- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the year ended March 31, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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 ST.
INDUSTRY, CALIFORNIA 91748
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (626) 965-6899
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
Common Stock Boston Stock Exchange
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE
Indicate by check mark whether the Registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 5-K is not contained herein, and will not be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing sales price of the
Common Stock on the NASDAQ National Market on June 26, 1998 was $20,327,249.
The number of shares of the Registrant's Common Stock outstanding as of
June 26, 1998, was 7,452,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Staetment for the period
ended March 31, 1998, are incoporated by reference into Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CUMETRIX DATA SYSTEMS CORP.
TABLE OF CONTENTS
Part I
Page
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 29
Item 8. Financial Statements and Supplementary Data F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
Part III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 30
Signatures 32
ii
ITEM 1. BUSINESS.
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), systems
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products and system configuration business to become a provider of
software-enabled custom configuration to its target markets both domestically
and internationally. The Company intends to implement a fully automated systems
integration and configuration process, referred to as the Automated Custom
System Assembly Solution, or "ACSA Solution," incorporating licensed proprietary
software. The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
The Company's first ACSA Center is expected to be completed and the Company is
expected to commence offering the ACSA Solution by August 1998. Future ACSA
Centers may be located at the facilities of the Company's customers. The
Company's ACSA Centers are intended to enable the Company's customers to
outsource their procurement, warehousing, assembly, staging, and shipping
processes.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD-ROMs, network adapters, hubs, small computer systems
interface components ("SCSIs"), integrated device enhancement components
("IDEs") and ZIP drives as well as memory and central processing units ("CPUs")
for desktop and notebook computer products. The Company also assembles
built-to-order computer systems for its target markets.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. The Company's executive offices are located at 957
Lawson Street, Industry, California 91748; and its telephone number is (626)
965-6899, and its facsimile number is (626) 965-8159.
COMPUTER PRODUCTS BUSINESS
The Company's principal current business is the procurement and
distribution of a broad and comprehensive range of Computer Products. These
products include components such as high capacity storage devices, CD-ROMs and
CD Recorders, network adapters, hubs, SCSIs, IDEs and ZIP drives as well as
memory and CPU's for desktop and notebook products. The Company also assembles
built-to-order computer systems for its target market.
COMPUTER PRODUCTS MARKET
The computer hardware and component market is heavily dependent on
worldwide personal computer demand and shipments. The Computer Products market
is generally segmented between top-level warehousing master distributors, who
distribute to VARs, OEMs, SIs and other distributors. Master distributors are
required to purchase significant volumes of Computer Products to obtain their
manufacturer relationships and pricing. The Company generally procures its
1
components from these master distributors and distributes these products to
medium sized VARs, SIs, ISVs and OEMs. The Company believes that a valuable
asset of the Company is its position in the distribution channel, between that
of master distributors and lower level VARs, SIs and ISVs because unlike master
distributors, the Company, without maintaining large inventories, can focus its
procurement on only those components it believes itself to have expertise in
marketing to its target markets.
COMPUTER PRODUCTS BUSINESS STRATEGY
The Company has structured its Computer Products business in a manner
intended to maximize net profit margins while competing on the basis of price
and service. The Company generated approximately 97.7% and 98.6% of net sales in
the fiscal years ended March 31, 1998 and 1997, respectively, from its Computer
Product distribution and procurement operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The remainder of
the Company's revenues in each period were derived primarily from system
assembly and sale.
Although the Company is seeking to expand into higher margin, value-added
services, the Company believes that the gross profit on its core distribution
operations will remain relatively stable. Therefore, management's primary
objective remains gross profit improvement through strategic implementation of
its planned ACSA operations.
COMPUTER PRODUCT CUSTOMERS AND SALES
The Company has more than 700 active customers, including Alpha
Computers, East Gate Micro, Inc. and Pony Computer. For the fiscal year ended
March 31, 1998 only one customer accounted for more than 10% of net sales.
During the year ended March 31, 1998, Alpha Systems Inc. accounted for 11.1% of
net sales.
The Company currently markets its distribution services via a direct sales
staff, with use of telemarketing techniques to identify, qualify and close
business. At the beginning of the 1997 calendar year, the Company began to
develop a channel program to sell its Computer Products through OEMs, SIs, and
ISVs.
As of March 31, 1998, the Company employed nine sales representatives.
The Company's sales representatives have been effective in developing and
maintaining customer relationships, averaging approximately $8.1 million of
sales per representative based on the year ended March 31, 1998.
The Company's representatives compete for sales on the basis of product
knowledge, product selection targeted to the Company's customer base and
competitive pricing. The Company offers a competitive return merchandise policy
("RMA") that is attractive to its customers. The Company's RMA allowances is
permitted due to favorable allowances it has negotiated from its vendors. See
"Cautionary Statements and Risk Factors-Risk of Product Returns."
VENDOR RELATIONSHIPS AND PROCUREMENT
2
The Company has relationships with manufacturers and distributors around
the world. The Company is a reseller of selected product lines and single
components from major manufacturers, including Western Digital Corporation,
Adaptec Inc., Fujitsu Computer Products of America, Samsung Electronics Co.
Ltd., Quantum Corporation, Maxtor Corporation, Matrox Electronics Systems, Ltd.,
Goldstar L.G. Electronics, Intel Corporation, Toshiba Corporation and Pioneer
Electronics Corp. In the distribution channel, major suppliers include DSS
Technology Distribution Partners, Inc. ("DSS"), Maxtor Corporation, Canara
Technologies, Alpha Computers, DTK Computer, Tech Data Computer, Merisel
Incorporated and Toshiba Corporation. For the years ended March 31, 1998 and
1997, DSS, a master distributor of hard drives to the Company, accounted for 64%
and 43%, respectively, of the Company's purchases. The Company believes that its
relationships with DSS and its other vendors is satisfactory and does not
believe that the loss of its relationship with DSS or any other of its vendors
would materially adversely affect its business. See "Cautionary Statements and
Risk Factors-Dependence Upon Relationships with Vendors."
The Company receives discounts from major Computer Product manufacturers
and master distributors as a result of its volume purchases. The Company also
negotiates stock rotation and price protection privileges with certain of its
major vendors. Additionally, DSS has featured the Company in certain of its
national advertising campaigns.
The Company has been able to benefit from its ability to dispose of excess
inventory of manufacturers and master distributors through the Company's sales
channel. From time to time major distributors and manufacturers use the Company
as a release valve for inventory when excess supplies must, due to contractual
commitments, be shipped by such manufacturers to the Company's master
distributor vendors. In return for the Company's willingness to accept such
excess inventory, the Company is often afforded pricing concessions and rebates
by the vendor. As a result, the Company receives generally favorable pricing
from master distributors who desire to reduce inventory growth or to be assured
of satisfying volume purchase commitments to manufacturers without adversely
impacting downstream pricing. Also, because the Company often solves a vendor's
excess inventory condition, the Company is often rewarded with preferential
allocation, allowing the Company to maintain availability and increase its
margins during component shortages. These arrangements with respect to purchases
of excess inventory from vendors are informal, are not subject to any written
agreements and may be discontinued by the Company at the Company's discretion.
See "Cautionary Statements and Risk Factors-Availability of Components,"
"-Foreign Trade Regulation," and "-Dependence Upon Relationships with Vendors."
The Company generally pays its vendors promptly, typically paying within 30
days from receipt of invoice. This policy also encourages the Company's vendors
to expedite shipments to the Company as these shipments can be quickly converted
to cash flow.
INVENTORY MANAGEMENT
The Company's vendor relationships enable it to receive generally prompt
and consistent deliveries. As a result, the Company, unlike many resellers of
3
Computer Products, maintains a limited inventory, and avoids certain of the
costs associated with the traditional distribution model, including capital
costs associated with the warehousing of products, obsolescence costs, inventory
finance costs, the costs of computer inventory and tracking systems, and the
costs associated with the need to employ personnel for stocking and shipping
duties.
Unlike master warehousing distributors who supply the Company, the Company
has the added flexibility of not being required to maintain large inventories to
achieve its favored pricing. The Company believes that although the pricing it
receives is not as favorable as the pricing received by master warehousing
distributors, the Company benefits by avoiding the need to stock and finance
large quantities of often rapidly depreciating Computer Products.
Prior to March 23, 1998 the Company's warehouse was 4,000 square feet and
employed three people. On March 23, 1998, the Company moved into a larger
facility of approximately 21,900 square feet of office and warehouse space. In
the year ended March 31, 1998, the Company shipped $70 million of Computer
Products, turning inventory at rate of approximately 44 times.
The Company has negotiated RMA terms with its vendors permitting rapid
replacement of parts returned by customers. Rapid replacement of such parts
allows the Company to reduce inventory costs (by increasing the speed of
inventory turns) and assists the company to improve customer satisfaction.
ACSA SERVICES
The Company intends to create a new high volume, custom system and software
configuration solution attractive to major computer system sellers, installers
and end-users both domestically and internationally. The ACSA Solution is
intended to replace a manual process with an automated assembly line. The
Company is currently constructing and equipping its first ACSA Center. The
Company's first ACSA Center is expected to be completed and the Company is
expected to commence offering the ACSA Solution by August 1998.
The Company intends to market the ACSA Solution to the Company's base of
Computer Products customers and vendors and create strategic alliances with
joint venture partners and licensees in domestic and overseas markets. The
Company also intends to utilize management's extensive network of domestic and
foreign contacts to explore possible acquisition opportunities. The Company is
exploring joint ventures with potential partners identified in Asia, but is not
currently negotiating any acquisition opportunities. There can be no assurance
that the Company will successfully establish any joint ventures or identify any
acquisition opportunities or that if such opportunities are presented that they
will be on terms and conditions acceptable to the Company. In addition, recent
economic and political developments in Asia may lead the Company to defer
establishment of joint ventures or partnerships with such potential partners.
See "Cautionary Statements and Risk Factors-Asian Market Instability."
THE ACSA OPPORTUNITY
The Company believes that the ACSA Solution and the automated methodology
it represents will enable it to successfully expand on its
4
existing systems and Computer Products sales and achieve higher margin sales of
the ACSA services as an increasing percentage of total revenues. Currently, most
SIs and VARs are unable to offer, and most corporate and institutional buyers
with large numbers of networked servers, PCs or workstations generally are
unable to procure, systems with non-uniform preconfigured software. For
instance, a hypothetical purchaser of 1,000 workstations cannot presently
specify diverse software configurations for each workstation without incurring
the potentially prohibitive cost of labor-intensive custom software installation
and configuration. The Company estimates that a typical manual assembly and
software configuration process for custom systems requires three to five hours
per workstation, excluding time required for re-builds due to inexperienced
labor or accidental typographical errors. Consequently, these enterprises either
specify uniform software configurations for each workstation, thereby depriving
some end users of valuable software applications while unnecessarily purchasing
licenses for others, or bear the high cost of manual software configuration for
each non-standard setup. As a result, many computers are installed with less
than optimal software configuration and any necessary custom software
configuration is provided by high cost consultants or management information
systems staff. The Company believes that the ACSA Solution will enable the
Company to successfully offer the first single-sourced, high volume, fully
automated computer assembly and custom software configuration service that
uniquely configures each workstation.
In marketing system assembly and integration services to VARs, OEMs, SIs
and ISVs, the Company expects that the planned ACSA Solution will enable the
Company to enjoy a meaningful advantage over traditional system configurators
who currently offer automated software configuration for only a limited subset
of business software applications and who are presently unable to offer custom
software configuration services. See "Cautionary Statements and Risk
Factors-Lengthy Sales and Implementation Cycles for ACSA" and "-Competition. "
The Company believes that its relationships with customers and vendors in
the Computer Products channel provide it with a platform to market the ACSA
Solution to OEMs, ISVs, VARs and SIs. Historically the systems integration
market has been heavily dependent on these vendors for its computer and software
procurement needs. The Company expects such dependence to increase as corporate
and government information technology departments are under increasing pressure
to outsource their network and personal computer configuration operations to
shorten customer delivery time, reduce labor cost, better manage the
uncertainties of component pricing and improve the quality control process.
THE ACSA SOLUTION
The Company is assembling technologies to automate the process of custom
configuration and integration in ACSA Centers of entire system solutions for its
customers. The technology to be employed by each ACSA Center is based upon
successful systems in use in flexible manufacturing environments. The ACSA
Center automation process will move components to unskilled workers to be
assembled and loaded using the Integrator's Workbench Product Series ("IWPS")
software created by Computer-Aided Software Integration, Inc. ("CASI") and
licensed by the Company. See "Cautionary Statements and Risk Factors-Dependence
on CASI for Developments and Enhancement of Configuration Software"
5
"-Conflicts of Interests." The IWPS "Configurator" component automates the
loading and personalized setup of workstations, servers and network devices,
saving labor costs and enabling accurate and consistent installations. The
Company believes, based on case studies published by CASI, that units coming off
the automated assembly line can be uniquely configured at the rate of up to 18
units per hour. The ACSA Centers are expected to enable the Company to:
- Meet customer demands for custom systems utilizing the latest
technologies where the assembly is outsourced but the customer closely
controls the design and software configuration.
- Shorten the time required to assemble complex, custom solutions.
- Eliminate up to 80% of the costs of manual labor normally associated
with custom software loading and configuration.
- Obtain ISO 9000 certification for systems assembly processes.
- Construct or have joint venture partners construct permanent or
temporary ACSA Centers for customers.
Even assuming that manual laborers are able to produce consistent,
error-free configurations, the ACSA Center is expected by the Company to be able
to provide significant increases in productivity compared to a manual process.
This technology is intended to enable the Company's customers to outsource their
procurement, warehousing, assembly, staging, and shipping processes. By
implementing manufacturing processes that automate the assembly of custom
systems, the Company intends to position itself as a low cost, high value
provider of outsourcing services to the systems distribution and end user
markets. The Company has commenced construction of six assembly lines at its
first ACSA Center located in Industry, California, which can support up to eight
assembly lines. Construction of its first ACSA Center is expected to be
completed in August 1998.
Each ACSA Center assembly line is modularly designed to enable the
Company and its customers to realize higher productivity and profits from
varying job lot size and location. Highest optimization is reached in
configurations of eight assembly lines, however these may be combined to
create larger facilities, or scaled back to create smaller ones with
corresponding increases or decreases in labor and productivity. ACSA Centers
can be located in a central facility, or be constructed at a customer's
location in a few weeks.
COMPETITION
The market for the Company's products and services are extremely
competitive and is characterized by rapid and constantly changing market
conditions, price fluctuations and technological change. Pricing is very
aggressive and the Company expects pricing pressures to continue. The Company
competes with a large number and wide variety of resellers of Computer Products,
including traditional personal computer retailers, computer superstores,
consumer electronics and office supply superstores, mass merchandisers, national
direct marketers (including VARs and specialty retailers, distributors,
franchisers, manufacturers and national computer
6
retailers which have commenced their own direct marketing operations to
end-users). Many of these companies compete principally on the basis of price
and may have lower costs than the Company. Many of the Company's competitors are
larger, have substantially greater resources and offer a broader range of
services than does the Company. The Company competes with, among others,
CompuCom Systems, Inc., En Point Technologies, Inc. and Vanstar Corp. in the
Computer Products distribution market.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most if not all of these factors, there can be no assurance that it
will continue to do so in the future. The industry has come to be characterized
by aggressive price cutting, and the Company expects that pricing pressures will
continue to increase in the foreseeable future. In addition, the Computer
Products industry is characterized by rapid changes in technology and associated
inventory and product obsolescence, rapid changes in consumer preferences, short
product life cycles and evolving industry standards. The Company will need to
continually provide competitive prices, superior product selection and delivery
response time in order to remain competitive. If the Company were to fail to
compete favorably with respect to any of these factors, the Company's business
and operating results would be adversely affected.
CASI and/or Datatec may directly enter into the Company's integration and
configuration markets using the software the Company has licensed from CASI.
While no operating division or subsidiary of Datatec is currently competing in
the Company's markets, there can be no assurance that Datatec will not decide to
directly compete with the Company in the future. Further, the terms of CASI's
license allow CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. See
"Cautionary Statements and Risk Factors-Conflicts of Interest."
The primary competition for the ACSA Centers will most likely be large
computer manufactures such as IBM Corp. and Compaq Computer, Inc. which provide
custom configuration and automated software configuration for standardized
systems, large distributors such as Ingram Micro Inc., Vanstar Corp., Tech Data
Computer and CompuCom Systems, Inc. in the systems integration and network
services market, network software and equipment providers such as Cisco Systems
Inc. that sell networking hardware and offer automated software configuration to
ensure compatibility between networks and hardware, and the internal departments
within the target markets currently performing hardware and/or software
configuration, and consulting and integration companies which offer manual
software configuration services. There are also retail chains such as Comp USA
and MicroAge that offer configuration and distribution services. These
competitors currently offer configuration services primarily for standardized
solutions, based upon generic configurations for limited numbers of products.
While some of these competitors offer the high level of customization which will
be available from an ACSA Center, they do so at high hourly rates. Although no
assurance can be given, the Company believes that leveraging its manufacturing
process and licensed proprietary software will enable it to offer increased
variety and customization with significant improvements in response times at
prices below
7
these competitors standardized solutions. There can be no assurance that the
Company will be able to compete successfully against existing competitors or
future entrants into the market.
EMPLOYEES
As of March 31, 1998, the Company had 24 full time employees. At that time,
the Company employed nine sales, two technical support, seven administrative and
finance, three customer service and three warehousing and delivery related
personnel. The Company does not have any unionized employees and believes its
relationship with its employees is satisfactory.
The Company's expansion may significantly strain the Company's management,
financial and other resources. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company's operating results.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurances that the
Company will be successful in retaining or recruiting key personnel.
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located in Industry, California.
Until March 23, 1998 the Company was headquartered in a leased facility of
approximately 6,200 square feet of office and warehousing space, which lease
expired on April 30, 1998.
The Company leases approximately 21,900 square feet of office and
warehouse space, located in Industry. The Company began to move its
operations into its new premises on February 1, 1998 and completed the move
on March 23, 1998. The Company believes the increased space will more
adequately meet the Company's current needs. The Company believes that if
needed, additional office space will be available on acceptable terms in the
future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is periodically subject to legal actions which arise in the
ordinary course of its business. The Company does not believe that any pending
action is material to its results of operation or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Common Stock
8
The Common Stock commenced trading April 8, 1998 on The Nasdaq SmallCap
Market (Nasdaq) under the symbol "CDSC" and the Boston Stock Exchange under the
symbol "CDS." Prior to that time, there was no public market for the Company's
Common Stock. The following table sets forth, for the period indicated, the high
and low closing prices per share of the Common Stock as reported by Nasdaq.
PRICE RANGE
HIGH LOW
Year Ended March 31, 1998 $7.00 $6.0625
Second Quarter (from April 8, 1998 through
June 26, 1998)
DIVIDENDS
The Company has not paid any cash dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance its
development and expansion and therefore does not anticipate the payment of any
cash dividends in the foreseeable future. Payment of future dividends, if any,
will depend upon future earnings and capital requirements of the Company and
other factors which the Board of Directors considers appropriate.
USE OF PROCEEDS
The Company's Registration Statement on Form S-1 (File No. 333-43151)
relating to the offer and sale (the "Offering") of an aggregate of 2,350,000
shares (the "Firm Shares") of Common Stock, without par value (the "Common
Stock"), of the Company was declared effective by the Securities and Exchange
Commission (the "Commission") on April 7, 1998. The managing underwriter for
the Offering was Joseph Stevens & Company, Inc. (the "Managing Underwriter").
The Offering commenced on April 8, 1998 and the sale of 2,350,000 shares
closed on April 14, 1998, with the sale of an additional 352,500 shares (the
"Option Shares" and, together with the Firm Shares, the "Shares") closing on
April 23, 1998 (which were sold by the Company upon the exercise of the
over-allotment option granted to the underwriters). All the Shares were sold
in the Offering at an aggregate price of $5.00 per share, for aggregate
proceeds of $13,512,500. After deducting underwriting discounts and
commissions of $0.4625 per share, and other issuance costs, the Company
received net proceeds of approximately $11,100,000. On April 14, 1998, the
Company also received $0.001 per warrant, for an aggregate of $23.50, in
consideration of unregistered 5-year warrants to purchase 235,000 shares of
Common Stock at an initial exercise price of 165% of the Offering price,
exercisable one year after the effective date of the Registration Statement,
granted to the Managing Underwriter in connection with the Offering. See
"Recent Sales of Unregistered Securities."
The Registration Statement became effective on April 7, 1998, after the
March 31, 1998 ending date for the period covered by this Report. The amount of
expenses incurred by the Company in connection with the Offering, and the
application by the Company of the net proceeds received by the Company in the
Offering, will be disclosed as required by Rule 463 of the Securities Act in the
Company's periodic report for the quarter ending June 30, 1998 and, to the
extent necessary, in subsequent periodic reports filed by the Company pursuant
to Section 13(a) or 15(d) of the Exchange Act.
9
RECENT SALES OF UNREGISTERED SECURITIES.
On April 14, 1998, in connection with the Offering, the Company issued
five (5) year warrants (the "Representative's Warrants") to purchase 235,000
shares of Common Stock to Joseph Stevens & Company, Inc., the managing
underwriter of the initial public offering (the "Offering") of the Common Stock
of the Company, for nominal consideration of $23.50, or $.0001 per warrant. The
Representative's Warrants are exercisable at any time during a period of four
(4) years commencing twelve months after the effective date of the Registration
Statement at a price equal to 165% of the Offering price per share and are
restricted from sale, transfer, assignment, or hypothecation for a period of
twelve months from the effective date of the Registration Statement, except to
officers of the underwriters. The issuance and sale of these securities was
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the
Act, as a transaction not involving any public offering.
On November 26, 1997, the Company issued warrants to purchase 35,000
shares of Common Stock to Joseph Stevens & Company, Inc. (the "Placement
Agent Warrants"). The Placement Agent's Warrants were sold for a nominal
purchase price of $3.50, or $0.001 per warrant, and were exercisable at $3.00
per share during the period commencing November 26, 1998 and ending November
26, 2001. The Placement Agent's Warrants were cancelled on March 6, 1998. In
December 1997, the Company issued warrants to purchase 45,000 shares of
common stock of the Company to Troop Meisinger Steuber & Pasich, LLP (TMSP).
The warrants issued to TMSP were issued for nominal consideration of $45.00
and for legal services provided in connection with the Bridge Financing (as
defined below). These warrants are exercisable beginning December 23, 1997
and ending December 31, 2002 at an exercise price of $3.00 per share. Each of
Joseph Stevens & Company, Inc. and TMSP, represented that (i) it acquired the
warrants for its own account with the present intention of holding such
warrants for investment purposes only and not with a view to, or for sale in
connection with, any distribution of such warrants (other than a distribution
in compliance with all applicable federal and state securities laws); (ii) it
is an experienced and sophisticated investor and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the relative merits and the risks of an investment in the warrants and of
protecting its own interest in connection with the transaction at issue;
(iii) it is willing to bear and is capable of bearing the economic risk of an
investment in the warrants; and (iv) the Company made available, prior to the
date of its warrant agreement, to it the opportunity to ask questions of the
Company and its officers, and to receive from the Company and its officers
information concerning the terms and conditions of the warrant and the
warrant agreement and to obtain any additional information with respect to
the Company, its business, operations and prospects, as reasonably requested
by it; and (v) it is an "accredited
10
investor" as that term is defined under Rule 501(a)(8) of Regulation D
promulgated by the Commission under the Securities Act. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D and Rule 152 promulgated by the
Commission under the Securities Act) as a transaction not involving any public
offering.
On December 23, 1997, prior to the filing of the Registration Statement
with respect to the Offering, the Company completed a financing (the "Bridge
Financing") consisting of the sale of 20 units (the "Units"), each unit
comprised of: (i) an unsecured promising note (each a "Bridge Note") of the
Company in the principal amount of $20,000, bearing interest at a rate of 10%
per annum payable upon the earlier of the closing of the Offering or 18 months
form the date of issuance; (ii) 15,000 shares of Common Stock of the Company,
and (iii) 5,000 warrants of the Company, each warrant exercisable to purchase
one share of Common Stock 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 are issued (the "Bridge Warrants"). Each Unit was sold for
$50,000 generating gross proceeds to the Company of $1,000,000 and net proceeds
of $678,184. 60,000 of the Bridge Warrants are exercisable during the period
beginning November 26, 1998 and ending November 26, 2001. 37,500 of the Bridge
Warrants are exercisable during the period beginning December 16, 1998 and
ending December 16, 2001. 2,500 of the Bridge Warrants are exercisable during
the period beginning December 23, 1998 and ending December 23, 2001. Prior to
filing the Registration Statement with respect to the Offering, the purchasers
in the Bridge Financing had entered into binding agreements for the purchase of
the Units. 12 of the Units were sold on November 26, 1997, 7.5 of the Units were
sold December 16, 1997, and 0.5 of the Units were sold on December 23, 1997. The
obligations of the purchasers were not subject to any conditions within the
control of the purchasers or any right of renegotiation. All purchasers of Units
in the Bridge Financing were brokerage customers of Joseph Stevens & Company,
Inc., the Underwriter, who acted as placement agent and there was no public
solicitation or advertising in connection with the offering. The transaction was
exempt from the registration requirements of the Securities Act of 1933 (the
"Act") under Section 4(2) of the Act (in accordance with Rule 506 of Regulation
D and Rule 152 promulgated by the Commission under the Act) as a transaction not
involving any public offering. The proceeds were used by the Company for working
capital, to repay indebtedness and to commence construction of the Company's
first ACSA Center.
On April 12, 1996, the Company sold 2,192,118 shares of its Common Stock to
Nancy Hundt for $200,000. On November 12, 1997, Ms. Hundt signed an investment
representation which states that she purchased the shares for her own account
and not with a view to resale or distribution. On April 12, 1996, Ms. Hundt was
appointed, and she accepted as a director of the Company. There were no
underwriters involved in the sale of these securities and there was no public
solicitation or advertisement by the Company in connection with the sale of
these securities. This transaction was exempt form the registration requirements
of the Act under section 4(2) of the Act and section 25102(f) of the California
Securities Law. The proceeds were used by the Company as working capital to
cover general start-up costs.
On April 12, 1996, the Company sold 1,096,059 shares of its Common Stock
11
each to James Ung and Mei Yang, who are married, each of whom paid $25,000 in
consideration therefor. On November 12, 1997, each of Mr. Ung and Ms. Yang
signed an investment representation which states that each of Mr. Ung and Ms.
Yang purchased the shares for their own accounts and not with a view to
resale or distribution. On April 12, 1996, Mr. Ung and Ms. Yang were
appointed, and they each accepted their appointment as a director of the
Company. There were no underwriters involved in the sale of these securities
and there was no public solicitation or advertisement by the Company in
connection with the sale of these securities. This transaction was exempt
from the registration requirements of the Act under section 4(2) of the Act
and section 25102(f) of the California Securities Law. The proceeds were used
by the Company as working capital to cover general start-up costs.
On April 7, 1997, the Company sold 65,764 shares of its Common Stock and an
option to purchase an additional 372,659 shares, which option expired October 7,
1997, to Vince Yiang, the brother of Mei Yang, who paid $300,000 in
consideration therefor. On November 12, 1997, Mr. Yiang signed an investment
representation in which Mr. Yiang represents that he purchased the shares for
his own account and not with a view to resale or distribution, and that he has
an individual net worth greater than $1.0 million. There were no underwriters
involved in the sale of these securities and there was no public solicitation or
advertisement by the Company in connection with the sale of these securities.
The transaction was exempt from the registration requirements of the Act under
section 4(2) of the Act. The proceeds were used by the Company as general
working capital.
The closing price as reported on June 26, 1998 on Nasdaq was $6.625 per
share. As of June 26, 1998, the Company had approximately 30 holders of
record of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating data of the
Company for the periods indicated. The following selected statement of
operations data for each of the years ended March 31, 1998, and 1997, and the
balance sheet data as of March 31, 1998 and 1997 are derived from the financial
statements and the notes thereto included elsewhere herein audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report also
included elsewhere herein. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and notes
thereto included elsewhere in this report.
PERIOD FROM
APRIL 2, 1996
YEAR ENDED (INCEPTION) TO
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
STATEMENTS OF OPERATIONS DATA:
Net sales:
Nonaffiliates $ 71,104,174 $ 25,407,403
Affiliate(1) 1,391,300 532,800
-------------- --------------
12
72,495,474 25,940,203
-------------- --------------
Cost of products:
Nonaffiliates 68,154,089 24,615,411
Affiliate(1) 1,314,408 523,590
-------------- --------------
69,468,497 25,139,001
-------------- --------------
Gross profit:
Nonaffiliates 2,950,085 791,992
Affiliate(1) 76,892 9,210
-------------- --------------
3,026,977 801,202
Selling, general and administrative expenses 1,542,294 751,133
-------------- --------------
Income from operations 1,484,683 50,069
Interest expense 239,791 9,334
Other (income) expense (57,998) 5,871
-------------- --------------
Income before provision for income taxes 1,302,890 34,864
Provision for income taxes 579,738 9,500
-------------- --------------
Net income $ 723,152 $ 25,364
-------------- --------------
-------------- --------------
Basic and diluted earnings per share $ 0.16 $ 0.01
-------------- --------------
-------------- --------------
AS OF MARCH 31,
---------------
1998 1997
------------- -------------
BALANCE SHEET DATA:
Working capital $ 97,504 $ 154,160
Total assets 12,185,185 1,855,241
Total liabilities 10,394,080 1,579,877
Retained earnings 748,516 25,364
Shareholders' equity 1,791,105 275,364
(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."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE OPERATING
RESULTS, FINANCIAL CONDITION AND LIQUIDITY/CASH FLOWS OF THE COMPANY FOR THE
YEARS ENDED MARCH 31, 1998 AND 1997. EXCEPT FOR THE HISTORICAL INFORMATION
CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED UPON JUDGMENTS
CONCERNING VARIOUS FACTORS THAT ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER FACTORS, THE FACTORS SET FORTH UNDER THE
CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS" BELOW.
OVERVIEW
13
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 peripherals. In December of 1996, the
Company entered the system configuration business. This process required certain
organizational and operational changes to effectively position the Company as a
provider of configuration and integration solutions to various levels within the
distribution, integration and end-user markets.
In order to enhance its competitive advantage in the systems integration
market, the Company has entered into a perpetual non-exclusive licensing
agreement with Computer Aided Software Integration, Inc. ("CASI") to license
CASI's Configurator software for use in the development and commercialization of
the Company's ACSA Solution. The Company paid CASI a one-time license fee of
$1.1 million. The license fee was paid (i) by delivering to CASI a non-interest
bearing promissory note in the principal amount of $950,000 (the "CASI Note"),
and (ii) a cash payment of $150,000 funded by the Datatec Note. The payments
under the CASI Note were capitalized and will be amortized starting when the
configurator software is placed in service over the useful life of the software,
which, for accounting purposes, is currently estimated to be between three and
five years.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most if not all of these factors, there can be no assurance that it
will continue to do so in the future. 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 form major manufacturers and reduced demand in the overall personal
computer industry. These factors can in part be traced to the economic slow-down
in Asia and excess worldwide build up of personal computers in the first
calendar quarter of 1998. The Company expects that these factors will continue
to sustain pricing pressures at least until fall of 1998 and possibly longer. As
a result of these pricing pressures, the Company's margins have been pressured
and the Company has declined to compete for certain lower margin business.
However, the Company will need to continually provide competitive prices,
superior product selection and delivery response time in order to remain
competitive. If the Company were to fail to compete favorably with respect to
any of these factors, the Company's business and operating results may be
adversely affected.
Also, the Company's business is subject to certain quarterly influences.
Net Sales and operating profits are generally higher in the third fiscal
quarter due to the purchasing patterns of personal computer integrators and
resellers and are generally lower in the first and second fiscal quarters due
primarily to lower industry shipments.
This discussion summarizes the significant factors affecting the
operating results, financial condition and liquidity/cash flows of the
Company for the years ended March 31, 1998 and 1997. The Company has a
limited history of operations.
RESULTS OF OPERATIONS
14
YEAR ENDED MARCH 31, 1998 AND 1997.
NET SALES. Net sales for the years ended March 31, 1998 were $72,495,474
(net of returns of $457,180) compared to $25,940,203 (net of returns of
$62,751) for the Company's first year of operations from April 2, 1996
(inception) through March 31, 1997. This increase of $46,555,271 in net sales
is attributable to growth of the Company's sales force from 4 to 9
individuals at the end of 1997 and 1998, respectively, and an increase in the
Company's available combined purchasing credit (including its vendor credit
and the Finova Line), from $1.3 million to $16.5 million (as a 90 day average
available credit for the respective periods) which allowed the Company to
increase its ability to purchase product to fulfill more sales orders. During
the same period, the Company also began marketing its integration and
configuration services, which accounted for $1.6 million of net sales in
fiscal 1998.
As a result of industry oversupply, resulting pricing pressures and the
Company's determination to attempt to defend margins rather than pursue sales
growth through low margin sales, the Company expects that its historical
annual growth rate for net sales will not be sustained in fiscal 1999. The
Company anticipates net sales for the first quarter will be in the range of
$17.0 million to $17.5 million, as compared to $10.8 million for the first
quarter of fiscal 1998.
COST OF PRODUCTS. Cost of products increased $44,329,496 from $25,139,001 to
$69,468,497 for the year ended March 31, 1997 and 1998, respectively. This
increase is mainly attributable to the increase in net sales. Cost of products
represented 96.9% and 95.8% of net sales for the years ended March 31, 1997 and
1998, respectively. The decrease in cost of products as a percentage of net
sales is primarily due to economies of scale and management's focus on a sales
mix which favors products with higher profit margins and computer system
integration sales.
GROSS PROFIT. Gross profit for the year ended March 31, 1998 was $3,026,977
compared to $801,202 in the year ended March 31, 1997. Gross profit as a
percentage of net sales were 4.2% for the year ended March 31, 1998 compared
to 3.1% for the year ended March 31, 1997. This represents a 278% increase in
gross profit, and is mainly attributable to strong product demand, the
ability of the Company to purchase inventory at favorable prices,
management's focus on a sales mix which favors products with higher profit
margins and computer system integration sales, a more efficient shipping
process implemented in the first quarter, tighter control and management of
labor costs and implementation of operational objectives requiring management
to focus on increasing efficiency. However, the Company believes that gross
profit margins for the first quarter of fiscal 1999 will be depressed as a
result of current industry pricing pressures and oversupply.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for year ended March 31, 1998 were $1,542,294 compared
to $751,133 for the year ended March 31, 1997, the Company's first year of
operations.
The major components of selling, general and administrative expenses for
the periods include the following:
15
March 31, March 31,
1998 1997
---------- ----------
Payroll $ 757,748 $ 323,649
Commissions 229,695 77,411
Write-off of related party receivable 100,000 -
Bad debt 91,310 50,329
Other (under 5%) 363,541 299,744
---------- ----------
Total $1,542,294 $ 751,133
---------- ----------
---------- ----------
The increase of $791,161 in selling, general and administrative expenses is
attributable to the Receivable Write-Off of $100,000 incurred in the first
quarter and to increased staff and overhead to support the higher levels of
sales and marketing activity. The Company also increased the salaries of
executive officers during this period to levels the Company believes to be
commensurate with current market levels. In addition, the Company hired
additional personnel in finance and administration to facilitate growth of the
Company's infrastructure and revenue expansion. Selling, general and
administrative expenses (excluding the Receivable Write-Off of $100,000) as a
percentage of net sales decreased by 31% from 2.9% for year ended March 31, 1997
to 2.0% for year ended March 31, 1998. This decrease is a result of economies of
scale achieved through significant increases in sales volume as well as
employment of various operational controls and organizational efficiencies. The
Company intends to continue strict monitoring of all its fixed and variable cost
structure to achieve optimum operational performance.
INTEREST EXPENSE
Interest expense for the year ended March 31, 1998 was $239,791 compared
to $9,334 for the year ended March 31, 1997. This increase was due to the
Bridge Financing raised in November and December of 1997 (including
amortization of debt discount and deferred financing costs related thereto).
The Bridge Financing was repaid in April 1998.
OTHER (INCOME) EXPENSE
Other income of $57,998 for the year ended March 31, 1998 is primarily
due to interest income earned on the investment of proceeds from the Bridge
Financing and excess cash generated from operations.
NET INCOME
Net income for the year ended March 31, 1998 was $723,152 compared to
$25,364 for the year ended March 31, 1997. The increase of $697,788 is mainly
attributable to the increase in net sales of $46,555,271 and economies of scale.
IMPACT OF YEAR 2000
The Company's present accounting software is not Year 2000 Compliant.
However, the Company has selected and begun the implementation of a new
accounting system that will be Year 2000 Compliant. The Company does not
believe that the costs associated with the new accounting system will be
material.
The Company has not yet performed an assessment of computer systems
belonging to customers, vendors, and other outside parties with whom the
Company does business. Such an assessment of significant relationships will
be performed during fiscal 1999. It is not anticipated that such an
assessment will reveal significant potential problems or will require the
Company to incur substantial costs.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company has historically met its working capital
and capital expenditure requirements through a combination of cash flows from
operations, bank financing, vendor credit lines, the sale of equity and the
Bridge Financing.
16
On April 8, 1998, the Company's initial public offering (the "Initial
Public Offering") of 2,702,500 shares of Common Stock at $5 per share
including overallotment of 352,500 shares provided net proceeds (after
deducting issuance costs) of approximately $11,100,000.
On November 26, 1997, December 16, 1997 and December 23, 1997, the
Company sold 12.0, 7.5, and 0.5 units, respectively. Each unit was comprised
of: (i) an unsecured promissory Bridge Note of the Company in the principal
amount of $20,000, bearing interest at a rate of 10% per annum payable upon
the earlier of the closing of the Offering or 18 months from the date of
issuance; (ii) 15,000 shares of Common Stock of the Company, and (iii) 5,000
Bridge Warrants of the Company, each exercisable to purchase one share of
Common Stock at an initial exercise price of $3.00 per share, subject to
adjustment, during the 36-month period commencing one year from the date the
Bridge Warrants were issued. Each unit was sold for $50,000 generating gross
proceeds to the Company of $1,000,000 and net proceeds (after deducting
issuance costs) of $678,184. The Company repaid $250,000 of the principal
amount of the CASI Note and $50,000 of the Datatec Note out of the proceeds
of the Bridge Financing. The Company paid the remainder of its indebtedness
under the CASI Note and the Datatec Note from proceeds of the initial public
offering in April 1998.
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation. Purchases are collateralized by inventory and
accounts receivable. Unless the Company fails to pay Finova within the agreed
upon period, all finance costs associated with this line are charged by Finova
to the Company's vendors. This arrangement is personally guaranteed by two
officers of the Company. At March 31, 1998, the Company's Finova line was $7.5
million and the Company had a payable to Finova Capital Corporation of
approximately $5,853,429 included in accounts payable.
Net cash provided by operating activities during the year ended March 31,
1998 was primarily attributable to higher net income, an increase in accounts
payable, accrued expenses and income taxes payable. Net cash provided by
financing activities in the year ended March 31, 1998 was due primarily to
proceeds of sale of Common Stock, offset by payments on notes and deferred
offering costs.
The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next year. See "Business." The Company is
dependent on the availability of accounts receivable financing on reasonable
terms and at levels that are high relative to its equity base in order to
maintain and increase its sales. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its stockholders. See "Cautionary Statements and
Risk Factors-Possible Additional Financing Required."
INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109 entitled
"Accounting for Income Taxes." The Company provides for federal and
17
state income taxes based on statutory rates. The provision for income taxes
differ from the amounts computed by applying the statutory federal income tax
rate to income before taxes primarily due to the effect of state income taxes
net of the related federal tax benefit.
Deferred income taxes are provided for income/expense items reported in
different periods for income tax and financial statement purposes. Deferred
income taxes are primarily attributable to temporary differences resulting from
depreciation, state income taxes and various accrued expenses. The Company has
no "tax loss carry forwards."
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations. There can be no assurance, however, that the
Company's business will not be affected by inflation in the future.
NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and
SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No.
128 revises and simplifies the computation for earnings per share and
requires certain additional disclosures. SFAS No. 129 requires additional
disclosures regarding the Company's capital structure. SFAS No. 128 and SFAS
No. 129 were adopted for the year ending March 31, 1998 and did not have a
material impact on the Company's financial statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments on Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income. SFAS No. 131 requires disclosure for each
segment that is similar to those required under current standards and
additional quarterly disclosure requirements. Both standards will be adopted
on April 1, 1998.
CAUTIONARY STATEMENTS AND RISK FACTORS
LIMITED OPERATING HISTORY. The Company commenced operations in April 1996;
therefore, there is only limited financial information in existence upon which
an investment decision may be based. Although the Company has achieved
profitability, the ability of the Company to sustain profitability will depend
in part upon the successful and timely introduction and operation of its ACSA
Centers, continuation of the Company's close relationships with its vendors and
customers, successful marketing of existing products and the Company's ability
to finance inventories and growth and to collect trade receivables in a timely
manner. The likelihood of the success of the Company in implementing its ACSA
Centers must be considered in light of the difficulties and risks inherent in a
new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations for the ACSA Center business. There can be no assurance that the
Company will be able to generate and sustain profitability in the future.
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon the
services of Max Toghraie and James Ung, its Chief Executive Officer and
President, respectively. Both James Ung and Max Toghraie are employed pursuant
to five year employment agreements. The success of the Company to date has been
in part dependent upon their efforts and abilities, and the loss of the services
of either of them for any reason could have a material adverse effect upon the
Company. In addition, the Company's work force includes executives and employees
with significant knowledge and experience in the Computer Products distribution
industry. The Company's future success will be strongly influenced by its
ability to continue to recruit, train and retain a skilled work force. While the
Company believes that it would be able to locate suitable replacements for its
executives or other personnel if their services were lost to the Company, there
can be no assurance that the Company would be able to do so on terms acceptable
to the Company. In particular, the location and hiring of suitable replacements
for Mr. Toghraie and Mr. Ung could be very difficult. The Company maintains a
key-man life insurance policy on the lives of Messrs. Toghraie and Ung with
benefits of $1,000,000 each, payable to the Company in the event of their death.
The benefits received under these policies would not be sufficient to compensate
the Company for the loss of the services of Mr. Toghraie or Mr. Ung should
suitable replacements not be employed.
18
DEPENDENCE UPON RELATIONSHIPS WITH VENDORS. A key element of the Company's
past success and future business strategy involves the establishment of
relationships with certain major distributors and Computer Product
manufacturers. Purchases from these vendors account for the majority of the
Company's aggregate purchases for fiscal 1997 and for the year ended March 31,
1998. For the year ended March 31, 1998, DSS Technology Distribution Partners,
Inc. ("DSS"), a master distributor of hard drives to the Company, accounted for
64% of the Company's purchases. Certain of these vendors provide the Company
with substantial incentives in the form of rebates passed through from the
manufacturer, discounts, credits and cooperative advertising. There can be no
assurance that the Company will continue to receive such incentives in the
future. Other than ordinary purchase orders, the Company does not have written
supply, distribution or franchise agreements with any of its Computer Product
vendors. Although the Company believes that it has established close working
relationships with its principal vendors, the Company's success will depend, in
large part, on maintaining these relationships and developing new vendor
relationships for its existing and future product and service lines. Because the
Company does not have written contracts with any of its vendors, there can be no
assurance that the Company will be able to maintain these relationships.
Periodically, Computer Product suppliers consolidate their distribution networks
and otherwise restructure or limit their distribution channels. There can be no
assurance that the Company will continue to be selected to resell products by
its principal vendors. Termination or interruption of such relationships or
modification of the terms the Company receives from these vendors would
materially adversely affect the Company's financial position, operating results,
and cash flows.
Certain of the products offered by the Company are subject to manufacturer
allocations, which limit the number of units of such products available to the
Company's vendors, which in turn may limit the number of units available to the
Company. In order to offer the products of most manufacturers, the Company is
required to obtain authorizations from the manufacturers to act as a reseller of
such products, which authorizations may be terminated at the discretion of the
manufacturers at any time. There can be no assurance that the Company will be
able to obtain or maintain authorizations to offer products, directly or
indirectly, from new or existing manufacturers. Termination of the Company's
rights to act as a reseller of the products of one or more significant
manufacturers would have a material adverse effect on the Company's financial
position, operating results, and cash flows.
POSSIBLE ADDITIONAL FINANCING REQUIRED. The Company's business is capital
intensive in that the Company is required to finance the purchase of Computer
Products in order to fill sales orders. In order to obtain necessary capital,
the Company relies primarily on unsecured vendor credit lines and a line of
credit provided by Finova Capital Corporation ("Finova") that is collateralized
by accounts receivable and inventory. As a result, the amount of credit
available to the Company may be adversely affected by factors such as delays in
collection or deterioration in the quality of the Company's accounts receivable,
economic trends in the computer industry, interest rate fluctuations and the
lending or credit policies of the Company's lenders and vendors. Many of these
factors are beyond the Company's control. Further, the Company must obtain
Finova's written permission prior to arranging other financing, and Finova may
require certain acknowledgments and undertakings from
19
other lenders. There can be no assurance that Finova will permit additional
financing or that other lenders will provide the acknowledgments and
undertakings Finova may require. Any decrease or material limitation on the
amount of capital available to the Company under its financing arrangements or
vendor credit lines will limit the ability of the Company to fill existing sales
orders or expand its sales levels and, therefore, would have a material adverse
effect on the Company's financial position, operating results, and cash flows.
In addition, while the Company does not have significant exposure to interest
rate fluctuations under its current financing, any significant increases in
interest rates will increase the cost of possible future financing to the
Company which would have a material adverse effect on the Company's financial
position, operating results, and cash flows. The Company is dependent on the
availability of accounts receivable financing on reasonable terms and at levels
that are high relative to its equity base in order to maintain and increase its
sales. There can be no assurance that such financing will be available to the
Company in the future. The inability of the Company to have continuous access to
such financing at reasonable costs would severely and adversely impact the
Company's financial position, operating results, and cash flows.
RISK OF PRODUCT RETURNS. As is typical of the computer industry, the
Company incurs expenses as a result of the return of products by customers. Such
returns may result from defective goods, inadequate performance relative to
customer expectations, distributor shipping errors and other causes which are
outside the Company's control. Although the Company's distributors and
manufacturers have specific return policies that enable the Company to return
certain types of goods for credit, to the extent that the Company's customers
return products which are not accepted for return by the distributor or
manufacturer of such products, the Company will be forced to bear the cost of
such returns. Any significant increase in the rate of product returns coupled
with the unwillingness by the Company's distributors or manufacturers to accept
goods for return could have a material adverse effect on the Company's financial
position, operating results, and cash flows.
PRODUCT MIX; RISK OF DECLINING PRODUCT MARGINS. The Company's gross profit
margins have increased from 3.1% to 4.2% in the years ending March 31, 1997 and
1998, respectively, due to a number of factors, including strong product demand,
the ability of the Company to obtain favorable pricing, and a sales mix of
products with higher profit margins. However, given the significant levels of
competition that characterize the Computer Products market and recent pricing
pressures and oversupply conditions, there can be no assurance that the Company
will maintain the current gross profit margins or be able to achieve further
increases in profit margins. From time to time, product margins will also be
reduced as a result of marketing strategies implemented by the Company. For
instance, introductory pricing implemented by the Company to develop market
awareness of product lines, particularly disk drives, of vendors new to the
Company will have an adverse effect upon gross profit margins and, potentially,
earnings during the period promotional pricing is offered. Moreover, in order to
attract and retain many of its larger customers, the Company frequently must
agree to volume discounts and maximum allowable mark-ups that serve to limit the
profitability of sales to such customers. Accordingly, to the extent that the
Company's sales to such customers increase, the Company's gross profit margins
may be reduced, and therefore any future increases in net income will have to be
derived from continued sales growth or effective expansion into
20
higher margin business segments, neither of which can be assured. Furthermore,
low margins increase the sensitivity of the business to increases in costs of
financing, because financing costs to carry a receivable can be very high
compared to the low amount of gross profit on the sale underlying the receivable
itself. Any failure by the Company to maintain or increase its profit margins
and sales levels could have a material adverse effect on the Company's results
of operations and prospects for future growth.
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION; IMPORTANCE OF ACSA TO
GROWTH. The Company's ability to successfully implement, market and introduce
the ACSA Solution services on a timely basis will be a significant factor in the
Company's ability to improve its operating margins and remain competitive. The
Company's ability to market the ACSA Solution successfully will depend on the
Company convincing potential customers of the benefits of the ACSA Solution. The
Company has only recently commenced marketing the ACSA Solution. The Company is
currently constructing its first ACSA Center located in Industry, California. No
ACSA Center is currently in operation and the Company currently has no sales
revenue attributable to the ACSA Solution or an ACSA Center. Although the
Company is engaged in negotiations and discussions with a number of potential
customers, there can be no assurance that any such discussions will lead to
significant sales of the ACSA Solution, or that the ACSA Solution will attain
market acceptance. Although the Company has devoted a substantial portion of the
proceeds of this Offering to implementation and marketing of ACSA Solution
services, there can be no assurance that the commitment and use of such funds
will result in successful implementation, marketing and sales of ACSA Solution
services. Any failure by the Company to anticipate or respond in a
cost-effective and timely manner to market trends or customer requirements, or
any significant delays in introduction of ACSA services, could have a material
adverse effect on the Company's business, operating results and financial
condition.
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR ACSA. The Company believes that
the purchase of the Company's ACSA Solution services will entail an
enterprise-wide decision by prospective customers and require the Company to
engage in a lengthy sales cycle, estimated at between three and twelve months,
as the Company will be required to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's ACSA
Solution services and products. Also, the purchase of ACSA Solution services
will often depend upon the successful coordination of marketing, system design
and installation efforts by the Company, end-user customers and others with
influence over the purchase decisions of the Company's customers such as
consultants, VARs and SIs. Purchase decisions will generally occur only after
significant internal analysis by each customer and will be subject to
competition with other capital spending priorities of certain customers. As a
result, the sales and customer implementation cycles will be subject to a number
of significant delays over which the Company has little or no control. Delay in
the sale or customer implementation of a limited number of transactions could
have a material adverse effect on the Company's business and results of
operations and could cause the Company's operating results to vary significantly
from quarter to quarter.
DEPENDENCE ON CASI FOR DEVELOPMENT AND ENHANCEMENT OF CONFIGURATION
SOFTWARE. Under the Company's non-exclusive license and reseller agreements
with Computer-Aided Software Integration, Inc. ("CASI"), CASI retains the
21
source code of the Configurator software required to operate the automated
software configuration functions of the Company's planned ACSA Solution and ACSA
Centers, and retains all rights to modify and enhance the Configurator-TM-
software. CASI has agreed to provide the Company with all enhancements and
upgrades to the Configurator software used internally or distributed by CASI to
its customers, and to develop additional enhancements requested by the Company
at the Company's sole expense. Any enhancements requested by the Company and
implemented by CASI at CASI's expense may be incorporated in the generally
distributed version of CASI's software. If CASI determines not to fund
development of an enhancement then CASI must prepare the enhancement at
pre-agreed rates and ownership of the requested enhancement will belong to the
Company. Failure by CASI to promptly and adequately perform its obligations
under its license agreement with the Company would have a material adverse
effect on the Company. Furthermore, there can be no assurance that CASI will
fully comply with its contractual obligations to the Company, that CASI will
dedicate sufficient software development capacity to satisfy the Company's
requirements, or that the Company's remedies in the event CASI does not perform
its obligations will be adequate. The Company has no capability to internally
develop any enhancements or upgrades. Failure or delay by CASI to fulfill the
Company's anticipated needs for enhancement and upgrading of the Configurator
software would adversely affect the Company's ability to market ACSA services
and to become and remain competitive in the software configuration market. In
the event that CASI fails to meet its obligations under the license, the Company
has, among other rights, the contractual right to the source code underlying the
software, but there can be no assurance that the Company will be able to obtain
the source code in a timely manner, if at all, because CASI is in possession of
the only copies of the source code. Even if the Company is able to obtain the
source code under such circumstances, internal maintenance and enhancement of
the source code could place a significant financial burden on the Company.
LIMITED MARKETING CAPABILITIES. The Company's operating results will depend
to a large extent on its ability to successfully market the ACSA Solution
services to personal computer manufacturers and multi-user system buyers. The
Company currently has limited marketing capability. The Company intends to use a
portion of the proceeds of the Offering to hire additional sales and marketing
personnel and outside consultants to market the ACSA Solution. There can be no
assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the ACSA Solution.
MANAGEMENT OF GROWTH. The Company has grown rapidly since inception in
April 1996, with net sales reaching $25,940,203 in the Company's first fiscal
year and reaching $72,495,474 for the year ended March 31, 1998, and employees
increasing from 3 at inception to 24 at March 31, 1998. Implementation of the
Company's business plan, including implementation of ACSA Solution services and
the general strains of the Company's growth will require that the Company
significantly expand its operations in all areas. This growth in the Company's
operations and activities will place a significant strain on the Company's
management, operational, financial and accounting resources. Successful
management of the Company's operations will require the Company to continue to
implement and improve its financial and management information systems. The
Company's ability to manage its future growth, if any, will also require it to
22
hire and train new employees, including management and technical personnel, and
motivate and manage its new employees and integrate them into its overall
operations and culture. The Company's failure to manage implementation of its
business plan would have a material adverse effect on the Company's business,
operating results and financial condition.
RISK OF POTENTIAL JOINT VENTURES OR ACQUISITIONS. In the future, the
Company may acquire complementary companies, products or technologies, although
no specific acquisitions currently are pending or under negotiation.
Acquisitions involve numerous risks, including adverse short-term effects on the
combined business' reported operating results, impairments of goodwill and other
intangible assets, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of intangible
assets and risks associated with unanticipated problems or legal liabilities. A
portion of the net proceeds of the initial public offering may be used to fund
such acquisitions at the broad discretion of the Board of Directors. The Board
of Directors may consummate such acquisitions, if any, without permitting
shareholders to review or vote on such transactions, unless required under
applicable law.
CONSTRUCTION OF FIRST ACSA CENTER. The Company intends to use approximately
$0.3 million of the net proceeds from the initial public offering to complete
construction of and to equip its first ACSA Center. It is expected that the
construction will require a substantial time commitment of certain members of
management. The first ACSA Center is expected to be completed by August 1998.
Any delay in completion of the first ACSA Center could result in delays in the
commencement of sales of assembly and custom software configuration services and
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to complete
the ACSA Center at the budgeted price. Additionally, there can be no assurance
that the ACSA Center will be available on time or that the Company will be
successful in timely hiring and training engineers and technicians necessary to
commence operations of the ACSA Center. Any such delay would delay the Company's
ability to commence offering the ACSA Solution and have a material adverse
effect upon the Company's business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS. The market for the
Company's ACSA technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's ACSA Solution services
using its licensed Configurator software gains initial market acceptance, the
Company's success will depend, among other things, upon its ability to enhance
the ACSA Solution services and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or offer new services successfully, that such new
products or services will gain market acceptance, or that the Company will be
able to respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a loss of market share
or revenues.
23
INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS OF DISTRIBUTION.
The personal computer industry is undergoing significant change. The industry
has become more accepting of large volume, cost-effective channels of
distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer resellers are consolidating operations and acquiring
or merging with other resellers to increase efficiency. This current industry
reconfiguration has resulted in increased pricing pressures. Decreasing prices
of Computer Products require the Company to sell a greater number of products to
achieve the same level of net sales and gross profit. The continuation of such
trend would make it more difficult for the Company to maintain or to increase
its net sales and net income. In addition, it is possible that the historically
high rate of growth of the personal computer industry may slow at some point in
the future. If the growth rate of the personal computer industry were to
decrease, the Company's financial position, operating results, and cash flows
could be materially adversely affected. Furthermore, new methods of distribution
and sales of Computer Products, such as on-line shopping services and catalogs
published on CD-ROM, may emerge in the future. Computer Products and software
manufacturers have sold, and may in the future intensify their efforts to sell,
their products directly to end users. From time to time, certain vendors have
instituted programs for the direct sale of large orders of Computer Products and
software to certain major corporate accounts. These types of programs may
continue to be developed and used by various vendors. While the Company attempts
to anticipate future distribution trends, any of these distribution methods or
competitive programs, if expanded, could have a material adverse effect on the
Company's financial position, operating results, and cash flows.
AVAILABILITY OF COMPONENTS. The computer component and computer assembly
businesses have from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend either to slow down shipments or
place their customers "on allocation," reducing the number of units sold to each
customer. While the Company believes that it has well-established relationships
with vendors and that it has not been adversely affected by recent shortages in
certain storage and other computer components, no assurance can be given that
future shortages will not adversely impact the Company.
COMPETITION. The Company faces intense competition, both in its selling
efforts and purchasing efforts, from the significant number of companies that
configure and/or assemble personal computers, manufacture or distribute disk
drives and offer software configuration services. Many of these companies, such
as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom,
Inc. in the Computer Products distribution market, large computer manufacturers
such as IBM Corp. and Compaq Computer Corporation, which provide custom
configuration and automated software configuration for standardized systems,
large distributors such as Ingram Micro Inc., Vanstar Corp., En Point
Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the
systems integration and network services market, have substantially greater
assets and possess substantially greater financial and personnel resources than
those of the Company and may develop software, or services or products which are
comparable to the ACSA Solution. Many competing distributors also carry or offer
brands or product lines which the Company does not carry. Generally, large disk
drive and personal computer component manufacturers and large
24
distributors do not focus their direct selling efforts on small to medium sized
OEMs and distributors, which constitute the vast majority of the Company's
customers; however, as the Company's customers increase in size, disk drive and
component manufacturers may find it cost effective to focus direct selling
efforts on those customers, which could result in the loss of customers or
pressure on margins. In addition, CASI and/or Datatec Systems Inc. ("Datatec"),
formerly known as Glasgal Communications, Inc., the parent corporation of CASI,
may directly enter into the Company's integration and configuration markets
using the software the Company has licensed from CASI. While no operating
division or subsidiary of Datatec is currently competing in the Company's
markets, there can be no assurance that Datatec will not decide to directly
compete with the Company in the future. Further, the terms of the Company's
license agreement with CASI allows CASI to license the software used in the ACSA
Solution and the ACSA Centers to new or existing direct competitors of the
Company. There can be no assurance that the Company will be able to continue to
compete effectively with existing or potential competitors.
ELECTRONICS INDUSTRY CYCLICALITY. The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
corporate end users of personal computers, as well as component distributors
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 disk drives and other personal computer components. Any downturns in
the personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
ASIAN MARKET INSTABILITY. Economies and financial markets in Asia have
recently experienced significant turmoil. A non-material portion of the
Company's revenues are derived from sales to businesses which primarily export
Computer Products to Asian customers, and certain of the Company's vendors are
based in Korea, Japan and other Asian countries. Asian financial markets has
orders or the Company's ability to obtain products from its Asian vendors. The
financial instability in these regions has had an adverse impact on the
financial position of end-users in the region which has been a contributing
factor to the oversupply condition and pricing pressures currently impacting the
Company (because Asian vendors have channeled excess inventory into the North
American market at reduced prices and have reduced component demand from
domestic manufacturers who export to Asia) and could also impact future orders
from the Company's customers and/or the ability of such end users to pay the
Company's customers, which could also impact the ability of such customers to
pay the Company. If the Company's customers who export into Asia are unable to
maintain export sales or current margins on such export sales, the Company's
sales and/or sales margins may be adversely affected. Additionally, if the
Company's vendors in these regions are unable to continue to supply the Company,
the Company may be adversely impacted.
FOREIGN TRADE REGULATION. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea, Japan 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 and
import and export controls and changes in governmental policies, any of which
25
could have a material adverse effect on the Company's business and results of
operations. The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation,
fluctuation in currency and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. For
example, it is possible that political or economic developments in China, or
with respect to the United States' relationship with China, could have an
adverse effect on the Company's business. The Company's ability to remain
competitive could also be affected by other governmental actions related to,
among other things, anti-dumping legislation and international currency
fluctuations. While the Company does not believe that any of these factors
adversely impact its business at 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.
FLUCTUATIONS IN QUARTERLY EARNINGS. The Company's business is subject to
certain quarterly influences. Net sales and operating profits are generally
higher in the fiscal third quarter due to the purchasing patterns of personal
computer integrators and resellers and are generally lower in the first and
second fiscal quarter due primarily to lower industry shipments. Quarterly
results may also be adversely affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of new
products, promotions, and component pricing and availability.
CONFLICTS OF INTERESTS. Until March 9, 1998, David Tobey, a director of the
Company, was President, Chief Executive Officer and a significant stockholder of
CASI and an employee of CASI's parent, Datatec. CASI is a vendor and licensor of
the Company. Until March 9, 1998 Mr. Tobey had an employment agreement with CASI
whereby Mr. Tobey was obligated to assign to CASI all ideas, inventions and
designs created or developed by Mr. Tobey (alone or with others) relating to
computer integration and development tools. On March 9, 1998, Mr. Tobey
resigned from his positions at CASI and Datatec, and his entire equity interest
in CASI was acquired by Datatec. Although the Company believes that Mr. Tobey's
departure from CASI and Datatec will have no adverse effect on the Company's
relationship with CASI and Datatec, there can be no assurance that Mr. Tobey's
resignation will not adversely effect the Company's working relationship with
CASI and Datatec. During Mr. Tobey's employment at CASI and Datatec, the Company
entered into a licensing agreement (the "CASI License") and a reseller agreement
(the "CASI Reseller Agreement") with CASI relating to the Company's
non-exclusive license to use and resell CASI's Configurator software. As a
result, although the Company believes that the CASI License and the CASI
Reseller Agreement were negotiated on an arms-length basis, conflicts existed
between Mr. Tobey's interests and obligations to CASI and Datatec and his
obligations as a Director of the Company during the period in which the Company
negotiated and concluded the CASI License and the CASI Reseller Agreement. The
license fee for the CASI Configurator software was $1.1 million, of which
$150,000 was advanced on the Company's behalf by an officer of CASI's parent,
Datatec and is evidenced by a promissory note (the "Datatec Note"), and
$950,000 was paid by delivery to CASI of a non-interest bearing promissory note
(the "CASI Note"). The Company repaid $250,000 principal amount of the CASI Note
and $50,000 of the principal amount of the Datatec Note out of the
26
proceeds of the Company's Bridge Financing in December 1997. The Company did
repay the outstanding $100,000 principal amount of the Datatec Note and the
$700,000 principal amount of the CASI Note out of the proceeds from its IPO.
The CASI Note provides that the Company has also issued CASI a contingent
warrant (the "CASI Warrant") pursuant to which CASI may apply any amount then
due and unpaid under the CASI Note to the purchase of the Company's Common
Stock at a price of $4.50 per share if the Company defaults under the CASI
Note. The CASI Warrant will expire upon full payment of the CASI Note. The
Company believes that all of these transactions were on terms no less
favorable than were available from unaffiliated third parties. There can be
no assurance that the Company will not enter into transactions with
affiliated parties in the future.
POSSIBLE ISSUANCE OF PREFERRED STOCK; BARRIERS TO TAKEOVER. The Company's
Articles of Incorporation authorize the issuance of up to 2,000,000 shares of
Preferred Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, because the rights and preferences for
any series of Preferred Stock may be set by the Company's Board of Directors in
its sole discretion, the rights and preferences of any such Preferred Stock are
likely to be superior to those of the Common Stock and thus could adversely
affect the rights of the holders of Common Stock. The Company currently has no
commitments or contracts to issue any additional securities. Any securities
issuances might result in a reduction in the book value or market price of the
outstanding shares. Further, any new issuances could be used for anti-takeover
purposes or might be used as a method of discouraging, delaying or preventing a
change of control of the Company. Additionally, certain provisions of the
Company's Articles of Incorporation and Bylaws could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.
NO DIVIDENDS ANTICIPATED. The Company has never declared or paid dividends
on its Common Stock. After the consummation of this Offering, the Company does
not intend for the foreseeable future to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business.
DELISTING FROM THE NASDAQ SMALLCAP MARKET; POTENTIAL PENNY STOCK
CLASSIFICATION. The Company's Common Stock is quoted on The Nasdaq SmallCap
Market and listed on the Boston Stock Exchange. However, there can be no
assurance that a trading market for the Common Stock will develop, or if
developed, that it will be maintained. No assurance can be given that the
Company will be able to satisfy the criteria for continued quotation on The
Nasdaq SmallCap Market or the criteria for continued listing on the Boston Stock
Exchange following this Offering. Failure to meet the maintenance criteria in
the future may result in the Common Stock not being eligible for quotation or
listing. If the Company were removed from The Nasdaq SmallCap Market and the
Boston Stock Exchange, trading, if any, in the Common Stock would thereafter
have to be conducted in the over-the-counter market in so-called "pink sheets"
or, if then available, the OTC Bulletin Board. As a result, holders of the
Common Stock would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
Boston Stock Exchange and the trading price of the Common Stock is less
27
than $5.00 per share, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such 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, according to
regulations adopted by the Securities Exchange Commission (the "Commission"),
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 therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
ELIMINATION OF CUMULATIVE VOTING. The Articles of Incorporation of the
Company provide that at such time as the Company has (i) shares listed on the
New York Stock Exchange or the American Stock Exchange, or (ii) securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the Company has at least 800 or more holders of its Common
Stock as of the record date of the Company's most recent annual meeting of
shareholders, the cumulative voting rights of shareholders will cease. Upon
closing of this Offering the Company believes that it will have more than 800
holders. If the Company has shares listed on the New York Stock Exchange or the
American Stock Exchange, or designated for trading as national market securities
on The Nasdaq National Market System, cumulative voting rights of shareholders
will cease. Elimination of cumulative voting will have the effect of making it
more difficult for minority shareholders to obtain representation on the Board
of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation, as amended, (the "Articles") include a provision that eliminates
the personal liability of its directors to the Company for monetary damages for
breach of their fiduciary duties (subject to certain limitations) as a director
to the fullest extent permissible under California law. The Company's Articles
and Bylaws allow the Company to provide for indemnification of its Directors the
fullest extent permitted by law. The Bylaws allow the Company to enter into
indemnity agreements with individual directors, officers, employees and other
agents. The Company has entered into indemnification agreements designed to
provide the maximum indemnification permitted by law with all the directors of
the Company. These agreements, together with the Company's Bylaws and Articles,
may require the Company, among other things, to indemnify these directors
against certain liabilities that may arise by reason of their status or service
as directors (other than liabilities resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on reasonable terms. The
28
Company has purchased and does maintain directors' and officers' liability
insurance. As a result of the provisions in the Company's Articles and in the
indemnification agreements, it may be more difficult for shareholders to obtain
relief against a director for breaches of such director's fiduciary duty than if
these provisions were not included in the Company's Articles and Bylaws.
NO EARTHQUAKE INSURANCE. The Company's executive office, warehouse and
assembly facility is located in a Company-leased facility in Industry,
California, an area which experienced damage in the 1994 Northridge, California
earthquake. The Company does not currently carry insurance against
earthquake-related risks.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This report includes
"forward-looking statements." All statements other than statements of historical
fact included in this report, including, without limitation, the statements
under "Offering Summary," "Cautionary Statements and Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," regarding the Company's strategies, plans,
objectives and expectations; the Company's ability to provide custom assembly,
configuration and distribution services of computer equipment and peripherals to
technology companies; the ability of the Company to establish and operate an
ACSA Center and to automate its custom configuration process and systems
integration solutions for its customers; the ability of the Company to
successfully market the ACSA Solution; the ability of the Company to develop
processes to position itself as a low-cost leader for outsourcing system
assembly and distribution services; the Company's future operating results; and
other matters are all forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that those expectations will
prove to be correct. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in these "Cautionary
Statements and Risk Factors," as well as elsewhere in this report. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these "Cautionary Statements and Risk Factors."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CUMETRIX DATA SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of March 31, 1998 and March 31, 1997 . . . . . . . . . . F-3
Statements of Operations for the year ended March 31, 1998 and
the period from April 2, 1996 (Inception) to March 31, 1997. . . . . . . F-4
Statements of Changes in Shareholders' Equity for the Year Ended
March 31, 1998 and the period from April 2, 1996 (inception) to
March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the year ended March 31, 1998 and
the period from April 2, 1996 (inception) to March 31, 1997. . . . . . . F-6
Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix Data Systems Corp.:
We have audited the accompanying balance sheets of Cumetrix Data Systems
Corp. (A California corporation, formerly "Data Net International, Inc.") as of
March 31, 1998 and 1997, and the related statements of operations, shareholders'
equity and cash flows for the year ended March 31, 1998 and the period from
April 2, 1996 (inception) to March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cumetrix Data Systems Corp.
as of March 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended March 31, 1998 and the period from April 2, 1996
(inception) to March 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
LOS ANGELES, CALIFORNIA
JUNE 5, 1998
F-2
CUMETRIX DATA SYSTEMS CORP.
BALANCE SHEETS
ASSETS MARCH 31, MARCH 31,
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 4,415,690 $ 479,796
Trade receivables, net of allowance for doubtful
accounts of $57,000 and $2,000 at March 31, 1998
and 1997, respectively................................. 3,885,803 853,090
Receivables from related party............................. - 39,700
Inventories................................................ 2,001,597 331,559
Deferred taxes............................................. 133,647 12,000
Prepaid expenses........................................... 45,983 5,318
----------- -----------
Total current assets.................................... 10,482,720 1,721,463
----------- -----------
FIXED ASSETS, net 87,538 32,278
OTHER ASSETS:
Deferred offering costs.................................... 514,927 -
Capitalized purchased software costs....................... 1,100,000 -
Receivable from director................................... - 100,000
Other...................................................... - 1,500
----------- -----------
Total Assets............................................ $12,185,185 $ 1,855,241
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $ 7,822,652 $ 1,455,139
Accrued expenses........................................... 641,844 87,274
Income taxes payable ...................................... 717,013 21,500
Current portion of long-term debt ......................... 1,203,707 3,390
----------- -----------
Total current liabilities............................... 10,385,216 1,567,303
----------- -----------
LONG-TERM DEBT, net of current portion ......................... 8,864 12,574
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 shares;
issued and outstanding, none............................... - -
Common stock, no par value: Authorized, 20,000,000 shares;
issued and outstanding, 4,750,000 and 4,384,236 at March
31, 1998 and 1997, respectively ........................... 1,042,589 250,000
Retained earnings............................................ 748,516 25,364
----------- -----------
Total shareholders' equity ............................ 1,791,105 275,364
----------- -----------
Total liabilities and shareholders' equity.............. $12,185,185 $ 1,855,241
----------- -----------
----------- -----------
The accompanying notes are an integral part of these balance sheets.
F-3
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
FOR THE
PERIOD FROM
APRIL 2,
FOR THE 1996
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH
1998 31, 1997
----------- -----------
NET SALES. . . . . . . . . . . . . . . . . . . . . $72,495,474 $25,940,203
COST OF PRODUCTS . . . . . . . . . . . . . . . . . 69,468,497 25,139,001
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . 3,026,977 801,202
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . 1,542,294 751,133
----------- -----------
Income from operations. . . . . . . . . . . . 1,484,683 50,069
INTEREST EXPENSE . . . . . . . . . . . . . . . . . 239,791 9,334
OTHER (INCOME) EXPENSE . . . . . . . . . . . . . . (57,998) 5,871
----------- -----------
Income before provision for income taxes. . . 1,302,890 34,864
PROVISION FOR INCOME TAXES . . . . . . . . . . . . 579,738 9,500
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 723,152 $ 25,364
----------- -----------
----------- -----------
BASIC AND DILUTED EARNINGS PER SHARE . . . . . . . $ 0.16 $ 0.01
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-4
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED
EARNINGS TOTAL
COMMON STOCK ----------- -----------
SHARES AMOUNT
---------- ----------- ----------- -----------
Balance, April 2, 1996
(inception)............. - $ - $ - $ -
Sale of common stock..... 4,384,236 250,000 - 250,000
Net income............... - - 25,364 25,364
---------- ----------- ----------- -----------
Balance, March 31, 1997.... 4,384,236 250,000 25,364 275,364
Sale of common stock,
net of offering
expenses of $233,641.... 365,764 717,589 - 717,589
Issuance of warrants in
connection with
Private Placement, net
of offering expenses
of $21,287.............. - 38,047 - 38,047
Issuance of warrants in
exchange for
professional fees in
connection with Private
Placement............... - 36,953 - 36,953
Net income............... - - 723,152 723,152
---------- ----------- ----------- -----------
Balance, March 31, 1998.... 4,750,000 $ 1,042,589 $ 748,516 $ 1,791,105
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements.
F-5
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
FOR THE
PERIOD FROM
APRIL 2,
FOR THE 1996
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH
1998 31, 1997
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 723,152 $ 25,364
Adjustments to reconcile net income to net cash
and cash equivalents provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . 8,934 6,634
Amortization of debt discount and deferred
financing costs . . . . . . . . . . . . . . . . . . . . 214,405 -
Provision for doubtful accounts . . . . . . . . . . . . . 91,310 50,329
Loss on receivable from director. . . . . . . . . . . . . 100,000 -
Changes in assets and liabilities:
Trade receivables . . . . . . . . . . . . . . . . . . . . (3,124,023) (903,419)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (1,670,038) (331,559)
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . (121,647) (12,000)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . (11,684) (5,318)
Other assets. . . . . . . . . . . . . . . . . . . . . . . (28,981) (1,500)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 6,367,513 1,455,139
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 554,570 87,274
Income taxes payable. . . . . . . . . . . . . . . . . . . 695,513 21,500
------------- -------------
Net cash provided by operating activities . . . . . . . 3,799,024 392,444
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets. . . . . . . . . . . . . . . . . . . (62,694) (38,912)
Purchase of investment guaranteed by director. . . . . . . . . - (100,000)
Receivables from related parties . . . . . . . . . . . . . . . 39,700 (39,700)
------------- -------------
Net cash used in investing activities . . . . . . . . . (22,994) (178,612)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings. . . . . . . . . . . . . . . . . - 18,820
Payments on bank borrowings. . . . . . . . . . . . . . . . . . - (2,856)
Proceeds from notes, net . . . . . . . . . . . . . . . . . . . 196,290 -
Payments on notes. . . . . . . . . . . . . . . . . . . . . . . (303,393) -
Proceeds from stock and warrant issuances, net . . . . . . . . 781,894 250,000
Deferred offering costs. . . . . . . . . . . . . . . . . . . . (514,927) -
------------- -------------
Net cash provided by financing activities . . . . . . . 159,864 265,964
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . 3,935,894 479,796
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . 479,796 -
------------- -------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . $ 4,415,690 $ 479,796
------------- -------------
------------- -------------
The accompanying notes are an integral part of these statements.
F-6
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
1. LINE OF BUSINESS
Cumetrix Data Systems Corp., formerly Data Net International, Inc. (the
Company), was incorporated on April 2, 1996 in the state of California. The
Company distributes computer peripherals, components, accessories and assembles
computer systems. The Company currently sells a majority of its products to
distributors, systems integrators, and retail stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
a. CASH AND CASH EQUIVALENTS
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.
b. TRADE RECEIVABLES
Trade receivables represent unsecured balances due from its customers with
the Company at risk to the extent such amounts become uncollectible. 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.
c. INVENTORIES
Inventories consist primarily of purchased finished goods and are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method of accounting.
d. FIXED ASSETS
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are as follows:
Furniture and fixtures 7 years
Office equipment 3-5 years
Vehicles 5 years
The Company's fixed assets are recorded at cost. 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
F-7
and any resulting gain or loss is recognized.
e. DEFERRED OFFERING COSTS
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. Offering costs of $514,927
incurred in connection with the Company's initial public offering in April 1998,
are capitalized as of March 31, 1998.
f. DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs
and amortized over the terms of the notes using the effective interest rate
method.
g. CAPITALIZED PURCHASED SOFTWARE COSTS
Capitalized purchased software costs represents the license fee paid to
Computer-Aided Software Integration, Inc. (CASI) for certain configuration
software (see Note 10). The Company will amortize these costs on a straight-line
basis over the estimated life of the configuration software (currently estimated
to be between 3-5 years) commencing on the date that the configuration software
is first placed into service.
h. STATEMENT OF CASH FLOWS
The Company prepares its statement of cash flows using the indirect
method as defined under Statement of Financial Accounting Standards No. 95
(SFAS No. 95). In July 1997, the Company licensed software for $1,100,000 by
issuing a note and obtaining a loan from a related party (see Note 10). In
fiscal 1998, the Company issued warrants in exchange for professional
services in connection with the private placement. The costs associated with
these warrants of $36,953 was calculated using the Black-Scholes model and
was allocated to debt ($10,696), common stock ($24,065), and warrants
($2,192), in accordance with Accounting Principles Board Opinion No. 14 (See
Note 8). Supplemental disclosures of cash flow information are as follows:
MARCH 31, MARCH 31,
1998 1997
--------- ----------
Cash paid for interest . . . . . . . . . $ 26,720 $ 1,431
Cash paid for income taxes . . . . . . . $ 20,000 $ -
i. USE OF 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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. CONCENTRATION OF RISK
During the year ended March 31, 1998 and the period from April 2, 1996
(inception) to March 31, 1997, one vendor accounted for 64 and 43 percent of
F-8
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, 1998 one customer accounted for 11 percent
of sales. During fiscal 1997, no customer accounted for more than 10 percent of
net sales.
k. REVENUE RECOGNITION
Net sales are currently generated from the sale of components and systems.
Systems include ready-to-use computers that have been assembled and have
software already installed. Components sales consist of individual hardware
items.
Revenue is recorded at the time of shipment net of allowances for estimated
sales returns.
l. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets
or liabilities are computed based on the temporary difference between the
financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rate in effect for the year in which the differences are
expected to reverse. Deferred income tax expenses or credits are based on the
changes in the deferred income tax assets or liabilities from period to period.
m. NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. SFAS No. 128 and SFAS No. 129 were
adopted for the year ending March 31, 1998 and did not have a material impact
on the Company's financial statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards and additional quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.
n. INCOME PER COMMON SHARE
Income per common share is based on the weighted average number of shares
of common stock and common stock equivalents outstanding during the related
periods. For all periods presented, per share information was computed pursuant
to the provisions of SFAS No.128.
A summary of the shares used to compute earnings per share is as follows:
F-9
FOR THE
PERIOD
FROM APRIL 2,
FOR THE 1996
YEAR ENDED (INCEPTION)
MARCH 31, TO MARCH 31,
1998 1997
----------- -----------
Weighted average common shares used to
compute basic earnings per share . . . . . 4,544,759 3,310,573
Effect of Dilutive Securities:
Stock options. . . . . . . . . . . . . . . 64,257 -
Warrants . . . . . . . . . . . . . . . . . 30,025 -
----------- -----------
Weighted average common shares used to
compute diluted earnings per share . . . . 4,639,041 3,310,573
----------- -----------
----------- -----------
The adoption of SFAS No. 128 did not have any impact on previously reported
earnings per share. As discussed in Note 12, in April 1998, in connection with
its initial public offering, the Company sold 2,702,500 shares of its common
stock. These shares are not included in the weighted average common share
amounts for any period presented.
o. RISK FACTORS
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION - The Company's
ability to successfully implement, market and introduce the ACSA Solution
services on a timely basis will be a significant factor in the Company's ability
to improve its operating margins and remain competitive. The Company's ability
to market the ACSA Solution successfully will depend on the Company convincing
potential customers of the benefits of the ACSA Solution. The Company has only
recently commenced marketing the ACSA Solution. The Company is currently
constructing its first ACSA Center located in the City of Industry. No ACSA
Center is currently in operation and the Company currently has no sales revenue
attributable to the ACSA Solution or an ACSA Center. Although the Company is
engaged in negotiations and discussions with a number of potential customers,
there can be no assurance that any such discussions will lead to significant
sales of the ACSA Solution, or that the ACSA Solution will attain market
acceptance. Any failure by the Company to anticipate or respond in a
cost-effective and timely manner to market trends or customer requirements, or
any significant delays in introduction of ACSA services, could have a material
adverse effect on the Company's business, operating results and financial
condition.
ELECTRONICS INDUSTRY CYCLICALITY - The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
end-users of personal computers, as well as component distributors 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
disk drives and other personal computer components. Any downturns in the
personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
F-10
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 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 U.S. dollars.
3. FIXED ASSETS, NET
Fixed assets, net, consist of the following:
MARCH 31,
1998 1997
---------- ----------
Furniture and fixtures . . . . . . . . . . . . . $ 52,972 $ 8,260
Office equipment . . . . . . . . . . . . . . . . 27,314 9,332
Vehicles . . . . . . . . . . . . . . . . . . . . 21,320 21,320
---------- ----------
101,606 38,912
Less-Accumulated depreciation and amortization . (14,068) (6,634)
---------- ----------
$ 87,538 $ 32,278
---------- ----------
---------- ----------
4. INCOME TAXES
The provision for income taxes is comprised of the following components:
MARCH 31,
1998 1997
---------- ----------
Current:
Federal. . . . . . . . . . . . . . . . . . . $ 550,986 $ 14,500
State. . . . . . . . . . . . . . . . . . . . 150,399 7,000
Deferred:
Federal. . . . . . . . . . . . . . . . . . . (93,460) (8,700)
State. . . . . . . . . . . . . . . . . . . . (28,187) (3,300)
---------- ----------
Provision for income taxes . . . . . . . . . . $ 579,738 $ 9,500
---------- ----------
---------- ----------
The approximate tax effect of temporary differences which gave rise to
significant deferred tax liabilities and assets are as follows:
MARCH 31,
1998 1997
Assets (Liabilities): ---------- ---------
Depreciation and amortization. . . . . . . . $ 75,073 $ (434)
Reserves . . . . . . . . . . . . . . . . . . 32,234 2,408
Unicap . . . . . . . . . . . . . . . . . . . 16,055 6,020
Accrued liabilities. . . . . . . . . . . . . 10,285 4,006
F-11
---------- ---------
$ 133,647 $ 12,000
---------- ---------
---------- ---------
A reconciliation of the provision for income taxes to the amount computed
at the Federal statutory rate is as follows:
MARCH 31,
1998 1997
---------- ---------
Federal income tax provision at the
statutory rate . . . . . . . . . . . . . . . . $ 442,983 $ 11,854
State taxes, net of federal benefit. . . . . . . 99,263 2,092
Other items, net . . . . . . . . . . . . . . . . 37,492 (4,446)
---------- ---------
Provision for income taxes . . . . . . . . . . . $ 579,738 $ 9,500
---------- ---------
---------- ---------
5. RELATED PARTY TRANSACTIONS
In February 1997, a director borrowed $39,700 from the Company. The
receivable is evidenced by an unsecured note with interest at 5.75 percent. The
note was repaid in June 1997.
During fiscal 1998 and 1997, the Company had sales of approximately
$1,391,300 and $532,800 to and purchases of approximately $598,200 and $804,300
from a corporation owned by a related party, respectively. At March 31, 1998
and 1997, the Company had $92,000 and $12,400 included in trade receivables and
$- and $132,700 included in accounts payable, respectively, related to these
transactions.
In September 1997, the Company signed a software license and a reseller
agreement with Computer Aided Software Integration, Inc. (CASI), a subsidiary of
Datatec Systems, Inc. (Datatec), formerly known as Glasgal Communications, Inc.
(See Note 10).
6. LONG-TERM DEBT
Long-term debt of the Company consists of the following as of March 31,
1998:
Note payable, 0% interest, repaid in April 1998 $ 700,000
(See Note 10)
Bridge loan, 10% interest, discount of $110,564 fully 400,000
amortized as of March 31, 1998, repaid in April 1998
(See Note 8)
Note payable, 10% interest, repaid in April 1998 100,000
(See Note 10)
Note payable to a bank, interest at 8.9 percent, monthly 12,571
installments of principal and interest of
approximately $400 made through April 2001, secured by
a delivery van
------------
1,212,571
Less-current portion (1,203,707)
------------
$ 8,864
------------
------------
Future annual maturities of long-term debt consists of the following as of March
31, 1998:
F-12
YEAR ENDING MARCH 31,
---------------------
1999. . . . . . . . . . . $ 1,203,707
2000. . . . . . . . . . . 4,054
2001. . . . . . . . . . . 4,426
2002. . . . . . . . . . . 384
------------
$ 1,212,571
------------
------------
7. RECEIVABLE FROM DIRECTOR
The receivable from director at March 31, 1997 resulted from the
purchase by the Company of 200,000 shares and 100,000 warrants for $100,000 in
Evolutions, Inc. (Evolutions) which at March 31, 1997, was personally guaranteed
by a director of the Company. Subsequent to June 13, 1997, the board of
directors and shareholders voted to release this director from this guarantee as
partial inducement for this individual to accept additional management
responsibilities at the Company, including agreeing to become the chief
executive officer. The Company has determined, due to significant cash flow
difficulties encountered by Evolutions, that its investment is worthless.
Accordingly, the Company has recorded a $100,000 loss during fiscal 1998 which
is included in selling, general and administrative expenses.
8. SHAREHOLDERS' EQUITY
COMMON STOCK
On April 7, 1997, a relative of a shareholder purchased 65,764 shares of
common stock for $300,000. In addition, the Company granted to this party an
option to acquire up to an additional 372,659 common shares at $4.56 per share.
The options expired on October 7, 1997 unexercised.
In October 1997, the Company effected a 10.960591 for one common stock
split and increased the number of authorized shares of common stock to
20,000,000. All share and per share information in the accompanying financial
statements has been retroactively restated to reflect these changes.
PREFERRED STOCK
In October 1997, the Company authorized 2,000,000 shares of preferred
stock. As of March 31, 1998 there were no shares of preferred stock
outstanding.
PRIVATE PLACEMENT
In December 1997, the Company completed a private placement for $1,000,000
with net proceeds of approximately $678,184. The Company sold 20 units for
$50,000 per unit. Each unit consisted of (i) an unsecured promissory note with
a face value of $20,000, bearing interest at 10 percent due eighteen months from
the date of issue or upon closing of a $2,000,000 financing, (ii) 15,000 shares
of common stock (with an estimated fair value at date of issuance of $3.00) and
(iii) 5,000 warrants exercisable at $3.00 per share (with an estimated fair
value at date of issuance of $0.82 per warrant) into common stock for three
years, commencing one year after the date of issuance.
F-13
The net proceeds for the private placement were allocated to the debt, stock and
warrants issued based upon their relative fair values at the date of issuance in
accordance with Accounting Principles Board opinion (APB) No. 14.
The proceeds were used, in part, to pay $250,000 of the CASI note and
$50,000 of the Datatec Note. In connection with the private placement, the
Placement Agent and the Company's legal counsel received 35,000 warrants and
45,000 warrants, respectively for nominal consideration. The warrants are
exercisable at $3.00 per share. The Placement Agent Warrants were cancelled on
March 6, 1998. The promissory notes were fully repaid subsequent to year-end
(See Note 12).
STOCK OPTIONS
In July 1997, the Company established the 1997 Stock Incentive Plan (the
"Plan"). Under the Plan, 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 500,000 shares of the Company's
common stock for issuance under the Plan. In July 1997, the Company granted
options to purchase up to 307,717 shares of common stock with an exercise price
of $2.70 per share (estimated fair market value at date of grant). In January
and February 1998, the Company granted options to purchase 36,000 and 40,000
shares of common stock, respectively, with an exercise price of $4.50 per share
(estimated fair market value at date of grant). The plan terminates in 2007.
Information regarding the Company's stock options is as follows:
Weighted
Shares Average
Under Exercise
Option Price
------- -----------
BALANCE, March 31, 1997. . . . . . . . . . . . . . - $ -
Granted. . . . . . . . . . . . . . . . . . . . . 383,717 3.06
Cancelled. . . . . . . . . . . . . . . . . . . . - -
Exercised. . . . . . . . . . . . . . . . . . . . - -
-------- ---------
BALANCE, March 31, 1998. . . . . . . . . . . . . . 383,717 $ 3.06
-------- ---------
-------- ---------
Options exercisable at March 31, 1998. . . . . . . 113,078 $ 2.70
-------- ---------
-------- ---------
The following table summarizes information about stock options outstanding
at March 31, 1998:
WEIGHTED AVERAGE
NUMBER OF OPTIONS REMAINING NUMBER EXERCISABLE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE AT MARCH 31, 1998
-------------- ----------------- ----------------- ------------------
$2.70 307,717 9.26 years 113,078
$4.50 76,000 9.26 years -
The Company accounts for stock options granted to non-employees in
accordance with SFAS No. 123 which requires non-cash compensation expense be
recognized over the expected period of benefit. In accordance with the terms of
F-14
APB No. 25, the Company records no compensation expense for its stock option
awards. As required by SFAS No. 123, the Company provides the following
disclosure of hypothetical values for these awards. The weighted-average
grant-date fair value of options granted during 1998 was estimated to be $0.79.
The value was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions for 1998: risk-free interest rate of
6.15 percent; expected life of 5 years; no expected volatility; and no expected
dividends.
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income would
have decreased as follows:
March 31,1998
As
reported Pro forma
-------- ---------
Net income ........................................ $723,152 $674,239
Basic and diluted earnings per share .............. $ 0.16 $ 0.15
Because options vest over several years and additional option grants are
expected, the effects of these hypothetical calculations are not likely to be
representative of similar future calculations.
In May 1998, the Company issued an officer of the Company options to
purchase 20,000 shares of common stock at an exercise price of $6.125 per share.
The options vest over two years and expire in May 2008.
9. FINANCING ARRANGEMENT
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation. Purchases are collateralized by inventory and
accounts receivable. Unless the Company fails to pay Finova within the agreed
upon period, all finance costs associated with this line are charged by Finova
to the Company's vendors. This arrangement is personally guaranteed by two
officers of the Company. At March 31, 1998, the Company's Finova line was $7.5
million and the Company had a payable to Finova Capital Corporation of
approximately $5,853,429 included in accounts payable.
10. SOFTWARE LICENSE
In September 1997, the Company signed a software license and a reseller
agreement with Computer Aided Software Integration, Inc. (CASI), a subsidiary of
Datatec Systems, Inc. (Datatec), formerly known as Glasgal Communications, Inc.
A director of the Company is also the founder, president, C.E.O., and a
principal shareholder of CASI. The Company paid CASI a one-time license fee of
$1,100,000 for the configuration software. The license agreement is generally a
worldwide royalty-free and nonexclusive license to reproduce and use the
software. The Company has capitalized this amount and will start to amortize
these costs' once the Company puts the software into use. The license fee was
paid in the form of a non-interest bearing promissory note for $950,000 and a
cash payment of $150,000 loaned to the Company by an officer of Datatec (Datatec
Note) with interest at 10 percent. The aggregate unpaid principal
F-15
balance on these Notes as of March 31, 1998 was $800,000 and is included in
current portion of long-term debt in the Balance Sheet. The Company also issued
CASI a contingent warrant exercisable in the event of default of the note at
$4.50 per share. The CASI and Datatec Notes were fully repaid with proceeds of
the initial public offering subsequent to year-end (see Note 12) and the
contingent warrant was cancelled.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases a facility under a lease agreement which expires on
April 30, 1998. In October 1997, the Company entered into a new facility lease
agreement commencing on February 1, 1998 and expiring on January 31, 2001. The
following is a schedule of future minimum lease payments required under these
operating leases as of March 31, 1998:
YEAR ENDING MARCH 31,
1999. . . . . . . . . . . . . . . . . . . . . . . 138,424
2000. . . . . . . . . . . . . . . . . . . . . . . 137,094
2001. . . . . . . . . . . . . . . . . . . . . . . 116,070
----------
$ 391,588
----------
----------
Total rental expense for the year ended March 31, 1998 and 1997 was
approximately $70,000 and $49,000, respectively.
F-16
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key executives. These
agreements have terms of five years.
12. SUBSEQUENT EVENTS
On April 8, 1998, the Company completed an initial public offering of
2,702,500 shares of common stock, which includes 352,500 shares sold pursuant
to the exercise of the underwriters overallotment option. The Company
received net proceeds (after deducting issuance costs) of approximately
$11,100,000. The Company will use 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.
In April 1998, the Company repaid $700,000 on the CASI Note, $100,000 on
the Datatec Note, and $400,000 on the private placement note out of proceeds
from the initial public offering in accordance with the debt agreements. Upon
payment of the CASI note, the Company cancelled the contingent warrant, which
would have been convertible into 155,902 shares of common stock.
F-17
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item will appear in the registrants
proxy statement for the 1998 Annual Meeting of Shareholders, which proxy
statement will be filed on or about July 29, 1998 and is incorporated herein by
this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item will appear in the registrants
proxy statement for the 1998 Annual Meeting of Shareholders, which proxy
statement will be filed on or about July 29, 1998 and is incorporated herein by
this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item will appear in the registrants
proxy statement for the 1998 Annual Meeting of Shareholders, which proxy
statement will be filed on or about July 29, 1998 and is incorporated herein by
this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item will appear in the registrants
proxy statement for the 1998 Annual Meeting of Shareholders, which proxy
statement will be filed on or about July 29, 1998 and is incorporated herein by
this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of documents filed as part of this Report:
(1) FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Public Accountants
Balance Sheets as of March 31, 1998 and March 31, 1997
Statements of Operations for the year ended March 31, 1998 and
the period from April 2, 1996 (Inception) to March 31, 1997
Statements of Changes in Shareholders' Equity for the Year Ended
March 31, 1998 and the period from April 2, 1996 (inception) to
March 31, 1997
Statements of Cash Flows for the year ended March 31, 1998 and
the period from April 2, 1996 (inception) to March 31, 1997
Notes to the Financial Statements
No other schedules are included because the required information
is inapplicable or is presented in the financial statements or related notes
thereto.
(2) EXHIBITS
30
The exhibits listed on the accompanying Index of Exhibits are
filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUMETRIX DATA SYSTEMS CORP.
------------------------------------------
(Registrant)
Date: June 29, 1998 By: /s/ MAX TOGHRAIE
---------------------------- -------------------------------------
Max Toghraie, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Max
Toghraie and Carl L. Wood, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ MAX TOGHRAIE Chief Executive Officer June 29, 1998
- ---------------------------- and Director (Principal
Max Toghraie Executive Officer)
/s/ JAMES UNG President and Director June 29, 1998
- ----------------------------
James Ung
/s/ JEFF TOGHRAIE Chief Operating Officer June 29, 1998
- ----------------------------
Jeff Toghraie
/s/ CARL L. WOOD Chief Financial Officer June 29, 1998
- ---------------------------- (Principal Financial and
Carl L. Wood Accounting Officer)
/s/ MEI YANG Secretary, Treasurer and June 29, 1998
- ---------------------------- Director
Mei Yang
32
/s/ NANCY HUNDT Director June 29, 1998
- ----------------------------
Nancy Hundt
/s/ DAVID TOBEY Director June 29, 1998
- ----------------------------
David Tobey
/s/ PHILIP J. ALFORD Director June 29, 1998
- ----------------------------
Philip J. Alford
33
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
3.1 Articles of Incorporation of Registrant. Incorporated by reference
to Exhibit 3.1 to Form S-1 filed on December 23, 1997, and amendments
thereto.
3.2 Certificate of Amendment to Articles of Incorporation, as filed on
December 22, 1997. Incorporated by reference to Exhibit 3.2 to Form
S-1 filed on December 23, 1997, and amendments thereto.
3.2.1 Certificate of Amendment of the Articles of Incorporation, as filed
on January 6, 1998. Incorporated by reference to Exhibit 3.2.1 to
Form S-1 filed on December 23, 1997, and amendments thereto.
3.3 Amended and Restated Bylaws of the Registrant. Incorporated by
reference to Exhibit 3.3 to Form S-1 filed on December 23, 1997, and
amendments thereto.
4.1 Specimen Stock Certificate of Registrant. Incorporated by reference
to Exhibit 4.1 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.1 Standard Sublease Agreement, dated April 9, 1996, by and between ITT
Barton Instruments and the Company. Incorporated by reference to
Exhibit 10.1 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 Promissory Note, dated July 1, 1997, executed by the Company in favor
of Computer-Aided Software Integration, Inc. Incorporated by
reference to Exhibit 10.7 to Form S-1 filed on December 23, 1997, and
amendments thereto.
10.8 Warrant Agreement, dated July 1, 1997, between the Company and
Computer-Aided Softward Integration, Inc. Incorporated by reference
to Exhibit 10.8 to Form S-1 filed on December 23, 1997, and
amendments thereto.
34
10.9 Promissory Note, dated July 1, 1997, executed by the Company in favor
of Ralph Glasgal. Incorporated by reference to Exhibit 10.9 to Form
S-1 filed on December 23, 1997, and amendments thereto.
10.10 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.
10.11 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.
10.12 Dealer Loan and Security Agreement, dated June 3, 1997, between the
Company and FINOVA Capital Corporation. Incorporated by reference to
Exhibit 10.12 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.13 Individual Guranty, dated June 3, 1997, between FINOVA Capital
Corporation and James Ung and Mei Yang. Incorporated by reference to
Exhibit 10.13 to Form S-1 filed on December 23, 1997, and amendments
thereto.
10.14 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.
10.15 Form of Nonstatutory Stock Option Agreement. Incorporated by
reference to Exhibit 10.15 to Form S-1 filed on December 23, 1997,
and amendments thereto.
10.16 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.
10.17 Employment Agreement, dated May 11, 1998, between the Company and
Steve Schaffert.
24.1 Power of Attorney (included on Signature Page)
27 Financial Data Schedule
35