SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934
For the quarterly period ended August 31, 2000.
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from ______________________ to ____________________
Commission File No. 000-27225
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ENETPC, INC.
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(Exact name of small business issuer as specified 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, Minnesota 55344
-------------------------------------------- ----------------------
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (952) 943-1598
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CYBERSTAR COMPUTER CORPORATION
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
The number of shares of the issuer's Common Stock outstanding at August
31, 2000 was 4,691,496 shares.
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<CAPTION>
ENETPC, INC.
TABLE OF CONTENTS
Page No.
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Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of August 31, 2000 (unaudited) and February 29, 2000 3
Statements of Operations for Three Months and Six Months Ended August 31, 2000 and 1999 4
(unaudited)
Statements of Cash Flows for the Six Months Ended August 31, 2000 and 1999 (unaudited) 5
Notes to the Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
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2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
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<CAPTION>
ENETPC, INC.
BALANCE SHEETS
AUGUST 31 FEBRUARY 29
2000 2000
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 766,871 $ 496,486
Accounts receivable, less allowance
for doubtful accounts - $68,466
at August 31, 2000 and
$80,500 at February 29, 2000 893,191 574,506
Inventories 463,643 295,511
Prepaid expenses 41,785 30,216
--------------- -----------------
Total current assets 2,165,490 1,396,719
Property and equipment:
Office equipment and furniture 397,770 260,949
Leasehold improvements 37,270 37,270
Production equipment 55,983 46,915
--------------- -----------------
491,023 345,134
Accumulated depreciation (261,030) (222,656)
--------------- -----------------
229,993 122,478
Goodwill 18,291 0
--------------- ------------------
Total assets $ 2,413,774 $ 1,519,197
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 300,000 $ 0
Accounts payable 26,383 239,329
Accrued payroll and payroll taxes 18,219 39,874
Accrued liabilities 80,995 38,176
--------------- ------------------
Total current liabilities 425,597 317,379
Shareholders' equity:
Common stock, $.01 par value
Authorized shares - 20,000,000
Issued and outstanding shares - 4,691,496
at August 31, 2000 and 4,333,095
at February 29, 2000 46,915 43,331
Additional paid-in capital 4,694,607 3,069,049
Deferred compensation (688,272) (237,370)
Accumulated deficit (2,065,073) (1,673,192)
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Total shareholders' equity 1,988,177 1,201,818
---------------- -------------------
Total liabilities and shareholders' equity $ 2,413,774 $ 1,519,197
================ ==================
SEE ACCOMPANYING NOTES
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3
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<CAPTION>
ENETPC, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31 AUGUST 31
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 3,313,280 $ 1,004,822 $ 6,570,701 $ 2,156,292
Cost of sales 2,924,337 827,644 5,998,392 1,783,208
------------- ------------- ------------ -------------
Gross profit 388,943 177,178 572,309 373,084
Operating expenses:
General and administrative 473,922 267,896 828,726 513,386
Sales and marketing 90,377 3,427 98,188 22,783
------------- ------------- ------------ -------------
564,299 271,323 926,914 536,169
------------- ------------- ------------ -------------
Loss from operations (175,356) (94,145) (354,605) (163,085)
Other income (expense):
Interest income 4,836 507 7,693 1,792
Interest expense (35,722) (32) (41,434) (2,224)
Other income (expense) (1,811) (1,272) (3,535) (1,898)
-------------- ------------- ------------ -------------
(32,697) (797) (37,276) (2,330)
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Net loss $ (208,053) $ (94,942) $ (391,881) $ (165,415)
============= ============== ============ =============
Net loss per common share - basic
and diluted $ (0.05) $ (0.02) $ (0.09) $ (0.04)
============= ============= ============ =============
Weighted average common shares
outstanding - basic and diluted 4,508,568 3,928,095 4,420,357 3,928,095
============= ============= ============= =============
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SEE ACCOMPANYING NOTES
4
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<CAPTION>
ENETPC, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, 2000 AUGUST 31, 1999
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<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (391,881) $ (165,415)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 137,782 38,242
Changes in operating assets and liabilities:
Accounts receivable (318,685) 124,817
Inventories (168,132) 128,377
Insurance receivable 0 246,380
Prepaid expenses (11,569) (147)
Goodwill (18,601) 0
Accounts payable (212,946) (139,110)
Accrued expenses 21,164 (75,371)
------------------ ---------------
Net cash used in operating activities (962,868) 157,773
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sale of property and equipment 0 8,428
Purchases of property and equipment (145,889) (15,058)
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Net cash used in investing activities (145,889) (6,630)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 1,079,142 0
Net proceeds from (payments on) line of credit 300,000 (150,000)
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Net cash provided by financing activities 1,379,142 (150,000)
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Increase in cash 270,385 1,143
Cash at beginning of period 496,486 73,191
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Cash at end of period $ 766,871 $ 74,334
================= ===============
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SEE ACCOMPANYING NOTES
5
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ENETPC, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of eNetpc (the "Company") as of
August 31, 2000 and for the three and six months ended August 31, 2000 and 1999
have been prepared by the Company, without audit, pursuant to rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements included in this Form 10-QSB include all
adjustments, consisting only of normal and recurring adjustments, considered
necessary for a fair presentation of the financial position and the results of
operations and cash flows for the periods presented. Operating results for the
three and six months ended August 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending February 28, 2001. These
condensed financial statements and footnote disclosures should be read in
conjunction with the financial statements and footnotes thereto for the year
ended February 29, 2000, included in the Company's Annual Report on Form 10-KSB.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes to the financial statements. Actual results could differ from
those estimates.
Note 2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased components.
Note 3. NOTE PAYABLE TO BANK
The Company has a revolving line of credit of $300,000 with a bank. This line of
credit is secured by all of the Company's assets and the personal guaranty of
the majority shareholder. Borrowings under the line accrued interest at a rate
of 1.0% over the prime rate (9.5% at August 31, 2000) and amounted to $300,000
at August 31, 2000.
During fiscal 2000, the Company had a revolving line of credit of $150,000 with
a bank. Borrowings under the line accrued interest at a rate of 1.5% over prime.
The line of credit expired April 25, 1999 and was not renewed.
Note 4. SEGMENT AND GEOGRAPHIC DATA
The Company has one reportable segment, computer systems and products. This
segment, which is comprised of the CyberStar, VAR and Virtual Distribution
(formerly ITC) divisions, distributes branded and proprietary computer systems
and peripheral equipment. CyberStar distributes its products throughout the
United States. The VAR division sells its products through resellers. The
Virtual Distribution division was started in April 2000 and distributes
domestically and internationally tier-one computer hardware, software and
peripherals to large computer resellers.
6
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<CAPTION>
The following table presents sales information by division:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31 AUGUST 31
1999
NET SALES 2000 1999 2000 1999
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
CyberStar(R)division $ 463,437 $ 707,638 $ 943,039 $ 1,467,608
VAR division $ 172,918 $ 297,184 $ 437,612 $ 688,684
Virtual Distribution division $ 2,676,925 $ 0 $ 5,190,050 $ 0
----------- ----------- ------------- ------------
$ 3,313,280 $ 1,004,822 $ 6,570,701 $ 2,156,292
=========== =========== ============= ============
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Note 5. NET LOSS PER COMMON SHARE
Basic net income/loss per share is computed based on the weighted average number
of common shares outstanding during each period. Diluted net loss 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 the
outstanding stock options and warrants is antidilutive.
Note 6. STOCK EXCHANGE
On April 1, 2000 eNetpc entered into a Stock Exchange Agreement (the
"Agreement") with the shareholders of International Trade Center, Inc. ("ITC"),
a global distributor of computer and computer related accessories, to acquire
all of the issued and outstanding stock of ITC. All of the conditions required
to close the transaction were completed June 21, 2000 and on that date eNetpc
acquired all of the issued and outstanding stock of ITC.
Under the terms of the Agreement, at closing, eNetpc issued shares of eNetpc
common stock in exchange for the stock of ITC. The shareholders of ITC received
an aggregate 9,576 shares of eNetpc common stock. The four former shareholders
of ITC, now employees of eNetpc, were also each granted options to purchase
25,000 shares of eNetpc common stock at $1.75 per share. The options become
exercisable five years after their issuance and may become exercisable three
years after their issuance, if certain performance criteria are met.
Compensation expense of $550,000 will be amortized over the vesting period as a
result of granting these options.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales:
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<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.3 82.4 91.3 82.7
------ ------ ------ ------
Gross profit 11.7 17.6 8.7 17.3
------ ------ ------ ------
Operating expenses
General and administrative 14.3 26.7 12.6 23.8
Sales and marketing 2.7 0.3 1.5 1.1
------ ------ ------ ------
17.0 27.0 14.1 24.9
------ ------ ------ ------
Loss from operations (5.3) (9.3) (5.4) (7.6)
Other income (expense) (1.0) (0.1) (0.6) (0.1)
------ ------- ------- ------
Net loss (6.3)% (9.4)% (6.0)% (7.7)%
======= ======= ======== =======
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COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
NET SALES. Net sales increased $2,308,458, or 229.7%, to $3,313,280 in the three
months ended August 31, 2000 compared to $1,004,822 for the three months ended
August 31, 2999. CyberStar (R) division sales decreased $244,201 to $463,437 in
the second quarter of fiscal 2001 from $707,638 in the second quarter of fiscal
2000. VAR division sales decreased $124,266 to $172,918 in the second quarter of
fiscal 2001 from $297,184 in the second quarter of fiscal 2000. Virtual
Distribution division sales were $2,676,925 for the second quarter of fiscal
2001, the second quarter of its operations.
GROSS PROFIT. Gross profit for the second quarter of fiscal 2001 was $388,943,
or 11.7% of net sales, compared to $177,178, or 17.6% of net sales, in the prior
year. The increase in gross profit is due primarily to increased sales volume,
while the decrease in the gross profit margin results from lower gross profit
margins on sales in the Virtual Distribution division.
OPERATING EXPENSES. General and administrative expenses were $473,922, or 14.3%
of net sales, in the second quarter of fiscal 2001 compared to $267,896, or
26.7% of net sales, in the second quarter of fiscal 2000. This increase is due
primarily to additional staff resulting in an increase in salary and other
employee related expenses of $82,180, amortization of deferred option
compensation of $64,919, an increase of $24,353 in professional and consulting
fees and an increase in bad debt expense of $24,188. Sales and marketing
expenses increased by $86,950 due primarily to commissions paid on sales in the
Virtual Distribution division.
8
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The loss from operations increased by $81,211 to $(175,356) in the second
quarter of fiscal 2001 from $(94,145) in fiscal 2000 reflecting an increase in
operating expenses of $292,976 offset by an increase in gross profits of
$211,765.
Interest expense increased by $35,690 to $35,722 in the second quarter of fiscal
2001 from $32 in fiscal 2000 due to increased borrowings on a bank line of
credit and other short term borrowings.
As a result of the foregoing factors, net loss increased by $113,111 to
$(208,053) in the second quarter of fiscal 2001 from $(94,942) in fiscal 2000.
COMPARISON OF THE SIX MONTHS ENDED AUGUST 31, 2000 AND 1999
NET SALES. Net sales increased by $4,414,409, or 204.7%, to $6,570,701 in the
six months ended August 31, 2000 compared to $2,156,292 for the six months ended
August 31, 1999. CyberStar (R) division sales decreased by $524,569, or 35.7%,
to $943,039 in the six months ended August 31, 2000 compared to $1,467,608 for
the same period in fiscal 2000. VAR division sales decreased by $251,072, or
36.5%, to $437,612 in the six months ended August 31, 2000 compared to $688,684
for the same period in fiscal 2000. Virtual Distribution division sales were
$5,190,050 for the six months ended August 31, 2000. Virtual Distribution
division sales were approximately 79% of total sales in the six months ended
August 31, 2000 while CyberStar (R) division sales accounted for approximately
14% and VAR division accounted for approximately 7%.
GROSS PROFIT. Gross profit for the six months ended August 31, 2000 was
$572,309, or 8.7% of net sales, compared to $373,084, or 17.3% of net sales, in
the prior year. The increase in gross profit is due primarily to increased sales
volume, while the decrease in the gross profit margin results from lower gross
profit margins on sales in the Virtual Distribution division.
OPERATING EXPENSES. General and administrative expenses were $828,726, or 12.6%
of net sales, for the six months ended August 31, 2000 compared to $513,386, or
23.8% of net sales, for the six months ended August 31, 1999. This increase is
due primarily to additional staff resulting in an increase in salary and other
employee related expenses of $125,310, amortization of deferred option
compensation of $99,098, an increase of $49,817 in professional and consulting
fees and an increase in bad debt expense of $42,263. Sales and marketing
expenses increased by $75,405 due primarily to commissions paid on sales in the
Virtual Distribution division.
The loss from operations increased by $191,520 to $(354,605) in the six months
ended August 31, 2000 from $(163,085) in fiscal 2000, reflecting an increase in
operating expenses of $390,745 offset by an increase in gross profits of
$199,225.
Interest expense increased by $39,210 to $41,434 in the six months ended August
31, 2000 from $2,224 in fiscal 2000 due to increased borrowings on a bank line
of credit and other short term borrowings.
As a result of the foregoing factors, net loss increased by $226,466 to
$(391,881) in the six months ended August 31, 2000 from $(165,415) in fiscal
2000.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 2000 was $766,871, an increase of
$270,385 from $496,486 at February 29, 2000. During the six months ended August
31, 2000, net cash used in operating activities was $962,868 due primarily to
net losses of $361,141, increases in accounts receivable of $318,685 and in
inventory of $168,132 and a reduction in accounts payable of $212,946. The
increases in accounts receivable and inventory are the result of increased
sales, the reduction in accounts payable is due to shorter payment terms from
vendors in the Company's Virtual Distribution division. During the six months
ended August 31, 1999, net cash provided by operations was $157,773 primarily
due to reductions in accounts receivable, inventory and an insurance claim
receivable which were offset by net losses and a reduction in accounts payable.
Net cash used in investing activities in the six months ended August 31, 2000
was $145,889 due to the purchases of equipment, computers and software
development. Net cash used in investing activities for the six months ended
August 31, 1999 was $6,630 due to the purchases of $15,058 of equipment and
computers which was offset by proceeds of $8,428 from the sale of equipment.
Net cash provided by financing activities of $1,379,142 in the six months ended
August 31, 2000 consisted of $1,079,142 from the proceeds of the sale of common
stock and $300,000 borrowed under a revolving line of credit. Net cash of
$150,000 used for financing activities for the six months ended August 31, 1999
consisted of payments on outstanding borrowings under a revolving line of
credit.
The Company has a revolving line of credit of $300,000 with a bank. This line of
credit is secured by all of the Company's assets and the personal guaranty of
the majority shareholder. Borrowings under the line accrued interest at a rate
of 1.0% over the prime rate (9.5% at August 31, 2000) and amounted to $300,000
at August 31, 2000.
Forward-Looking Statements
--------------------------
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. Among the
factors that could cause actual results to differ materially are the following:
market acceptance of new products, changes in competitive environment, general
conditions in the industries served by the Company's products, continued
availability of financing and related costs, and overall economic conditions
including inflation.
10
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(2) The Company held its Annual Shareholders' meeting on August 8, 2000.
(b) (1) The election of three directors to serve for one-year terms was
approved.
Affirmative Voting Authority
Name Votes Withheld
---------------------- ----------------- ----------------
Richard A. Pomije 3,807,865 2,200
James T. Greenfield 3,807,865 2,200
Ed Havlik 3,807,865 2,000
There were no abstentions and no broker non-votes.
(2) The amendment and restatement of the Company's Articles of
Incorporation was approved. There were 3,799,965 votes for, 5,100
votes withheld, 5,000 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K, dated June 21, 2000, reporting under Items
2, 5, and 7 was filed during the quarter ended August 31, 2000.
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENETPC, INC.
Dated: October __, 2000 By /s/ Jonathan J. Bumba
----------------------------
Jonathan J. Bumba
Its Chief Executive Officer
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