SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM OF REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
CyberStar(R) Computer Corporation
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(Name of Small Business Issuer in Its Charter)
Minnesota 41-1427445
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6825 Shady Oak Road, Eden Prairie, MN 55344
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(Address of Principal Executive Offices) (Zip Code)
(612) 943-1598
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Name Of Each Exchange On Which Each
Title of Each Class To Be So Registered Class Is To Be Registered
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
CyberStar(R) Computer Corporation designs and manufactures a wide range
of computer systems and products, including desktop, midtowers, minitowers,
notebooks, workstations and file servers. CyberStar markets, services and
supports its products through a nationwide network of approximately 275
authorized dealers who sell CyberStar's products to end-users, which are
typically businesses purchasing multi-computer office systems. Through its VAR
(value-added reseller) division, CyberStar resells branded computers and various
branded and non-branded peripheral products to end-users.
CyberStar was founded in 1982 under the laws of the State of Minnesota
as Command Small Computer Learning Center, Inc., a computer training company.
Over a period of years, CyberStar became involved in the sale of computer
components and, eventually, became a VAR of major computer brands. In 1987, it
changed its name to Command Electronics, Inc. In February 1995, Command
Electronics, Inc. acquired the assets of CyberStar Computer Systems, a
manufacturer and marketer of microcomputers and servers, and in 1997 it changed
its name to CyberStar(R) Computer Corporation. CyberStar's offices are located
at 6825 Shady Oak Road, Eden Prairie, Minnesota 55344, and its telephone and
facsimile numbers are (612) 943-1598 and (612) 943-1599, respectively.
CyberStar's Internet addresses are www.cyberstarpc.com and
www.buildtoorderpc.com.
INDUSTRY OVERVIEW
The PC hardware market is generally thought to consist of three tiers
of manufacturers, based primarily upon the manufacturers' size and ability to
set industry standards. Tier one consists of four companies (IBM Corporation,
Compaq Computer Corporation, Hewlett-Packard Company and Apple Computer, Inc.),
which have the research and development capabilities and reputation to set the
standards for the PC manufacturing industry. Tier two consists of companies such
as Dell Computer Corporation, Gateway 2000, Inc., AST Research, Inc. and Packard
Bell NEC, Inc. These tier two companies create certain products of their own,
but more frequently create clones of tier one products. Tier three consists of
all other computer manufacturers. Tier three manufacturers are clone makers that
follow the technology trends set by tier one manufacturers. Manufacturers
generally have access to the same components and thus can produce identical
systems of various configurations. The ability of tier three manufacturers to
compete with tier one and tier two manufacturers and with each other depends on
the pricing of systems, the services offered in connection with a system, and
the marketing and sales capability of the tier three manufacturer or its
dealers. CyberStar is considered a tier three manufacturer.
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The computer industry is one of the fastest changing industries today,
subject to constant fluctuation in price, technology and products offered.
Although tier one manufacturers once dominated the market, resellers report that
non-branded, or white-box, systems are their best selling "brands"; in a poll
published in August 1999 by COMPUTER RESELLER NEWS ("CRN"), resellers reported
that sales of white-box systems exceeded the sales of the next top three branded
vendors (Compaq, Dell, and Hewlett Packard) combined, citing price, flexibility
in configuration, the ability to upgrade and the ability to provide complete
packages of products and support as the reasons for sales of non-branded
systems.
As white-box systems have become more popular with end-users, tier
three manufacturers have become able to offer their products at a variety of
price points. According to CRN (August 16, 1999), the retail prices of 60% of
white-box systems, i.e., systems without nationally-recognized brand names, were
under $1,400. Substantially all of the systems sold by CyberStar range in price
between $800 and $2,500.
Recently, the PC industry has undergone a fundamental shift in
distribution processes and methods. Traditionally, manufacturers of branded
products, such as IBM, manufactured computers and shipped them to distributors
and dealers who, in turn, shipped them to dealers and end-users, respectively.
End-users, under this distribution process, purchased systems from dealers in
whatever format the original manufacturer provided. Consequently, limited
opportunities existed for end-users to custom-configure their computer systems.
Further, this method required dealers to stockpile considerable inventory
levels, which often could not be sold out before an announced or expected change
in technology. Thus, dealers were forced, in many cases, to sell obsolete
systems. As a result, the traditional distribution method created inefficiencies
and additional costs, as well as consumer dissatisfaction.
While traditional distribution methods persist in certain parts of the
computer industry, in particular in the retail segment, the trend is toward
build-to-order and custom-configured computer systems. Dell and Gateway
pioneered this shift when they began offering custom-built PCs to consumers
primarily for home use. Today, many of the tier one manufacturers, such as IBM
and Compaq, also use channel assembly methods. These manufacturers ship products
that are not completely assembled to their distributors and rely on the
distributor for final assembly and shipment. This distribution method provides
only limited build-to-order benefits and does not provide the advantage of a
direct contact person to whom the end-user may direct technical and support
questions.
Generally, the number of purchasers and the amount spent for goods on
the Internet is increasing. Forrester Research, Inc. has estimated that the
total e-commerce purchases made in 1998 were $51 billion, of which $43 billion
was business-to-business and $8 billion was consumer. Forrester estimates that
the total will increase to an estimated $551 billion in the year 2001.
Increasingly businesses have been developing electronic commerce sites in
response to this trend. Computer resellers are spending substantial time on the
Internet conducting their
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business. According to CRN, as of June 1999, 54% of resellers polled reported
that they spent between 11 and 30 hours per week conducting their business on
the Internet. This same poll reported that an additional 13% of resellers spent
31 hours or more conducting their business on the Internet. CyberStar believes
that as resellers and end-users become more comfortable with the Internet they
will rely on it more and that this increased reliance will translate into a
desire on the part of resellers to offer their various computer systems via
electronic commerce.
CYBERSTAR DIVISION
CyberStar currently offers a number of products, substantially all of
which are based on Intel's microprocessors. Currently, CyberStar's products
target a broad range of performance and functionality for each of the high-end,
midrange and entry-level segments of the PC market. CyberStar's current products
include the Alliance Series of desktop computers, the FilePro SHV Series of
fileservers and the CyberBook Series of notebooks. For compatibility with a wide
range of applications software, CyberStar's products utilize the major industry
standard operating systems, Microsoft Windows 98, and the current leading
network protocols, Novell Netware and Microsoft NT. CyberStar intends to
maintain compatibility with other major standards as they evolve.
The Alliance Series, available in three models, is designed to provide
maximum performance at the lowest possible price point without sacrificing
quality. The FilePro SHV Series is designed to be a tier one file server
alternative. CyberStar's four servers are available in single to quad Pentium
III Xeon processor configurations and all feature Intel LanDesk server
management software. Designed for current networking platforms, the FilePro SHV
servers are certified compatible with various operating systems, including
Microsoft NT, Novell and UNIX. The CyberBook Series of notebooks is designed to
offer full functionality to mobile users, including high performance graphic
capabilities, large active matrix screens and full multimedia capabilities. The
CyberBook Series is available in Intel Celeron or Intel Pentium II mobile
processors with storage capacities up to 10.1GB. This series of three notebooks
comes standard with carrying case, AC-adapter, battery and a Windows 98
operating system.
BUILDTOORDERPC.COM
CyberStar is developing buildtoorderpc.com(TM), a proprietary
Internet-based development tool, to capitalize on two significant trends:
e-commerce and the desire for custom-built, custom-configured computer systems.
Through buildtoorderpc.com, CyberStar intends to provide end-users with the
ability to custom-configure, price and order CyberStar(R) or dealer-branded
products directly on-line through a dealer's website.
The heart of buildtoorderpc.com is CyberStar's innovative and
proprietary configurator. The configurator is designed to link participating
dealers' websites directly to CyberStar. The configurator is being designed to
act as an invisible window that will route orders placed with individual dealers
to CyberStar for processing and fulfillment. CyberStar's configurator is also
being designed to test compatibility of the various component and system choices
made by end-users, thus prohibiting end-users from making incompatible software,
hardware and component choices.
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The products ordered via buildtoorderpc.com can be manufactured with
the CyberStar(R) brand name or with a dealer's brand name. CyberStar believes
that custom-built, custom-configured computers provide solutions that are
relevant to the needs of end-users. While CyberStar will maintain proprietary
rights in buildtoorderpc.com and its configurator, CyberStar will provide them
to its dealers for their use, free of charge. CyberStar believes that
buildtoorderpc.com will allow dealers to meet their needs in a flexible and
efficient manner, and in a manner that allows dealers to provide cutting-edge
technological choices without having to maintain significant inventory levels.
Development of buildtoorderpc.com has been completed for end-user
customers and was launched in September 1999 under CyberStar's own end-user
site. CyberStar originally anticipated that completing development of the site
would occur in late 1998 and began hiring staff in anticipation of the launch.
CyberStar is nearing completion of the development of buildtoorderpc.com for its
dealers. Upon completion of development, CyberStar plans to beta test this
concept with a limited number of dealers. During beta testing, CyberStar will
also continue internal refinements of buildtoorderpc.com. CyberStar plans to
commence beta tests during the fourth quarter of 1999, expects to complete beta
testing during the first quarter of 2000 and to make buildtoorderpc.com
available to its dealers during the second quarter of 2000.
VAR DIVISION
Through its VAR division, CyberStar acts as a reseller of products
offered by other manufacturers, such as Compaq, IBM, Hewlett Packard and Apple,
that offer branded products to end-users. CyberStar also offers end-users
CyberStar(R) or other non-branded peripheral products as alternatives to those
offered by tier one manufacturers through its VAR division.
MAJOR CUSTOMERS
One customer represented 44% of CyberStar's sales in 1998 and 31% of
its sales in 1999. For the three months ended May 31, 1998 and 1999, one
customer represented 43% of sales and two customers represented 22% and 11% of
sales, respectively.
SALES AND MARKETING
CyberStar currently distributes its products through a nationwide
network of approximately 275 authorized dealers consisting of qualified VARs,
systems integrators and office equipment dealers.
CyberStar is developing buildtoorderpc.com to capitalize on trends
toward increased Internet usage by dealers. CyberStar believes that by
enabling participating dealers to offer custom-built, custom-configured computer
systems, it will be able to retain existing dealer relationships and create new
ones.
CyberStar's reseller and dealer customers are not and are not expected
to be contractually committed to future purchases of CyberStar's products. These
parties could discontinue carrying CyberStar's products at any time. The loss of
any major customer could adversely affect CyberStar's results of operations
until alternative distribution channels could be established, of which there can
be no assurance.
MANUFACTURING AND SUPPLIERS
CyberStar's manufacturing operations are currently located at its
executive offices and include facilities to (i) procure, inspect and test
circuit boards and (ii) assemble, test and package finished products. All
components are tested before undergoing final assembly. Once assembled, all
systems undergo a series of diagnostic tests for up to 24 hours. CyberStar
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performs various levels of assembly on all of the products marketed under the
CyberStar(R) name, except for monitors, which are delivered fully assembled and
branded as CyberStar.
CyberStar currently procures all of its components from outside
suppliers. CyberStar generally utilizes standard parts and components available
from multiple vendors. However, CyberStar is technologically-dependent on
Microsoft to provide Microsoft NT and Windows. CyberStar purchases components
pursuant to purchase orders placed in the ordinary course of business and has no
guaranteed supply arrangements with single source suppliers. Reliance on
suppliers generally involves risks, including the possibility of defective
parts, shortage of components, increases in component cost and disruptions in
delivery of components. From time to time, increases in demand for PCs have
created industry-wide shortages of key components, such as microprocessors.
Pursuant to CyberStar's arrangement with Intel, Intel microprocessors are
available in quantities that CyberStar believes will be adequate to meet its
anticipated requirements. However, if CyberStar is unable to obtain sufficient
quantities of any components, CyberStar will experience delays in product
shipments that would adversely affect sales. In addition, such supply shortages
may cause price increases that could result in lower margins and adversely
affect CyberStar's operating results.
In addition to microprocessors, CyberStar purchases file server
components, network interface cards and ATX motherboards from Intel for use in
CyberStar's branded products. CyberStar is, and will continue to be, heavily
dependent on Intel, not only for microprocessors and other components, but also
for manufacturing, research and development and marketing support. The
arrangements that CyberStar has with Intel are not exclusive and can be
terminated at any time. There can be no assurance that Intel will continue its
relationship with CyberStar or that it will support CyberStar's operations at
the level currently anticipated. The loss of these arrangements with Intel would
have a material adverse effect on CyberStar's business.
CyberStar purchases notebook products from Taiwanese manufacturers.
CyberStar resells these notebooks under the CyberStar(R) name to dealers and
end-users. CyberStar's ability to bring its notebook products to market is
highly dependent upon these third-party vendors to effectively design, develop
and manufacture these products. Should these companies not be able to design,
develop or manufacture CyberStar's products in a timely manner, CyberStar's
sales, cash flows and profitability could be materially and adversely affected.
CyberStar recently improved its inventory controls and purchasing
systems by making software upgrades. CyberStar's business model provides it with
the ability to operate with reduced levels of component and finished goods
inventories, and CyberStar's limited success to date has been due in part to its
asset management practices, including its ability to achieve rapid inventory
turns. CyberStar's ability to aggressively manage its inventory has been
enhanced by favorable supply conditions in the computer industry. Less favorable
supply conditions, as well as other factors beyond CyberStar's control, may
require or result in increased inventory levels in the future, which could have
a material adverse effect on CyberStar's cash flows.
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COMPETITION
The microcomputer industry is intensely competitive and characterized
by dynamic customer demand patterns, frequent introduction of new products,
technological advances and product obsolescence. In addition, the pricing
environment is extremely competitive, and there are a variety of competing
distribution channels. CyberStar anticipates that the microcomputer industry
will continue to experience intense price competition and dramatic price
reductions, as well as intense competition among distribution channels. In
addition to pricing, the principal elements of competition among manufacturers
are product quality and usability, performance characteristics, distribution
capability, ability to customize, service and support and reputation. CyberStar
competes with a number of large tier one and tier two manufacturers, including
Compaq, IBM, Hewlett-Packard, Apple, Dell, Gateway, and Packard Bell NEC.
CyberStar competes with the larger name manufacturers mostly on the basis of
quality, price and performance. In addition, CyberStar competes with an even
larger number of smaller distributors, such as Supercom and Almo, which market
through a single distribution channel. CyberStar competes with these smaller
distributors on the basis of name recognition, quality, usability and
performance characteristics, as well as service, support and reputation.
Substantially all of CyberStar's competitors have significantly greater
financial, marketing and technological resources than CyberStar.
INTELLECTUAL PROPERTY
CyberStar owns no patents, nor has it applied for any patents covering
its products. CyberStar is subject to risks related to misappropriation of the
proprietary technology upon which buildtoorderpc.com is being designed. While
CyberStar believes that it is designing buildtoorderpc.com to be secure,
computer "hackers" are becoming increasingly sophisticated. Any misappropriation
of CyberStar's technology could subject CyberStar to increased competition and
the loss of its perceived advantage over other competitors.
CyberStar owns the rights to the registered trademark "CyberStar(R)".
CyberStar's use of the "CyberStar(R)" mark is limited to products within the
class of electronic and scientific apparatus. Any use of the mark by others on
products in other classes may cause dilution of the mark and the goodwill
CyberStar has created in the mark. CyberStar has applied for federal trademark
protection on buildtoorderpc.com(TM). CyberStar claims common law trademark
rights in FilePro(TM) file server and CyberBook(TM) notebook.
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SERVICE AND PRODUCT WARRANTY
CyberStar provides dealers with access to its technical support line
for answers to questions that require immediate attention. CyberStar maintains a
data base of technical information that it can easily access in response to
customer inquiries in order to provide quick and accurate answers to its
dealers. CyberStar also provides file access for its dealers, featuring a secure
Bulletin Board Service and Internet site equipped to provide access to
up-to-date support and technical information. CyberStar also provides its
dealers with current product information, including manuals, specifications and
product change notifications.
To support its end-users, CyberStar contracts with Micro Warranty
Services L.L.C. ("MWS") of Irving, Texas to provide all CyberStar(R) desktops,
workstations, notebooks, and file servers with on-site warranty service.
End-users are provided with 24 hour, 7 days per week toll-free help desk support
and an on-site repair program. The help desk and parts dispatch are handled by
MWS through its toll-free service line, while parts are shipped via overnight
service by CyberStar. Similar to tier one manufacturers, an authorized
CyberStar(R) dealer performs the repair work and is reimbursed for its services.
CyberStar utilizes what it believes is an effective product tracking
system which allows it to track product failure history from initial quality
control testing to customer arrival and up to twelve months thereafter. Each
CyberStar(R) product is sold with a one-year warranty for the benefit of the
end-user. The warranty can be upgraded to either a one- or three-year on-site
warranty for a modest upgrade price.
GOVERNMENT REGULATION
In the United States, the Federal Communications Commission (the "FCC")
regulates the radio frequency emissions of computing equipment. The FCC has
established two standards for computer products, Class A and Class B. Only Class
B products may be sold for use in a residential environment. Both Class A and
Class B products may be sold for use in a commercial environment. All of
CyberStar's current desktop, notebook, workstation and network server systems
are sold under the more restrictive Class B certification.
CyberStar's business also is subject to regulation by various other
federal and state governmental agencies. Such regulation includes the antitrust
regulatory activities of the U.S. Federal Trade Commission and Department of
Justice, the import/export regulatory activities of the U.S. Department of
Commerce and the product safety regulatory activities of the U.S. Consumer
Products Safety Commission.
CyberStar also is required to obtain regulatory approvals in other
countries prior to the sale or shipment of products. In certain jurisdictions,
such requirements are more stringent than in the United States. Many developing
nations are just beginning to establish safety, environmental and other
regulatory requirements, which may vary greatly from U.S. requirements.
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EMPLOYEES
As of July 31, 1999, CyberStar had 18 employees, of which 17 were
full-time employees. None of these employees is represented by a union.
CyberStar believes that its relations with its employees are good.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
CyberStar has two operating divisions, the CyberStar(R) division and
the VAR division. Revenues from CyberStar(R) operations are generated through
the sale of a wide range of computer systems and products, including personal
computers, work stations and file servers, under the CyberStar(R) brand name.
The VAR division is an authorized reseller of products from Compaq, CyberStar,
IBM, Hewlett-Packard and Apple, among others, as well as selling non-branded
products.
CyberStar incurred net losses in both fiscal 1998 and 1999. In both
years, losses resulted from decreased sales and increased operating expenses.
Beginning in fiscal year 1998 and continuing into fiscal year 1999, sales
declined due to a reduction in sales to a major customer. In addition, prices
were reduced in fiscal year 1999 in an effort to stimulate sales volume.
In both years operating expenses increased as CyberStar prepared for
the growth that was anticipated from increased sales volume. In fiscal 1998
CyberStar moved to a location with greater office, assembly and warehouse space.
It also added support staff in the areas of finance and operations management.
In fiscal 1999 CyberStar again added staff, primarily in sales and marketing but
also in development of an e-commerce site. During fiscal 1999, significant
investments in equipment were also made.
In the first quarter of fiscal 2000, desired sales volumes were not
realized. In response, staff levels were reduced and price increases were
initiated. CyberStar began forming relationships with outside sales and
marketing organizations to increase and expand sales volume. The e-commerce site
was launched in September 1999, and CyberStar has begun to make sales
through the site. CyberStar believes that the outside sales and marketing
relationships that it has formed and the potential to utilize the e-commerce
site engine in forming new relationships will have a positive impact on future
sales.
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1999 AND 1998
Sales decreased by 10%, or $522,352, to $4,854,299 in fiscal 1999 from
$5,376,651 in fiscal 1998. This decrease was due primarily to reduced volume of
sales to a major customer (from 44% of total sales to 31%) and price decreases
of between 4% and 5% on the entire product line in an effort to stimulate sales
volume. In fiscal 1999 and fiscal 1998, CyberStar(R) division sales accounted
for 66%, or $3,203,837, and 97%, or $5,215,351, respectively, of total sales.
Sales for the VAR division increased by $1,489,162 to $1,650,462 in fiscal 1999
from $161,300 in fiscal 1998.
Gross profit decreased by 36%, or $358,200, to $638,459 in fiscal 1999
from $996,659 in fiscal 1998. Gross profit as a percentage of sales was 13% in
fiscal 1999 as compared to 18% in fiscal 1998. The decrease in gross profit
percentage of 5% was primarily due to the price reductions noted above, a
$17,374 increase in cost of warehouse supplies, and a $40,569 increase in
freight expense.
Selling, general and administrative expenses increased by 47%, or
$502,143, to $1,567,154 in fiscal 1999 from $1,065,011 in fiscal 1998, and
operating expenses, as a percentage of sales, were 32% in fiscal 1999 as
compared to 20% in fiscal 1998. These increases were primarily due to increases
in employee related expenses ($379,718), occupancy expenses ($23,810), and
depreciation and amortization ($9,578). Staff increases were primarily in sales
and marketing both in anticipation of e-commerce site sales in late 1998 and in
an effort to stimulate sales in general. In addition, CyberStar prepared for an
anticipated increase in sales by moving to a location with more office, assembly
and warehouse space, adding an operations manager, and making significant
investments in equipment.
The loss from operations increased by $860,343 to $(928,695) in fiscal
1999 from $(68,352) in fiscal 1998, reflecting both the decrease in gross profit
of $358,200 and the increase in operating expenses of $502,143.
Interest expense decreased by 28%, or $2,274, to $5,759 in fiscal 1999
from $8,033 in fiscal 1998 primarily as a result of lower average borrowings in
fiscal 1999. CyberStar raised $876,881 through the sale of common stock in a
private offering in fiscal 1999.
As a result of the foregoing factors, net loss increased by $849,285 to
$(920,057) in fiscal 1999 from $(70,772) in fiscal 1998.
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THREE MONTHS ENDED MAY 31, 1999 AND 1998
For the first quarter of fiscal 2000, net sales were $1,151,470,
compared to $1,228,759 in the corresponding fiscal 1999 period. CyberStar(R)
division sales accounted for approximately 66%, or $759,970, of net sales,
compared to 97%, or $1,191,896, in the first quarter of the prior year. This
decrease of $431,926 was due primarily to reduced volume of sales to a major
customer (from 43% of total sales to 11%). Sales for the VAR Division increased
by $354,637 from $36,863 in the first quarter of fiscal 1999 to $391,500 in the
first quarter of fiscal 2000.
Gross profit for the first quarter of fiscal 2000 was $195,906,
compared to $203,893 in the prior year. In both periods, gross profit was 17% of
sales. The decrease in gross profit dollars of $7,987 is a result of lower sales
in the first quarter of fiscal 2000 as compared to the prior year period.
Selling, general and administrative expenses were $264,846, or 23% of
sales, in the first quarter of fiscal 2000, compared to $361,448, or 29% of
sales in the corresponding 1999 period. This decrease of $96,602 is due
primarily to reduction in staff, resulting in a decrease of $160,985 in salary
and other employee-related expenses.
The loss from operations was $(68,940) for the first quarter of fiscal
2000, compared to $(157,555) in first quarter of fiscal 1999. This improvement
of $88,615 primarily reflects the effects of the decrease in selling, general
and administrative expenses discussed above.
As a result of the foregoing factors, net loss for the first quarter of
fiscal 2000 was $(70,473), compared to $(161,947) in the corresponding period in
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
CyberStar's cash position at February 28, 1999 was $73,191, a decrease
of $30,817 from $104,008 at February 28, 1998. During the twelve months ended
February 28, 1999, net cash used in operating activities was $694,560 primarily
due to the net loss of $920,057.
Net cash from financing activities of $751,881 in the twelve months
ended February 28, 1999 consisted primarily of net proceeds of $876,881 from the
sale of common stock which was offset by payments of $125,000 on outstanding
borrowings under CyberStar's revolving credit facility.
Net cash flows used in investing activities in the twelve months ended
February 28, 1999 was $88,138 due to the purchases of property and equipment.
CyberStar's cash position at May 31, 1999 was $22,715, a decrease of
$50,476 from $73,191 at February 28, 1999, primarily due to repayment of debt
and cash provided by operating activities.
During the three months ended May 31, 1999, net cash provided in
operating activities was $91,096 primarily due to the reduction of operating
expenses resulting from the decrease in staff as a result of delays in
development of the e-commerce site and decreased sales.
Net cash of $150,000 used for financing activities in first quarter
2000 consisted of payments on outstanding borrowings under the revolving credit
facility.
CyberStar had a revolving line of credit of $150,000 with a bank. This
line of credit was secured by all of CyberStar's assets and the personal
guaranty of the majority shareholder. Borrowings under the line accrued interest
at a rate of 1.5% over prime rate and the balance outstanding at February 28,
1999 was $150,000. The balance outstanding was paid in full subsequent to
February 28, 1999. The line of credit expired on April 25, 1999 and was not
renewed.
In May 1999 CyberStar entered into an agreement whereby it can sell
receivables or borrow money up to 80% of the eligible receivable balance.
CyberStar pays a 1% commission on all receivables sold or is charged interest at
a rate of 8% or prime plus 1-1/2%, whichever is greater, for receivables which
are borrowed against. This agreement is for one year and automatically renews
until either party terminates the agreement. The minimum commissions payable
under this agreement are $24,000 per year.
In fiscal 1999 several CyberStar sales representatives knowingly booked
sales and shipped products to fictitious customers. Upon discovery, the sales
and accounts receivable resulting from these transactions were reversed in
CyberStar's records. A claim was filed under CyberStar's insurance policy and an
insurance receivable was recorded in an amount equal to the value of inventory
lost. Subsequent to May 31, 1999, CyberStar received payment of the insurance
receivable in the amount of $246,380.
Management believes that cash on hand together with funds available
under the agreement noted above will be sufficient to satisfy fiscal 2000
operating requirements.
YEAR 2000 READINESS
Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to
accurately process certain date-based
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information at or after the year 2000. This is commonly referred to as the "Year
2000 issue." CyberStar has analyzed the Year 2000 readiness issues related to
its computer systems and determined that all systems critical to managing the
business are Year 2000 compliant and its customer service and billing vendor's
systems are also Year 2000 compliant.
CyberStar has identified its critical component and service providers
and is contacting each such vendor to assess that vendor's Year 2000 readiness
and expects to complete a review of all of its critical vendors by no later than
October 15, 1999. Because CyberStar is relying on information provided to it
by third parties to assess the year 2000 readiness of such vendors, CyberStar
cannot provide assurances that all of its critical vendors are or will be Year
2000 ready. Therefore, CyberStar cannot provide assurances that CyberStar
will not be adversely affected by the Year 2000 change.
CyberStar has analyzed the Year 2000 readiness status of the products
it manufactures and implemented an ongoing testing and monitoring program to
help enable all current computer hardware offerings to meet Year 2000 readiness
standards. CyberStar's current product offerings meet Year 2000 readiness
standards. Hardware previously manufactured by CyberStar can be updated to meet
Year 2000 readiness standards through BIOS upgrades or software patches.
CyberStar has created a Web site, at www.cyberstarpc.com/y2000, which contains
detailed information about the Year 2000 issue, Year 2000 readiness standards
and CyberStar's Year 2000 program. Through the Web site, customers can assess
the Year 2000 readiness of their hardware and can obtain software patches and
BIOS upgrades, free of charge, to help prepare the hardware for the Year 2000
rollover. Customers without Internet access may request free copies of the
software patches and BIOS upgrades by telephone or mail. CyberStar's Year 2000
readiness program applies only to CyberStar hardware manufactured by CyberStar.
Although CyberStar has attempted to ascertain the year 2000 status of third
party software and peripherals loaded on or distributed with CyberStar's
computer systems, it does not and cannot guarantee the Year 2000 status of any
software or peripherals provided by third parties.
CyberStar expects that the total costs of its Year 2000 readiness
program will not be material to its financial condition or results of operation.
All costs are charged to expense as incurred and do not include potential costs
related to any customers or other claims or the cost of internal software and
hardware replaced in the normal course of business.
CyberStar believes that the most likely worst case scenarios would
involve the interruption of crucial suppliers as a result of infrastructure
failures or third party vendor failures. As a result, CyberStar is developing
contingency plans that will address each of the most likely worst case
scenarios. Such contingency plans are expected to be complete no later than
December 1, 1999. CyberStar believes that it is taking appropriate steps to
assess and address its Year 2000 issues and currently does not expect that its
business will be adversely affected by Year 2000 issues in any material respect.
Nevertheless, achieving Year 2000 readiness is dependent on many factors, some
of which are not completely within its
10
<PAGE>
control. Should either CyberStar's internal systems and devices or the internal
systems and devices or one or more critical vendors fail to achieve Year 2000
readiness, CyberStar's business and its results of operations could be adversely
affected. There can be no assurance that CyberStar or its business will not be
adversely impacted by any year 2000 problems that may be experienced by its
customers, suppliers, dealers, distributors, regulators or others.
FORWARD-LOOKING INFORMATION
Any statements contained herein related to future events are
forward-looking statements and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. These statements are
based upon management's current expectations and judgments about future
developments in CyberStar's business and may be affected by several factors,
including, without limitation, the ability to respond to customer demands, the
success of the e-commerce site, the ability to sell products at a profitable
price, readiness for Year 2000 as well as the readiness of third parties with
whom CyberStar does business, and other factors affecting the computer industry
in general. Readers are cautioned not to place undue reliance on forward-looking
statements. CyberStar undertakes no obligation to update any such statements to
reflect actual events.
ITEM 3. DESCRIPTION OF PROPERTY.
CyberStar leases approximately 14,265 square feet of space used for
offices, assembly, manufacturing and packaging at 6825 Shady Oak Road, Eden
Prairie, Minnesota 55344 at a monthly rent of $10,700. This lease expires on
April 30, 2000. The Company believes that these premises will meet its
requirements for facilities for the remainder of the lease term.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of July 31, 1999
with respect to the number of shares of Common Stock beneficially owned by (i)
each person known by CyberStar to own beneficially 5% or more of the Common
Stock; (ii) each director; (iii) the Chief Executive Officer, and (iv) all
directors and executive officers as a group. Unless otherwise noted, each person
listed below has sole voting and investment power with respect to his shares.
The address for each individual set forth below is 6825 Shady Oak Road, Eden
Prairie, Minnesota 55344.
PERCENTAGE OF
NUMBER OF OF OUTSTANDING
NAME OF BENEFICIAL OWNER(1) SHARES SHARES
--------------------------- --------- --------------
Richard A. Pomije 3,112,386 79.1%
James T. Greenfield 100,000(2) 2.5
Ed Havlik 5,000 *
All directors and executive officers as a group
(5 persons) 3,284,054(3) 80.1
11
<PAGE>
- --------------
* Indicates an amount less than 1%
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Commission and, accordingly, may include securities
owned by or for, among others, the spouse, children or certain other
relatives of such person as well as other securities as to which the person
has or shares voting or investment power or has the right to acquire within
60 days.
(2) Includes 100,000 shares of Common Stock purchasable pursuant to the
exercise of currently exercisable options.
(3) Includes 166,668 shares of Common Stock purchasable pursuant to the
exercise of currently exercisable options.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Set forth below is certain information concerning each of the
directors, executive officers and significant employees of CyberStar.
NAME AGE POSITION
---- --- --------
Richard A. Pomije 44 President, Secretary, Treasurer
and Director
Brian Fredrickson 40 National Marketing Manager
Richard Palmer 40 Senior Buyer
James T. Greenfield 54 Director
Ed Havlik 43 Director
RICHARD A. POMIJE has been with CyberStar since 1982 and has served as
President, Secretary, Treasurer, and a director since 1996. He had previously
served in such positions from 1983 through 1992. Mr. Pomije's primary
responsibilities include overall strategic planning. Mr. Pomije holds a degree
in Communication Technology, Audio Technology and Technical Services from Brown
Institute. Mr. Pomije also received a First Class FCC license with radar
endorsement.
BRIAN FREDRICKSON has been the National Marketing Manager of the
CyberStar(R) Division since February 1995. Mr. Fredrickson is responsible for
the overall sales and marketing efforts of the CyberStar(R) Division and the
hiring, training and management of the employees directly involved with the
CyberStar(R) Division. From 1993 to 1995, Mr. Fredrickson was the Sales and
Marketing Manager of CyberStar Computer Systems, Inc.
RICHARD PALMER has been the Purchasing Manager at CyberStar since July
1993. Mr. Palmer is responsible for the overall buying and procurement of
products. He also assists with inventory management and product management. From
1990 to 1993 Mr. Palmer was a Senior Account Executive with ComputerWare Data
Products where he was responsible for procuring computer products for the sale
to end-user business accounts.
12
<PAGE>
JAMES T. GREENFIELD became a director in December 1997. Mr. Greenfield
had previously served as Secretary and Treasurer of CyberStar from 1992 to 1996.
From 1982 through the present, Mr. Greenfield has served as the President of
Stone Fabrics, Inc., a wholesaler of fabrics. Mr. Greenfield is the
brother-in-law of Mr. Pomije.
ED HAVLIK has been a director since February 1998. Since 1990, Mr.
Havlik has served as National Sales Manager for Panasonic Multimedia Division.
Until 1994, Mr. Havlik also served as Western Regional Manager for Panasonic
OAG.
Directors are elected at the annual meeting of the shareholders and
serve until their successors are elected and qualified. Officers are elected by
the Board of Directors and serve at the discretion of the Board of Directors or
until their earlier resignation or removal.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid for services
rendered during the fiscal years ended February 28, 1999, 1998 and 1997 to the
Chief Executive Officer. No officer earned cash compensation in excess of
$100,000 in fiscal 1999.
ANNUAL COMPENSATION
--------------------------------------
NAME AND OTHER
PRINCIPAL POSITION YEAR SALARY($) ANNUAL COMPENSATION(1)
- ----------------------- ------ ----------- ------------------------
Richard A. Pomije, 1999 $ 69,615 $ 15,094
Chief Executive Officer 1998 112,692 19,451
1997 55,443 16,849
(1) Amounts paid for Mr. Pomije's business use of automobiles.
No stock options have been granted to Mr. Pomije.
STOCK OPTION PLAN
In December 1996, the Board of Directors and shareholders adopted the
CyberStar(R) Computer Corporation 1996 Stock Option Plan (the "Plan"). The Plan
provides for the granting of options to purchase shares of Common Stock to key
employees, directors and consultants. CyberStar has reserved 1,000,000 shares of
Common Stock for issuance under the Plan. The Plan provides for the granting of
both incentive stock options (as defined in Section 422 of the Internal Revenue
Code of 1986, as amended) and non-statutory stock options (options which do not
meet the requirements of Section 422). The exercise price of incentive options
granted under the Plan may not be less than the fair market value of the Common
Stock on the date of grant. The exercise price of non-statutory options granted
under the Plan may not be less than 85% of the fair market value of the Common
Stock on the date of grant. As of May 31, 1999, options to purchase 302,184
shares of Common Stock at an average price of $1.85 per share were outstanding
under the Plan.
13
<PAGE>
DIRECTORS' COMPENSATION
To date, CyberStar has not paid any cash compensation to its directors
for their services as directors, but may pay fees to its outside directors when
it becomes profitable.
In June 1998, an option to purchase 100,000 shares of Common Stock at
$3.00 per share was granted to James T. Greenfield.
In July 1999, CyberStar issued 5,000 shares of its Common Stock to Ed
Havlik as partial consideration for his service on the Board. Such shares were
valued at $12,500 as of the date of issuance.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 8. DESCRIPTION OF SECURITIES.
GENERAL
The description of CyberStar's capital stock contained herein is
qualified by reference to CyberStar's Articles of Incorporation, as amended to
date, and Bylaws. CyberStar's authorized capital stock consists of 20,000,000
shares, par value $0.01 per share.
COMMON STOCK
As of the date hereof, CyberStar has 3,933,095 shares of Common Stock
issued and outstanding and an additional 1,050,000 shares of Common Stock
reserved for issuance under stock option plans and outstanding warrants.
CyberStar has authorized only one class of Common Stock. The holders of Common
Stock are entitled to one vote for each share on all matters voted upon by the
shareholders, including the election of directors, and there is no cumulative
voting. The holders of the Common Stock are also entitled to such dividends as
may be declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are entitled
to share ratably in the net assets of CyberStar upon liquidation after payment
or provision for all liabilities. The holders of Common Stock have no preemptive
rights to purchase shares of stock of CyberStar. Shares of Common Stock are not
subject to any redemption provisions and are
14
<PAGE>
not convertible into any other securities of CyberStar. All outstanding shares
of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors, without further action by the shareholders, is
authorized to issue preferred stock or other senior equity securities in one or
more class or series and to determine preferences as to dividends and in
liquidation, and conversion, redemption and other rights of each such series.
The Board of Directors could issue a class or series of preferred stock or other
senior equity securities with rights more favorable with respect to dividends,
voting and liquidation than those held by the holders of Common Stock. The
issuance of preferred stock or other senior equity securities may have the
effect of delaying, deferring or preventing a change in control of CyberStar. No
shares of preferred stock or other senior equity securities are outstanding, and
CyberStar has no present plans to issue such stock or securities.
ANTITAKEOVER PROVISIONS
The existence of authorized but unissued preferred stock described
above, and certain provisions of CyberStar's Articles of Incorporation and
Minnesota law, described below, could have an antitakeover effect. These
provisions could have the effect of discouraging some attempts to acquire
CyberStar which could deprive shareholders of opportunities to sell their shares
of Common Stock at prices higher than prevailing market prices.
Section 302A.671 of Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of a Minnesota corporation such
as CyberStar (from a person other than the company, and other than in connection
with certain mergers and exchanges to which the company is a party) resulting in
the beneficial ownership of 20% or more of the voting stock then outstanding.
Section 302A.671 requires approval of any such acquisitions by a majority vote
of the company's shareholders prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the company within 30 days after
the acquiring person has failed to give a timely information statement to the
company or the date the company's shareholders have voted not to grant voting
rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by a company, or any subsidiary of the company, with any
shareholder that purchases 10% or more of the company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors before the interested shareholder's share acquisition
date.
WARRANTS
CyberStar has outstanding warrants exercisable for an aggregate of
50,000 shares of Common Stock at an exercise price of $2.20 per share. These
warrants, which expire April 27, 2003, were issued to the selling agent for a
private placement in 1998. The warrants provide for antidilution adjustments in
the event of certain mergers, consolidations, reorganizations, recapitalization,
stock dividends, stock splits or other changes in corporate structure.
15
<PAGE>
Holders of the warrants are entitled to certain participatory and demand
registration rights for the shares of Common Stock issuable upon exercise of the
warrants.
DIVIDEND POLICY
To date CyberStar has paid no cash dividends on its Common Stock.
CyberStar intends to retain its future earnings, if any, to make acquisitions,
finance the expansion of its business and for general corporate purposes. It
does not anticipate paying any cash dividends on its Common Stock in the future.
Any payment of future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that the Board of
Directors deems relevant.
TRANSFER AGENT
The transfer agent for the Common Stock is Signature Stock Transfer
Inc.
16
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS.
CyberStar's Common Stock has been traded on the OTC Bulletin Board
("OTCBB") since June 12, 1998. The high and low bid prices for the last three
quarters in fiscal 1999 and the first quarter of fiscal 2000 as provided by
OTCBB are as follows:
QUARTER ENDED HIGH LOW
August 31, 1998 $3.625 $2.50
November 30, 1998 3.375 1.50
February 28, 1999 2.125 1.00
May 31, 1999 2.75 1.50
These quotations represent interdealer prices, without retail markup,
markdown, or commission, and may not reflect actual transactions.
As of August 26, 1999, there were approximately 22 record holders of
CyberStar's Common Stock.
CyberStar has paid no cash dividends in its Common Stock.
ITEM 2. LEGAL PROCEEDINGS.
On July 22, 1999, Martin J. McIntyre commenced an action against
CyberStar in the Circuit Court of Cook County, Illinois, alleging that he is
entitled to compensation for providing services to CyberStar in connection with
obtaining financing. Mr. McIntyre claims that he is entitled to $200,000 in
commissions (based on his assumption that CyberStar received at least $5,000,000
of financing) and warrants to purchase a number of shares of Common Stock equal
to 5% of the shares sold in the offering. CyberStar intends to file a motion
seeking an order to dismiss and compelling arbitration pursuant to the agreement
with Mr. McIntyre. CyberStar believes that Mr. McIntyre's claim is without merit
and intends vigorously to defend against the claim.
CyberStar is, from time to time, a party to litigation arising in the
normal course of its business. CyberStar believes that none of these actions
will have a material adverse effect on its financial condition or results of
operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following share amounts have been adjusted to reflect a reverse
stock split in December 1997.
In February 1997, CyberStar sold 244,280 shares of Common Stock to
eight private investors for aggregate consideration of $671,770. In March 1997,
CyberStar sold 60,000 shares of Common Stock to four private investors (one of
whom had also purchased in February 1997) for aggregate consideration of
$180,000. No selling agent was used for these sales.
In April 1998, CyberStar sold 500,000 shares of Common Stock to ten
investors (five of whom had invested in 1997) for aggregate consideration of
$1,000,000 (less the selling agent's commissions and expenses of $100,000).
CyberStar also issued warrants to purchase
17
<PAGE>
50,000 shares of Common Stock at $2.20 per share to the selling agent, Global
Financial Group, Inc. This offering was conducted in compliance with Rule 504 of
Regulation D under the Securities Act of 1933.
In September 1998, CyberStar issued 11,429 shares of Common Stock,
valued at $40,000, as consideration for the purchase of the assets of Vision
Business Systems.
In July 1999, CyberStar issued 5,000 shares of Common Stock to Ed
Havlik, a director (as partial consideration for his service on the Board).
CyberStar has also granted options to purchase, in the aggregate,
438,684 shares of Common Stock, at an average exercise price of $1.95, to
employees. None of these options has been exercised, and options for 81,500
shares have been cancelled. CyberStar plans to rely on Rule 701 under the
Securities Act for these transaction.
Except as noted above, CyberStar relied upon the exemption from the
registration provided by Section 4(2) of the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Unless prohibited in a corporation's articles or bylaws, Minnesota
Statutes Section 302A.521 requires indemnification of officers, directors,
employees and agents, under certain circumstances, against judgments, penalties,
fines, settlements and reasonable expenses (including attorneys' fees and
disbursements) incurred by such persons in connection with the acts or omissions
of such persons in their official capacities. Section 302A.521 of the Minnesota
Business Corporation Act also provides that CyberStar shall indemnify any
director, officer, employee or agent of CyberStar made or threatened to be
made a party to a legal proceeding, by reason of the former or present official
capacity of the person, against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
certain statutory standards are met.
CyberStar's Articles of Incorporation provide that a director shall not
be personally liable to the company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for dividends, stock repurchases and other distributions
made in violation of Minnesota law or for violations of federal or state
securities laws, (iv) for any transaction from which the director derived an
improper personal benefit, or (v) for any act or omission occurring prior to the
effective date of the provision in the Articles of Incorporation limiting such
liability.
CyberStar's Bylaws provide that each director and officer, whether or
not then in office, shall be indemnified against all costs, attorneys' fees and
expenses reasonably incurred by or imposed upon him or her in connection with or
arising out of any action, suit, or proceeding in which he or she may be
involved by reason of being or having been a director or officer of CyberStar or
of a subsidiary of CyberStar; said expenses shall include the cost of reasonable
settlements made with view of curtailment of costs of litigation. Neither
CyberStar nor any subsidiary shall, however, indemnify any director or officer
for expenses incurred or imposed upon him or her in any action, suit, or
proceeding
18
<PAGE>
brought against him or her by CyberStar or any subsidiary with respect to
matters as to which he or she shall be finally adjudged in any such action,
suit, or proceeding to have been derelict in the performance of his or her duty
as officer or director, nor in respect of any matter on which any settlement or
compromise is effected, if the total expense which might reasonably be incurred
by such director or officer in conducting such litigation to a final conclusion
would be less than the settlement amount. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of CyberStar pursuant to the Minnesota
Statutes or otherwise, CyberStar has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CyberStar intends to maintain liability insurance for the benefit of
its directors and officers.
19
<PAGE>
CYBERSTAR COMPUTER CORPORATION
FINANCIAL STATEMENTS
Years ended February 28, 1998 and 1999
CONTENTS
Report of Independent Auditors.................................................1
Financial Statements
Balance Sheets.................................................................2
Statements of Operations.......................................................3
Statement of Stockholders' Equity..............................................4
Statements of Cash Flows.......................................................5
Notes to Financial Statements..................................................6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CyberStar Computer Corporation
We have audited the accompanying balance sheets of CyberStar Computer
Corporation as of February 28, 1998 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 CyberStar Computer Corporation
at February 28, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
April 9, 1999
1
<PAGE>
CYBERSTAR COMPUTER CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28 MAY 31,
1998 1999 1999
---------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 104,008 $ 73,191 $ 22,715
Accounts receivable, less allowance for doubtful
accounts - $20,000 at February 28, 1998, and
$16,700 at February 28, 1999 and May 31, 1999 1,014,408 693,490 484,289
Inventories 437,301 463,303 367,122
Insurance receivable -- 246,380 246,380
Deferred financing costs 47,600 25,000 25,000
Prepaid expenses 1,907 15,680 15,887
---------------------------------------------
Total current assets 1,605,224 1,517,044 1,161,393
Property and equipment:
Office equipment and furniture 119,896 224,404 215,976
Leasehold improvements 33,115 37,270 37,270
Production equipment 27,382 46,857 46,857
---------------------------------------------
180,393 308,531 300,103
Accumulated depreciation (57,504) (133,988) (153,109)
---------------------------------------------
122,889 174,543 146,994
---------------------------------------------
Total assets $ 1,728,113 $ 1,691,587 $ 1,308,387
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 275,000 $ 150,000 $ --
Accounts payable 621,110 647,152 568,714
Accrued payroll and payroll taxes 34,590 34,273 12,505
Accrued liabilities 59,946 125,871 63,350
---------------------------------------------
Total current liabilities 990,646 957,296 644,569
Stockholders' equity:
Common stock, $.01 par value
Authorized shares - 20,000,000
Issued and outstanding shares - 3,416,666 at
February 28, 1998, and 3,928,095 at
February 28, 1999 and May 31, 1999 34,167 39,281 39,281
Additional paid-in capital 989,262 1,901,029 1,901,029
Accumulated deficit (285,962) (1,206,019) (1,276,492)
---------------------------------------------
Total stockholders' equity 737,467 734,291 663,818
---------------------------------------------
Total liabilities and stockholders' equity $ 1,728,113 $ 1,691,587 $ 1,308,387
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
CYBERSTAR COMPUTER CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED FEBRUARY 28 ENDED MAY 31
1998 1999 1998 1999
-------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales $ 5,376,651 $ 4,854,299 $ 1,228,759 $ 1,151,470
Cost of sales 4,379,992 4,215,840 1,024,866 955,564
-------------------------------------------------------------
Gross profit 996,659 638,459 203,893 195,906
Operating expenses:
General and administrative 845,580 1,412,754 332,693 245,490
Sales and marketing 219,431 154,400 28,755 19,356
-------------------------------------------------------------
1,065,011 1,567,154 361,448 264,846
-------------------------------------------------------------
Loss from operations (68,352) (928,695) (157,555) (68,940)
Other income (expense):
Interest income 4,356 17,824 811 1,285
Interest expense (8,033) (5,759) (4,294) (2,192)
Other income (expense) 1,257 (3,427) (909) (626)
-------------------------------------------------------------
(2,420) 8,638 (4,392) (1,533)
-------------------------------------------------------------
Net loss $ (70,772) $ (920,057) $ (161,947) $ (70,473)
=============================================================
Basic and dilutive net loss
per share $ (.02) $ (.24) $ (.05) $ (.02)
Weighted average shares
outstanding 3,232,199 3,880,083 3,182,893 3,928,095
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
CYBERSTAR COMPUTER CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 3,170,870 $ 31,709 $ 818,391 $ (215,190) $ 634,910
Sale of common stock, net of offering costs
of $6,671 14,365 144 173,185 -- 173,329
Stock price adjustment 231,431 2,314 (2,314) -- --
Net loss -- -- -- (70,772) (70,772)
-------------------------------------------------------------------------
Balance, February 28, 1998 3,416,666 34,167 989,262 (285,962) 737,467
Sale of common stock, net of offering costs
of $123,119 500,000 5,000 871,881 -- 876,881
Issuance of common stock for asset purchase 11,429 114 39,886 -- 40,000
Net loss -- -- -- (920,057) (920,057)
-------------------------------------------------------------------------
Balance, February 28, 1999 3,928,095 39,281 1,901,029 (1,206,019) 734,291
Net loss -- -- -- (70,473) (70,473)
-------------------------------------------------------------------------
Balance, May 31, 1999 (unaudited) 3,928,095 $ 39,281 $ 1,901,029 $(1,276,492) $ 663,818
=========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
CYBERSTAR COMPUTER CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 THREE MONTHS ENDED MAY 31
1998 1999 1998 1999
----------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (70,772) $ (920,057) $ (161,947) $ (70,473)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation 33,453 76,484 8,000 19,121
Changes in operating assets and
liabilities:
Accounts receivable (766,607) 320,918 437,537 209,201
Inventories (236,006) (26,002) 142,236 96,181
Insurance receivable -- (246,380) -- --
Deferred financing costs (47,600) 22,600 47,600 --
Prepaid expenses (707) (13,773) 1,867 (207)
Accounts payable 465,802 26,042 (411,729) (78,438)
Accrued expenses 42,973 65,608 5,324 (84,289)
----------------------------------------------------------
Net cash (used in) provided by operating
activities (579,464) (694,560) 68,888 91,096
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and
equipment -- -- -- 8,428
Purchases of property and equipment (125,876) (88,138) (39,979) --
----------------------------------------------------------
Net cash (used in) provided by investing
activities (125,876) (88,138) (39,979) 8,428
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 173,329 876,881 901,921 --
Net proceeds (payments) on line of credit 275,000 (125,000) (275,000) (150,000)
----------------------------------------------------------
Net cash provided by (used in) financing
activities 448,329 751,881 626,921 (150,000)
----------------------------------------------------------
(Decrease) increase in cash (257,011) (30,817) 655,830 (50,476)
Cash at beginning of period 361,019 104,008 104,008 73,191
----------------------------------------------------------
Cash at end of period $ 104,008 $ 73,191 $ 759,838 $ 22,715
==========================================================
Supplemental information:
Cash paid during the period for interest $ 6,736 $ 5,759 $ 4,294 $ 2,912
Property and equipment acquired with
common stock issuance -- 40,000 -- --
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company currently has two operating divisions, Cyberstar and VAR. The
Cyberstar Division manufactures and markets a line of microcomputers, including
personal computers, workstations and file servers under the Cyberstar brand
name. The VAR Division currently is an authorized reseller of products from
Compaq, IBM, Digital Equipment, and Hewlett-Packard, among others.
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of May 31, 1999 and for the three-month
periods ended May 31, 1999 and 1998 are unaudited. In the opinion of management
of the Company, these financial statements reflect all adjustments, consisting
only of normal and recurring adjustments necessary for a fair presentation of
the financial statements. The results of operations for the three-month period
ended May 31, 1999 are not necessarily indicative of the results that may be
expected for the full year ending February 29, 2000.
NET LOSS PER SHARE
Basic net income per share is computed based on the weighted average number of
common shares outstanding during each period. Diluted net income per share
includes the incremental shares assumed issued on the exercise of stock options.
Basic and diluted net loss per share are equal because the effect of outstanding
stock options and warrants is antidilutive.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased components.
6
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized over the shorter of
the related lease term or estimated useful lives on a straight-line basis.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has elected to follow the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("Statement 123"). Accordingly, the Company has made pro forma disclosures of
what net loss would have been had the provisions of Statement 123 been applied
to the Company's stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
7
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses all advertising as incurred. Advertising costs charged to
operations were $40,885 and $53,853 for the years ended February 28, 1998 and
1999, respectively; and $4,997 and $500 for the three months ended May 31, 1998
and 1999, respectively.
2. NOTE PAYABLE TO BANK
The Company had a revolving line of credit of $150,000 with a bank. This line of
credit was secured by all of the Company's assets and the personal guaranty of
the majority stockholder. Borrowings under the line accrued interest at a rate
of 1.5% over the prime rate (9.5% at February 28, 1999) and amounted to $150,000
at February 28, 1999. On March 26, 1999, the line of credit was renewed until
April 25, 1999, at which time the line of credit was not renewed.
3. OPERATING LEASES
The Company leases vehicles and office space under operating leases that expire
at various times through 2001.
Minimum lease payments on these leases for years after 1999 are as follows:
2000 $192,443
2001 51,243
------------
$243,686
============
Rent expense was $59,316 and $156,137 for the years ended February 28, 1998 and
1999, respectively. Rent expense was $37,279 and $51,564 for the three months
ended May 31, 1998 and 1999, respectively.
8
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
At February 28, 1999, the Company had net operating loss carryforwards of
approximately $1,054,000. The net operating loss carryforwards are available to
offset future taxable income through 2019 and may be subject to the limitations
under Section 382 of the Internal Revenue Code if significant changes in the
equity ownership of the Company have occurred. Significant components of the
Company's deferred tax assets are as follows:
FEBRUARY 28
1998 1999
-----------------------------
Deferred tax assets:
Net operating loss carryforwards $ 94,200 $ 426,300
Allowance for doubtful accounts 6,800 5,700
Accrued vacation 3,600 1,300
-----------------------------
Deferred tax assets before valuation allowance 104,600 433,300
Valuation allowance (104,600) (433,300)
-----------------------------
Net deferred tax assets $ -- $ --
=============================
5. MAJOR CUSTOMERS
The Company had one customer which represented 44% of sales in 1998 and one
customer which represented 31% of its sales in 1999. The accounts receivable
balance from these major customers as of February 28, 1998 and 1999 was $552,170
and $226,662, respectively. For the three months ended May 31, 1998 and 1999,
the Company had one customer which represented 43% of sales and two customers
which represented 22% and 11% of sales, respectively. At May 31, 1999, the
accounts receivable balance from these customers was $133,530.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1997, the Company sold 14,365 shares of common stock at $12.53 per
share from which the Company received net proceeds of $173,329.
9
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1997, the Board of Directors approved an adjustment of the purchase
price of each stockholder who purchased common stock in the private placements
in February and March 1997. The purchase price of the February 1997 private
placement was adjusted from $11.49 to $2.75 resulting in an additional 185,796
shares being issued. The purchase price of the March 1997 private placement was
adjusted from $12.53 per share to $3.00 per share resulting in an additional
45,635 shares being issued.
In April 1998, the Company sold 500,000 shares of common stock at $2.00 per
share from which the Company received proceeds of $876,881, net of direct
financing costs. In connection with the sale of the shares, the Company issued a
warrant to the selling agent exercisable for an aggregate of 50,000 shares of
Common Stock at an exercise price of $2.20 per share. The warrant expires in
April 2003.
In September 1998, the Company issued 11,429 shares of common stock at $3.50 per
share in exchange for certain assets.
STOCK OPTIONS
The Company has a stock option plan that includes both incentive and
non-statutory stock options granted to directors, officers, employees and
consultants of the Company. The maximum number of shares of Common Stock
reserved for issuance is 1,000,000 shares under the 1996 Stock Option Plan.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OUTSTANDING AVERAGE EXERCISE
SHARES --------------------------- PRICE
AVAILABLE TOTAL SHARES PER SHARE
FOR GRANT SHARES EXERCISABLE OUTSTANDING
--------------------------------------------------------
<S> <C> <C> <C> <C>
Establishment of Stock Option Plan 478,828 -- --
---------------------------------------
Balance at February 28, 1998 478,828 -- --
Additional shares reserved 521,172 -- --
Options granted (338,684) 338,684 -- $1.86
Options becoming exercisable -- -- 211,668 --
---------------------------------------
Balance at February 28, 1999 661,316 338,684 211,668 1.86
Options canceled 36,500 (36,500) -- 1.97
---------------------------------------
Balance at May 31, 1999 (unaudited) 697,816 302,184 211,668 $1.85
=======================================
</TABLE>
10
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices for options outstanding as of February 28, 1999 ranged from
$1.75 to $3.00. The weighted average exercise price of exercisable options
outstanding was $1.75 at February 28, 1999 and May 31, 1999. The weighted
average remaining contractual life is 6.5 years at February 28, 1999.
In February 1999, the exercise price for certain outstanding options was
repriced from $3.00 to $1.75. The total number of repriced options was 308,334.
The Company has 30,350 options which begin to vest on the one-year anniversary
of the date at which the Company completes an initial public offering, if ever.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss is required by Statement 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of Statement 123. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for 1999, respectively:
risk-free interest rates of 5.0% and a weighted average expected life of the
option of five years. The weighted average fair value of options granted during
1999 was $.39.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
11
<PAGE>
CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999
-------------
Pro forma net loss $(1,004,336)
Basic and dilutive pro forma net loss per share $(.26)
7. SUBSEQUENT EVENTS
In May 1999, the Company entered into an agreement whereby they can sell
receivables or borrow money up to 80% of the eligible receivable balance. The
Company pays a 1% commission on all receivables sold or is charged interest at a
rate of 8% or prime plus 1 1/2%, whichever is greater, for receivables which are
borrowed against. This agreement is for one year and automatically renews until
either party terminates the agreement. The minimum commissions payable under
this agreement is $24,000 per year.
12
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.
The exhibits listed in the following table have been filed as part of
this Registration Statement.
*2.1 Articles of Incorporation of the Company, as amended and restated to
date
*2.2 Bylaws of the Company
*3.1 Specimen form of the Company's Common Stock Certificate
*3.2 Form of warrant for shares of the Company's Common Stock
*6.1 Lease for facility at 6825 Shady Oak Road
*6.2 1996 Employee Stock Option Plan, as amended to date
10.1 Consent of Ernst & Young LLP
*27 Financial Data Schedules
* Filed previously.
ITEM 2. DESCRIPTION OF EXHIBITS.
See Item 1, above.
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amendment to registration statement on Form 10-SB to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: October 14, 1999
----------------------
CYBERSTAR(R) COMPUTER CORPORATION
By /s/ Richard A. Pomije
--------------------------------------
Richard A. Pomije
President and Chief Executive Officer
EXHIBIT 10.1
Consent of Ernst & Young LLP
We consent to the use of our report dated April 9, 1999 in the Registration
Statement (Form 10-SB) of CyberStar Computer Corporation for the registration of
its Common Stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 13, 1999
