<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
\X\ QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 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 - June 30, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Operations - Three and nine months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements - June 30, 1999 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
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>
June 30, September 30,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 2,622 $ 3,365
Restricted cash 120 1,999
Accounts receivable, net 116,175 101,956
Inventories 10,620 7,009
Recoverable income taxes 3,698 --
Prepaid expenses and other current assets 583 448
--------- ---------
Total current assets 133,818 114,777
Property and equipment, net 11,168 16,113
Other assets 644 1,677
--------- ---------
Total assets $ 145,630 $ 132,567
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 74,327 $ 79,598
Accounts payable 24,539 8,838
Accrued liabilities 9,165 5,015
Other current liabilities 5,931 564
Current portion of notes payable 236 790
Deferred taxes 141 141
--------- ---------
Total current liabilities 114,339 94,946
Notes payable and other 5,516 6,602
--------- ---------
Total liabilities 119,855 101,548
Stockholders' equity:
Common stock 6 6
Additional paid-in capital 19,066 18,757
Treasury stock -- (6)
Retained earnings 6,703 12,262
--------- ---------
Total stockholders' equity: 25,775 31,019
--------- ---------
Total liabilities and stockholders' equity $ 145,630 $ 132,567
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 174,573 $ 142,923 $ 478,478 $ 408,415
Internet subsidiary sales 8,365 888 19,985 888
--------- --------- --------- ---------
Total net sales 182,938 143,811 498,463 409,303
--------- --------- --------- ---------
Cost of sales 161,478 129,501 441,593 368,809
Internet subsidiary cost of sales 7,737 757 18,725 757
--------- --------- --------- ---------
Total cost of sales 169,215 130,258 460,318 369,566
Gross profit 13,723 13,553 38,145 39,737
Selling and marketing expenses 9,275 8,547 27,104 25,302
General and administrative expenses 5,369 3,557 13,881 9,989
Non-recurring charges -- -- 7,917 --
--------- --------- --------- ---------
Operating income (loss) (921) 1,449 (10,757) 4,446
Interest expense 624 298 2,395 1,145
Gain on sale of securities -- -- (4,428) --
Other income, net (105) (70) (172) (204)
--------- --------- --------- ---------
Income (loss) before income taxes (1,440) 1,221 (8,552) 3,505
Provision for income taxes (504) 501 (2,993) 1,437
--------- --------- --------- ---------
Net income (loss) $ (936) $ 720 $ (5,559) $ 2,068
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share:
Basic $ (0.16) $ 0.12 $ (0.94) 0.35
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ (0.16) $ 0.12 $ (0.94) 0.34
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic 5,935 5,898 5,931 5,867
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 5,935 5,926 5,931 6,019
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
Nine months ended
June 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,559) $ 2,068
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation and amortization 2,262 1,322
Impairment loss -- Ontario facility 6,092 --
Deferred compensation -- 21
Allowance for inventory and doubtful accounts 467 599
Net change in operating assets and
liabilities 5,196 (14,294)
-------- --------
Net cash provided by operating activities 8,458 (10,284)
-------- --------
Cash flows from investing activities:
Proceeds on sale of property 5,500
Purchase of property and equipment (2,662) (8,483)
-------- --------
Net cash used by investing activities 2,838 (8,483)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) under lines of credit (5,271) 14,092
Proceeds from equipment financing -- 3,500
Payment on notes payable (7,083) (280)
Proceeds from sales of stock to employees 315 384
-------- --------
Net cash used by financing activities (12,039) 17,696
-------- --------
DECREASE IN CASH $ (743) $ (1,071)
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 2,734 $ 1,146
-------- --------
-------- --------
Income taxes paid $ 2,212 $ 1,591
-------- --------
-------- --------
Long-term debt acquired in purchase of plant $ 4,000
--------
--------
Unrealized gain on equity holdings, net of taxes $ 1,885
--------
--------
</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 June 30, 1999,
and the unaudited condensed consolidated statements of income and unaudited
condensed consolidated statements of cash flows for the interim periods ended
June 30, 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
nine months ended June 30, 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>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------------------------------ ------------------------------------------
Net Income EPS Net Income EPS
(Loss) Shares Amount (Loss) Shares Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (936) 5,935 $ (0.16) $ 720 5,898 $ 0.12
Common stock equivalents -- -- -- -- 28 --
------------------------------------------ ------------------------------------------
Diluted EPS $ (936) 5,935 $ (0.16) $ 720 5,926 $ 0.12
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 1999 June 30, 1998
------------------------------------------ ------------------------------------------
Net Income EPS Net Income EPS
(Loss) Shares Amount (Loss) Shares Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (5,559) 5,931 $ (0.94) $2,068 5,867 $ 0.35
Common stock equivalents -- -- -- -- 152 --
------------------------------------------ ------------------------------------------
Diluted EPS $ (5,559) 5,931 $ (0.94) $2,068 6,019 $ 0.34
------------------------------------------ ------------------------------------------
------------------------------------------ ------------------------------------------
</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 securities classified
as available-for-sale.
In June 1997, the Financial Accounting Standards Board ("FASB") issued a new
Statement, SFAS No.
7
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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. 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.com focuses its efforts on the sale of technology products and other
services 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
nine month periods ended June 30, 1999 and 1998:
8
<PAGE>
<TABLE>
<CAPTION>
EN POINTE
TECHNOLOGIES FIRSTSOURCE TOTAL
------------- ---------------- ------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenues $ 174,573 $ 8,365 $ 182,938
Gross Profit $ 13,095 $ 628 $ 13,723
Segment pretax profit (loss) $ 582 $ (2,022) $ (1,440)
Segment Assets $ 135,987 $ 4,201 $ 140,188
THREE MONTHS ENDED JUNE 30, 1998
Revenues $ 142,923 $ 888 $ 143,811
Gross Profit $ 13,422 $ 131 $ 13,553
Segment pretax profit (loss) $ 1,307 $ (86) $ 1,221
Segment Assets $ 121,132 $ 1,515 $ 122,647
NINE MONTHS ENDED JUNE 30, 1999
Revenues $ 478,478 $ 19,985 $ 498,463
Gross Profit $ 36,885 $ 1,260 $ 38,145
Segment pretax profit (loss) $ (4,651) $ (3,901) $ (8,552)
NINE MONTHS ENDED JUNE 30, 1998
Revenues $ 408,415 $ 888 $ 409,303
Gross Profit $ 39,606 $ 131 $ 39,737
Segment pretax profit (loss) $ 3,591 $ (86) $ 3,505
</TABLE>
NOTE 5 -- STOCK OPTIONS
In May 1999, the Company's subsidiary, Purchase Pointe, Inc.
(firstsource.com), adopted a stock option plan which provides for the issuance
of both non-statutory and incentive stock options to employees, officers,
directors and consultants of the subsidiary. Firstsource.com issued a total
of 3,494,500 options with a weighted average exercise price of $0.12. In
issuing the options, firstsource.com recorded unearned deferred compensation
of $11.7 million to be amortized over the vesting period of four years, of
which $0.4 million expense was recognized in the current period.
NOTE 6 -- LEGAL CONTINGENCIES
The Company is involved with various claims and litigation in the normal
course of business. On the advice of counsel, and in the opinion of
management, the ultimate resolution of these matters will not have a
significant effect on the financial position, results of operations and cash
flows of the Company except as described below.
The Company was named, along with CEO, Bob Din, as a defendant in a lawsuit
filed on April 29, 1997 in Los Angeles County (California) Superior Court as
Case No. BC 170234, captioned Novaquest Infosystems, et al v. En Pointe
Technologies, Inc. et al. The lawsuit alleged that the Company knowingly
accepted trade secret information and interfered with the Plaintiffs'
prospective economic advantage in tort, and that these actions also
constituted breach of a prior contract. Plaintiffs' trade secret claim was
dropped on the eve of trial. The remaining claims were tried to a jury.
On March 23, 1999, the jury arrived at verdicts awarding $50,000 for the
breach of contract claim and $375,000 for the intentional interference with
plaintiffs' prospective economic advantage tort claim. On April 2, 1999, the
jury arrived at a verdict awarding $1,000,000 in punitive damages on the tort
claim. After various post-trial motions, Judgement on the above verdicts was
entered on June 15, 1999.
Because Plaintiffs prevailed on their contract claim, they are entitled to
seek the court (not a jury) to award them their "reasonable attorney's fees"
incurred in enforcing that contract and receiving a verdict of $50,000 on the
contract. Plaintiffs are not entitled to attorney's fees incurred in
enforcing their tort claim or in obtaining the punitive damages award.
Plaintiffs are entitled to seek recovery of the "costs" (as defined in
California Code of Civil Procedure section 1033.5; e.g. filing fees,
deposition costs, etc.) on claims on which they prevailed. After the
Judgement was entered on June 15, 1999, Plaintiffs, on June 29, 1999, served
their request for the court to award them approximately $100,000 in "costs"
and approximately $1,800,000 in attorney's fees, to which the Company has
timely objected. Because one of the factors required to be considered by the
court in awarding reasonable attorney's fees is the amount of the recovery,
the Company does not believe that a judge would find reasonable the expending
of $1,800,000 to recover $50,000.
The Company is permitted to seek "costs" from Plaintiffs on claims on which
the Company prevailed (i.e. the dropped trade secret claim noted above). On
September 10, 1999, the Company filed its request for "costs" of
approximately $51,000 against Plaintiffs. Additionally, because the dropped
claim was a trade secret claim, the Company has the right to seek the
attorney's fees it incurred relating to the dropped claim from Plaintiffs;
this statutory claim is in the discretion of the court. The time for the
Company to file its attorney's fees claim against plaintiffs has not yet run.
For the quarter ended March 31, 1999, the Company recorded a reserve for
litigation expense of $1,725,000, which included $50,000 for contract
damages, $375,000 for
9
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tort damages, $1,000,000 for punitive damages and $300,000 as an estimate of
costs and attorneys' fees which might be awarded to Plaintiffs.
The Company believes that the accrual made at March 31, 1999 remains a
reasonable estimate for the loss incurred with respect to this matter.
Other than as noted above, 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.
NOTE 7 -- SALE-LEASEBACK
On June 24, 1999, the company entered into a sale-leaseback arrangement.
Under the arrangement, the company sold its Ontario facility for $5.5 million
and leased it back under a triple net lease term of 15 years. The base rent
is $544,320 the first year with 3% increases in each of the following 15
years. The terms of the lease permit the Company to terminate the lease, at
no cost nor penalty, at the end of the seventh and tenth year.
The Company currently occupies approximately 55% of the facility and
originally planned to sublease the remaining space. However, under SFAS No.
98 "Accounting for Leases", subleasing space in excess of 10% is considered
retaining a financial interest in the property and requires that the property
remain on the financial statements. The balance sheet has thus been restated
for the quarter ended June 30, 1999 to restate the property at its estimated
fair value ($5.4 million) and related liability until the lease qualifies as
a "normal leaseback" under SFAS No. 98. Management is attempting to
restructure the lease so that the Company no longer has a financial interest
in the property, but there can be no assurance that the restructuring will be
successful.
The lease is being accounted for under SFAS No. 98, as a financing lease. The
aggregate non-cancellable and annual future minimum lease payments for the
term up to which the Company may terminate the lease for the Ontario facility
are as follows:
<TABLE>
<CAPTION>
Minimum
Lease Payments
Year (In Thousands)
- ---- --------------
<S> <C>
2000 $ 544
2001 561
2002 577
2003 595
2004 613
2005 through 2006 1,281
------
Total $4,171
======
</TABLE>
During the three months ended March 31, 1999, the Company, in accordance with
SFAS 121, recognized a charge for impairment relating to the Ontario facility
of approximately $6.2 million. The $6.2 million impairment loss was based on
a $5.5 million estimated sale price less $11.1 million of carrying costs,
less estimated selling expenses of $.2 million, less capitalized interest and
loan fees of $.4 million. Approximately 73% of the impairment loss related to
the property decline pertained to the special purpose improvements, with the
balance applicable to personal property, including warehouse and computer
equipment.
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:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.5 90.6 92.3 90.3
--------- --------- --------- -------
Gross profit 7.5 9.4 7.7 9.7
Selling and marketing expenses 5.1 5.9 5.5 6.2
General and administrative expenses 2.9 2.5 2.8 2.4
Non-recurring charges -- 1.6 --
--------- --------- --------- -------
Operating income (0.5) 1.0 (2.2) 1.1
Interest expense 0.3 0.2 0.5 0.2
Gain on sale of securities -- -- 1.0 --
Other income, net 0.0 0.0 0.0 0.0
--------- --------- --------- -------
Income (loss) before taxes (0.8) 0.8 (1.7) 0.9
Provision (credit) for income taxes (0.3) 0.3 (0.6) 0.4
Net income (loss) (0.5)% 0.5% (1.1)% 0.5%
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
COMPARISON OF THE THIRD QUARTER AND NINE MONTHS ENDED JUNE 30, 1999 (FISCAL
1999) AND 1998 (FISCAL 1998)
NET SALES. Net sales increased $39.1 million, or 27.2% to $182.9 million in
the third quarter of fiscal 1999 from $143.8 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 $8.4
million (4.6%) for the quarter.
Service revenues increased $3.5 million, or 102.9% to $6.9 million in the
third quarter of fiscal 1999 from $3.4 million in the prior fiscal year quarter
and were 3.8% of total net sales versus 2.4% in the prior fiscal year quarter.
Sales under the IBM contract were $34.6 million and accounted for 18.9% of total
net sales in the third quarter of fiscal 1999 compared with $30.1 million or
20.9% for the prior fiscal year quarter.
Net sales compared to the second quarter of fiscal 1999 increased by $38.0
million or 26.2%, reversing the adverse sequential trend experienced in the
second quarter's comparison with the first. As was stated in the prior quarter,
it was not anticipated that the March quarter weakness was indicative of any
significant change in trend in future sales growth for the Company.
Net sales for the nine months increased $89.2 million, or 21.8% to $498.5
million from $409.3 million in the prior fiscal year quarter. Service revenues
increased $8.2 million, or 95.3% to $16.8 million from $8.6 million in the prior
fiscal year quarter. Sales under the IBM contract were $96.2 million and
accounted for 19.3% of total net sales for the nine months of fiscal 1999
compared with $90.8 million or 22.2% of total net sales in the prior fiscal year
period.
GROSS PROFIT. Gross profit increased $0.1 million, or 1.3% to $13.7 million
in the third quarter of
11
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fiscal 1999 as compared to $13.6 million in prior fiscal year quarter. As a
percentage of net sales, gross profits declined to 7.5% from 9.4% in the prior
fiscal year quarter, but declined only slightly compared with the 7.6% of the
prior sequential quarter. Continuing industry pricing pressures contributed to
the decline in gross margins. Countering this trend, Firstsource.com gross
profit margins continued their improvement from 4.6% in the first quarter to
6.0% in the second and 7.5% in the current third quarter. For the nine month
period, the gross profit percentage of net sales decline was a similar 7.7%
versus 9.7% in the prior fiscal year quarter.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$0.8 million, or 8.5% to $9.3 million in the third quarter of fiscal 1999, from
$8.5 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 5.1% in 1999 from 5.9% in 1998.
For the nine month period, selling and marketing expenses increased
marginally by $1.8 million, or 7.1% to $27.1 million, from the $25.3 million of
the prior fiscal period. However, as a percentage of net sales, selling and
marketing expenses actually declined by 0.7%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.8 million, or 51.0% to $5.4 million in the third quarter of fiscal
1999, from $3.6 million in the prior fiscal year quarter. Most of the increase,
$1.5 million, was attributable to the build up of staff and other administrative
functions at Firstsource.com, including $0.4 million of stock options expense
for options granted by the subsidiary during the third quarter. As a percentage
of net sales, general and administrative expenses increased to 2.9% from 2.5% in
the prior year fiscal quarter but declined from the 3.2% in the prior sequential
quarter. Firstsource.com itself experienced general and administrative expenses
that were 19.4% of their net sales. Exclusive of the internet subsidiary,
general and administrative expenses as a percentage of net sales actually
declined to 2.1% for the third quarter of fiscal 1999.
For the nine month period, general and administrative expenses increased
$3.9 million, or 39.0% to $13.9 million, from $10.0 million in the prior fiscal
period. As a percentage of net sales, general and administrative expenses
increased to 2.8% from 2.4% in the prior fiscal period.
NON-RECURRING CHARGES. Two items, a provision for litigation expense of
$1.7 million and an impairment loss of $6.2 million make up the balance of
the nine month period non-recurring charges. See Note 6, for a description of
the legal actions that comprise the basis for the $1.7 million accrual. The
impairment loss was specific to the Ontario configuration facility which was
sold and subsequently leased back (see Note 7 above). The impairment loss was
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 $2.3 million, to a $.9 million
loss in the third quarter of fiscal 1999 from $1.4 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. Operating income, as a
percent of net sales, declined to a negative 0.5% in the third fiscal quarter of
1999 from a positive 1.0% in the 1998 fiscal quarter.
Similarly operating income for the nine month period decreased $14.8
million, to a $10.4 million loss from $4.4 million of income in the prior fiscal
period.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 109.4% to $0.6
million in the third
12
<PAGE>
quarter of fiscal 1999 from $0.3 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 nine month period increased $1.3 million, or
109.2% to $2.4 million from $1.1 million in the prior fiscal period.
GAIN ON SALE OF SECURITIES. The nine month year-to-date $4.4 million gain on
sale of securities was from the sale of Shopping.com stock and 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 $1.6 million, to a net loss of
$0.9 million in the third quarter of fiscal 1999 from $0.7 million net income
in the prior fiscal year quarter. The decrease in the third quarter of fiscal
1999 was primarily a result of a $2.5 million increase in operating expenses
without margin growth to support the increase. Firstsource.com was
responsible for the $0.9 million consolidated net loss with their $2.0
million net loss for the quarter. Exclusive of the Firstsource.com net loss,
the Company had net income of $1.1 million.
Net income for the nine month period decreased $7.7 million, to a $5.6
million net loss from $2.1 million net income in the prior fiscal period.
Firstsource.com contributed $3.9 million of the $5.6 million loss for the nine
month period. Another $3.5 million of the loss was from the sale and leaseback
of the Ontario facility of $7.9 million less a $4.4 million gain on the disposal
of marketable securities in Shopping.com.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1999 operating activities provided
cash totaling $8.5 million compared to $10.3 million cash used in the prior
fiscal year period. The largest increase in cash when converting from the net
loss reported on the financial statements to the cash provided from operating
activities was from the $6.1 million impairment loss related to the Ontario
facility. The impairment loss was first recognized in the March 31, 1999
quarter when a reserve of $6.2 million was established.
The Company's accounts receivable balance at June 30, 1999 and September 30,
1998, was $116.2 million and $102.0 million, respectively. The number of days'
sales outstanding in accounts receivable decreased to 58 days from 66 days, as
of June 30, 1999 and September 30, 1998, respectively.
Investing activities provided cash of $2.8 million during the nine months
ended June 30, 1999 compared with cash used of $8.5 million in the prior year
fiscal period. Proceeds of $5.5 million resulting from the sale of the Ontario
facility was responsible for the cash provided from investing activities.
Computer equipment and software accounted for most of the $2.7 million in
purchases of property and equipment.
Financing activities used net cash totaling $12.0 million during the nine
months ended June 30, 1999, of which $5.3 million was attributable to net
payments under the Company's lines of credit. Another $7.1 million was from the
payoff of debt related to the real estate and personal property when the Ontario
facility was sold.
As of June 30, 1999, the Company had approximately $2.7 million in cash,
including $0.1 million in restricted cash, and working capital of $19.5 million.
The Company has several revolving credit facilities
13
<PAGE>
collateralized by accounts receivable and all other assets of the Company,
including an $87.0 million line with IBMCC. As of June 30, 1999, such lines of
credit provided for maximum aggregate borrowings of approximately $128.0
million, of which approximately $74.3 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 June 30, 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 nine months ended June 30, 1999 has realized
a pre-tax loss of $3.9 million on sales of $20.0 million. With the significant
investment required to fully launch Firstsource.com before it can reach a
break-even point, the Company believed that additional financing was necessary
and in July 1999 completed a $9.3 million private placement. The Company is
continuing to pursue other options to raise additional capital for the fledgling
subsidiary.
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 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 -- Legal Contingencies, for an explanation of all current
claims and legal actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.17 Private Placement Memorandum for a minimum of 1,200,000
shares and a maximum of 3,000,000 shares of Purchase
Pointe, Inc. (dba firstsource.com) at $3.50 per share.
27 Financial Data Schedule for the quarter ended June 30,
1999
</TABLE>
b. On April 21, 1999 the Company filed Form 8-K, announcing under
Item 2, Disposition of Assets, that all of its stock and warrants
in Shopping.com were sold for a total gain of $4,427,783. In the
same Form 8-K, under Item 5, Other Events, the Company also
announced that a jury on March 23, 1999 in Los Angeles Superior
Court Case Number BC170234, had returned a verdict in favor of
the plaintiffs and against the Company and Bob Din finding that
they should pay $50,000 in contract damages plus $375,000 in tort
damages. On April 2, 1999 the jury found the defendants should
pay $1 million in punitive damages to the plaintiffs.
On May 10, 1999 the Company filed another Form 8-K, announcing
its intent to seek funding for a private placement of securities
for between $5.1 million to $20.4 million in its then currently
wholly-owned internet subsidiary, Purchase Pointe, Inc., dba
firstsource.com.
15
<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: November 10, 1999 By: /s/ Javed Latif
-------------------------------------
Javed Latif, Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<NAME> EN POINTE TECHNOLOGIES, INC.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
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