United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Transition Period From ________to ________.
COMMISSION FILE NUMBER: 001-14001
CUMETRIX DATA SYSTEMS CORP.
(Exact Name of Registrant as Specified in its Charter)
California 95-4574138
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
957 Lawson Street, Industry, California 91748
(Address, Including Zip Code, Of Registrant's Principal Executive Offices)
(626) 965-6899
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days. Yes [X] No [ ]
As of November 15, 1999, the Registrant had 7,392,500 shares of Common
Stock, without par value, issued and outstanding.
CUMETRIX DATA SYSTEMS CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - September 30, 1999 and March 31,1999
Condensed Statements of Operations - Three Months Ended September 30,
1999 and 1998; and, Six Months Ended September 30, 1999 and 1998.
Condensed Statements of Cash Flow - Six Months Ended September 30, 1999
and 1998
Notes to Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
CUMETRIX DATA SYSTEMS CORP.
CONDENSED BALANCE SHEETS
September 30, March 31,
1999 1999
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,810,813 $ 6,743,198
Time deposits 1,500,000 1,500,000
Trade receivables, net of allowance for doubtful
accounts of $300,000 and $280,000 at September 30, 1999
and March 31, 1999, respectively 1,010,276 1,951,685
Inventories 560,535 2,320,127
Income tax receivable 262,430 262,430
Prepaid expenses and other current assets 118,122 149,555
----------- -----------
Total current assets 8,262,176 12,926,995
FIXED ASSETS, net 423,956 504,363
OTHER ASSETS 527,822 892,429
----------- -----------
Total Assets $ 9,213,954 $14,323,787
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 709,421 $ 3,945,595
Accrued expenses and other current liabilities 604,011 561,018
----------- -----------
Total current liabilities 1,313,432 4,506,613
LONG-TERM DEBT, net of current portion 2,068 4,810
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 - -
shares; issued and outstanding, none
Common stock, no par value: Authorized, 20,000,000 12,063,414 12,063,414
shares; issued and outstanding, 7,392,500 shares
Retained earnings (deficit) (4,164,960) (2,251,050)
----------- -----------
Total shareholders' equity 7,898,454 9,812,364
----------- -----------
Total liabilities and shareholders' equity $ 9,213,954 $14,323,787
=========== ===========
See notes to financial statements.
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
SALES $ 4,055,896 $19,418,109 $11,112,570 $37,832,635
COST OF SALES 3,920,060 18,868,874 10,829,998 36,851,490
----------- ----------- ----------- -----------
GROSS PROFIT 135,836 549,235 282,572 981,145
OPERATING EXPENSES 1,136,391 572,843 1,998,394 1,101,695
----------- ----------- ----------- -----------
OPERATING LOSS (1,000,555) (23,608) (1,715,822) (120,550)
OTHER INCOME (LOSS)
Interest expense (166) 323 (359) 2,203
Interest income 94,233 172,695 166,878 320,666
Loss on equity investment (215,375) - (364,607) -
----------- ----------- ----------- -----------
(121,308) 173,018 (198,088) 322,869
INCOME (LOSS) BEFORE INCOME TAXES (1,121,863) 148,764 (1,913,910) 197,913
PROVISION FOR INCOME TAXES - 62,271 - 82,771
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,121,863) $ 86,493 $(1,913,910) $ 115,142
=========== =========== =========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ (0.15) $ 0.01 $ (0.26) $ 0.02
=========== =========== =========== ===========
See notes to financial statements.
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,913,910) $ 115,142
Adjustments to reconcile net income to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 108,000 4,500
Provision for doubtful accounts 20,000 52,000
Loss on equity investment in subsidiary 364,607 -
Changes in assets and liabilities:
Trade receivables 921,409 301,523
Inventories 1,759,592 (2,095,109)
Prepaid expenses and other current assets 31,433 (69,819)
Accounts payable (3,236,174) 216,884
Accrued expenses 42,193 (528,362)
Income taxes payable 800 (695,468)
----------- -----------
Net cash used by operating activities (1,902,050) (2,698,709)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (27,593) (267,485)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from initial public offering - 11,203,472
Payments on long-term debt (2,742) (1,201,812)
Deferred offering costs - 514,927
----------- -----------
Net cash provided by financing activities (2,742) 10,516,587
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,932,385) 7,550,393
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,743,198 4,415,690
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,810,813 $11,966,083
=========== ===========
SUPPLEMENTAL INFORMATION ON CASH FLOW
Cash paid for interest $ 359 $ 2,203
Cash paid for income taxes $ - $ 730,000
See notes to financial statements.
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (which comprise only
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the periods ended September 30, 1999 are
not necessarily indicative of results to be expected for the year ending March
31, 2000. For further information, refer to the financial statements and notes
thereto for the year ended March 31, 1999.
NOTE B - EARNINGS PER SHARE
Earnings per share calculations are in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share. Basic earnings per
share are computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share are
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding for each period presented. Common
equivalent shares include stock options assuming conversion under the treasury
stock method.
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ---------- ------------ ----------
BASIC AND DILUTED EARNINGS
Net Income (Loss) $(1,121,863) $ 86,493 $(1,913,910) $ 115,142
=========== ========== =========== ==========
BASIC AND DILUTED SHARES
Weighted average common shares 7,392,500 7,452,500 7,392,500 7,304,822
Dilutive effect of outstanding options 252,021 - 233,043
----------- ---------- ----------- ----------
Diluted shares 7,392,500 7,704,521 7,392,500 7,537,865
=========== ========== =========== ==========
NOTE C - SEGMENT INFORMATION
The Company has two business segments, Computer Products and Computer System
Assembly. The Company evaluates performance based on revenue only and does not
separate operating income or assets between segments. E-Commerce sales and
distribution, an emerging sales channel initiated in April 1999 which supports
both these business segments, represents less than 10% of revenues for the
periods presented.
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software (the "Computer Products business"). In
December 1996, the Company began offering end-users custom computer
configuration and assembly (the "Computer System Assembly" business), through
resellers, third-party E-commerce sites, and its own system configuration E-
commerce web site. The Company has substantially reduced its dependence on the
distribution of Computer Products in response to industry-wide price declines,
resulting partly from excess manufacturer inventories and a slow-down in demand
in the personal computer industry. Consequently, the Company has substantially
reduced inventory levels necessary to support sales, and significantly lowered
the Company's working capital requirements and finance costs. The Company
continues to sell Computer Products in selected product categories and where
periodic market opportunities exist, using its established supplier base while
principally acting as a broker for critical computer components. Sales
opportunities in Computer System Assembly, particularly through E-commerce,
are the focus of the Company's current sales and marketing efforts.
Results of Operations
- ---------------------
Sales for the six months ended September 30, 1999 were $11,112,570 as compared
with sales of $37,832,635 for the same period in the prior year. Sales for the
three months ended September 30, 1999 were $4,055,896 as compared with sales of
$19,418,109 for the three months ended September 30, 1998. Sales for the six
months and three months ended September 30, 1999 include Computer System
Assembly sales of $2,326,676 and $1,485,046, respectively. Computer System
Assembly sales did not exist in the same periods in the prior year. Excluding
the Computer System Assembly sales, sales for the six months ended September 30,
1999 declined $29,046,741, or 77%, and sales for the three months ended
September 30, 1999 declined $16,847,259, or 87%. The decline in sales is the
result of the Company's decision to reduce its dependence on the Computer
Products business (in particular the distribution of computer hard-drives) in
response to changes in the market conditions within this segment of the
business, and unacceptably low profit margins.
Gross profit for the six months ended September 30, 1999 was $282,572, or 2.5%
of sales, as compared with gross profit of $981,145, or 2.6% of sales for the
six months ended September 30, 1998. Gross profit for the three months ended
September 30, 1999 was $135,836, or 3.3% of sales as compared with gross profit
of $549,235, or 2.8% of sales for the quarter ended September 30, 1998. The
decline in gross profit for the periods is attributable to the lower sales
volumes. The increase in gross profit as a percent of sales for the three
months ended September 30, 1999, as compared with the same period in the prior
year is principally attributable to higher margins achieved from Computer
System Assembly sales.
Operating expenses for six months ended September 30, 1999 were $1,998,394 as
compared with $1,101,695 for the six months ended September 30, 1998. Operating
expenses for three months ended September 30, 1999 were $1,136,391 as compared
with $572,843 for the three months ended September 30, 1998. The increase in
operating expenses for the periods is principally attributable to legal,
auditing, investigative, and management consulting fees incurred during the
periods in connection with a special investigation of allegations of
improprieties and record-keeping irregularities initiated by the Board of
Directors. A brief summary of the principle components of operating expense for
the periods is presented below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED.
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- --------- ---------- ----------
Operating Expenses
------------------
Salaries & wages $ 390,000 $332,000 $ 820,000 $ 674,000
Rent 32,000 18,000 55,000 36,000
Legal, accounting & consulting 349,000 57,000 449,000 94,000
Management consulting & settlement fees 126,000 - 126,000 -
Credit & Collection 79,000 39,000 127,000 91,000
Advertising 61,000 3,000 67,000 6,000
Other 99,391 123,843 354,394 200,695
---------- -------- ---------- ----------
$1,136,391 $572,843 $1,998,394 $1,101,695
========== ======== ========== ==========
Interest income, primarily from the investment of the proceeds of the Company's
initial public offering of the Company's stock, was $166,878 for the six months
ended September 30, 1999, and $94,233 for the three months ended September 30,
1999. Interest income for the six months and three months ended September 30,
1998, was $320,666 and $172,695, respectively. The decline in interest earnings
is associated with lower available funds for investment.
For the six months ended September 30, 1999, the Company incurred a net loss of
$1,913,910, as compared to net income of $115,142 for the six months ended
September 30, 1998. The Company reported a net loss of $1,121,863 for the three
months ended September 30, 1999, as compared to net income of $86,493 for the
three months ended September 30, 1998. The decrease in net earnings for the six
months and three months ended September 30, 1999, of $2,029,052 and $1,208,356,
respectively, as compared with the same periods in the prior year is
attributable to the decrease in sales volume and higher operating expenses
associated with the investigative matters previously noted.
Liquidity and Sources of Capital
For the six months ended September 30, 1999, net cash used by operating
activities was $1,902,050 as compared to net cash used by operating activities
of $2,698,709 for the same period in the prior year. The net use of cash for
the six months ended September 30, 1999 was principally the result of net
operating losses. For the six months ended September 30, 1998, the principal
use of cash by operating activities was the increase in inventory, the payment
of operating expenses incurred during the IPO, and the payment of income taxes.
Capital expenditures of $27,593 and $267,485 for the six months ended September
30, 1999 and 1998, respectively, constitute the principle use of cash from
investing activities.
Cash flows from financing activities for the six months ended September 30, 1998
are principally associated with funds generated by the Company's initial public
offering, net of long-term debt liquidated with those proceeds.
As of September 30, 1999 the Company had $6,310,813 in cash, cash equivalents,
and investment deposits, and working capital of $6,948,744, with a ratio of
current assets to current liabilities of approximately 6.3 : 1. This compares
with cash, cash equivalents, and investment deposits, of $8,243,198, and working
capital of $8,420,382, with a ratio of current assets to current liabilities of
2.9 : 1 as of March 31, 1999.
To insure the availability of funds to meet its various needs, the Company has a
credit facility with Finova Capital Corporation ("Finova"), which consists of a
$20 million flooring line of credit, secured by certain inventory and equipment,
as well as an additional $5 million revolving line of credit secured by accounts
receivables and inventory. At September 30, 1999 the Company had an outstanding
balance on this credit line of $148,300. The Company believes it has adequate
resources to achieve its operating plans for at least the next twelve months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Subsequent Events and Management Restructuring
During the first quarter of fiscal year 2000, allegations of certain
improprieties and record-keeping irregularities in fiscal year 1999 were brought
to the attention of the Board of Directors. Under the direction of the Audit
Committee of the Board of Directors a special investigation was initiated. As a
result of this investigation, the Company's former President and its Secretary-
Treasurer were terminated from employment.
The Company failed to file timely its Annual Report on form 10-K for the fiscal
year ended March 31, 1999, and its Quarterly Report on form 10-Q for the first
quarter ended June 30, 1999, consequently the Company's stock was delisted from
the Boston Stock Exchange and from Nasdaq on August 27, 1999 and August 30,
1999, respectively. The Company employed an independent management consultant
as Chief Executive Officer in early September, principally to oversee the filing
of the delinquent SEC reports.
The special investigation was completed to the satisfaction of the Company's
Board of Directors and its outside auditors. On October 15, 1999, the Company's
fiscal year 1999 Annual Report and first Quarterly Report for fiscal year 2000
were filed with the SEC.
On October 22, 1999, the Company ended its contract with the independent
consultant, and Mr. Max Toghraie was appointed as the Company's Chief Executive
Officer.
In late October, a restructuring plan to reduce the company's operating overhead
and improve operating efficiencies was adopted, which to date has resulted in
the elimination of approximately 20% of the Company's workforce, including
certain management positions.
In October and November 1999, Directors Mr. James Ung (formerly President), Mr.
Philip Alford, and Mr. David Tobey, resigned from the Board of Directors.
Year 2000 Update
In 1998 the Company began a Year 2000 Project to address the issue of whether
computer programs and imbedded computer chips within the Company's processes and
products will be able to distinguish between the years 1900 and 2000. The
Company evaluated its Year 2000 readiness for both information technology ("IT")
and non-information technology ("non-IT") systems. Non-IT systems typically
include embedded technology in electronic equipment, such as microprocessors,
and are more difficult to assess and repair than IT systems. The Company
believes it has implemented the changes necessary to materially insure the
Company's readiness for the year 2000. Programs to evaluate the readiness of
the Company's major vendors and customers to determine what impact, if any,
their readiness will have on the Company, continue. The Company does not
anticipate that the evaluation will reveal significant potential problems or
require the Company to incur substantial costs.
Forward-looking Statements
Certain statements in this Form 10-Q contain "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933, as amended) that involve
risks and uncertainties that may cause actual results to differ materially from
those predicted in the forward-looking statements. Forward-looking statements
can be identified by their use of such verbs as expects, anticipates, believes
or similar verbs or conjugations of such verbs. If any of the Company's
assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, the Company's actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including but not limited to, the risks detailed in the Company's Securities and
Exchange Commission filings, including the Company's Form 10-K for the fiscal
year ended March 31, 1999; the possibility that the Company may not be able to
market effectively Computer System Assembly products, the narrow margins
available in the brokering of Computer Products, and the risks of fluctuation in
the prices of Computer Products.
PART II. OTHER INFORMATION
- --------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.16 - Executive employment Agreement and General Release,
dated August 23, 1999, between the Company and Max
Toghraie
Exhibit 10.17 - Executive employment Agreement and addendum, dated
September 8, 1999, and Amendment dated November 8,
1999, between the Company and Inverness Partners,
Inc.
Exhibit 10.18 - Settlement Agreement and General Release, dated
October 22, 1999, between the Company and Inverness
Partners, Inc.
Exhibit 27 Financial Data Schedule
(b) Form 8-K Dated July 13, 1999, Item 5 - Other Events.
Announcing preliminary results of Audit Committee
investigation, management changes and delay in
filing Annual Report on Form 10-K.
Form 8-K Dated July 15, 1999, Item 5 - Other Events.
Announcing receipt of Nasdaq letter regarding
potential change of listing status and change of
Nasdaq trading symbol.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CUMETRIX DATA SYSTEMS CORP. (REGISTRANT)
Date: November 15, 1999 /s/ Max Toghraie
----------------- -----------------------------------
Max Toghraie
President & Chief Executive Officer
and Principle Accounting Officer