the difficulty of raising equity
capital and any future financing. Therefore, the Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to comply with the terms of its Bridge
Note Financing, to obtain additional financing and ultimately to attain
profitability.
Many investment bankers and investors view companies with a "going-concern"
qualification as less desirable for investment. Accordingly, we might have a
more difficult time raising equity capital or borrowing capital at all or on
favorable terms. Our suppliers might be less willing to extend credit. Our
potential customers might be less willing to purchase our products and services
if they believe that we will not be viable enough to provide service, support,
back-up and follow-on products when needed. Furthermore, we might be
disadvantaged in recruiting employees who might be concerned about the stability
of employment with us. Therefore, the "going-concern" qualification can have
severe adverse consequences on the Company.
<PAGE>
Results of Operations
---------------------
Sales for the six months ended September 30, 2000 were $6,008,522 as
compared with sales of $11,112,570 for the same period in the prior year. Sales
for the three months ended September 30, 2000 were $3,032,239 as compared with
sales of $4,055,896 for the three months ended September 30, 1999. Sales for the
six months ended September 30, 2000 declined $5,104,048 or 46% and sales for the
three months ended September 30, 2000 declined $1,023,657 or 25% over the same
periods in the prior year. The decline in sales is partly the result of the
Company's decision to substantially reduce its dependence on the Computer
Products business (in particular the distribution of computer hard-drives) in
response to changes in market conditions within this segment of the business,
and unacceptably low profit margins. While the Company has substantially reduced
computer hard-drive sales, the Company has increased its sales of Computer
Components and Products relative to Computer Systems Assembly. Currently
approximately 70% of total sales are derived from Computer Components and
Products and 30% from Computer Systems Assembly.
Gross profit for the six months ended September 30, 2000 was $288,178 or
4.8% of sales, as compared with gross profit of $282,572 or 2.5% of sales for
the six months ended September 30, 1999. Gross profit for the three months ended
September 30, 2000 was $114,900 or 3.8% of sales, as compared with gross profit
of $135,836 or 3.3% of sales for the three months ended September 30, 1999.
Selling, general and administrative expenses for the six months ended
September 30, 2000 were $1,836,284 as compared with $1,998,394 for the six
months ended September 30, 1999. Selling, general and administrative expenses
for the three months ended September 30, 2000 were $977,379 as compared with
$1,136,391 for the three months ended September 30, 1999.
Salaries and wages for the three months ended September 30, 2000 as
compared to the three months ended September 30, 1999 declined $195,000 from
$390,000 to $195,000 due to an overall decrease in assembly, plant employees,
management and administrative personnel. A one time charge for the three months
ended September 30, 1999 for $71,250 was due to an adjustment in one of the
management and administrative personnel's salary and wage.
A brief summary of the principle components of selling, general and
administrative expenses for the periods is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- --- ----
<S> <C> <C> <C> <C>
Salaries and wages $195,000 $ 390,000 $ 378,000 $ 820,000
Outside services 195,000 126,000 359,000 201,000
Investment expenses 309,000 - 309,000 -
Legal 81,000 161,000 123,000 211,000
Accounting and audit 59,000 188,000 109,000 238,000
Rent 20,000 32,000 40,000 55,000
Credit and collection 16,000 79,000 174,000 127,000
Depreciation and amortization - 54,000 - 108,000
Other (under 5%) 102,379 106,391 344,284 238,394
-------- ---------- ---------- ----------
$977,379 $1,136,391 $1,836,284 $1,998,394
======== ========== ========== ==========
</TABLE>
The increase in outside services for the three months ended September 30,
2000 is principally attributable to outside consulting service fees of $239,400
paid to TMA, a California based company that provides Internet/website and e-
commerce consulting services. The increase in credit and collection expenses is
due to an increase in service fees charged by websites Egghead.com and CNet.com.
Investment expenses are principally due to investment expenses related to the
Company's $1,125,000 Bridge Notes. The increase in legal, accounting and audit
fees for the six months ended September 30, 1999 are the result of legal,
auditing, investigative and management consulting fees incurred during the
periods in connection with a
<PAGE>
special investigation of allegations of improprieties and record-keeping
irregularities initiated by the Board of Directors.
For the three months ended June 30, 2000, the Company recorded a non-cash
impairment loss of $207,740 related to a write-down of the value of the
Company's fixed assets. These assets were written down to their fair values
based on the salvage value of the assets. The recognition of this impairment was
in accordance with the provisions of Statement of Financial Accounting Standards
No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
For the three months ended September 30, 2000, the Company recorded a
non-cash impairment loss of $500,000 related to a write-down of the value of the
Company's Loans Receivables from Officers. This asset was written off based on
the lack of value of the Officers stock options used as collateral for the
loans. The recognition of this impairment was in accordance with the provisions
of Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
Interest income, primarily from the investment of the proceeds of the
Company's public offering of the Company's stock was $68,039 for the six months
ended September 30, 2000, and $28,409 for the three months ended September 30,
2000. Interest income for the six months and three months ended September 30,
1999, was $166,878 and $94,233, respectively.
For the six months ended September 30, 2000, the Company reported a net
loss Of $3,490,358, as compared to a net loss of $1,913,910 for the six months
ended September 30, 1999. The Company reported a net loss of $2,238,184 for the
three months ended September 30, 2000 as compared to a net loss of $1,121,863
for the three months ended September 30, 1999. Net losses for the six months
ended September 30, 2000 increased $1,576,448 or 82% and net losses for the
three months ended September 30, 2000 doubled by $1,116,321 or 100% over the
same periods in the prior year.
The net loss of $3,490,358 for the six months ended September 30, 2000 are
principally the result of decreasing Company sales resulting in low margins,
impairment losses from fixed assets, write-offs of loans made to Company
officers, expenses related to the Company's investments and losses from the
write-off of the company's investments.
The Company anticipates continuing losses from operations and currently
cannot determine when the Company will be profitable from operations.
Shareholders equity at September 30, 2000 was $2,535,071 compared to
shareholders equity of $7,898,454 on September 30, 1999 a decrease of
$5,363,383 or 68%.
Liquidity and Sources of Capital
--------------------------------
For the six months ended September 30, 2000, net cash used by operating
activities was $1,934,776, as compared to net cash used by operating activities
of $1,902,050 for the same period in the prior year. The net use of cash for the
six months ended September 30, 2000 was principally the result of net operating
losses, loans made to officers and payments of accrued expenses. The net use of
cash for the six months ended September 30, 1999 was principally the result of
net operating losses and payments on accounts payable.
An investment of $1,000,000 in Salescentrix.com, which included an initial
investment of $250,000 and an additional investment of $750,000, constitute the
principle use of cash from investing activities for the six months ended
September 30, 2000. Capital expenditures of S27,593 constitute the principle use
of cash for the six months ended September 30, 1999. Capital expenditures for
the six months ended September 30, 2000 were $0. Cash of $452,189 from a time
deposit constituted the only source of cash provided by investing activities for
the six months ended September 30, 2000.
Cash flows provided by financing activities for the six months ended
September 30, 2000 of $1,133,262 are principally associated with the issuance of
a $1,125,000 demand note payable (see NOTE E in Notes to Financial Statements).
Principal repayment of long-term debt of $9,269 and $2,742 for the six months
ended September 30, 2000 and 1999, respectively, constitute the balance of funds
used in financing activities.
<PAGE>
As of September 30, 2000 the Company had $3,567,660 in cash, cash
equivalents and investment deposits and working capital of $2,379,786 with a
ratio of current assets to current liabilities of approximately 1.9 : 1. This
compares with cash, cash equivalents and investment deposits of $5,369,174 and
working capital of 5,234,224 with a ratio of current assets to current
liabilities of 4.1 :1 as of March 31, 2000. For the six months ended September
30, 2000, cash decreased $1,801,514 and working capital decreased $2,854,438.
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.
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.
Management Restructuring
------------------------
During the first quarter of fiscal year 2000, allegations of certain
improprieties and record-keeping irregularities in fiscal year 1999 were brought
to the attention of the Board of Directors. Under the direction of the Audit
Committee of the Board of Directors a special investigation was initiated. As a
result of this investigation, the Company's former President and its Secretary-
Treasurer were terminated from employment and disciplinary actions were taken
with certain other non-management employees.
The Company failed to file timely its Annual 10-K Report for the fiscal
year ended March 31, 1999 and its Quarterly 10-Q Report for the first quarter
ended June 30, 1999, consequently, the company's stock was delisted from the
Boston Stock Exchange and from NASDAQ on August 27, 1999, respectively. The
Company employed an independent management consultant as Chief Executive Officer
in early September, 1999 principally to oversee the filing of the delinquent SEC
reports.
The special investigation was completed to the satisfaction of the
Company's Board of Directors and its outside auditors. On October 15, 1999, the
Company's fiscal year 1999 Annual Report and first Quarterly Report for fiscal
year 2000 were filed with the SEC.
On October 22, 1999 the Company ended its contract with the independent
consultant, and Mr. Max Toghraie was appointed as the Company's Chief Executive
Officer.
In late October 1999, a restructuring plan to reduce the company's
operating overhead and improve operating efficiencies was adopted, which
resulted in the elimination of approximately 25% of the Company's workforce,
including certain management positions.
In October and November, 1999, Directors Mr. James Ung (formerly
President), Mr. Philip Alford and Mr. David Tobey, resigned from the Board of
Directors.
In 1999, Mr. Herbert Tom was appointed as the Company's new Chief Financial
Officer. Mr. Tom's background includes extensive experience in operations as
well as finance and accounting. Mr. Tom is a certified public accountant and
holds a Master's degree in business administration.
Finova Capital Corporation
--------------------------
On January 31, 2000, the Company's agreement with Finova Capital
Corporation to insure the availability of funds to meet the Company's various
cash flow needs was terminated. The Company believes it has adequate resources
to achieve its operating plans for at least the next twelve months.
<PAGE>
Leased Facility
---------------
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. The current lease expires January 31, 2001 with an
intent to renew notice due by July 31, 2000. The Company and the Lessor agreed
to extend the current lease for one additional year from January 31, 2001 to
January 31, 2002. The monthly base rent will increase from $11,607 to $14,235.
Egghead Fees
------------
Effective August 10, 2000, the fees charged to the Company by the internet
site Egghead.com, the Company's major source of sales, will increase for all
sales generated through the Egghead.com website to 10% from the current fees
charged of 5% and 10%. Currently, approximately 70% of Sales incurred through
the Egghead internet website are charged a 5% fee by Egghead, however, beginning
August 10, 2000, all Sales will be charged a 10% fee. This increase in Egghead
fees will have a material effect on the Company's margins.
Egghead Sales
-------------
At least 80% of the Company's sales are derived from its internet marketing
partner's internet site Egghead.com. Any adverse occurrence to Egghead.com's
operations would have a serious and far reaching consequence on the Company's
ability to continue its operations.
Board of Directors
------------------
The Board of Directors currently consist of John Botdorf, Chairman of the
Board (shareholder), Max Toghraie, CEO, Jeff Toghraie, VP Sales & Marketing (who
also runs day-to-day operations) and Nancy Hundt (shareholder).
Related Party
-------------
In 1997, the Company employed Sam Toghraie, brother of Max Toghraie and
Jeff Toghraie, as a Department Head for the RMA Department on an at-will basis
for an annual salary of $60,000 including the use of a company car. Effective
November 3, 2000, Sam Toghraie resigned as an employee of the Company and will
instead be consulting for the Company as an independent Sales Consultant on a
full-time basis. As of November 13, 2000, the consulting fees to be paid to Sam
Toghraie by the Company, had not been determined, except for the fact that Sam
Toghraie's consulting fee will be higher than his previous employee annual
salary of $60,000 and may involve use of a Company car and other sales expenses.
Year 2000 Update
----------------
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. 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.
<PAGE>
Forward-Looking Statements
--------------------------
Certain statements in this Form 10-Q contain "forward-looking statements"
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties that may cause actual results to differ
materially from those predicted in the forward-looking statements. Forward-
looking statements can be identified by their use of such verbs as expects,
anticipates, believes or similar verbs. If any of the Company's assumptions on
which the statements are based prove incorrect or should unanticipated
circumstances arise, the Company's actual results could materially differ from
those anticipated by such forward-looking statements. The differences could be
caused by a number of factors or combination of factors including but not
limited to, the risks detailed in the Company's Securities and Exchange
Commission filings, including the Company's Form 10-K for the fiscal year ended
March 31, 2000.
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.20 - Series 1 Bridge Financing Notes dated September 29, 2000
Exhibit 10.21 - Cumetrix Data Systems Corp 2000 Loan Plan dated
August 18, 2000
Exhibit 27 - Financial Data Schedule
(b) none.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 13, 2000 CUMETRIX DATA SYSTEMS CORP.
/s/ Herbert H. Tom
---------------------------------
Herbert H. Tom
Chief Financial Officer
