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 November 30, 1999
_____ 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
CYBERSTAR COMPUTER CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1427445
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6825 Shady Oak Road, Eden Prairie, Minnesota 55344
- -------------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (612) 943-1598
--------------
No Change
- --------------------------------------------------------------------------------
(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 ___ No _X_
The number of shares of the issuer's Common Stock outstanding at
November 30, 1999 was 3,928,095 shares.
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CYBERSTAR COMPUTER CORPORATION
TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets as of February 28, 1999 and November 30, 1999 (unaudited) 3
Statements of Operations for Three Months and Nine Months Ended
November 30, 1998 and 1999 (unaudited) 4
Statements of Cash Flows for Nine Months Ended November 30, 1998 and
1999 (unaudited) 5
Notes to the Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
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2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CYBERSTAR COMPUTER CORPORATION
BALANCE SHEETS
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FEBRUARY 28 NOVEMBER 30
1999 1999
---- ----
(Unaudited)
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ASSETS
Current assets:
Cash $ 73,191 $ 69,028
Accounts receivable, less allowance
for doubtful accounts - $16,700
at February 28, 1999 and
$59,610 at November 30, 1999 693,490 702,566
Inventories 463,303 281,169
Insurance receivable 246,380 --
Deferred financing costs 25,000 30,000
Prepaid expenses 15,680 16,118
----------- -----------
Total current assets 1,517,044 1,098,881
Property and equipment:
Office equipment and furniture 224,404 231,195
Leasehold improvements 37,270 37,270
Production equipment 46,857 46,915
----------- -----------
308,531 315,380
Accumulated depreciation (133,988) (191,351)
----------- -----------
174,543 124,029
----------- -----------
Total assets $ 1,691,587 $ 1,222,910
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 150,000 $ 357,104
Accounts payable 647,152 305,082
Accrued payroll and payroll taxes 34,273 17,729
Accrued liabilities 125,871 18,095
----------- -----------
Total current liabilities 957,296 698,010
Shareholders' equity:
Common stock, $.01 par value
Authorized shares - 20,000,000
Issued and outstanding shares - 3,928,095
at February 28, 1999 and November
30, 1999 39,281 39,281
Additional paid-in capital 1,901,029 1,901,029
Accumulated deficit (1,206,019) (1,415,410)
----------- -----------
Total shareholders' equity 734,291 524,900
----------- -----------
Total liabilities and shareholders' equity $ 1,691,587 $ 1,222,910
=========== ===========
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SEE ACCOMPANYING NOTES
3
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CYBERSTAR COMPUTER CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 1,319,230 $ 1,250,964 $ 3,504,998 $ 3,407,256
Cost of sales 1,151,557 1,024,615 3,028,992 2,807,823
----------- ----------- ----------- -----------
Gross profit 167,673 226,349 476,006 599,433
Operating expenses:
General and administrative 365,674 280,104 1,035,982 793,490
Sales and marketing 72,464 9,243 119,428 32,026
----------- ----------- ----------- -----------
438,138 289,347 1,155,410 825,516
----------- ----------- ----------- -----------
Loss from operations (270,465) (62,998) (679,404) (226,083)
Other income (expense):
Interest income 4,809 115 12,500 1,887
Interest expense (39) (4,995) (4,418) (7,219)
Other income (expense) (1,030) 23,901 (2,613) 22,023
----------- ----------- ----------- -----------
3,740 19,021 5,469 16,691
----------- ----------- ----------- -----------
Net loss $ (266,725) $ (43,977) $ (673,935) $ (209,392)
=========== =========== =========== ===========
Net loss per common share - basic
and diluted $ (0.07) $ (0.01) $ (0.17) $ (0.05)
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 3,926,211 3,928,095 3,864,370 3,928,095
=========== =========== =========== ===========
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SEE ACCOMPANYING NOTES
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CYBERSTAR COMPUTER CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
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NINE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, 1998 NOVEMBER 30, 1999
----------------- -----------------
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CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $(673,935) $(209,392)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 36,000 57,363
Changes in operating assets and liabilities:
Accounts receivable 292,577 (9,076)
Inventories (250,620) 182,134
Insurance receivable -- 246,380
Deferred financing costs 3,100 (5,000)
Prepaid expenses (14,588) (437)
Accounts payable (83,724) (342,070)
Accrued expenses 131,527 (124,320)
--------- ---------
Net cash used in operating activities (559,663) (204,418)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment (104,436) (6,849)
--------- ---------
Net cash used in investing activities (104,436) (6,849)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 916,881 --
Net payments on line of credit (275,000) (150,000)
Net proceeds from Capital Factors -- 357,104
--------- ---------
Net cash provided by financing activities 641,881 207,104
--------- ---------
Decrease in cash (22,218) (4,163)
Cash at beginning of period 104,008 73,191
--------- ---------
Cash at end of period $ 81,790 $ 69,028
========= =========
Supplemental information:
Cash paid during the period for interest $ 4,418 $ 7,219
Property and equipment acquired with
common stock issuance $ 40,000 $ --
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SEE ACCOMPANYING NOTES
5
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CYBERSTAR COMPUTER CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of CyberStar Computer
Corporation (the "Company") as of November 30, 1999 and for the three and nine
months ended November 30, 1999 and 1998 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 nine months ended November 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending February 29, 2000. These condensed financial statements and footnote
disclosures should be read in conjunction with the financial statements and
footnotes thereto for the year ended February 28, 1999, included in the
Company's Registration Statement on Form 10-SB/A. The preparation of the
financial statements in conformity with generally accepted accounting principles
require management to make estimates and assumptions that effect amounts
reported in the financial statements and accompanying notes to the financial
statements. Actual results could differ from those estimates.
Note 2. INSURANCE RECEIVABLE
In fiscal 1999 one of the Company's sales representatives knowingly booked sales
and shipped products to fraudulent customers. Upon discovery, the sales and
accounts receivable resulting from these transactions were reversed in the
Company's records. A claim was filed under the Company's insurance policy and an
insurance receivable was recorded in an amount equal to the value of inventory
lost. During the nine months ended November 30, 1999, the Company received
payment of the insurance receivable in the amount of $246,380.
Note 3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist principally of purchased components.
Note 4. 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 shareholder. 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.
6
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Note 5. NOTE PAYABLE TO CAPITAL FACTORS
In May 1999 the Company entered into an agreement whereby it can sell
receivables or borrow money in amounts up to 80% of the eligible accounts
receivable balance. The Company pays a 1% commission on all receivables sold or
is charged interest at a rate of 8% or prime plus 1.5%, 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 and interest payable under this agreement are $24,000 per year.
Receivables borrowed against amounted to $357,104 at November 30, 1999.
Note 6. SEGMENT AND GEOGRAPHIC DATA
The Company has one reportable segment, computer systems and products. This
segment, which is comprised of the CyberStar and VAR divisions, distributes
branded and proprietary computer systems and peripheral equipment. CyberStar
distributes its product throughout the United States. The following table
presents sales information by division:
NINE MONTHS ENDED NINE MONTHS ENDED
NET SALES NOVEMBER 30, 1998 NOVEMBER 30, 1999
- --------- ----------------- -----------------
CyberStar(R)division $2,841,856 $2,239,260
VAR division 663,142 1,167,996
---------- ----------
$3,504,998 $3,407,256
========== ==========
Note 7. 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.
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:
Three Months Ended Nine Months Ended
November 30 November 30
1998 1999 1998 1999
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.3 81.9 86.4 82.4
----- ----- ----- -----
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Gross profit 12.7 18.1 13.6 17.6
----- ----- ----- -----
Operating expenses
General and administrative 27.7 22.4 29.6 23.3
Sales and marketing 5.5 0.7 3.4 0.9
----- ----- ----- -----
33.2 23.1 33.0 24.2
----- ----- ----- -----
Loss from operations (20.5) (5.0) (19.4) (6.6)
Other income (expense) 0.3 1.5 0.2 0.5
----- ----- ----- -----
Net loss (20.2)% (3.5)% (19.2)% (6.1)%
===== ===== ===== =====
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COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1999
NET SALES. Net sales decreased $68,266, or 5.2%, to $1,250,964 in the three
months ended November 30, 1999 compared to $1,319,230 for the three months ended
November 30, 1998. CyberStar (R) division sales decreased $179,820 to $802,008
in the third quarter of fiscal 2000 from $981,828 in the third quarter of fiscal
1999.
GROSS PROFIT. Gross profit for the third quarter of fiscal 2000 was $226,349, or
18.1% of net sales, compared to $167,673, or 12.7% of net sales, in the prior
year. This increase in gross profit margin is due primarily to sales price
increases initiated in the first quarter of fiscal 2000.
OPERATING EXPENSES. General and administrative expenses were $280,104, or 22.4%
of net sales, in the third quarter of fiscal 2000 compared to $365,674, or 27.7%
of net sales, in the third quarter of fiscal 1999. The decrease is due primarily
to a reduction in staff resulting in a decrease in salary and other employee
related expenses of $109,970. Sales and marketing expenses decreased by $63,221
due primarily to changes in the methods by which sales commissions are
calculated, reduced sales staff and the use of relationships with outside sales
and marketing organizations to increase sales. These reductions in expenses were
offset by an increase of $24,400 in professional and consulting fees.
COMPARISON OF THE NINE MONTHS ENDED NOVEMBER 30, 1998 AND 1999
NET SALES. Net sales decreased $97,742, or 2.8%, to $3,407,256 in the nine
months ended November 30, 1999 compared to $3,504,998 for the nine months ended
November 30, 1998. CyberStar (R) division sales accounted for approximately 66%,
or $2,239,260, of net sales in the nine months ended November 30, 1999 compared
to 81%, or $2,841,856, of net sales in the nine months ended November 30, 1998.
Sales for the VAR division increased by $504,854 to $1,167,996 in the first nine
months of fiscal 2000 from $663,142 in the first nine months of fiscal 1999. The
decrease in net sales of $97,742 was due primarily to a reduced volume of sales
to a major customer.
GROSS PROFIT. Gross profit for the nine months ended November 30, 1999 was
$599,433, or 17.6% of net sales, compared to $476,006, or 13.6% of net sales,
for the nine months ended November 30, 1998. This increase in gross profit
margin is due primarily to sales price increases initiated in the first quarter
of fiscal 2000.
OPERATING EXPENSES. General and administrative expenses were $793,490, or 23.3%
of net sales, for the nine months ended November 30, 1999 compared to
$1,035,982, or 29.6% of net sales, for the nine months ended November 30, 1998.
This decrease is due primarily to a reduction in staff, resulting in a decrease
in salary and other employee related expenses of $336,621. Sales and marketing
expenses decreased by $87,402 due primarily to reduced sales staff and related
expenses. These reductions in expenses were offset by an increase of $87,402 in
professional and consulting fees.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at November 30, 1999 was $69,028, a decrease of
$4,163 from $73,191 at February 28, 1999. The decrease in cash reflects the use
of cash of $211,267, primarily to pay down payables and other accrued expenses,
and cash of $207,104 provided by financing activities, consisting of payments on
the Company's bank line of credit of $150,000 offset by borrowings on
receivables of $357,104.
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 shareholder. 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.
In May 1999 the Company entered into an agreement whereby it can sell
receivables or borrow money in amounts 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 1.5%, 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. Receivables
borrowed against amounted to $357,104 at November 30, 1999.
Year 2000
CyberStar analyzed the Year 2000 readiness issues related to its computer
systems and determined that all systems critical to managing the business,
including its customer service and billing vendor's systems, were Year 2000
compliant. CyberStar also identified its critical component and service
providers and contacted each such vendor to assess that vendor's Year 2000
readiness. 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 Year 2000 ready.
Therefore, CyberStar cannot provide assurances that CyberStar will not be
adversely affected by the Year 2000 change.
CyberStar 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 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 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
10
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developed contingency plans to address each of the most likely worst case
scenarios. To date, CyberStar believes that its business has not been adversely
affected by Year 2000 issues. Nevertheless, achieving Year 2000 readiness is
dependent on many factors, some of which are not completely within its control.
There can be no assurance that CyberStar or its business will not be adversely
impacted by any Year 2000 problems that may yet be experienced by its customers,
suppliers, dealers, distributors, regulators or others.
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.
PART II. OTHER INFORMATION
Item 1. 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.
On October 20, 1999, CyberStar filed a motion seeking an order to dismiss based
on an arbitration clause in the agreement with Mr. McIntyre. The Court granted
this motion on December 20, 1999, and there have been no further developments in
this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
November 30, 1999.
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.
CYBERSTAR COMPUTER CORPORATION
Dated: January __, 2000 By /s/ Richard A. Pomije
---------------------------------
Richard A. Pomije
Its Chief Executive Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE 9 MONTHS ENDED NOVEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 69,208
<SECURITIES> 0
<RECEIVABLES> 762,176
<ALLOWANCES> 59,610
<INVENTORY> 281,169
<CURRENT-ASSETS> 1,098,881
<PP&E> 315,380
<DEPRECIATION> 191,351
<TOTAL-ASSETS> 1,222,910
<CURRENT-LIABILITIES> 698,010
<BONDS> 0
0
0
<COMMON> 39,921
<OTHER-SE> 695,010
<TOTAL-LIABILITY-AND-EQUITY> 1,222,910
<SALES> 3,407,256
<TOTAL-REVENUES> 3,407,256
<CGS> 2,807,823
<TOTAL-COSTS> 2,807,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,646
<INTEREST-EXPENSE> 7,219
<INCOME-PRETAX> (209,392)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209,392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209,392)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
