<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 000-28052
EN POINTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State or other jurisdiction of I.R.S. Employer I. D.
incorporation or organization: Delaware Number: 75-2467002
100 N. Sepulveda Blvd., 19th Floor
El Segundo, California 90245
(Address of principal executive offices) (ZIP CODE)
Registrant's telephone number, including area code: (310) 725-5200
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: YES X NO
--- ---
As of May 14, 1999, 5,934,635 shares of Common Stock of the Registrant were
issued and outstanding.
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<PAGE>
INDEX
EN POINTE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Operations - Three and six months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Six months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements - March 31, 1999 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
<PAGE>
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 2,850 $ 3,365
Restricted cash 1,451 1,999
Accounts receivable, net 87,636 101,956
Inventories 5,529 7,009
Recoverable income taxes 3,220 --
Prepaid expenses and other current assets 571 448
--------- ---------
Total current assets 101,257 114,777
Property and equipment, net of depreciation 15,633 16,113
Reserve for loss on sale of configuration facility (5,581) --
--------- ---------
Property and equipment, net 10,052 16,113
Other assets 643 1,677
--------- ---------
Total assets $ 111,952 $ 132,567
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 61,412 $ 79,598
Accounts payable 7,105 8,838
Accrued liabilities 7,234 5,015
Other current liabilities 2,572 564
Current portion of notes payable 846 790
Deferred taxes 141 141
--------- ---------
Total current liabilities 79,310 94,946
Notes payable 6,117 6,602
--------- ---------
Total liabilities 85,427 101,548
Stockholders' equity:
Common stock 6 6
Additional paid-in capital 18,880 18,757
Treasury stock -- (6)
Retained earnings 7,639 12,262
--------- ---------
Total stockholders' equity: 26,525 31,019
--------- ---------
--------- ---------
Total liabilities and stockholders' equity $ 111,952 $ 132,567
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------- -------------------------
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 138,036 $ 135,303 $ 303,906 $ 265,492
Internet subsidiary sales 6,882 -- 11,619 --
--------- --------- --------- ---------
Total net sales 144,918 135,303 315,525 265,492
--------- --------- --------- ---------
Cost of sales 127,410 122,510 280,116 239,308
Internet subsidiary
Cost of sales 6,468 -- 10,987 --
--------- --------- --------- ---------
Total cost of sales 133,878 122,510 291,103 239,308
--------- --------- --------- ---------
Gross profit 11,040 12,793 24,422 26,184
Selling and marketing expenses 9,065 8,625 17,830 16,755
General and administrative expenses 4,571 3,476 8,511 6,432
Non-recurring charges 7,917 -- 7,917 --
--------- --------- --------- ---------
Operating income (loss) (10,513) 692 (9,836) 2,997
Interest expense 916 419 1,771 846
Gain on sale of securities (4,428) -- (4,428) --
Other income, net (36) (81) (67) (134)
--------- --------- --------- ---------
Income (loss) before income taxes (6,965) 354 (7,112) 2,285
Provision for income taxes (2,429) 145 (2,489) 937
--------- --------- --------- ---------
Net income (loss) $ (4,536) $ 209 $ (4,623) $ 1,348
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) income per share:
Basic $ (0.76) $ 0.04 $ (0.78) $ 0.23
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ (0.76) $ 0.04 $ (0.78) $ 0.22
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic 5,935 5,862 5,929 5,852
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 5,935 5,942 5,929 6,035
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,623) $ 1,348
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation and amortization 1,447 777
Reserve for loss on sale of property 6,192 --
Deferred compensation -- 22
Allowance for inventory and doubtful accounts 26 180
Net change in operating assets and
liabilities 15,855 6,165
-------- --------
Net cash provided by operating activities 18,897 8,492
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (926) (5,919)
-------- --------
Net cash used by investing activities (926) (5,919)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) under lines of credit (18,186) (2,802)
Payment on notes payable (429) (164)
Proceeds from sales of stock to employees 129 329
-------- --------
Net cash used by financing activities (18,486) (2,637)
-------- --------
Decrease in cash $ (515) $ (64)
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 1,255 $ 419
-------- --------
-------- --------
Income taxes paid $ 2,212 $ 1,584
-------- --------
-------- --------
Long-term debt acquired in purchase of plant $ 4,000
--------
--------
Unrealized gain on equity holdings, net of taxes $ 1,621
--------
--------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In the opinion of management, the unaudited condensed consolidated balance
sheet of En Pointe Technologies, Inc. (the "Company" or "En Pointe") at March
31, 1999, and the unaudited condensed consolidated statements of income and
unaudited condensed consolidated statements of cash flows for the interim
periods ended March 31, 1999 and 1998 include all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly these
financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. Operating
results for the three and six months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending September
30, 1999. It is suggested that these condensed statements be read in
conjunction with the Company's most recent Form 10-K and Annual Report as of
September 30, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Significant estimates in these financial statements include
allowances for uncollectible accounts receivable and for unreimbursed product
returns, net realizable value of rebates, and liability for legal claims and
associated costs. Actual results could differ from those estimates.
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements and their inclusion
should not be regarded as a representation by the Company or any other person
that the objectives or plans will be achieved. Factors that might cause such
a difference include, but are not limited to, competitive, technological,
financial and business challenges making it more difficult than expected to
continue to sell information technology products and services. The Company
may be unable to retain existing key sales, technical and management
personnel; there may be other material adverse changes in the information
technology industry or in the Company's operations or business, and any or
all of these factors may affect the Company's ability to continue its current
rate of sales growth or may result in lower sales volume than currently
experienced.
Certain important factors affecting the forward-looking statements made
herein include, but are not limited to (I) A Significant portion of the
Company's sales continuing to be to certain large customers, (II) Continued
dependence by the Company on certain Allied Distributors, (III) Continued
downward pricing pressures in the information technology market, (IV) The
decision by the Company to expand its sales force into various new geographic
territories (V) Quarterly fluctuations in results (VI) Seasonal patterns of
sales and client buying behaviors (VII) Changing economic influences in the
industry (VIII) The development by competitors of new or superior delivery
technologies or entry in the market by new competitors (IX) Dependence on
intellectual property rights (X)Delays in product development (XI)The
company's dependence on key personnel, and potential influence by executive
officers and principal
6
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stockholders (XII) Volatility of the company's stock price (XIII) Delays in
the receipt of orders or in the shipment of products (XIV) Any delay in
execution and implementation of the company's system development plans (XV)
Loss of minority ownership status (XVI) Planned or unplanned changes in the
quantity and/or quality of the suppliers available for the company's products
(XVII) Changes in the costs or availability of products (XVIII)
Interruptions in transport or distribution (XIX) General business conditions
in the economy (XX) Inability to raise additional private or public capital
necessary for development of the Internet business to that of a profitable
enterprise. Assumptions relating to budgeting, marketing, and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
marketing, capital expenditure or other budgets, which may in turn affect the
Company's business, financial position, results of operations and cash flows.
The reader is therefore cautioned not to place undue reliance on
forward-looking statements contained herein and to consider other risks
detailed more fully in the Company's most recent Form 10-K and Annual Report
as of September 30, 1998.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------------------ -----------------------------
Net Income EPS Net Income EPS
(Loss) Shares Amount (Loss) Shares Amount
------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(4,536) 5,935 $(0.76) $209 5,862 $0.04
Common stock equivalents -- -- -- -- 80 --
------------------------------ -----------------------------
Diluted EPS $(4,536) 5,935 $(0.76) $209 5,942 $0.04
------------------------------ -----------------------------
------------------------------ -----------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1999 March 31, 1998
------------------------------ -----------------------------
Net Income EPS Net Income EPS
(Loss) Shares Amount (Loss) Shares Amount
------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(4,623) 5,929 $(0.78) $1,348 5,852 $0.23
Common stock equivalents -- -- -- -- 183 --
------------------------------ -----------------------------
Diluted EPS $(4,623) 5,929 $(0.78) $1,348 6,035 $0.22
------------------------------ -----------------------------
------------------------------ -----------------------------
</TABLE>
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
Statement requires that companies disclose comprehensive income, which
includes net income and unrealized gains and losses on marketable
7
<PAGE>
securities classified as available-for-sale.
In June 1997, the Financial Accounting Standards Board ("FASB") issued a
new Statement, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes new requirements for the reporting of
segment information by public companies. It supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise, and is effective for the
annual financial statements of fiscal years beginning after December 15,
1997. The new framework for segment reporting is referred to as the
management approach. It is intended to give analysts and other
financial-statement users a view of the company "through the eyes of
management", by looking to a company's internal management reporting
structure as the basis for determining the company's external segments, as
well as the basis for determining the information that is to be disclosed for
those segments.
NOTE 4 - SEGMENT INFORMATION
The Company consists primarily of two business units (companies), En Pointe
Technologies and Purchase Pointe, Inc. dba firstsource.com ("Firstsource").
Each of these companies has separate management teams, infrastructures and
facilities.
En Pointe Technologies focuses its efforts on sales of technology products
and services to Fortune 1000 and government customers. En Pointe
Technologies utilizes both a traditional national sales force with branch
offices in major metropolitan areas along with electronic interfaces between
En Pointe and its customers and vendors.
Firstsource focuses its efforts on the sale of technology products primarily
via the Internet to consumers and small to mid-sized businesses.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" included in this report on
Form 10-Q and in the Company's report on Form 10-K for the year ended
September 30, 1998.
The tables below present information about reported segments for the three
and six month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
En Pointe
Technologies FIRSTSOURCE TOTAL
------------ ----------- --------
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenues 138,036 6,882 144,918
Gross Profit 10,626 414 11,040
Segment pretax profit (loss) (5,762) (1,203) (6,965)
Segment Assets 108,009 3,943 111,952
THREE MONTHS ENDED MARCH 31, 1998
Revenues 135,303 - 135,303
Gross Profit 12,793 - 12,793
Segment pretax profit (loss) 354 - 354
Segment Assets 110,980 - 110,980
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C>
SIX MONTHS ENDED MARCH 31, 1999
Revenues 303,906 11,619 315,525
Gross Profit 23,790 632 24,422
Segment pretax profit (loss) (5,233) (1,879) (7,112)
SIX MONTHS ENDED MARCH 31, 1998
Revenues 265,492 - 265,492
Gross Profit 26,184 - 26,184
Segment pretax profit (loss) 2,285 - 2,285
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
management's best judgment based on factors currently known, involve risks
and uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including but not limited to those discussed below. Forward-looking
information provided by En Pointe pursuant to the safe harbor established by
recent securities legislation should be evaluated in the context of these
factors.
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 92.4 90.5 92.3 90.1
------- ------ ------- ------
Gross profit............................. 7.6 9.5 7.7 9.9
Selling and marketing expenses............. 6.2 6.4 5.6 6.4
General and administrative expenses........ 3.2 2.6 2.7 2.4
Non-recurring charges...................... 5.5 - 2.5 -
------- ------ ------- ------
Operating income......................... (7.3) 0.5 (3.1) 1.1
Interest expense........................... 0.6 0.3 0.6 0.3
Gain on sale of securities................. (3.1) - (1.4) -
Other income, net.......................... - 0.1 - 0.1
------- ------ ------- ------
Income (loss) before taxes............... (4.8) 0.3 (2.3) 0.9
Provision (credit) for income taxes........ (1.7) 0.1 (0.8) 0.4
------- ------ ------- ------
Net income (loss)........................ (3.1)% 0.2% (1.5)% 0.5%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
9
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COMPARISON OF THE SECOND QUARTER AND SIX MONTHS ENDED MARCH 31, 1999 (FISCAL
1999) AND 1998 (FISCAL 1998)
NET SALES. Net sales increased $9.6 million, or 7.1% to $144.9 million
in the second quarter of fiscal 1999 from $135.3 million in fiscal 1998. The
increase in sales was attributable to sales to new customers, increased sales
to existing customers, and increased sales of value-added services.
Firstsource.com, an Internet business acquired in June of 1998, contributed
$6.9 million (4.7%) for the quarter.
Service revenues increased $2.3 million, or 88.5% to $4.9 million in the
second quarter of fiscal 1999 from $2.6 million in the prior fiscal year
quarter and were 3.4% of total net sales versus 1.9% in the prior fiscal year
quarter. Sales under the IBM contract were $26.3 million and accounted for
18.1% of total net sales in the second quarter of fiscal 1999 compared with
$29.4 million or 21.7% for the prior fiscal year quarter.
However, net sales when compared to the first quarter of fiscal 1999
declined by $25.7 million or 15.0%. It is believed that the March 1999
quarter decline over the December 1998 quarter was due first to the March
quarter being a seasonally low sales period. Secondly, there was general
weakness in the industry as many manufacturers and distributors suffered
significant declines in both revenues and gross margins. This resulted in
revenue declines from a decrease in end-user demand. It is not anticipated
that the March quarter weakness is indicative of any significant change in
trend in future sales growth for the Company.
Net sales for the six months increased $50.0 million, or 18.8% to $315.5
million from $265.5 million in the prior fiscal year quarter. Service
revenues increased $4.6 million, or 86.8% to $9.9 million from $5.3 million
in the prior fiscal year quarter. Sales under the IBM contract were $61.6
million and accounted for 19.5% of total net sales for the six months of
fiscal 1999 compared with $60.7 million or 22.9% of total net sales in the
prior fiscal year period.
GROSS PROFIT. Gross profit declined $1.8 million, or 13.7% to $11.0
million in the second quarter of fiscal 1999 as compared to $12.8 million in
prior fiscal year quarter. As a percentage of net sales, gross profits
declined to 7.6% from 9.5% in the prior fiscal year quarter, but declined
only slightly compared with the 7.8% of the prior sequential quarter.
Continuing industry pricing pressures contributed to the decline in gross
margins. In addition, while Firstsource sales of $6.9 million continued to
grow, with gross margins improving from 4.6% in the first quarter to 6.0% in
the second, the lower Firstsource margins were a factor in the overall margin
decline. For the six month period, the gross profit percentage of net sales
decline was a similar 7.7% versus 9.9% in the prior fiscal year quarter.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased $0.4 million, or 5.1% to $9.1 million in the second quarter of
fiscal 1999, from $8.6 million in prior fiscal year quarter, primarily as
a result of increased net sales volume. As a percentage of net sales,
however, selling and marketing decreased to 6.2% in 1999 from 6.4% in 1998.
For the six month period, selling and marketing expenses increased
marginally by $1.0 million, or 6.4% to $17.8 million, from the $16.8 million
of the prior fiscal period. However, as a percentage of net sales, selling
and marketing expenses actually declined by 0.8%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased
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$1.1 million, or 31.5% to $4.6 million in the second quarter of fiscal 1999,
from $3.5 million in the prior fiscal year quarter. A large portion of the
increase, $0.5 million, was attributable to the build up of staff and other
administrative functions at Firstsource. Another $0.4 million was due to
severance expenses related to staff reductions. As a percentage of net
sales, general and administrative expenses increased to 3.2% from 2.6% in the
prior year fiscal quarter and from 2.3% in the prior sequential quarter.
Exclusive of the above special items related to Firstsource and certain
severance expenses, general and administrative expenses as a percentage of
net sales actually declined to 2.2% for the second quarter of fiscal 1999.
For the six month period, general and administrative expenses increased
$2.1 million, or 32.3% to $8.5 million, from $6.4 million in the prior fiscal
period. As a percentage of net sales, general and administrative expenses
increased to 2.7% from 2.4% in the prior fiscal period.
NON-RECURRING CHARGES. Two items, a provision for litigation expense of
$1.7 million and a reserve for loss on sale of property of $6.2 million make
up the balance of the non-recurring charges. See Part II, Item 1, Legal
Proceedings, for a description of the legal actions that comprise the basis
for the $1.7 million accrual. The reserve for loss on sale of property is
specific to the Ontario configuration facility which is in the process of
being sold and will be subsequently leased back. The loss is based on real
property and equipment with a net book value of $11.0 million, selling
expenses of $0.4 million, and the expensing of previously capitalized
interest costs related to construction of $0.3 million, less proceeds on
sale of $5.5 million.
OPERATING INCOME. Operating income decreased $11.2 million, to a $10.5
million loss in the second quarter of fiscal 1999 from $0.7 million of income
in prior fiscal year quarter. The decrease was primarily a result of
declining gross profit margins which were insufficient to cover the increase
in operating expenses resulting from the increase in sales volume and the
non-recurring charges of $7.9 million. Operating income, as a percent of net
sales, declined to a negative 7.3% in the second fiscal quarter of 1999 from
a positive 0.5% in the 1998 fiscal quarter.
Similarly operating income for the six month period decreased $12.8
million, to a $9.8 million loss from $3.0 million of income in the prior
fiscal period.
INTEREST EXPENSE. Interest expense increased $0.5 million, or 118.6% to
$0.9 million in the second quarter of fiscal 1999 from $0.4 million in the
prior fiscal year quarter. Additional interest of $0.1 million related to
Ontario facility and equipment debt that was not present in the prior year's
quarter. The remainder represented interest incurred on increased borrowing
under the Company's lines of credit which was used for accounts receivable
financing, property and equipment financing and general working capital
purposes.
Interest expense for the six month period increased $1.0 million, or
109.3% to $1.8 million from $0.8 million in the prior fiscal period.
GAIN ON SALE OF SECURITIES. The $4.4 million gain on sale of securities
represents the sale of 125,000 shares of Shopping.com stock and 199,800
related warrants. Net sale proceeds were $5.0 million on $0.6 million of
costs (net of $.2 million write down for other than temporary impairment of
value at September 30, 1998).
NET INCOME (LOSS). Net income decreased $4.7 million, to a net loss of
$4.5 million in the second quarter of fiscal 1999 from $0.2 million net
income in the prior fiscal year quarter. The decrease in the second quarter
of fiscal 1999 was primarily a result of a $1.8 million decline in gross
profit margins along with $9.5 million increase in operating expenses offset
by a $3.9 increase in net other income and an
11
<PAGE>
increase of tax credits of $2.6 million. Firstsource contributed $1.5
million of the $4.7 million net loss for the quarter.
Net income for the six month period decreased $6.0 million, to a $4.6
million net loss from $1.3 million net income in the prior fiscal period.
Firstsource contributed $1.9 million of the $4.6 million loss for the six
month period.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1999 operating activities provided
cash totaling $18.9 million compared to $8.5 million in the prior fiscal year
period. The largest provider of cash was a $14.3 million decline of accounts
receivable due to improved collections and lower sales volume. The Company's
accounts receivable balance at March 31, 1999 and September 30, 1998, was
$87.6 million and $102.0 million, respectively. The number of days' sales
outstanding in accounts receivable decreased to 51 days from 66 days, as of
March 31, 1999 and September 30, 1998, respectively.
At March 31, 1999, restricted cash amounted to $1.5 million and related
principally to unexpended funds from the $3.5 million of equipment financing
targeted for the Ontario integration, repair, and RMA facility. The
remaining restricted funds will be applied against the original $3.5 million
indebtedness, the remaining balance of which is included in notes payable.
Investing activities used cash totaling $0.9 million during the six
months ended March 31, 1999 compared with $5.9 million in the prior year
fiscal period. Warehouse equipment for the Ontario facility and computer
related purchases were the principal uses for the $0.9 million in
expenditures.
Financing activities used net cash totaling $18.5 million during the six
months ended March 31, 1999, of which $18.2 million was attributable to net
payments under the Company's lines of credit.
As of March 31, 1999, the Company had approximately $4.3 million in cash,
including $1.5 million in restricted cash, and working capital of $21.9
million. The Company has several revolving credit facilities collateralized
by accounts receivable and all other assets of the Company, including a $73
million line with IBMCC. As of March 31, 1999, such lines of credit provided
for maximum aggregate borrowings of approximately $105.0 million, of which
approximately $61.4 million was outstanding.
Outstanding borrowings under the IBMCC line of credit bears interest at
prime less .25%. The line of credit is automatically renewable on an annual
basis unless notification of an election not to renew is made by either the
Company or creditor on or prior to the annual renewal date. Borrowings are
collateralized by substantially all of the Company's assets. In addition,
the line of credit contains certain financing and operating covenants
relating to net worth, liquidity, profitability, repurchase of indebtedness
and prohibition on payment of dividends, as well as restrictions on the use
of proceeds obtained under the line. The Company has obtained a waiver for
non-compliance with certain IBMCC loan covenants at March 31, 1999.
The Firstsource.com acquisition made in June of 1998 was the Company's
entry into the rapid growth Internet sales arena. Typical of Internet sales
operations, Firstsource.com for the six months ended March 31, 1999 has
realized a pre-tax loss of $1.9 million on sales of $11.6 million. With the
significant investment required to fully launch Firstsource before it can
reach a break even point, the Company believes that additional financing will
be necessary and is currently negotiating a $5.1 to $20.4 million private
placement.
12
<PAGE>
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "Year 2000"
problem is concerned with whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, computer systems and/or software used
by many companies and governmental agencies may need to be upgraded to comply
with such Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities
In the Company's own analysis of its computer programs and operations, it
has reached the conclusion that its business systems, including its computer
systems have been tested and are now substantially in compliance with Year
2000 requirements. The Company will continue to assess Year 2000 readiness
to insure its business needs will be fulfilled.
It is possible, however, that "Year 2000" problems incurred by the
customers or suppliers of the Company could have a negative impact on future
operations and financial performance of the Company, although the Company has
not been able to specifically identify any such problems among its suppliers.
The Company believes that it will not be dependent upon any single supplier
or customer for its equipment or supplies or sales in the Year 2000; it has
contacted its primary suppliers to determine if they are developing plans to
address processing transactions which may impact the Company. All main
suppliers have indicated that they are Year 2000 compliant. In addition the
Company deals with thousands of secondary suppliers and there can be no
assurance that they will be Year 2000 compliant as checking on each would be
a time-consuming and expensive proposition; however, it is believed that no
single secondary supplier could have a material negative effect on the
Company.
Furthermore, the Year 2000 problem may impact other entities (e.g.
electric utilities, telephone companies, banks, etc.) with which the Company
transacts business and the Company cannot predict the effect of the Year 2000
problem on such entities or the resulting effect on the Company. As well,
the purchasing patterns of existing and potential customers may be affected
by Year 2000 problems, which could cause fluctuations in the Company's sales
volumes.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and legal actions pending against the
Company. On March 23, 1999, in Los Angeles County (California)
Superior Court Case No. BC 170234 the jury returned a verdict in
favor of the plaintiffs and against the Company and its CEO, Bob
Din, finding that they should pay $50,000 in contract damages,
plus $375,000 in tort damages to plaintiffs. The contract damages
verdict carries with it rights to claim an as-yet undetermined
amount of reasonable attorneys' fees. On April 2, 1999, the jury
found that defendants should pay $1 million in punitive damages
to plaintiffs. An additional $300,000 has been accrued for
contingencies related to the action. A final judgment has not yet
been entered; contemplated post-trial motions may or may not
result in a final judgment different from the verdicts. The
Company and Mr. Din are currently considering whether to appeal
the determination of the Court once a final judgment has been
entered. In the opinion of management, the outcome of other
claims and litigation will not have a material adverse effect
upon the Company's financial position or results of operations.
Other than as noted there have been no material changes in the
legal proceedings reported in the Company's Annual Report on Form
10-K for the year ended September 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on March 17,
1999. The stockholders elected all of the Company's nominees for
director who constitute the entire Board of Directors. The
stockholders also approved the appointment of PricewaterhouseCoopers
LLP as the Company's independent auditors for 1999. The votes were
as follows:
1 Election of Directors:
<TABLE>
<CAPTION>
Votes For Withheld
------------------------
<S> <C> <C>
Attiazaz "Bob" Din 3,949,590 1,582,649
Naureen Din 3,949,905 1,586,334
Zubair Ahmed 3,951,705 1,580,534
Verdell Garroutte 3,953,790 1,578,449
Mark Briggs 3,953,790 1,578,449
2 Appointment of PricewaterhouseCoopers LLP:
For 5,207,138
Against 320,101
Abstain 5,000
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
NUMBER DESCRIPTION
27 Financial Data Schedule for the quarter ended
March 31, 1999
b. The Company did not file any reports on Form 8-K during the
three months ended March 31, 1999.
14
<PAGE>
SIGNATURES
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.
En Pointe Technologies, Inc.
----------------------------
(REGISTRANT)
Date: May 17, 1999 By: /s/ Javed Latif
------------------------------------
Javed Latif, Chief Financial Officer
15
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,850
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 5,529
<CURRENT-ASSETS> 101,259
<PP&E> 20,963
<DEPRECIATION> 5,330
<TOTAL-ASSETS> 111,952
<CURRENT-LIABILITIES> 79,310
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 26,519
<TOTAL-LIABILITY-AND-EQUITY> 101,952
<SALES> 315,525
<TOTAL-REVENUES> 315,525
<CGS> 291,103
<TOTAL-COSTS> 325,361
<OTHER-EXPENSES> (67)
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 1,771
<INCOME-PRETAX> (7,112)
<INCOME-TAX> (2,477)
<INCOME-CONTINUING> (4,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,623)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
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