AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2001
REGISTRATION NO. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
CUMETRIX DATA SYSTEMS CORP.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 5045 95-4574138
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer Identification No.)
incorporation or organization) classification code number)
-------------------------------------------
957 Lawson Street
Industry, California 91748
(626) 965-6899
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------------------------
Max Toghraie, Chief Executive Officer
957 Lawson Street
Industry, California 91748
(626) 965-6899
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------------------
Copies to:
Marc J. Ross, Esq.
Thomas A. Rose, Esq.
Sichenzia, Ross & Friedman LLP
135 West 50th Street, 20th Floor
New York, New York 10020
(212) 664-1200
------------------------------------------
Approximate date of proposed sale to public:
As soon as practicable after this registration statement becomes effective.
------------------------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------------------
CALCULATION OF REGISTRATION FEE
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------
Common Stock, no par value 5,269,014 $1,317.25
- -------------------------------------------------------------------------------------------------------------------
TOTAL 5,269,014 $1,317.25
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(1) Estimated solely for the purpose of determining the registration fee.
--------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS SUBJECT TO COMPLETION
March 26, 2001
CUMETRIX DATA SYSTEMS CORP.
5,269,014 shares of common stock
This prospectus relates to the sale of up to 5,269,014 shares of common
stock of Cumetrix Data Systems Corp. offered by certain selling stockholders.
The selling stockholders may sell all or any portion of the shares in this
offering in one or more transactions by a variety of methods, including through
the OTC Bulletin Board or in negotiated transactions. The selling stockholders
will determine the selling price of the shares. The selling stockholders will
also pay any broker or dealer commission, fee or other compensation or
underwriter discount. We will not receive any of the proceeds from the sale of
the shares by the selling stockholders.
Each of the selling stockholders may be deemed to be an underwriter, as
such term is defined in the Securities Act of 1933.
Our common stock trades on the OTC Bulletin Board under the symbol "CDSC."
On March 26, 2001, the closing sale price of the common stock was $.20 per
share.
The securities offered hereby are speculative and involve a high degree of
risk and substantial dilution. Only investors who can bear the risk of loss of
their entire investment should invest. See "Risk Factors" beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is April 13, 2001.
CUMETRIX DATA SYSTEMS CORP
TABLE OF CONTENTS
Section Page
- ------- ----
Prospectus Summary 4
The Offering 5
Risk Factors 7
Use of Proceeds 11
Price Range of Common Stock 12
Dividend Policy 12
Capitalization 13
Selected Financial Data 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Business 25
Management 30
Executive Compensation 31
Security Ownership of Management and
Certain Beneficial Owners 33
Description of Capital Stock 35
Plan of Distribution 40
Legal Matters 41
Experts 41
Index to Financial Statements F-1
Exhibits and Reports on Form 8-K
Signatures 46
Prospectus Summary
Our business................ We distribute and supply computer systems and hardware
components and provide computer configuration and assembly
services primarily to e-commerce businesses and consumers. Our
products and services are marketed through Internet marketing
partners such as Egghead.com and Cnet.com and through our own
Internet website, suredeals.com.
Our products................ Our principal business is the sale of fully configured personal
computers and a range of computer related products to e-commerce
retailers. These products include private label personal
computers, CD-recorders, memory chips, microprocessors and
motherboards, modems, as well as other items for personal
computers.
Marketing .................. We market our products and services through our Internet
marketing partners such as Egghead.com and CNet.com., our
outside sales representatives and our Web site, suredeals.com.
Our strategy................ Our strategy is to provide a broad array of fully configured
personal computers and related products to consumers and
businesses. We will attempt to leverage our knowledge of the
computer industry and the Internet, and our ability to deliver
competitive levels of customer service. We have focused
primarily on sales of upgrades and additional configuration
services as a way to enhance our relatively low margins on entry
level personal computer systems sales.
Our history................. We were incorporated in California on April 2, 1996, under the
name Data Net International, Inc. On January 6, 1998, we
changed our name to Cumetrix Data Systems Corp.
Our principal offices....... Our principal executive offices are located at 957 Lawson
Street, Industry, California 91748 and our telephone number is
(626) 965-6899.
4
The Offering
Common stock outstanding
before this offering............ We have 7,392,500 shares of common stock outstanding as of the date
hereof. We may issue up to 5,269,014 additional shares to the selling
stockholders, which may be re-offered pursuant to this prospectus.
Common stock offered by the
selling stockholders............ 5,269,014 shares of common stock
Common stock outstanding after
this offering................... 12,661,514 shares, assuming all shares issuable are issued to the selling
stockholders.
Use of proceeds................. We will not receive any proceeds from the sale of securities by the
selling stockholders.
Risk factors.................... Investing in these securities involves a high degree of risk and immediate
and substantial dilution of your investment. As an investor, you should
be able to bear a complete loss of your investment.
Forward-looking statements...... This prospectus contains forward-looking statements that address, among
other things, our expansion and acquisition strategy, business
development, use of proceeds, projected capital expenditures, liquidity,
and our development of additional revenue sources. The forward-looking
statements are based on our current expectations and are subject to risks,
uncertainties and assumptions. We base these forward-looking statements
on information currently available to us, and we assume no obligation to
update them. Our actual results may differ materially from the results
anticipated in these forward-looking statements, due to various factors.
5
Summary Financial Data
The following summary of financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes. The
statement of operations for the fiscal year ended March 31, 2000 and the balance
sheet data at March 31, 2000 are derived from the audited financial statements
of Cumetrix Data Systems Corp., which have been audited by Singer Lewak
Greenbaum & Goldstein LLP. The statement of operations for the fiscal years
ended March 31, 1998 and 1999, and the balance sheet data at March 31, 1999 and
1998 are derived from the audited financial statements of Cumetrix Data Systems
Corp., which have been audited by Arthur Andersen LLP. The statement of
operations for the nine months ended December 31, 1999 and 2000 and the balance
sheet data at December 31, 1999 and 2000 have been prepared from our books and
records and reflect, in our opinion, all adjustments necessary for a fair
presentation of our financial position, results of operations, and cash flows,
as of the periods indicated therein. The selected interim financial data
presented below do not necessarily indicate the operating results or our
performance for the full year.
Statement of Operations:
Fiscal Year End March 31, Nine Months Ended Dec 31,
---------------------------------------- -------------------------------
1998 1999 2000 1999 2000
Revenues $72,495,474 $63,813,350 $18,629,566 $15,063,615 $10,510,558
Operating Expenses:
Cost of Sales 69,468,497 62,911,633 18,087,762 14,283,306 10,021,763
Administrative Expenses 1,542,294 3,292,569 4,211,141 2,931,620 2,695,631
Write-off of Capitalized Software - 1,100,000 - - -
Impairment Loss- Loans from Officers - - - - 500,000
Impairment Loss- Long Lived Assets - - - - 207,740
Loss on Equity Investment - (122,000) (896,157) (364,607) (1,281,843)
Interest Income 68,158 514,345 316,434 246,576 113,522
Interest Expense (239,791) (4,652) (1,746) 410 (217,255)
Gain on Sale of Investment - - - - 445,000
Other Income (Expense) (10,160) 1,365 - - -
----------- ----------- ----------- ----------- -----------
Total Expenses 71,192,584 66,915,144 22,880,372 17,333,367 14,365,710
----------- ----------- ----------- ----------- -----------
Net Profit (Loss) Before Income Taxes 1,302,890 (3,101,794) (4,250,806) (2,269,752) (3,855,152)
Income Taxes 579,738 (102,228) (278,871) - (46,699)
----------- ----------- ----------- ----------- -----------
Net Profit (Loss) for the Period $ 723,152 $(2,999,566) $(3,971,935) $(2,269,752) $(3,808,453)
=========== =========== =========== =========== ===========
Earnings (Loss) per Basic and
Diluted Share $ .16 $ (.41) $ (0.54) $ (.31) $ (.52)
=========== =========== =========== =========== ===========
Weighted average basic shares
outstanding 4,544,759 7,364,828 7,392,500 7,392,500 7,392,500
=========== =========== =========== =========== ===========
Weighted average diluted shares
outstanding 4,639,041 7,364,828 7,392,500 7,392,500 7,392,500
=========== =========== =========== =========== ===========
Balance Sheet Data:
As of March 31, As of December 31,
1998 1999 2000 1999 2000
----------- ----------- ----------- ----------- -----------
Working Capital 97,504 8,420,382 5,234,224 6,641,334 1,632,991
Total Current Assets 10,482,720 12,926,995 6,945,555 7,891,822 4,350,834
Total Assets 12,185,185 14,323,787 7,754,624 8,793,100 4,999,086
Total Current Liabilities 10,385,216 4,506,613 1,711,331 1,250,488 2,717,843
Total Shareholders' Equity 1,791,105 9,812,364 5,965,429 7,542,612 2,216,976
6
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Cumetrix. As one of our shareholders, your investment will be
subject to risks inherent in our business. The price of our common stock may
decline. You should carefully consider the following factors as well as other
information contained in this prospectus before deciding to invest in shares of
our common stock. Additional risks that are not currently known to us or that we
deem immaterial may also harm us and the value of your investment.
The conversion of the Bridge Financing Notes and the exercise of related
warrants may cause a substantial increase in shares outstanding, which could
adversely affect our stock price.
As of March 26, 2001, we had 7,392,500 shares of common stock outstanding.
We have reserved 5,269,014 shares of common stock for future issuance pursuant
to the conversion of notes and the exercise of certain warrants. We cannot
assure that the issuance of the common stock reserved for future issuance will
not materially adversely affect the prevailing market price of our common stock
and other shareholders' ownership interest.
Because the conversion and/or exercise price of the Bridge Financing Notes
and warrants is tied to the market price of our common stock, the number of
shares that may be issued will increase as our stock price decreases.
A potentially unlimited number of shares can be issued under the conversion
terms of the notes and related warrants since the exercise price of the warrants
is tied to the market price of our common stock. As such, the number of shares
that can be issued will increase as the price decreases. The 5,269,014 shares we
are registering should be sufficient to cover the conversion of the notes and
exercise of the warrants down to a low price of $.50 per share. Should the
conversion and/or exercise price drop below $.50 per share, we may need to
register additional shares to complete the transaction.
Our common stock is subject to the "Penny Stock Rules," which could limit
your ability to sell your shares.
The closing sale price of our common stock on March 26, 2001 was $.20 per
share. Because our common stock trades on the OTC Bulletin Board 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.
7
We face litigation risks resulting from our internal investigation.
In connection with our Audit Committee's investigation into certain
improprieties and record-keeping irregularities, James Ung, our former
President, a director and a significant shareholder, and Mei Yang, our former
Secretary, Treasurer, director and a significant shareholder, were relieved of
all executive officer and employment responsibilities. During the course of the
investigation, our Audit Committee uncovered evidence of the unauthorized resale
of certain software.
Mr. Ung and Ms. Yang each were party to employment agreements with
Cumetrix. 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
six 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, we elected to treat Mr. Ung's and Ms. Yang's relief of
their executive position 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 acts.
Mr. Ung and Ms. Yang are still significant shareholders and their votes
could have a significant impact on Cumetrix.
We operated at a loss during the year ended March 31, 2000 and the nine
months ended December 31, 2000, and we anticipate continuing to operate at a
loss for the foreseeable future.
For the year ended March 31, 2000 and the nine months ended December 31,
2000, our net loss was $3,971,935 and $3,808,453, respectively. Further, due to
the significant development and marketing costs we have incurred and will
continue to 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 and
as a result our future results of operations may not improve or may worsen.
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.
If we are not able to identify, develop, assemble, market or support our
products successfully or respond effectively to technological changes or product
announcements by competitors, we may not remain competitive.
Rapidly changing technology and new product introductions characterize the
markets for our products. Accordingly, we believe that our future success will
depend on our ability to enhance our existing products and to develop and
introduce in a timely fashion new products that achieve market acceptance. We
cannot assure you that we will be able to identify, develop, assemble, market or
support our products successfully or that we will be able to respond effectively
to technological changes or product announcements by competitors.
8
We are not able to determine our projected revenues, operating expenses and
operating results accurately, which could result in our inability to
successfully react to changes in our business.
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 are dependent upon key personnel and may not be able to retain them.
We are dependent upon the services of Max Toghraie, our Chief Executive
Officer, and Jeff Toghraie, our Vice President of Sales and Marketing. 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
on our company. 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
9
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 as a going concern.
Our continuation as a going concern is dependent upon our ability to
generate sufficient cash flow, to meet our obligations on a timely basis, to
obtain additional financing and ultimately to attain profitability.
We face risks arising from seasonality which could result in fluctuation of
our stock price.
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 are in a cyclical industry, which could materially affect our results of
operations.
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.
This prospectus contains forward looking statements and their associated
risks.
This prospectus contains certain forward-looking statements. These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. In addition to the other
risks described elsewhere in this "Risk Factors" discussion, important factors
to consider in evaluating such forward-looking statements include:
(1) changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of
operations;
(2) unanticipated working capital or other cash requirements;
(3) changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the industries in which we
operate; and
(4) various competitive factors that may prevent us from competing
successfully in the marketplace.
In light of these risks and uncertainties, many of which are described in
greater detail elsewhere in this "Risk Factors" discussion, we cannot be certain
that the events predicted in forward-looking statements contained in this
prospectus will in fact occur.
10
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders of our company. There
will be no proceeds to our company from the sale of shares of common stock in
this offering.
DILUTION
Since this offering is being made solely by the selling stockholders and
none of the proceeds will be paid to our company, our net tangible book value
will be unaffected by this offering.
11
MARKET FOR COMMON EQUITY AND RELATED STOCK MATTERS
Market Information
Our 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 our common
stock. Our common stock was delisted from Nasdaq and the Boston Stock Exchange
on August 30, 1999 for failure to meet their standards, primarily due to our
failure to keep current our reports to the Securities Exchange Commission
pursuant to the Securities Exchange Act of 1934. Our common stock presently
trades on the NASD 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 our common stock.
PERIOD HIGH LOW
- ------- ---- ---
Quarter ended March 31, 1999 $9.63 $3.56
Quarter ended June 30, 1999 $7.00 $2.38
Quarter ended September 30, 1999 $3.44 $0.75
Quarter ended December 31, 1999 $2.00 $0.69
Quarter ended March 31, 2000 $4.97 $1.06
Quarter ended June 30, 2000 $3.50 $1.13
Quarter ended September 31, 2000 $2.12 $0.50
Quarter ended December 31, 2000 $0.69 $0.08
Quarter ended March 31, 2001
(through March 26, 2001) $0.69 $0.09
Holders
The approximate number of holders of record of our common stock as of March
26, 2001 was approximately 300.
Dividends
We have not paid any cash dividends with respect to our Common Stock. We
presently intend to retain future earnings to finance our development and
expansion and therefore do not anticipate the payment of any cash dividends in
the foreseeable future. Payment of future dividends, if any, will depend upon
our future earnings and capital requirements and other factors, which our board
of directors considers appropriate.
12
CAPITALIZATION
The following table summarizes our long-term obligations and capitalization
as of March 31, 2000 and December 31, 2000. The information in the table should
be read in conjunction with the more detailed financial statements and notes
presented elsewhere in this prospectus.
Nine Months
Ended Year Ended
December 31, March 31,
2000 2000
------------ -----------
Long-term obligations, less current portion $ 64,267 $ 77,864
Shareholders' equity:
Preferred stock, no par value, 2,000,000 authorized,
0 shares issued and outstanding - -
Common stock, no par value, 20,000,000 shares authorized,
7,392,500 shares issued and outstanding 12,248,414 12,188,414
Accumulated deficit (10,031,438) (6,222,985)
------------ -----------
Net shareholders' equity 2,216,976 5,965,429
------------ -----------
Total capitalization $ 2,281,243 $ 6,043,293
============ ===========
Additional Information About Financial Presentation
Options and Warrants. Unless this prospectus indicates otherwise, all
information presented in this prospectus assumes no exercise of warrants or
options outstanding.
13
Selected Financial Data
The following summary of financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes. The
statement of operations for the fiscal year ended March 31, 2000 and the balance
sheet data at March 31, 2000 are derived from the audited financial statements
of Cumetrix Data Systems Corp., which have been audited by Singer Lewak
Greenbaum & Goldstein LLP. The statement of operations for the fiscal years
ended March 31, 1998 and 1999, and the balance sheet data at March 31, 1999 and
1998 are derived from the audited financial statements of Cumetrix Data Systems
Corp., which have been audited by Arthur Andersen LLP. The statement of
operations for the nine months ended December 31, 1999 and 2000 and the balance
sheet data at December 31, 1999 and 2000 have been prepared from our books and
records and reflect, in our opinion, all adjustments necessary for a fair
presentation of our financial position, results of operations, and cash flows,
as of the periods indicated therein. The selected interim financial data
presented below do not necessarily indicate the operating results or our
performance for the full year.
Statement of Operations:
Fiscal Year End March 31, Nine Months Ended Dec 31,
--------------------------------------- -------------------------------
1998 1999 2000 1999 2000
Net sales:
Nonaffiliates $70,154,439 $62,633,340 $18,629,566 $13,883,605 $10,510,558
Affiliate (1) 1,391,300 - - - -
Other (2) 949,735 1,180,010 - 1,180,010 -
----------- ----------- ----------- ----------- -----------
72,495,474 63,813,350 18,629,566 15,063,615 10,510,558
Cost of products:
Nonaffiliates 67,422,362 61,763,312 18,087,762 13,134,985 10,021,763
Affiliate (1) 1,314,408 - - - -
Other (2) 731,727 1,148,321 - 1,148,321 -
----------- ----------- ----------- ----------- -----------
69,468,497 62,911,633 18,087,762 14,283,306 10,021,763
Gross profit:
Nonaffiliates 2,732,077 870,028 541,804 748,620 488,795
Affiliate (1) 76,892 - - - -
Other (2) 218,008 31,689 - 31,689 -
----------- ----------- ----------- ----------- -----------
3,026,977 901,717 541,804 780,309 488,795
Operating Expenses:
Administrative Expenses 1,542,294 3,292,569 4,211,141 2,931,620 2,695,631
Write-off of Capitalized Software - 1,100,000 - - -
Impairment Loss - Loans from Officers - - - - 500,000
Impairment Loss - Long Lived Assets - - - - 207,740
Loss on Equity Investment - (122,000) (896,157) (364,607) (1,281,843)
Interest Income 68,158 514,345 316,434 246,576 113,522
Interest Expense (239,791) (4,652) (1,746) 410 (217,255)
Gain on Sale of Investment - - - - 445,000
Other Income (Expense) (10,160) 1,365 - - -
----------- ----------- ----------- ----------- -----------
Total Expenses 1.724,087 4,033,511 4,792,610 3,050,061 4,343,947
----------- ----------- ----------- ----------- -----------
Net Profit (Loss) Before Income Taxes 1,302,890 (3,101,794) (4,250,806) (2,269,752) (3,855,152)
Income Taxes 579,738 (102,228) (278,871) - (46,699)
----------- ----------- ----------- ----------- -----------
Net Profit (Loss) for the Period $ 723,152 $(2,999,566) $(3,971,935) $(2,269,752) $(3,808,453)
=========== =========== =========== =========== ===========
Earnings (Loss) per Basic and
Diluted Share $ .16 $ (.41) $ (0.54) $ (.31) $ (.52)
=========== =========== =========== =========== ===========
Weighted average basic shares
outstanding 4,544,759 7,364,828 7,392,500 7,392,500 7,392,500
=========== =========== =========== =========== ===========
Weighted average diluted shares
outstanding 4,639,041 7,364,828 7,392,500 7,392,500 7,392,500
=========== =========== =========== =========== ===========
Balance Sheet Data:
As of March 31, As of December 31,
1998 1999 2000 1999 2000
----------- ----------- ----------- ----------- -----------
Working Capital 97,504 8,420,382 5,234,224 6,641,334 1,632,991
Total Current Assets 10,482,720 12,926,995 6,945,555 7,891,822 4,350,834
Total Assets 12,185,185 14,323,787 7,754,624 8,793,100 4,999,086
Total Current Liabilities 10,385,216 4,506,613 1,711,331 1,250,488 2,717,843
Total Shareholders' Equity 1,791,105 9,812,364 5,965,429 7,542,612 2,216,976
- ---------------
(1) Relates to sales at fair market value made to Samax Technology Inc., a
company controlled by the mother of Mr. Max Toghraie. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(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."
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus. This document contains certain
forward-looking statements including, among others, anticipated trends in our
financial condition and results of operations and our business strategy. These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to consider
in evaluating such forward-looking statements include (i) changes in external
competitive market factors or in our internal budgeting process which might
impact trends in our results of operations; (ii) unanticipated working capital
or other cash requirements; (iii) changes in our business strategy or an
inability to execute our strategy due to unanticipated changes in the industries
in which we operate and (iv) various competitive factors that may prevent us
from competing successfully in the marketplace.
Overview
We were 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, we entered the system configuration business.
We substantially reduced our dependence on our Computer Products Business
at the end of fiscal 1999 as a result of our inability 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. We did not fully anticipate the severity of this
issue or react adequately. As a result of these pricing pressures, our margins
were pressured and we attempted to shift to higher margin wholesale computer
product sales. We were unable to be competitive in this area, and business and
operating results were adversely affected.
Results of Investigation
On July 13, 1999, we 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 Cumetrix and a
director, and Mei Yang, the Secretary, Treasurer and a director of Cumetrix,
were relieved from all executive offices and employment responsibilities held by
them. We did not nominate Mr. Ung and Ms. Yang for election as directors at our
annual meeting.
Additionally, our audit committee directed counsel to retain a special
investigative unit of our outside auditors, Arthur Andersen LLP, to assist it in
the investigation.
Since the audit committee was still in the process of completing their
investigation, we were not able to timely file our March 31, 1999 Annual Report
on Form 10-K. We contacted the staff of the Securities and Exchange Commission
and provided complete details of the preliminary results of the internal
investigation.
15
We took appropriate actions to mitigate any damages to Cumetrix resulting
from events giving rise to the investigation. At the conclusion of the
investigation, the following actions were taken: in July, 1999, we dismissed
both James Ung, the President of Cumetrix and a director and Mei Yang, the
Secretary, Treasurer and a director of Cumetrix, 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 our 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, we have restated and re-filed the financial statements set forth in our
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 Cumetrix for the nine
months ended December 31, 2000 and 1999 and the years ended March 31, 2000, 1999
and 1998.
Three Months and Nine Months Ended December 31, 2000 As Compared To Three
and Nine Months Ended December 31, 1999
Net Sales. Sales for the nine months ended December 31, 2000 were
$10,510,558 as compared with sales of $15,063,615 for the same period in the
prior year. Sales for the three months ended December 31, 2000 were $4,502,036
as compared with sales of $3,951,045 for the three months ended December 31,
1999. Sales for the nine months ended December 31, 2000 declined $4,553,057 or
30% and sales for the three months ended December 31, 2000 increased $550,991 or
14% over the same periods in the prior year. While we have substantially reduced
our dependence on computer hard-drive sales, we increased our focus on sales of
computer components and products relative to computer systems assembly.
Currently approximately 85% of total sales are derived from computer components
and products and 15% from computer systems assembly.
Gross profit. Gross profit for the nine months ended December 31, 2000 was
$488,795 or 5% of sales, as compared with gross profit of $780,309 or 5% of
sales for the nine months ended December 31, 1999. Gross profit for the three
months ended December 31, 2000 was $200,617 or 4% of sales, as compared with
gross profit of $497,737 or 13% of sales for the three months ended December 31,
1999. The decrease in gross profit for the three months ended December 31, 2000
from 13% to 4% compared with the three months ended December 31, 1999 is due
primarily from selling lower margin computer components and products relative to
higher margin computer systems assembly.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended December 31, 2000 were
$2,695,631 as compared with $2,931,620 for the nine months ended December 31,
1999. Selling, general and administrative expenses for the three months ended
December 31, 2000 were $859,347 as compared with $933,226 for the three months
ended December 31, 1999.
16
Salaries and wages for the nine months ended December 31, 2000 as compared
to the nine months ended December 31, 1999 declined $233,000 from $1,382,000 to
$1,149,000 due to an overall decrease in assembly, plant employees, management
and administrative personnel.
A brief summary of the principle components of selling, general and
administrative expenses for the periods is presented below.
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
--------- -------- ---------- -----------------
Salaries and wages $ 391,000 $562,000 $1,149,000 $1,382,000
Allocation to cost of sales (220,000) 0 (600,000) 0
--------- -------- ---------- ----------
Salaries and wages 171,000 562,000 549,000 1,382,000
Cost of borrowing expenses 160,000 0 521,000 0
Outside services 44,000 76,000 346,000 277,000
Bad debt 200,000 0 200,000 0
Credit and collection 241,000 87,000 523,000 214,000
Allocation to cost of sales (241,000) 0 (349,000) 0
--------- -------- ---------- ----------
Credit and collection 0 87,000 174,000 214,000
Legal 33,000 7,000 156,000 218,000
Accounting and audit 30,000 18,000 139,000 256,000
Internet/Web Support 134,000 0 139,000 0
Rent 25,000 25,000 65,000 80,000
Depreciation and amortization 21,000 54,000 116,000 162,000
Allocation to cost of sales (13,000) 0 (108,000) 0
--------- -------- ---------- ----------
Depreciation and amortization 8,000 54,000 8,000 162,000
Other (under 5%) 54,347 104,226 398,631 342,620
--------- -------- ---------- ----------
$ 859,347 $933,226 $2,695,631 $2,931,620
========= ======== ========== ==========
The increase in cost of borrowing expenses for the three months ended
December 31, 2000 of $160,000 primarily consist of fees paid to Benz Consulting
Corp. of $130,000 and $37,500 paid to John Botdorf. The increase in cost of
borrowing expenses for the nine months ended December 31, 2000 primarily consist
of fees paid to Benz Consulting Corp of $230,000, cost of borrowing expenses
paid of $192,000 related to the Company's $1,125,000 Bridge Notes and consulting
fees of $112,500 paid to John Botdorf.
The increase in outside services for the nine months ended December 31,
2000 are 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 for the three months and
nine months ended December 31, 2000 is due to an increase in service fees
charged by websites Egghead.com and CNet.com.
The increase in legal, accounting and audit fees for the nine months ended
December 31, 1999 are the result of legal, auditing, investigative and
management consulting fees incurred during the periods in connection with a
special investigation of allegations of improprieties and record-keeping
irregularities initiated by the Board of Directors.
The increase in internet/web support expenses of $134,000 for the three
months ended December 31, 2000 is due primarily to consulting fees paid to two
consulting firms related to each other, Imaging Design for $65,800 and Astral
Port Systems for $56,000. The Company entered into an Agreement with Imaging
Design of Los Angeles dated November 15, 2000 to provide corporate web site
design and development for the Company's web site at www.cumetrix.com. As of
February 8, 2001, $103,100 was paid to Imaging Design. The Company also entered
into an Agreement with Astral Port Systems of Los Angeles dated December 19,
2000 to prepare a comprehensive study for the design of an international
17
web portal for an estimated fee between $70,000 to $90,000. As of February 8,
2001, $87,000 was paid to Astral Port Systems. As of February 8, 2001, $190,100
were paid to both firms.
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.
Interest expense, primarily related to the Company's $1,125,000 Bridge
Notes was $217,255 for the nine months ended December 31, 2000, and $196,547 for
the three months ended December 31, 2000. Interest expense for the nine months
and three months ended December 31, 1999, was $410 and $51, respectively.
Interest income, primarily from the investment of the proceeds of the
Company's public offering of the Company's stock was $113,522 for the nine
months ended December 31, 2000 and $45,483 for the three months ended December
31, 2000. Interest income for the nine months and three months ended December
31, 1999 was $246,576 and $79,698, respectively.
For the nine months ended December 31, 2000, the Company reported a net
loss of $3,808,453, as compared to a net loss of $2,269,752 for the nine months
ended December 31, 1999. The Company reported a net loss of $318,095 for the
three months ended December 31, 2000 as compared to a net loss of $355,842 for
the three months ended December 31, 1999. Net losses for the nine months ended
December 31, 2000 increased $1,538,701 or 68% and net losses for the three
months ended December 31, 2000 decreased by $37,747 or 11% over the same periods
in the prior year.
The net loss of $3,808,453 for the nine months ended December 31, 2000 are
principally the result of decreased Company sales resulting in lower margins,
impairment losses from fixed assets, write-offs of loans made to Company
officers, expenses related to the Company's investments, losses from the write-
off of the Company's investments and fees paid to various outside consultants.
The Company anticipates continuing losses from operations and currently
cannot determine when the Company will be profitable from operations.
Year Ended March 31, 2000 As Compared To Year Ended March 31, 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, our unwillingness to compete for lower margin
business and a significant decrease in sales as we discontinued our 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, we
accrued
18
$150,000 for anticipated expenses related to the unauthorized sales of software.
In fiscal year 2000, we determined that these amounts would not be paid and
therefore reversed this accrual.
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 computer
systems as compared to computer components and the accrual reversal of $150,000
for anticipated expenses related to the unauthorized sales of software during
the year ended March 31, 2000.
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:
Year ended Year ended
March 31, 2000 March 31, 1999
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
========== ==========
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
We attempted to implement our ACSA automated custom software configuration
assembly line solution. In this regard, we invested in fixed assets comprising
an assembly line and related computer equipment. We 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 our ACSA Solution. We paid CASI a
onetime license fee of $1.1 million. The payments under the CASI Note were
initially capitalized. We have written off our investment in
19
capitalized software related to ACSA as of March 31, 1999. While certain
hardware and assets related to the ACSA solution are currently being used by us,
the CASI software is not being used and we do 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 our 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, our unwillingness to compete for lower margin
business and a significant decrease in sales during the fourth quarter as we
discontinued our 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, we have 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 inventory
reserves required to reduce inventory levels to net realizable values based upon
the continuing drop in prices of acquired product in the fourth
20
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:
Year ended Year ended
March 31, 1999 March 31, 1998
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
========== ==========
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 our company. In addition, we hired additional personnel in all areas
to facilitate growth of our 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. We also
recorded reserves related to litigation described elsewhere herein. 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.
Write-off of Capitalized Purchased Software
We attempted to implement our ACSA automated custom software configuration
assembly line solution. In this regard, we invested in fixed assets comprising
an assembly line and related computer equipment. We 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 our ACSA Solution. We paid CASI a one
time license fee of $1.1 million. The payments under the CASI note were
initially capitalized. We have written off our investment in capitalized
software related to ACSA as of March 31, 1999. While certain hardware and assets
related to the ACSA solution are currently being used by us, CASI software is
not being used and we do not intend to generate any significant revenue from
this software.
21
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.
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 our initial
public offering.
Loss on Equity Investment
Loss on equity investment for the year ended March 31, 1999 was $122,000
which relates to our investment in Online Transaction Technologies (OTT). The
Company's investment provided substantially all of OTT's working capital.
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
We have historically met our 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.
On April 8, 1998, our 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, we completed a 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 Cumetrix in the principal amount of $20,000; (ii)
15,000 shares of common stock of Cumetrix, and (iii) 5,000 warrants of Cumetrix,
each to purchase one share of common stock of Cumetrix, at an initial exercise
price of $3.00 per share, subject to adjustment, during the 36-month period
commencing one year from the date the warrants were issued. We 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. We paid the remainder of our indebtedness
under the CASI note and the Datatec note from proceeds of our initial public
offering.
In June 1997, we obtained credit for inventory purchases through Finova
Capital Corporation. In September 1998, we 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
22
revolving line of credit secured by accounts receivables and inventory. Due to
our substantially reduced volume of distribution business, we terminated our
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.
Current Funds
We believe that current funds may not be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next twelve
months if certain events occur. For example, anticipated continued losses from
operations, the cash payment of $1,400,000 to the Holders of our Bridge Notes
plus additional interest and penalties, the difficulty of raising equity
capital, our inability to secure favorable vendor terms which have resulted in
numerous inventory purchases by COD only and the difficulty of obtaining
financing on favorable terms.
Bridge Loan
Effective as of September 29, 2000, we issued an aggregate of
$1,142,531.26 principal amount, including accrued interest of $17,531.26, Series
1 Bridge Financing Notes to three purchasers, from which we received net
proceeds of approximately $858,000. The Bridge Notes are convertible into
shares of our common stock at an initial conversion price of $2.00 per share, as
described below. Each purchaser will receive a repricing warrant which
effectively reduces the conversion price of the Bridge Notes, as set forth below
(the "Repricing Warrants").
In addition, for each $100,000 loaned to us, the purchaser received a
warrant to purchase 10,000 shares of our 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 our common stock is in excess of $.6668. In connection with
the sale of the foregoing securities, Sovereign Capital Advisors, LLC, the
placement agent, received fees and expenses in the amount of $109,982.
In addition to 75,000 warrants received by Sovereign Capital Advisors, LLC
on August 9, 2000, Sovereign Capital also received on September 29, 2000 a
warrant to purchase 10,000 shares of our 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 our common stock is in excess of $1.4375. See "Issuance of
Common Stock to Selling Stockholders."
Acquisition
On May 22, 2000, we 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. Our 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 Cumetrix and
Salescentrix.com, we have acquired the rights to purchase common stock and
warrants in three separate stages, each stage is contingent on the previous
stage.
23
In Stage One, we have 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 would 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 had 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, totaling $750,000. The Company
did not exercise it's right to purchase the remaining 550,000 shares of Common
Stock (925,000 - 375,000). In the quarter ended September 30, 2000, this
$750,000 investment was written off due to recurring losses of the investee.
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 remaining $750,000 investment, invested on August 10,
2000, due to recurring losses by the investee and the investee's minimum
shareholders equity. As of September 30, 2000, the entire investment had been
written-off.
For the quarter ended December 31, 2000, the Company made no additional
investments in Salescentrix.com.
Inflation
We do not believe that inflation has had a material effect on our results
of operations. There can be no assurance, however, that our business will not be
affected by inflation in the future.
Leased Facility
Our corporate offices are 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, however, 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 Egghead.com,
our major source of revenue, increased for all sales generated through the
Egghead.com website to 10%. Previously a majority of sales derived through the
Egghead.com website were charged a 5% fee with a very small percentage of sales
charged at a 10% fee. This increase in Egghead fees will have a material effect
on the Company's margins.
24
BUSINESS
Overview
Cumetrix Data Systems Corp. distributes and supplies computer systems and
hardware components and provides computer configuration and assembly services
primarily to e-commerce businesses and consumers. Our products and services are
marketed through Internet marketing partners such as Egghead.com and Cnet.com
and through our own Internet website, suredeals.com.
Our principal business during fiscal 2001, providing the majority of our
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 motherboards, modems, as well as other items for personal computers.
We were incorporated in California on April 2, 1996 under the name Data Net
International, Inc. On January 6, 1998, we changed our name to Cumetrix Data
Systems Corp. Our executive offices are located at 957 Lawson Street, Industry,
California 91748. Our telephone number is 626-965-6899, and our facsimile
number is 626-965-8159.
We hold a minority interest in Vsource, Inc., a California based provider
of business to business electronic procurement services (eProcurement) and a
minority interest in Salescentrix.com, a Canadian based Internet Application
Service Provider.
Computer Sales
During fiscal 2001, we had more than 1,000 customers. One customer
accounted for approximately 65% of net sales, the only customer that accounted
for more than 10% of net sales.
We previously marketed our wholesale computer products exclusively via a
direct sales staff, using telemarketing techniques to identify, qualify and
close business. In the middle of fiscal 1998, we began to develop a channel
program to sell our computer products through Original Equipment Manufacturers,
System Integrators, and Independent Software Vendors. Our representatives
compete for sales on the basis of product knowledge, product selection targeted
to our customer base and competitive pricing. With our shift to Internet
computer and component sales, our sales staff has been assigned new functions
and responsibilities. As of March 26, 2001, we employed 3 sales
representatives. This sales staff now operates primarily as an Internet based
marketing force focused on generating VAR and reseller leads for our e-commerce
site, Suredeals.com, as well as sales of additional configuration and upgrade
services to our web site's end-user and retail customers.
Currently we derive approximately 85% of our sales from computer components
and approximately 15% of sales from computer systems assembly. We reduced our
emphasis on computer system sales due to decreasing market prices which forced
us to lower our selling price to remain competitive, resulting in lower margins.
Furthermore, we experienced a high rate of computer system returns, due to
faulty supplier components, thereby, further eroding margins on sales of our
computer systems.
25
Internet Computer Sales
Since April 1999, our 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. We currently offer computer hardware,
peripherals, accessories, networking products and software. We select products
that we sell based upon technology and effectiveness, market demand, product
features, quality, price, margins and warranties.
We market our products and services through our Internet Web site,
Suredeals.com, other Internet marketing partners such as Egghead.com and
CNet.com., and our outside sales representatives and telemarketing sales
representatives. Through our e-commerce site, we provide our customers product
information and pricing, and enable our 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 goal of suredeals.com is to provide a broad array of fully configured
personal computers and related products to consumers and businesses. We will
attempt to leverage our knowledge of the computer industry and the Internet, and
our ability to deliver competitive levels of customer service. We are currently
evaluating the addition of new product categories to Suredeals.com.
We offer 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 Cumetrix are warranted by
the manufacturer. We generally accept returns directly from the customer and
then either credit the customer's account or ship the customer a similar product
from our inventory. We typically offer a one-year limited parts and labor
warranty on all computer systems we market through our various sales channels
and Internet marketing partners. We offer longer warranty terms at an
additional cost.
Internet Computer Marketing Sales and Customers
In April 1999, we launched suredeals.com, our commercial Internet web site
and began accepting electronic orders. Product descriptions and prices are
provided on-line, with full, updated information. We offer, and continuously
update, selected product offerings and other special buys.
Our marketing and advertising programs have 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, we launched a national advertising
campaign aimed at boosting public-awareness of our web site suredeals.com
through banner and e-mail advertising on other trade sites such as PCworld.com.
We 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 2001, Cumetrix had relationships with manufacturers and
distributors around the world as suppliers of our computer products business.
We were 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
26
Electronics Corp. For the fiscal year ending March 31, 2000, Advanced Micro
Devices, Inc., a computer chip manufacturer accounted for 50% of our purchases.
Our 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.
We believe that our relationships with our vendors are satisfactory and do not
believe that the loss of our relationship with any other of our vendors would
materially adversely affect our business.
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 our competitors have longer operating histories, larger customer
bases, greater brand recognition, and significantly greater financial, marketing
and other resources. We believe that the principal competitive factors in our
market include: brand recognition, customer service, selection, convenience and
price. Many of our 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, we believe 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 our business, prospects, financial
condition and results of operations.
Government Regulation
Our 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 our 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
27
would impose taxes on the sale of goods and services and certain other Internet
activities. Our 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 26, 2001, we had 27 full time employees. At that time, we
employed 3 in sales, 2 in purchasing, 6 in technical support and assembly, 8 in
administration and finance, and 8 in warehousing and delivery related personnel.
We do not have any unionized employees and believe our relationship with our
employees is satisfactory.
We believe our future success will depend in large part on our ability to
recruit and retain qualified employees. There can be no assurances that we will
be successful in retaining or recruiting key personnel.
Legal Proceedings
From time to time we are subject to litigation incidental to our business
including possible product liability claims. Such claims, if successful, could
exceed applicable insurance coverage. We are currently a defendant in a lawsuit
filed by one of our vendors seeking damages of $119,680. The vendor is claiming
damages for unpaid merchandise shipped to and received by us. While we believe
we will prevail in this lawsuit, we have accrued an amount equal to the damages
sought by our vendor of $119,680. Other than the aforementioned lawsuit, we are
not currently a party to any legal proceedings that we consider at this time to
be material.
Property
Our 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 for which we pay annual rent of $170,820. The lease for this
property will expire January 31, 2002.
28
HOW TO OBTAIN MORE INFORMATION ABOUT CUMETRIX DATA SYSTEMS CORP.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and in accordance therewith file reports, proxy or information
statements and other information with the Securities and Exchange Commission.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
following regional offices: Seven World Trade Center, New York, New York 10048,
and Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.20549, at
prescribed rates. In addition, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
Cumetrix has filed with the Commission, a registration statement on Form
SB-2 under the Securities Act of 1933 with respect to the shares of common stock
being offered by our selling shareholders. As permitted by the rules and
regulations of the Commission, this prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to our common stock
offered by the selling shareholders, reference is made to the registration
statement, and such exhibits and schedules. A copy of the registration
statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at the
addresses set forth above, and copies of all or any part of the registration
statement may be obtained from such offices upon payment of the fees prescribed
by the Commission. In addition, the registration statement may be accessed at
the Commission's web site. Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference.
29
MANAGEMENT
Executive Officers, Directors, And Key Employees
Our executive officers, directors and key employees and their ages and
positions with Cumetrix as of March 14, 2001 are as follows:
NAME AGE POSITION/TERM
- ---- ---- -------------
Max Toghraie 38 Chief Executive Officer, Secretary and Director, since 1997
Herbert Tom -- Chief Financial Officer, since 1999
Jeff Toghraie 33 Vice President - Sales and Marketing and Director, since 1998
Nancy Hundt 31 Director, since 1996
All directors will serve on the board until our next annual meeting of the
shareholders, or until their successors have been duly elected and qualified.
Background of Directors & Officers
MAX TOGHRAIE served as the Chief Executive Officer of Cumetrix 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 Cumetrix since our
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
Cumetrix, are brothers.
NANCY HUNDT has served as a director of Cumetrix since our inception in April of
1996. Ms. Hundt is a co-founder of Cumetrix. 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.
JEFF TOGHRAIE served as the Chief Operating Officer of Cumetrix 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 Cumetrix
since our 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 Cumetrix, are brothers.
HERBERT TOM has served as our Chief Financial Officer since 1999. Mr. Tom's
background includes extensive experience in operations as well as finance and
accounting. Prior to joining Cumetrix, Mr. Tom served as Chief Financial Officer
/ Consultant of several public and privately held companies, most recently as
Chief Financial Officer and Chief Operating Officer with profit and loss
responsibility. 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.
30
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
we paid to our Chief Executive Officer and our other executive officers whose
income exceeded $100,000 for our last fiscal year ended March 31, 2000
(collectively referred to the "Named Officers").
Summary compensation table
Annual Compensation Long-Term Compensation Awards
--------------------------------------------------------------------------------------
Awards
-------------------------------------------
Name and Other Annual Securities Restricted Shares or
Principal Salary Bonus Compensation Under Restricted Share
Position Year ($) ($) ($) Options Granted # Units [$]
- ------------------------------------------------------------------------------------------------------------------
Max Toghraie, 2000 $180,474 $291,500 nil 300,000 nil
Director and Chief 1999 $ 93,000 0 nil 126,046 nil
Executive Officer /1/
- ------------------------------------------------------------------------------------------------------------------
Jeff Toghraie, 2000 $136,812 $106,000 nil 150,000 nil
Director and Vice 1999 $ 79,423 0 nil 0 nil
President - Sales
and Marketing /2/
==================================================================================================================
------------
Payouts All
------------ Other
Name and LTIP Compensation
Principal Payouts ($)
Position ($)
- -------------------------------------------------------
Max Toghraie, $1,950
Director and Chief nil 0
Executive Officer /1/ nil
- -------------------------------------------------------
Jeff Toghraie, nil $8,752
Director and Vice nil 0
President - Sales
and Marketing /2/
=======================================================
(1) Max Toghraie's stock options were granted as follows 126,046 options in
July 1997 under our 1997 Stock Option Plan, 150,000 options in January 2000
as per his Employment Agreement dated January 2000 and 150,000 options in
February 2000 under our Year 2000 Restated and Amended Stock Option Plan.
(2) Jeff Toghraie's stock options were all granted in February 2000 under our
Year 2000 Restated and Amended Stock Option Plan.
Aggregate Options Exercised During the Most Recently Completed Financial
Year and Financial Year-End Option Values.
The following table sets out certain information relating to options
exercised by our senior management during the most recent financial year and the
value of unexercised in-the-money options held by such person as of March 31,
2000:
Securities Aggregate Value of Unexercised in-the-
Acquired on Value Unexercised Options Money Options at FY-End
Exercise Realized at FY-End [#] ($)/1/
Name (#) [$] Exercisable/Unexercisable Exercisable/Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Max Toghraie nil nil 185,717 / 240,330 $557,151 / $720,990
- -----------------------------------------------------------------------------------------------------------------------------------
Jeff Toghraie nil nil 44,531 / 105,469 $133,593 / $316,407
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Based upon a closing sale price of our common stock at $3.00 per share on
March 31, 2000.
31
Options Granted During Most Recent Financial Year.
The following table sets out certain information relating to options granted
during the most recent financial year ended March 31, 2001 to the Named
Executive Officer.
Name Securities Under % of Total Options Exercise Per Market Value of Expiration Date
Options Granted Granted to Security Securities Underlying
Employees in ($/Security) Options on the Date of
Financial Year the Grant ($/Security)
- ------------------------------------------------------------------------------------------------------------------------------------
Max Toghraie 500,000 46.2% $1.00 $ 0 November 15, 2006
250,000 $ .18 $17,500 November 15, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Jeff Toghraie 400,000 36.9% $1.00 $ 0 November 15, 2006
200,000 $ .18 $14,000 November 15, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Herbert Tom 175,000 16.9% $1.00 $ 0 November 15, 2006
100,000 $ .18 $ 7,000 November 15, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Compensation of Directors
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 Cumetrix currently receive a
director's fee of $500 per meeting personally attended and $250 per meeting
telephonically attended for services 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.
Employment Agreements
We 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
an 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, we 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. Effective February 18, 2001, the Board of Directors
approved an increase in Mr. Toghraie's annual compensation to $210,000. Mr.
Toghraie is entitled to a company purchased or leased car for Mr. Toghraie's
exclusive use for the duration of his employment.
We 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 our board of
directors. Per the agreement, upon execution of the agreement on November 15,
1999, Jeff Toghraie received a retention fee of $37,500. We may
terminate Mr. Toghraie's employment without cause provided that we pay 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
32
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, we will provide Mr. Toghraie the
exclusive use of an apartment for the duration of his employment. Effective
February 18, 2001, the Board of Directors approved an increase in Mr. Toghraie's
annual compensation to $200,000.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of our voting
securities as of March 26, 2001 by:
. each person known by us to beneficially own 5% or more of the
outstanding shares of our voting securities
. each of our directors
. our named executive officers
. all directors and executive officers as a group.
As of March 26, 2001, there were 7,392,500 shares of common stock issued
and outstanding. The information set forth in the table and accompanying
footnotes has been furnished by the named beneficial owners.
Number of Shares
----------------
Title of Class Identity of Person or Group Beneficially Owned/(1)/ Percent of Class
-------------- --------------------------- ------------------------ ----------------------
Common Stock Max Toghraie/(2)/ 187,500 2.54%
Common Stock Jeff Toghraie/(3)/ 150,000 2.03%
Common Stock Nancy Hundt/(4)/ 2,122,525 28.71%
Common Stock James Ung /(5)/ and Mei Yang/(5)/ 2,128,823 28.80%
Common Stock Herbert Tom/(6)/ 68,750 *
. Represents less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unissued common shares subject
to options, warrants or other convertible securities currently exercisable
or convertible, or exercisable or convertible within 60 days, are deemed
outstanding for the purpose of computing the beneficial ownership of common
shares of the person holding such convertible security but are not deemed
outstanding for computing the beneficial ownership of common shares of any
other person.
(2) Consists of 187,500 shares issuable upon exercise of options. Mr.
Toghraie's address is 957 Lawson Street, Industry, California 91748.
33
(3) Consists of 150,000 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) Mr. Ung and Ms. Yang are married. Mr. Ung's and Ms. Yang's address is 957
Lawson Street, Industry, California 91748.
(6) Consists of 68,750 shares, issuable upon exercise of options. Mr. Tom's
address is 957 Lawson Street, Industry, California 91748.
We do not know of any arrangements, the operation of which may, at a
subsequent date, result in a change in control of Cumetrix.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to this offering, we entered into transactions and business
relationships with certain of our officers, directors and principal stockholders
or their affiliates. We believe that all of the transactions were on terms no
less favorable than we could have obtained from independent third parties. Any
future transactions between us and our officers, directors or affiliates will be
subject to approval by a majority of disinterested directors or stockholders in
accordance with California law.
In connection with an internal investigation into certain improprieties and
record-keeping irregularities, our audit committee uncovered evidence of
transactions with certain entities it believes to be related to James Ung, the
former President and a director of Cumetrix, and his wife Mei Yang, the former
Secretary and Treasurer and a director of Cumetrix, as described more fully
below. We believe 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, we sold 17,967 units of a product we
believe to be unauthorized OEM versions of certain software to the Related
Entities at a price we believe was less than the fair market value for such
software. During the same time period, we believe that we 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. We believe 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 us to the Related Entities that were not
subsequently repurchased by us, we have 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 were sold to customers who purchased units from the
Related Entities in lieu of purchasing units from us. We estimate lost profits
on these 7,090 units to be approximately $48,000.
In 1997, we employed Sam Toghraie, brother of Max Toghraie and Jeff
Toghraie, as a Department Head for the Return Merchandise Department on an at-
will basis for an annual salary of $60,000, including the personal use of a
Company car. Effective November 6, 2000, Sam Toghraie resigned as an
34
employee of the Company and entered into a Consulting Agreement with the Company
as an independent outside Sales and Marketing Consultant for an annual fee of
$72,000.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of common stock
with no par value per share, of which 7,392,500 shares were issued and
outstanding as of the date hereof, and 2,000,000 shares of "blank check"
preferred stock, of which none have been issued as of March 26, 2001.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. The holders of common
stock are entitled to receive dividends ratably, when, as and if declared by the
board of directors, out of funds legally available therefor. In the event of a
liquidation, dissolution or winding-up of Cumetrix, the holders of common stock
are entitled to share equally and ratably in all assets remaining available for
distribution after payment of liabilities and after provision is made for each
class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion,
preemptive, or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered by the selling stockholders hereby,
when issued against the consideration set forth in this prospectus, will be,
validly issued, fully-paid and non-assessable.
Preferred Stock
Under our articles of incorporation, our board of directors is authorized,
subject to any limitations prescribed by the laws of the State of California,
but without further action by our shareholders, to provide for the issuance of
up to 2,000,000 shares of preferred stock in one or more series, to establish
from time to time the number of shares to be included in each such series, to
fix the designations, powers, preferences and rights of the shares of each such
series and any qualifications, limitations or restrictions thereof, and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding) without any further vote or
action by the stockholders. Our board of directors may authorize and issue
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock. The issuance of
preferred stock, for example in connection with a shareholder right's plan,
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, a majority of our outstanding
stock.
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company serves as transfer agent and
registrar for our common stock.
35
Issuance of Common Stock to Selling Stockholders
Effective as of September 29, 2000, we issued an aggregate of
$1,142,531.26 principal amount, including accrued interest of $17,531.26, Series
1 Bridge Financing Notes to three purchasers, from which we received net
proceeds of approximately $858,000. The Bridge Notes are convertible into
shares of our common stock at an initial conversion price of $2.00 per share, as
described below. Each purchaser will receive a repricing warrant which
effectively reduces the conversion price of the Bridge Notes, as set forth below
(the "Repricing Warrants").
In addition, for each $100,000 loaned to us, the purchaser received a
warrant to purchase 10,000 shares of our 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 our common stock is in excess of $.6668. In connection with
the sale of the foregoing securities, Sovereign Capital Advisors, LLC, the
placement agent, received fees and expenses in the amount of $109,982.
In addition to 75,000 warrants received by Sovereign Capital Advisors, LLC
on August 9, 2000, Sovereign Capital also received on September 29, 2000 a
warrant to purchase 10,000 shares of our 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 our common 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
#27 Cumberland House
PO Box CB-13016
Nassau, New Providence
The Bahamas
EIG Capital Investments Ltd. $507,791.67 50,000
Avda. Senero Ocha, 28
Edf. Marina Marbella
29600 Marbella, Spain
Arab Commerce Bank Ltd. $126,947.92 12,500
PO Box 309
Grand Cayman, Cayman Islands
Bridge Notes
The Bridge Financing Notes are due and payable on demand on or after March
28, 2001. 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 will be secured by a pledge of our
newly issued common stock having a value of approximately 200% of the aggregate
principal
36
value of all outstanding Bridge Notes. The Bridge Notes are redeemable for cash
or shares of our 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%
At any time prior to the date when a holder demands repayment of a Bridge
Note, we 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 we may require that the Bridge Notes be
converted into shares of our 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:
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. By exercising the
repricing warrant, the effective conversion price of the Bridge Notes is reduced
to the average closing bid price of our 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 our 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. 1,196,358
EIG Capital Investments Ltd. 1,196,358
37
Arab Commerce Bank Ltd. 299,090
---------
2,691,806
=========
The actual formula for determining the number of shares issuable upon
exercise of a repricing warrant, or any portion thereof, is as follows:
# 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
Given the recent price of our stock, we reserved an additional 2,700,000
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 our 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 increases. In fact, a potentially unlimited number of shares
may be issued under the repricing warrants should our stock near a price of
$0.00 per share. Given the current reserve of 2,700,000 shares, we will need to
register additional shares in order to satisfy our obligation under the
repricing warrants if the price of our common stock drops significantly below
$.50 per share.
Selling Stockholders
The following table sets forth certain information regarding the beneficial
ownership of common stock by each of the selling stockholders assuming for each
the conversion of the Bridge Note and exercise of all warrants beneficially
owned by such stockholder. The table assumes that the price of our common stock
is $.50 and that the Bridge Notes are held until March 28, 2001. Because the
selling stockholders may offer all, some or none of their shares, no definitive
estimate as to the number of shares that will be held by the selling
stockholders after the offering can be provided and the following table has been
prepared on the assumption that all shares offered under this prospectus will be
sold.
Common Stock to be
Common Stock Beneficially Owned
Beneficially Owned on If All Shares Offered
March 26, 2001 Shares Hereunder Are Sold
Offered
Name Shares Percent Hereunder Shares Percent
SovCap Equity Partners, Ltd. 2,341,783 18.5% 2,341,783 -- --
EIG Capital Investments, Ltd. 2,341,783 18.5% 2,341,783 -- --
Arab Commerce Bank, Ltd. 585,448 4.6% 585,448 -- --
Sovereign Capital Advisors LLC 75,000 .6% 0 -- --
38
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the debentures and exercise of the debenture warrants is subject to
adjustment depending on, among other factors, the future market price of the
common stock, and could be materially more or less than the number estimated in
the table.
The percentage interest of each selling stockholder is based on the number
of shares of common stock beneficially owned by such stockholder divided by the
sum of the outstanding shares of common stock (as of March 26, 2001), plus the
shares, if any, which would be issued to such stockholder upon conversion of
Bridge Notes held or exercise of any warrants. On March 26, 2001, we had
7,392,500 shares outstanding. In order to take into account declines in the
price of our common stock and the resultant issuance of additional shares, such
amounts also assume the issuance of up to 150% of the actual shares to be
issued.
39
PLAN OF DISTRIBUTION
Sales of the shares may be effected by or for the account of the selling
stockholders from time to time in transactions (which may include block
transactions) on the NASD OTC Electronic Bulletin Board, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale or at negotiated prices. The selling stockholders may effect such
transactions by selling the shares directly to purchasers, through broker-
dealers acting as agents of the selling stockholders, or to broker-dealers
acting as agents for the selling stockholders, or to broker-dealers who may
purchase shares as principals and thereafter sell the shares from time to time
in transactions (which may include block transactions) on the NASD OTC
Electronic Bulletin Board, in negotiated transactions, through a combination of
such methods of sale, or otherwise. In effecting sales, broker-dealers engaged
by a selling stockholder may arrange for other broker-dealers to participate.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of the shares for whom such broker-dealers may act as agents or to whom they may
sell as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in the distribution of the shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933. Any
commissions paid or any discounts or concessions allowed to any such persons,
and any profits received on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act of
1933.
We have agreed to bear all expenses of registration of the shares other
than legal fees and expenses, if any, of counsel or other advisors of the
selling stockholders. The selling stockholders will bear any commissions,
discounts, concessions or other fees, if any, payable to broker-dealers in
connection with any sale of their shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933 or to contribute to payments the selling stockholders or
their respective pledgees, donees, transferees or other successors in interest,
may be required to make in respect thereof.
40
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Cumetrix by Sichenzia, Ross & Friedman LLP, New York, New York.
EXPERTS
The financial statements as of March 31, 2000, and for the year then ended
included in this prospectus and elsewhere in the registration statement have
been audited by Singer Lewak Greenbaum & Goldstein LLP, independent public
accountants, as indicated in their report with respect thereto and are included
in reliance upon the authority of said firm as experts in giving said reports.
The financial statements as of March 31, 1999 and for the year then ended
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
CHANGE IN PRINCIPAL ACCOUNTANTS
On November 19, 1999, we decided to replace Arthur Andersen LLP as our
principal accountants and terminated the relationship. Arthur Andersen's report
on our financial statements 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 our two most recent fiscal years which Arthur
Andersen audited and in the period from March 31, 1999 until the termination of
their services, there were no disagreements with Arthur 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 Arthur Andersen, would have caused it to make reference to the
subject matter of the disagreements in connection with its report. Arthur
Andersen initially expressed unwillingness to rely on management's
representations with respect to our financial statements at March 31, 1999, and
for the year then ended. After we responded to issues raised by Arthur Andersen,
Arthur Andersen rendered its unqualified opinion on the 1999 Annual Statements.
On January 6, 2000, the Company engaged Singer, Lewak, Greenbaum &
Goldstein, LLP as its independent certified public accountants. Management had
not previously consulted with Singer, Lewak, Greenbaum & Goldstein LLP on any
accounting or financial reporting matter.
41
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Public Accountants.................................................................. F-2
Balance Sheets as of March 31, 2000 and December 31, 2000 (unaudited)...................................... F-4
Statement of Operations for the twelve month periods ended March 31, 2000 and
March 31, 1999 and the nine month periods ended December 31, 2000 (unaudited)
and December 31, 1999 (unaudited)................................................................... F-5
Statement of Stockholders Equity for the year ended March 31, 2000 and 1999
and the nine month period ended December 31, 2000 (unaudited)....................................... F-6
Statement of Cash Flows for the years ended March 31, 2000 and 1999
and the nine month periods ended December 31, 2000 (unaudited) and
December 31, 1999 (unaudited)...................................................................... F-7
Notes to Financial Statements.............................................................................. F-9
F-1
REPORT OF INDEPENDENT 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
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix Data Systems Corp.
We have audited the accompanying statements of operations, shareholders'
equity and cash flows for the year ended March 31, 1999 of Cumetrix Data
Systems Corp. (a California corporation, formerly "Data Net International,
Inc."). 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Cumetrix
Data Systems Corp. for the year ended March 31, 1999 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 31, 1999
F-3
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEET
ASSETS
March 31, December 31,
2000 2000
---------- ----------
(unaudited)
Current assets
Cash and cash equivalents $3,769,174 $1,229,751
Time deposits, of which $100,000 is restricted 1,600,000 1,165,117
Trade receivables, net of allowance for doubtful accounts
of $150,000 and $250,000 336,854 991,713
Inventories 698,226 381,486
Income taxes receivable 541,301 541,301
Prepaid expenses - 41,466
---------- ----------
Total current assets 6,945,555 4,350,834
Property and equipment, net 516,057 192,083
Investment in affiliate 281,843 445,000
Other 11,169 11,169
---------- ----------
Total assets $7,754,624 $4,999,086
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2000 2000
----------- ------------
(unaudited)
Current liabilities
Note payable $ - $ 1,142,531
Bank overdraft 906,566 -
Accounts payable 152,116 845,680
Accrued expenses 635,067 711,337
Accrued legal and other - -
Current portion of long-term debt 17,582 18,295
----------- ------------
Total current liabilities 1,711,331 2,717,843
Long-term debt, net of current portion 77,864 64,267
----------- ------------
Total liabilities 1,789,195 2,782,110
----------- ------------
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 12,248,414
Accumulated deficit (6,222,985) (10,031,438)
----------- ------------
Total shareholders' equity 5,965,429 2,216,976
----------- ------------
Total liabilities and shareholders' equity $ 7,754,624 $ 4,999,086
=========== ============
F-4
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
Nine Months Nine Months
Year Ended Year Ended Ended Ended
March 31, March 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ---------- -----------
(unaudited) (unaudited)
Net sales $18,629,566 $63,813,350 $10,510,558 $15,063,615
Cost of sales 18,087,762 62,911,633 10,021,763 14,283,306
----------- ----------- ----------- -----------
Gross profit 541,804 901,717 488,795 780,309
Selling, general, and administrative expenses 4,211,141 3,292,569 2,695,631 2,931,620
Write-off of capitalized purchased software - 1,100,000 - -
Impairment loss - loans receivable from officers - - 500,000 -
Impairment loss - long lived assets - - 207,740 -
----------- ----------- ----------- -----------
Loss from operations (3,669,337) (3,490,852) (2,914,576) (2,151,311)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 316,434 514,345 113,522 246,576
Interest expense (1,746) (4,652) (217,255) (410)
Loss on equity investment (896,157) (122,000) (1,281,843) (364,607)
Gain on sale of investment - - 445,000 -
Other income (expense) - 1,365 - -
----------- ----------- ----------- -----------
Total other income (expense) (581,469) 389,058 (940,576) (118,441)
----------- ----------- ----------- -----------
Loss before provision for (benefit from)
income taxes (4,250,806) (3,101,794) (3,855,152) (2,269,752)
Provision for (benefit from) income taxes (278,871) (102,228) (46,699) -
----------- ----------- ----------- -----------
Net loss $(3,971,935) $(2,999,566) $(3,808,453) $(2,269,752)
=========== =========== =========== ===========
Basic and diluted loss per share $(0.54) $(0.41) $(0.52) $(.31)
=========== =========== =========== ===========
Weighted-average basic shares outstanding 7,392,500 7,364,828 7,392,500 7,392,500
=========== =========== =========== ===========
Weighted-average diluted shares outstanding 7,392,500 7,364,828 7,392,500 7,392,500
=========== =========== =========== ===========
F-5
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Earnings
------------------------- (Accumulated
Shares Amount Deficit) Total
---------- ------------ ----------- ---------
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
========= =========== ============ ===========
Issuance of 75,000 warrants to
Sovereign in connection with
the Bridge Note - 60,000 - 60,000
Net loss - - (3,808,453) (3,808,453)
--------- ----------- ------------ -----------
Balance, December 31, 2000 (unaudited) 7,392,500 $12,248,414 $(10,031,438) $ 2,216,976
========= =========== ============ ===========
F-6
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
Ended Ended
December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $(3,971,935) $(2,999,566) $(3,808,453) $(2,269,752)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 166,252 89,800 116,234 162,000
Amortization of deferred financing costs - - - -
Provision for doubtful accounts - 345,598 100,000 (230,000)
Loss on equity investment in affiliate 896,157 122,000 1,281,843 364,607
Impairment loss - loan receivable officers - - 500,000 -
Impairment loss - long-lived assets - - 207,740 -
Decrease in inventory reserve - - (50,000) -
Gain on sale of investment - - (445,000) -
Write-off of capitalized purchase software - 1,100,000 - -
Loss on receivable from director - - - -
Issuance of warrants and options for services 125,000 117,353 - -
Issuance of warrants related to Bridge Note - - 60,000 -
Deferred taxes - 133,647 - -
(Increase) decrease in
Trade receivables 1,527,831 1,675,520 (754,859) 1,060,416
Receivables from unauthorized parties 87,000 (87,000) - -
Inventories 1,621,901 (393,530) 366,740 1,759,592
Income tax receivable (278,871) (262,430) - -
Loan receivable - officer - - (500,000) -
Prepaid expenses 149,555 (103,572) (41,466) 81,109
Other assets 3,260 (14,429) - -
Increase (decrease) in
Book overdraft 906,566 - - -
Accounts payable (3,793,479) (3,877,057) 693,564 (3,217,168)
Accrued expenses 78,103 430,047 (829,583) (39,757)
Income taxes payable - (717,013) - 800
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (2,482,660) (4,440,632) (3,103,240) (2,328,153)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment (177,946) (431,625) - (31,093)
Proceeds (investment) in time deposits (100,000) (1,500,000) 434,883 -
Investment in affiliate (300,000) (1,000,000) (1,000,000) -
----------- ----------- ----------- -----------
Net cash used in investing activities (577,946) (2,931,625) (565,117) (31,093)
----------- ----------- ----------- -----------
F-7
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
Nine Months Nine Months
Ended Ended
December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- ------------
(unaudited) (unaudited)
Cash flows from financing activities
Proceeds from long-term debt $ 100,000 $ - $ - $ -
Payments on long-term debt (13,418) (1,203,707) (13,597) (4,810)
Proceeds from note payable - - 1,142,531 -
Proceeds from stock and warrant issuances, net - 11,203,472 - -
Repurchase of common stock - (300,000) - -
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities 86,582 9,699,765 1,128,934 (4,810)
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents (2,974,024) 2,327,508 (2,539,423) (2,364,056)
Cash and cash equivalents, beginning of year 6,743,198 4,415,690 3,769,174 6,743,198
----------- ----------- ----------- ------------
Cash and cash equivalents, end of year $ 3,769,174 $ 6,743,198 $ 1,229,751 $ 4,379,142
=========== =========== =========== ============
Supplemental disclosures of cash flow
information
Interest paid $ 1,746 $ 17,652 $ 4,740 $ 410
=========== =========== =========== ============
Income taxes paid $ - $ 730,000 $ 1,600 $ -
=========== =========== =========== ============
Supplemental schedule of non-cash investing and financing activities
For the quarter ended September 30, 2000 (unaudited) 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.
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.
F-8
CUMETRIX DATA SYSTEMS CORP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 and DECEMBER 31, 2000 (unaudited)
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
Interim Financial Information
-----------------------------
The unaudited financial information furnished herein reflects all
adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary to fairly state Cumetrix's
financial position, the results of its operations and cash flows for the
periods presented. The results of operations for the nine months ended
December 31, 2000 are not necessarily indicative of the results for the
full year ending March 31, 2001.
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.
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:
F-9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment (continued)
----------------------------------
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 and 1999, one vendor accounted for
50% and 55%, 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.
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.
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 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.
F-10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (continued)
-------------------------------------
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.
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 March 26, 2001 was
$.20 per share. Because the Company's 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 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.
F-11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
On December 14, 2000, OTT and Vsource finalized a Plan of Merger
Agreement, in which, Vsource formed OTT Acquisition Corp (the "Merger
Sub"), a wholly-owned subsidiary of Vsource, Inc. to merge with and into
OTT (the "Merger"). OTT would be the surviving corporation and become a
wholly-owned subsidiary of Vsource, Inc. and shares of the common stock of
Vsource, Inc. would be issued to OTT shareholders. The merger
consolidation dollar value of the Merger Agreement was $6,668,482
representing issued Vsource, Inc. shares of 1,089,390 at $6.1213 per share
at an exchange ratio of .2423832.
As of December 14, 2000, the Company had 1,328,581 preferred and common
shares of OTT which converted to 322,026 (1,328,581 x .2423832) Vsource,
Inc. Company Shares.
Twenty-five percent (25%) of the 322,026 shares or 80,505 shares of
Vsource, Inc. common stock issued to each shareholder was deposited into
an escrow account for the purpose of providing a means for Vsource, Inc.
to recover losses resulting from or arising out of any inaccuracy in or
any breach of any representation, warranty, covenant or agreement of any
Founder or of OTT related to the Merger Agreement. The shares are to be
held in escrow for a period of six months ending on June 14, 2001, any
unused shares at that time would be distributed to shareholders.
On December 14, 2000, the Company also received 24,800 warrants,
exerciseable as follows, 12,400 warrants at $17.36 per share and 12,400
warrants exerciseable at $8.68 per share.
The issued Vsource, Inc. shares and warrants are not freely tradeable
unless Vsource, Inc. registers their "Series 2-A Convertible Preferred
Stock". The Company has the right to be included in any registration of
Vsource, Inc's Series 2-A Convertible Preferred Stock upon proper notice
and acceptance. Vsource is under no obligation to register their Series 2-
A Convertible Preferred Stock within any specified time period.
On December 31, 2000, the Company recorded an initial gain on sale of
investment of $593,375 on Vsource issued common shares. The gain is
calculated as follows, Vsource, Inc's (NASDAQ:VSRC) closing stock price on
December 31, 2000 (December 29, 2000) $1.84375 multiplied by 322,026
shares. Due to the lack of marketability on Vsource shares held by the
Company, the Company recorded a 25% lack of marketability discount
totalling $148,375. The net gain on sale of investment totalled $445,000.
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.
F-12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate (continued)
-----------------------------------
In Stage One, the Company had 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 would 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
had 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. The Company did not exercise it's
right to purchase the remaining 550,000 shares of Common Stock (925,000 -
375,000). In the quarter ended September 30, 2000, this $750,000
investment was written off due to recurring losses of the investee.
On August 10, 2000, $750,000 of the $858,000 proceeds from the Bridge Note
(See NOTE E) 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 remaining $750,000 investment, invested on
August 10, 2000, due to recurring losses by the investee and the
investee's minimum shareholders equity. As of September 30, 2000, the
entire investment had been written-off.
For the quarter ended December 31, 2000, the Company made no additional
investments in Salescentrix.com.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31 consisted of the following:
2000
--------
Furniture and fixtures $103,165
Machinery and equipment 339,966
Software 159,412
Vehicles 153,636
Leasehold improvements 29,998
--------
786,177
Less accumulated depreciation and amortization 270,120
--------
Total $516,057
========
Depreciation and amortization expense was $166,253 and $89,800, for the
years ended March 31, 2000 and 1999, respectively.
F-13
NOTE 3 - PROPERTY AND EQUIPMENT (Continued)
Property and equipment at December 31 consisted of the following:
2000
--------
Furniture and fixtures $ 94,255
Machinery and equipment 31,680
Software 42,764
Vehicles 153,636
Leasehold improvements 4,200
--------
326,535
Less accumulated depreciation and amortization 134,452
--------
Total $192,083
========
Depreciation and amortization expense was $116,234 and $162,000 for the nine
months ended December 31, 2000 and 1999, 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.
NOTE 5 - LONG-TERM DEBT
Long-term debt at March 31 consisted of the following:
2000
-------
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. $ -
F-14
NOTE 5 - LONG-TERM DEBT (Continued)
2000
-------
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
Less current portion 17,582
-------
Long-term portion $77,864
=======
Future annual maturities of long-term debt consisted of the following as of
March 31, 2000:
Year Ending
March 31,
-----------
2001 $17,582
2002 18,984
2003 20,278
2004 21,659
2005 16,943
-------
Total $95,446
=======
Long-term debt at December 31 consisted of the following:
2000
-------
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. 64,267
-------
64,267
Less current portion 18,295
-------
Long-term portion $45,972
=======
F-15
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 and 1999 was
approximately $205,000 and $144,000, respectively.
The current lease expires January 31, 2001, however, 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 increased from
$11,607 to $14,235.
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.
We are currently (as of March 30, 2001) a defendant in a lawsuit filed by one
of our vendors seeking damages of $119,680. The vendor is claiming damages
for unpaid merchandise shipped to and received by us. While we believe we
will prevail in this lawsuit, we have accrued an amount equal to the damages
sought by our vendor of $119,680.
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.
F-16
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. As of December 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 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:
Weighted-
Shares Average
Under Exercise
Option Price
-------- ----------
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
========
F-17
Stock Options (continued)
-------------------------
The following table summarizes information about stock options outstanding
at March 31, 2000:
Weighted-
Average
Stock Options Stock Options Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ------------- ------------- ----------------
$ 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
======= =======
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 and 1999, would be as follows:
2000 1999
----------- -----------
Net income (loss)
As reported $(3,971,935) $(2,999,566)
Pro forma $(4,111,591) $(3,068,317)
Basic and diluted earnings (loss)
per share
As reported $ (0.54) $ (0.41)
Pro forma $ (0.56) $ (0.42)
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 and 1999:
volatility of 100% and 69.2%, respectively; dividend yields of 0% and 0%,
respectively; risk-free interest rates of 6.4% and 4.9%, respectively;
exercise prices of $1.17 and $3.42, respectively; and expected lives of five
and 3.1, respectively. The weighted-average fair value of options granted
during the year ended March 31, 2000 was $0.91 per share.
F-18
NOTE 7 - SHAREHOLDERS' EQUITY (continued)
Stock Options (continued)
-------------------------
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
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.
At December 31, 2000 the following individuals had vested stock options as
follows: Max Toghraie, 62,500, Jeff Toghraie, 50,000, John Botdorf,
237,500 and Herbert Tom, 21,875.
On December 31, 2000 the stock closed at $.095 per share. As of December
31, 2000, none of the options were in-the-money and none of the options
were exercised.
NOTE 8 - INCOME TAXES
The provision for (benefit from) income taxes is comprised of the
following:
2000 1999
--------- ---------
Current
Federal $(278,871) $(235,875)
State - -
--------- ---------
(278,871) (235,875)
--------- ---------
F-19
NOTE 8 - INCOME TAXES (continued)
2000 1999
--------- ---------
Deferred
Federal - 102,680
State - 30,967
--------- ---------
- 133,647
--------- ---------
Total $(278,871) $(102,228)
========= =========
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes consisted of the following:
2000 1999
----------- -----------
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 $ - $ -
=========== ===========
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:
2000 1999
----------- -----------
Rate reconciliation
Federal (benefit) provision at
statutory rate $(1,403,000) $(1,054,610)
State, net of federal benefit (233,000) (180,971)
Benefit of net operating losses (278,871) -
Valuation allowance 1,636,000 1,074,432
Other - 58,921
----------- -----------
Total $ (278,871) $ (102,228)
=========== ===========
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.
F-20
NOTE 9 - RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company had sales of approximately $1,391,300 and
purchases of approximately $598,200 from Samax Technologies, Inc., a
corporation owned by a related party. During fiscal 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.
In 1997, we employed Sam Toghraie, brother of Max Toghraie and Jeff
Toghraie, as a Department Head for the Return Merchandise Department on an
at-will basis for an annual salary of $60,000, including the personal use
of a Company car. Effective November 6, 2000, Sam Toghraie resigned as an
employee of the Company and entered into a Consulting Agreement with the
Company as an independent outside Sales and Marketing Consultant for an
annual fee of $72,000.
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 - WRITE-OFF OF CAPITALIZED PURCHASED SOFTWARE
We attempted to implement our ACSA automated custom software configuration
assembly line solution. In this regard, we invested in fixed assets
comprising an assembly line and related computer equipment. We 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 our ACSA
Solution. We paid CASI a one time license fee of $1.1 million. The
payments under the CASI note were initially capitalized. We have written
off our investment in capitalized software related to ACSA as of March 31,
1999. While certain hardware and assets related to the ACSA solution are
currently being used by us, CASI software is not being used and we do not
intend to generate any significant revenue from this software.
NOTE 13 - 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,
F-21
NOTE 12 - SUBSEQUENT EVENT (continued)
Bridge Loan (continued)
-----------------------
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.
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.
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 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
F-22
Bridge Loan (continued)
-----------------------
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 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%.
On September 29, 2000, in exchange for the demand notes, the Company
issued an aggregate of $1,142,531.26 including accrued interest of
$17,531.26, 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
============= =======
F-23
Bridge Loan (continued)
-----------------------
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%
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
=======
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.
F-24
Bridge Loan (continued)
-----------------------
The Company as of February 14, 2001 has not filed a Registration Statement
on Form S-3 with the SEC, covering the resale of all of the Registrable
Securities, no later than forty five (45) days (November 13, 2000) after
the First Closing Date (September 29, 2000) and is therefore, in default
with respect to this Mandatory Registration. The Company did not file a
Registration Statement with the SEC by February 26, 2001 (the
"Registration Deadline"). However, the Company is continuing the process
of filing the Registration Statement with the SEC.
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
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
F-25
Bridge Loan (continued)
-----------------------
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.
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 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 $1,400,000. If the price of the
Company's
F-26
Bridge Loan (continued)
-----------------------
stock was to remain at current levels ($.20 per share at March 26, 2001)
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. The $1,400,000 potential cash payment has not been reserved
by the Company.
Additional Interest and Penalties after March 28, 2001
Additional interest and penalties of approximately $70,000 per month will
accrue after March 28, 2001 since a Registration Statement on Form S-3
covering the resale of all of the Registrable Securities was not filed or
effective with the SEC, in addition to the $1,400,000.
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 stock options to purchase 450,000 shares, vesting
over a three-year period, in equal quarterly installments. The stock
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 stock
options to purchase 450,000 shares, vesting over a three-year period and
replaced the 450,000 stock options with 500,000 stock 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.
The Company's consulting agreement with Mr. Botdorf was terminated on
January 19, 2001. Therefore, the total of 500,000 stock options issued to
Mr. Botdorf are fully vested as of January 19, 2001.
On January 26, 2001, Mr. Botdorf resigned as Chairman of the Board.
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 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 December 31, 2000, the Company paid TMA an additional $239,400,
to total $282,100.
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.
F-27
2000 Loan Plan (continued)
--------------------------
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 and
were replaced with stock options priced at $1.00 to $3.00 per share. As of
F-28
2000 Loan Plan (continued)
--------------------------
December 31, 2000 the stock options were not-in-the-money and therefore of
no value as the Company's stock price was $.095 per share.
On March 4, 2001, the Board of Directors approved an increase in the total
amount of loans outstanding from $500,000 to $800,000 and increased Max
Toghraie's maximum loan amount from $275,000 to $500,000.
On March 5, 2001, $300,000 in additional loan amounts was disbursed as
follows:
Max Toghraie $140,000
Jeff Toghraie $125,000
Herbert Tom $ 35,000
--------
$300,000
========
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).
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.
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.
ImagingDesign And Astral Port Systems
-------------------------------------
The Company entered into an Agreement with two consulting firms that are
related to each other and both based in Los Angeles. On November 15, 2000
the Company entered into an Agreement with ImagingDesign to provide
corporate web site design and development for the Company's web site at
www.cumetrix.com. As of February 13, 2001, $103,100 was paid to
ImagingDesign. The Company also entered into an Agreement with Astral Port
Systems dated December 19, 2000 to prepare a comprehensive study for the
design of an international web portal for an estimated fee between $70,000
to $90,000. As of February 13, 2001, $87,000 was paid to Astral Port
Systems. As of February 13, 2001, a total of $190,100 was paid to both
firms.
International Marketing Agreement
---------------------------------
The Company entered into an International Marketing Agreement dated
January 15, 2001 with Ameritech S.A., a Mexico corporation, (consultant)
to serve as an International Marketing and Consulting firm and advisor to
the Company. The consultant will work on opening new and lucrative
channels in the international markets exclusively for Cumetrix Products
and Services. The term is for a period of 12 months. There is no stated
fee in the Agreement. The fee is based upon the scale and scope of the
marketing operation. In January 2001, $58,790 was wired to Ameritech S.A.
F-29
================================================================================
5,269,014 SHARES
COMMON STOCK
CUMETRIX DATA SYSTEMS CORP.
------------------
PROSPECTUS
------------------
The date of this prospectus is
March 26, 2001
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's bylaws provide for indemnification of officers, directors
and others to the fullest extent permitted by the laws of the State of
California.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities offered hereby.
SEC registration fee $
Printing and engraving
Accountants' fees and expenses
Legal fees
Blue Sky fees and expenses
Miscellaneous
Total $
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
ITEM 27. EXHIBITS
The exhibits filed as part of this Registration Statement are as follows:
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.
42
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.
4.2 Form of Series 1 Bridge Note with Attached Repricing Warrant, dated as of
September 29, 2000. Incorporated by reference to Exhibit 4.2 of the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 2000.
4.3 Form of Common Stock Purchase Warrant issued in connection with Bridge
Financing Notes. Incorporated by reference to Exhibit 4.3 of the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 2000.
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 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.
43
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.
10.15.1 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. Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2000.
10.17 Amended and Restated 2000 Stock Plan dated January 1, 2000. Incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.
10.18 Employment Agreement, dated November 15, 1999, between the Company and
Jeff Toghraie. Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2000.
10.19 Amended Employment Agreement, dated December 20, 1999, between the
Company and Jeff Toghraie. Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein, LLP
23.2 Consent of Arthur Andersen LLP
44
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during
any period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually, or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of
this Chapter) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement of any material change to such information in the
Registration Statement.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
(4) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) That, insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
45
(6) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Industry,
California on the 26th day of March, 2001.
By /s/ MAX TOGHRAIE
--------------------------------
Max Toghraie
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- --------- ----
/s/ MAX TOGHRAIE Chief Executive Officer, March 26, 2001
- -------------------- Secretary and Director
Max Toghraie (Principal Executive Officer)
/s/ JEFF TOGHRAIE Vice President - Sales and March 26, 2001
- -------------------- Marketing and Director
Jeff Toghraie
/s/ NANCY HUNDT Director March 26, 2001
- --------------------
Nancy Hundt
/s/ HERBERT TOM Chief Financial Officer March 26, 2001
- -------------------- (Principal Financial and
Herbert Tom Accounting Officer)
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