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, 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
incorporation or organization) Identification No.)
6825 Shady Oak Road, Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (952) 943-1598
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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
November 30, 2000 was 4,691,496 shares.
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ENETPC, INC.
TABLE OF CONTENTS
Page No.
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Part I. Financial Information
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Item 1. Financial Statements
Balance Sheets as of November 30, 2000 (unaudited) and February 29, 2000 3
Statements of Operations for Three Months and Nine Months Ended November 30, 2000 and 4
1999 (unaudited)
Statements of Cash Flows for the Nine Months Ended November 30, 2000 and 1999 5
(unaudited)
Notes to the Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis 8
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENETPC, INC.
BALANCE SHEETS
NOVEMBER 30 FEBRUARY 29
2000 2000
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(Unaudited)
ASSETS
Current assets:
Cash $ 419,150 $ 496,486
Accounts receivable, less allowance
for doubtful accounts - $68,466
at November 30, 2000 and
$80,500 at February 29, 2000 1,421,296 574,506
Inventories 259,771 295,511
Prepaid expenses 26,166 30,216
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Total current assets 2,126,383 1,396,719
Property and equipment:
Office equipment and furniture 427,631 260,949
Leasehold improvements 37,270 37,270
Production equipment 69,811 46,915
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534,712 345,134
Accumulated depreciation (280,746) (222,656)
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253,966 122,478
Goodwill 17,981 --
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Total assets $ 2,398,330 $ 1,519,197
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 636,836 $ --
Accounts payable 146,303 239,329
Accrued payroll and payroll taxes 6,431 39,874
Accrued liabilities 6,083 38,176
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Total current liabilities 795,653 317,379
Shareholders' equity:
Common stock, $.01 par value
Authorized shares - 20,000,000
Issued and outstanding shares - 4,691,496
at November 30, 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 (626,593) (237,370)
Accumulated deficit (2,512,252) (1,673,192)
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Total shareholders' equity 1,602,677 1,201,818
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Total liabilities and shareholders' equity $ 2,398,330 $ 1,519,197
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SEE ACCOMPANYING NOTES
3
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ENETPC, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Sales $ 3,587,011 $ 1,235,027 $ 10,167,654 $ 3,350,049
Cost of sales 3,453,961 1,008,678 9,423,602 2,750,616
------------ ------------ ------------ ------------
Gross profit 133,050 226,349 744,052 599,433
Operating expenses:
General and administrative 452,343 280,104 1,214,787 793,490
Sales and marketing 96,293 9,243 264,619 32,026
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548,636 289,347 1,479,406 825,516
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Loss from operations (415,586) (62,998) (735,354) (226,083)
Other income (expense):
Interest income 1,736 115 9,428 1,887
Interest expense (8,009) (4,995) (52,868) (7,219)
Other income (expense) (25,319) 23,815 (60,264) 22,023
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(31,592) 18,935 (103,704) 16,691
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Net loss $ (447,178) $ (44,063) $ (839,058) $ (209,392)
============ ============ ============ ============
Net loss per common share - basic
and diluted $ (0.10) $ (0.01) $ (0.19) $ (0.05)
============ ============ ============ ============
Weighted average common shares
outstanding - basic and diluted 4,691,496 3,928,095 4,510,397 3,928,095
============ ============ ============ ============
SEE ACCOMPANYING NOTES
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<CAPTION>
ENETPC, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NOVEMBER 30
2000 1999
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CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (839,058) $ (209,392)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 218,867 57,363
Changes in operating assets and liabilities:
Accounts receivable (846,790) (9,076)
Inventories 35,740 182,134
Insurance receivable -- 246,380
Deferred financing costs -- (5,000)
Prepaid expenses 4,050 (437)
Goodwill (17,981) --
Accounts payable (93,026) (342,070)
Accrued expenses (65,538) (124,320)
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Net cash used in operating activities (1,603,736) (204,418)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment (189,578) (6,849)
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Net cash used in investing activities (189,578) (6,849)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from notes payable 900,000 --
Payments on line of credit -- (150,000)
Net proceeds from sale of stock 179,142 --
Net proceeds from loans 636,836 357,104
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Net cash provided by financing activities 1,715,978 207,104
Decrease in cash (77,336) (4,163)
Cash at beginning of period 496,486 73,191
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Cash at end of period $ 419,151 $ 69,028
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Supplemental Information:
Notes Payable converted to Common Stock $ 926,475
SEE ACCOMPANYING NOTES
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4
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ENETPC, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of eNetpc, Inc. (the "Company")
as of November 30, 2000 and for the three and nine months ended November 30,
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 nine months ended November 30, 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
The Company's revolving lines of credit of $300,000 and $150,000 with a bank
were not renewed. The Company entered into a new loan and security agreement
with a financing institution in October, 2000 in the amount of $2,500,000 which
allows an advance of up to 85% of the Company's eligible accounts receivable at
an annual interest rate of prime plus 4% (prime rate at November 30, 2000 is 9.5
%). Borrowings under this agreement are secured by the Company's assets and
guaranteed by the majority shareholder. Borrowings totaled $636,836 at November
30, 2000.
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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The following table presents sales information by division:
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THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
2000 1999 2000 1999
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NET SALES
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CyberStar(R)division $ 215,487 $ 738,041 $ 1,129,703 $ 2,182,053
VAR division 314,328 496,986 751,448 1,167,996
Virtual Distribution division 3,057,196 -- 8,286,503 --
----------- ----------- ----------- -----------
$ 3,587,011 $ 1,235,027 $10,167,654 $ 3,350,049
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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 9,576 shares of
eNetpc common stock in exchange for the stock of ITC. 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.
Note 7. NOTES PAYABLE
In April and May 2000, the Company entered into various notes totaling $900,000.
The notes bear interest at prime plus 4% and are due in April and May 2001. The
notes are unsecured. In July 2000, $926,475 representing principal and interest,
was converted to 308,825 shares of common stock.
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:
Three Months Ended Nine Months Ended
November 30 November 30
2000 1999 2000 1999
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 96.3 81.7 92.7 82.1
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Gross profit 3.7 18.3 7.3 17.9
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Operating expenses
General and administrative 12.6 22.7 11.9 23.7
Sales and marketing 2.7 0.7 2.6 0.9
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15.3 23.4 14.5 24.6
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Loss from operations (11.6) (5.1) (7.2) (6.7)
Other income (expense) (0.9) 1.5 (1.0) 0.5
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Net loss (12.5)% (3.6)% (8.2)% (6.2)%
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COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999
NET SALES. Net sales increased $2,351,984 or 190.4%, to $3,587,011 in the three
months ended November 30, 2000 compared to $1,235,027 for the three months ended
November 30, 1999. CyberStar (R) division sales decreased $522,554 to $215,487
in the third quarter of fiscal 2001 from $738,041 in the third quarter of fiscal
2000. VAR division sales decreased $182,658 to $314,328 in the third quarter of
fiscal 2001 from $496,986 in the third quarter of fiscal 2000. Virtual
Distribution division sales were $3,057,196 for the third quarter of fiscal
2001, the 2nd full quarter of its operations.
GROSS PROFIT. Gross profit for the third quarter of fiscal 2001 was $133,050, or
3.7% of net sales, compared to $226,349, or 18.3% of net sales, in the prior
year. The decrease in gross profit is due primarily to lower gross profit
margins on sales in the Virtual Distribution division, which is becoming a
larger percentage of the total overall volume. Intense downward market pressures
on price in the traditional Cyberstar and VAR business units is the primary
cause for the decrease in gross profit in these divisions. In addition, the
Company made charges to cost of sales of $61,716, in the third quarter,
primarily due to obsolete inventory recognition.
OPERATING EXPENSES. General and administrative expenses were $452,343, or 12.6%
of net sales, in the third quarter of fiscal 2001 compared to $280,104, or 22.7%
of net sales, in the third quarter of fiscal 2000. This increase is due
primarily to the addition of the ITC organization, resulting in an increase in
salary and other employee related expenses of $87,427, amortization of deferred
option compensation of $61,679, and an increase of $69,088 in professional and
consulting fees. Sales and marketing expenses increased by $87,050 due primarily
to commissions paid on sales in the Virtual Distribution division.
8
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The loss from operations increased by $352,588 to $(415,586) in the third
quarter of fiscal 2001 from $(62,998) in fiscal 2000, reflecting an increase in
operating expenses of $259,289 and a decrease in gross profits of $(93,299).
Interest expense increased by $3,014 to $8,009 in the third quarter of fiscal
2001 from $4,995 in fiscal 2000 due to increased borrowings on a bank line of
credit and other short-term borrowings.
The Company incurred other expense of $(25,319) in the third quarter of fiscal
2001 as compared to the receipt of other income of $23,815 in fiscal 2000. This
primarily results from adjustments from a prior year of $(22,661).
As a result of the foregoing factors, net loss increased by $403,115 to
$(447,178) in the third quarter of fiscal 2001 from $(44,063) in fiscal 2000.
COMPARISON OF THE NINE MONTHS ENDED NOVEMBER 30, 2000 AND 1999
NET SALES. Net sales increased by $6,817,605, or 203.5%, to $10,167,654 in the
nine months ended November 30, 2000 compared to $3,350,049 for the nine months
ended November 30, 1999. CyberStar (R) division sales decreased by $1,052,350,
or 48.2%, to $1,129,703 in the nine months ended November 30, 2000 compared to
$2,182,053 for the same period in fiscal 2000. VAR division sales decreased by
$416,548, or 35.7%, to $751,448 in the nine months ended November 30, 2000
compared to $1,167,996 for the same period in fiscal 2000.
Virtual Distribution division sales were $8,286,503 for the nine months ended
November 30, 2000. Virtual Distribution division sales were approximately 82% of
total sales in the nine months ended November 30, 2000, while CyberStar (R)
division sales accounted for approximately 11% and VAR division accounted for
approximately 7%.
GROSS PROFIT. Gross profit for the nine months ended November 30, 2000 was
$744,052, or 7.3% of net sales, compared to $599,433, or 17.9% of net sales in
the prior year. The increase in gross profit dollars 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 $1,214,787, or
11.9% of net sales, for the nine months ended November 30, 2000 compared to
$793,490, or 23.7% of net sales for the nine months ended November 30, 1999.
This increase is due primarily to additional staff, resulting in an increase in
salary and other employee related expenses of $256,791, and amortization of
deferred option compensation of $181,337. Sales and marketing expenses increased
by $232,593, due primarily to commissions paid on sales in the Virtual
Distribution division.
The loss from operations increased by $509,271 to $(735,354) in the nine months
ended November 30, 2000 from $(226,083) in fiscal 2000, reflecting an increase
in operating expenses of $653,890 offset by an increase in gross profits of
$144,619.
Interest expense increased by $45,649 to $52,868 in the nine months ended
November 30, 2000 from $7,219 in fiscal 2000 due to increased borrowings on bank
lines of credit and other short-term borrowings.
The Company incurred other expense of $(60,264) in the nine months ended
November 30, 2000 as compared to receipt of $22,023 of other income in fiscal
2000, primarily due to increased bad debt expenses $(34,480) and adjustments
from a prior year $(22,661).
9
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As a result of the foregoing factors, net loss increased by $629,666 to
$(839,058) in the nine months ended November 30, 2000 from $(209,392) in fiscal
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at November 30, 2000 was $419,150, a decrease of
$77,336 from $496,486 at February 29, 2000. During the nine months ended
November 30, 2000, net cash used in operating activities was $1,603,736 due
primarily to the net loss of $839,058, an increase in accounts receivable of
$846,790 and decreases in inventory of $35,740, accounts payable of $93,026 and
accrued expenses of $65,538. The increase in accounts receivable is 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 November 30, 1999, net cash used by operations was $204,418,
primarily due to the net operating loss.
Net cash used in investing activities in the nine months ended November 30, 2000
was $189,578 due to the purchases of equipment, computers and software
development. Net cash used in investing activities for the nine months ended
November 30, 1999 was $6,849 primarily due to the purchases of $15,058 of
equipment and computers, offset by proceeds of $8,428 from the sale of
equipment.
Net cash provided by financing activities of $1,715,978 in the nine months ended
November 30, 2000 consisted of $900,000 from the proceeds of notes payable,
$179,142 from the sale of common stock, and $636,836 borrowed under a
receivables financing agreement. Net cash of $207,104 provided by financing
activities for the nine months ended November 30, 1999 consisted of payments on
outstanding borrowings under a revolving line of credit offset by proceeds from
receivables financing.
The Company's revolving lines of credit of $300,000 and $150,000 with a bank
were not renewed. The Company entered into a loan and security agreement in the
amount of $2,500,000 which allows an advance of up to 85% of the Company's
eligible accounts receivable at an annual interest rate of prime plus 4% (prime
rate at November 30, 2000 is 9.5 %). Borrowings under this agreement are secured
by the Company's assets and guaranteed by the majority shareholder. Borrowings
totaled $636,836 at November 30, 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 1. Legal Proceedings.
In its Report on Form 10-KSB for the fiscal year ended February 29,
2000, the Company reported an action brought against the Company by Martin J.
McIntyre. Initially Mr. McIntyre claimed he was entitled to $200,000 in
commissions in connection with an agreement he had with the Company. In November
2000, Mr. McIntyre amended his claim to demand approximately $450,000. This
matter was heard by an arbitration panel in December 2000. No decision has been
rendered.
There have been no further developments in the action involving Euler
Solutions, Inc., reported in the Company's Report on Form 10-QSB for the quarter
ended May 31, 2000.
Item 2. Changes in Securities.
On June 21, 2000, the Company issued an aggregate of 9,576 shares of
its common stock to the four shareholders of International Trade Center, Inc.
("ITC"), in exchange for all of the outstanding stock of ITC. In addition, the
four shareholders were each granted options to purchase 25,000 shares of the
Company's common stock at $1.75 per share.
On July 14, 2000, the Company converted promissory notes in the
aggregate principal amount of $900,000, plus $26,475 in accrued interest, to
308,825 shares of its Common Stock.
No underwriter or selling agent was used in connection with either of
the above transactions. The exemption available under Section 4(2) of the
Securities Act for sales not involving a public offering was relied upon in both
instances.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 - Loan and Security Agreement dated as of October 9, 2000,
by and between Capital Business Credit and eNetpc, Inc.
(b) Reports on Form 8-K
An amendment to Report on Form 8-K dated June 21, 2000, reporting
under items 5 and 7, was filed on October 11, 2000.
11
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SIGNATURE
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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: January 15, 2001 By /s/ Jonathan J. Bumba
---------------------------
Jonathan J. Bumba
Its Chief Executive Officer
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