<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 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 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</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 5,726 16,113
Other assets 644 1,677
--------- ---------
Total assets $ 140,188 $ 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 74 6,602
--------- ---------
Total liabilities 114,413 101,548
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 $ 140,188 $ 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
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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
Loss on sale of property 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.
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:
9
<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
10
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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 a reserve for loss on sale of property of $6.2 million make up the
balance of the nine month period 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 was
specific to the Ontario configuration facility which was sold and subsequently
leased back. The 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
11
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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 loss on the sale of the Ontario
facility. The loss was first recognized in the March 31, 1999 quarter when a
reserve of $6.2 million was set up. The actual loss recognized was slightly
lower due the retention of the property resulting in additional depreciation
that lowered the cost basis of the asset.
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
12
<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.
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 judgment has been entered; post-trial motions, including a
filed motion to set aside verdicts, 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 determinations of the
Court once post-trial motions are heard and determined. 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 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.
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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: August 13, 1999 By: /s/ Javed Latif
-------------------------------------
Javed Latif, Chief Financial Officer
15
<PAGE>
COPY NUMBER:____
SUBMITTED TO: ________________ Dated: June 25, 1999
PURCHASE POINTE, INC.
(A DELAWARE CORPORATION)
PRIVATE PLACEMENT MEMORANDUM
THE SECURITIES DESCRIBED IN THIS MEMORANDUM INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" HEREIN
Purchase Pointe, Inc., a Delaware corporation (the "Company") is
offering (the "Offering") a minimum of 1,200,000 shares and a maximum of
3,000,000 shares of its common stock, $.001 par value (the "Shares") at a price
of $3.50 per Share on the terms described herein. The minimum purchase shall be
120,000 Shares for an aggregate purchase price of $420,000, although
subscriptions for less than 120,000 Shares may be accepted in the discretion of
the Company. Subscription funds will be held in escrow by California Bank &
Trust pending closing of the Offering.
The Offering will terminate on the earlier of the sale of all 3,000,000
Shares or June 30, 1999, unless extended, in the discretion of the Company, to a
date not later than July 9, 1999 (the "Termination Date"). If subscriptions for
at least 1,200,000 Shares have been received prior to the Termination Date, the
Company may accept such subscriptions, whereupon an initial closing will be
held. Following such initial closing, the Company may continue the Offering
until the Termination Date, during which time further closings may be held and
additional subscriptions may be accepted by the Company. If subscriptions for at
least 1,200,000 Shares have not been received by the Termination Date, no Shares
will be sold and all subscription funds will be returned to subscribers.
THE SHARES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT" OR "THE ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES
LAWS OF ANY STATE. ALL SALES OF THE SHARES ARE MADE IN RELIANCE ON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THE REGULATIONS
PROMULGATED THEREUNDER AND APPLICABLE STATE SECURITIES LAWS. NEITHER THE
SECURITIES AND EXCHANGE COMMISSION NOR THE SECURITIES COMMISSION OF ANY STATE
HAS REVIEWED OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM.
BECAUSE THE SHARES ARE BEING OFFERED ONLY TO "ACCREDITED INVESTORS" AS
DEFINED IN RULE 501 UNDER THE SECURITIES ACT, THIS PRIVATE PLACEMENT MEMORANDUM
IS NOT SUBJECT TO THE SPECIFIC DISCLOSURE REQUIREMENTS APPLICABLE TO OFFERINGS
THAT ARE MORE WIDELY AVAILABLE. POTENTIAL INVESTORS SHOULD BE AWARE THAT THIS
PRIVATE PLACEMENT
<PAGE>
MEMORANDUM DOES NOT CONTAIN DISCLOSURES WHICH ARE AS DETAILED AND COMPLETE AS
WOULD BE FOUND IN A PROSPECTUS OR PRIVATE PLACEMENT MEMORANDUM SUBJECT TO THE
SPECIFIC DISCLOSURE RULES UNDER SECURITIES ACT.
THE SHARES ARE SUBJECT TO RESTRICTION ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT AND SUCH STATE LAWS. THERE IS NO PUBLIC OR OTHER MARKET FOR THE SHARES
OFFERED HEREBY AND SUCH MARKETS MAY NEVER DEVELOP. THEREFORE, AN INVESTOR MAY BE
REQUIRED TO RETAIN HIS INVESTMENT IN THE SHARES AND BEAR THE ECONOMIC RISK OF
HIS INVESTMENT FOR AN INDEFINITE PERIOD.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
STATE OR JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
THE COMPANY WILL MAKE AVAILABLE TO EACH PROSPECTIVE INVESTOR, DURING
THIS OFFERING AND PRIOR TO THE SALE OF ANY SHARES OFFERED HEREBY, THE
OPPORTUNITY TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM REPRESENTATIVES OF THE
COMPANY CONCERNING ANY ASPECT OF THE INVESTMENT AND TO OBTAIN ANY ADDITIONAL
INFORMATION, TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE
IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF
THE INFORMATION CONTAINED IN THIS MEMORANDUM. ANY PROSPECTIVE INVESTOR HAVING
ANY QUESTIONS REGARDING THIS OFFERING OR DESIRING ANY ADDITIONAL INFORMATION OR
DOCUMENTS TO VERIFY OR SUPPLEMENT THE INFORMATION CONTAINED IN THIS MEMORANDUM,
SHOULD CONTACT MR. JACOB J. STETTIN FOR THE COMPANY AT (310) 725-9773.
THIS MEMORANDUM IS INTENDED TO FURNISH INFORMATION TO PROSPECTIVE
INVESTORS REGARDING THE INVESTMENT DESCRIBED HEREIN AND INCLUDES SUMMARIES OF
VARIOUS DOCUMENTS, STATUTES AND REGULATIONS. THESE SUMMARIES DO NOT PURPORT TO
BE COMPLETE AND REFERENCE MUST BE MADE IN EACH CASE TO THE ORIGINAL DOCUMENT,
STATUTE AND REGULATION.
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS
MEMORANDUM OR ANY COMMUNICATION, WHETHER WRITTEN OR ORAL, FROM THE COMPANY, ITS
EMPLOYEES OR AGENTS, AS LEGAL, TAX, ACCOUNTING OR OTHER EXPERT ADVICE. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN COUNSEL, ACCOUNTANTS AND OTHER
PROFESSIONAL ADVISERS AS TO LEGAL, TAX, ACCOUNTING AND RELATED MATTERS
CONCERNING AN INVESTMENT IN THE
2
<PAGE>
COMPANY.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK, SEE "CERTAIN RISK
FACTORS," AND CONSEQUENTLY THE PURCHASE OF THE SHARES OFFERED HEREBY SHOULD BE
CONSIDERED ONLY BY INVESTORS WHO HAVE NO NEED FOR LIQUIDITY WITH RESPECT TO
THEIR INVESTMENT, WHO HAVE A SUBSTANTIAL NET WORTH AND WHO CAN BEAR A TOTAL LOSS
OF THEIR INVESTMENT. EACH INVESTOR MUST REPRESENT IN WRITING TO THE COMPANY,
AMONG OTHER MATTERS, INFORMATION AS TO HIS NET WORTH, TAXABLE INCOME AND OTHER
INVESTMENTS.
THIS MEMORANDUM CONTAINS PROJECTIONS PREPARED ON THE BASIS OF THE
ASSUMPTIONS AND HYPOTHESES STATED HEREIN. THE PROJECTIONS MERELY REPRESENT A
PREDICTION BASED UPON ASSUMPTIONS OF FUTURE EVENTS WHICH MAY OR MAY NOT OCCUR.
FUTURE OPERATING RESULTS AND ECONOMIC RETURNS ARE IMPOSSIBLE TO PREDICT AND NO
ASSURANCES CAN BE GIVEN NOR REPRESENTATIONS OF ANY KIND MADE THAT THE ACTUAL
RESULTS OF OPERATIONS WILL CONFORM TO THE PROJECTED RESULTS FOR ANY PERIOD
INDICATED OR OVERALL.
THE COMPANY RESERVES THE RIGHT TO WITHDRAW THIS OFFERING AT ANY TIME
PRIOR TO THE SALE OF ANY SHARES OFFERED HEREBY.
THE INFORMATION CONTAINED IN THE MEMORANDUM IS CONFIDENTIAL AND IS
FURNISHED ONLY FOR USE BY PROSPECTIVE INVESTORS. BY ACCEPTING DELIVERY OF THIS
MEMORANDUM, EACH PROSPECTIVE INVESTOR AGREES NOT TO TRANSMIT, REPRODUCE OR MAKE
THIS MEMORANDUM, ITS EXHIBITS OR OTHER RELATED DOCUMENTS AVAILABLE TO ANY OTHER
PERSON, AND AGREES TO RETURN ALL OF THE FOREGOING TO THE COMPANY IF SUCH
PROSPECTIVE INVESTOR DOES NOT PURCHASE ANY SHARES.
FOR SALES OF SHARES IN THE STATE OF CONNECTICUT:
THE SHARES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION AND HAVE NOT
BEEN REGISTERED UNDER SECTION 36-485 OF THE CONNECTICUT UNIFORM SECURITIES
ACT. THEY CANNOT THEREFORE BE RESOLD UNLESS THEY ARE REGISTERED UNDER SAID
ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THESE SECURITIES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE BANKING COMMISSIONER OF THE
STATE OF CONNECTICUT NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
FOR SALES OF SHARES IN THE STATE OF NEW YORK:
3
<PAGE>
THIS PRIVATE PLACEMENT MEMORANDUM HAS NOT BEEN FILED WITH OR REVIEWED
BY THE ATTORNEY GENERAL OF THE STATE OF NEW YORK PRIOR TO ITS ISSUANCE AND USE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
FOR SALES OF SHARES IN THE STATE OF PENNSYLVANIA:
EACH PURCHASER OF SHARES IN THE STATE OF PENNSYLVANIA MUST AGREE NOT TO
SELL HIS OR HER INTERESTS WITHIN TWELVE MONTHS AFTER THE DATE OF PURCHASE
THEREOF. EACH PERSON WHO ACCEPTS AN OFFER TO PURCHASE SHARES EXEMPTED FROM
REGISTRATION BY SECTION 203(D) DIRECTLY FROM THE COMPANY IN THE STATE OF
PENNSYLVANIA SHALL HAVE THE RIGHT TO WITHDRAW HIS OR HER ACCEPTANCE WITHOUT
INCURRING ANY LIABILITY TO THE COMPANY FOR SUCH WITHDRAWAL WITHIN TWO BUSINESS
DAYS FROM THE DATE OF RECEIPT BY THE COMPANY FROM SUCH PURCHASER OF A
SUBSCRIPTION AGREEMENT.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
SUMMARY OF THE OFFERING 6
SUBSCRIPTION PROCEDURE 7
BUSINESS 8
MANAGEMENT 9
STOCKHOLDERS 9
CAPITALIZATION 11
DILUTION 12
CERTAIN RISK FACTORS 13
OPERATIONAL RISKS 13
OTHER RISKS 23
CERTAIN TRANSACTIONS AND RELATED
PARTY TRANSACTIONS 25
FORWARD-LOOKING STATEMENTS 26
USE OF PROCEEDS 27
CERTAIN FEDERAL INCOME TAX MATTERS 27
DESCRIPTION OF SECURITIES 28
Common Stock 28
Reports to Shareholders 28
ACCESS TO INFORMATION 28
</TABLE>
SUMMARY OF THE OFFERING
5
<PAGE>
The following is a summary of certain provisions of this
Memorandum. This summary is intended only for quick reference, is neither
complete nor exact, and is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Memorandum.
THE COMPANY Purchase Pointe, Inc., a Delaware corporation
(the ACompany@) formed on July 15, 1997, is engaged in the marketing and sale of
computers and computer related equipment through its online store under the name
"firstsource.com". Through its proprietary technology and the relationships it
has developed with numerous suppliers, the Company currently offers consumers
on-line access to approximately $4 billion in virtual inventory of a wide range
of manufacturers. The Company intends to use what it considers to be its
technological edge to become a low cost vertical-transaction based e-commerce
portal specializing in small to mid-sized integrated business solutions, home
offices and the retail consumer market. The Company also expects its product
sales to spur growth of its high margin solutions and service divisions over
time. A complete description of the business of the Company is included it its
Corporate Profile which is attached to this Offering Memorandum as Exhibit A.
This Memorandum only briefly summarizes the business of the Company. Prospective
investors should review the Company's Corporate Profile for a more in depth
discussion of the Company's business.
SECURITIES OFFERED The securities to be offered are shares of the Company's
common stock, $.001 par value ("Shares").
THE OFFERING The Company is offering a minimum of 1,200,000 Shares
($4,200,000) and a maximum of 3,000,000 Shares
($10,500,000). The minimum investment will be 120,000 Shares
($420,000), unless waived by the Company in its sole
discretion. Each investor must be an "Accredited Investor"
as defined in Regulation D under the Securities Act. Payment
in full must be made at the time of investment.
USE OF PROCEEDS The Company intends to devote a significant portion of the
proceeds of this Offering to an aggressive marketing and
advertising campaign designed to build the Company's brand
to its target market. Other uses of proceeds include
purchase of the core operating technology from its current
parent corporation, En Pointe Technologies, Inc. ("En
Pointe") (see "CERTAIN TRANSACTIONS AND RELATED PARTY
TRANSACTIONS"), the addition of additional senior management
including a Chief Financial Officer and Vice President of
Merchandising and Branding, continuing research and
development relating to its core operational technologies,
the purchase of additional computer hardware and working
capital. See " USE OF PROCEEDS."
RISK FACTORS An investment in Shares will be subject to various risks,
including, but not limited to, risks relating to the
Company's implementation of its business plan, the highly
competitive and rapidly evolving industry in which it
operates and the illiquid nature of the Shares. Investors
should carefully consider the risks relating to this
investment, including those discussed below under "CERTAIN
RISK FACTORS."
6
<PAGE>
COMPANY REPORTS The Company will mail to each Shareholder
following the end of each fiscal year of the Company an audited financial
statement of the Company's operations. Each Shareholder will also receive
unaudited quarterly reports of the Company's operations in such form as the
Company shall determine.
ADDITIONAL INFORMATION Prospective Investors are invited to
meet with officers of the Company for a further explanation of the terms and
conditions of this Offering and to obtain any additional information
reasonably requested to verify the information contained in this Memorandum.
Requests for such information should be directed to Mr. Jacob J. Stettin for
the Company at (310) 725-9773.
SUBSCRIPTION PROCEDURE
A potential investor may subscribe for Shares by delivering the following
to Mr. Jacob Stettin, c/o Purchase Pointe, Inc., 100 N. Sepulveda Boulevard,
19th Floor, El Segundo, California 90245, prior to the Termination Date:
1. An executed copy of the Subscription Agreement, a form of which is
annexed hereto as Exhibit B;
2. A completed Purchaser Questionnaire, a form of which is annexed hereto
as Exhibit C-1 for individuals and Exhibit C-2 for organizations; and
3. A cashier's or certified check in the full amount of the purchase price
for the number of Shares subscribed for, payable to the order of "California
Bank & Trust, Escrow Account F/B/O Purchase Pointe, Inc." Alternatively,
subscription funds may be wired to California Bank & Trust, ABA No. 121002042,
Account No. 3360002031, F/B/O Purchase Pointe, Inc. The Bank's address is:
California Bank & Trust, West Los Angeles Branch, 11345 West Olympic Boulevard,
Los Angeles, CA 90064.
7
<PAGE>
TERMS OF THE OFFERING
The Offering will terminate upon the earlier of the sale of 3,000,000
Shares or June 30, 1999, unless extended by the Company to a date not later than
July 9, 1999. If subscriptions for at least 1,200,000 Shares have been received
prior to the Termination Date, the Company may accept such subscriptions,
whereupon an initial closing will be held. Following such initial closing, the
Company may continue the Offering until the Termination Date, during which time
further closings may be held and additional subscriptions may be accepted by the
Company. If subscriptions for a minimum of 1,200,000 Shares have not been
accepted by the Company by the Termination Date, no Shares will be sold and the
subscription funds will be returned promptly to subscribers.
The minimum purchase will be 120,000 Shares at a purchase price of $3.50
per Share; provided, however, that the Company may accept subscriptions for less
than 120,000 Shares in its discretion.
Funds paid by subscribers will be deposited in an escrow account to be
maintained by California Bank & Trust.
INVESTOR SUITABILITY REQUIREMENTS
Sales of Shares will be made only to "accredited investors," as such term
is defined in Rule 501 of Regulation D promulgated under the Act. Generally, to
be an "accredited investor," an investor who is a natural person must, at the
time of his purchase, (i) have a net worth, individually or jointly with one's
spouse, in excess of $1,000,000 or (ii) have had an individual income in excess
of $200,000 in each of the two most recent years, or joint income with one's
spouse in excess of $300,000 in each of those years and have a reasonable
expectation of reaching the same income level in the current year. An
organization or entity subscribing for Shares also may qualify as an "accredited
investor" if it is (a) a bank as defined in Section 3(a)(2) of the Act or a
savings and loan association or other institution defined in Section 3(a)(5)(A)
of the Securities Act whether acting in its individual or fiduciary capacity; a
broker-dealer registered pursuant to Section 15 of the Securities Exchange Act
of 1934, as amended; an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that act; any Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality thereof, for the
benefit of its employees, if such plan has total assets in excess of $5,000,000;
an employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974 ("ERISA"), if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings
and loan association, insurance company or registered investment adviser, or if
the employee benefit plan has total assets in excess of $5,000,000, or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors, (b) a private business development company as
8
<PAGE>
defined in Section 202(a)(22) of the Investment Advisers Act of 1940, (c) an
organization described in Section 501(c)(3) of the Internal Revenue Code, a
corporation, Massachusetts or similar business trust or partnership, not formed
for the specific purpose of acquiring Shares, with total assets in excess of
$5,000,000, (d) a director or officer of the Company, (e) a trust with total
assets in excess of $5,000,000, not formed for the specific purpose of acquiring
Shares, whose purchase is directed by a sophisticated person and described in
Rule 506(b)(2)(ii) of the Act or (f) an entity all of the equity owners of which
are accredited investors, all as defined in Regulation D.
PLAN OF DISTRIBUTION
The Shares are being offered and sold primarily directly by the Company.
Some Shares may be sold by May Davis Group, Inc., a registered broker dealer
firm with offices located at One World Trade Center, 87th Floor, New York, NY
10048, (212) 775-7400 (a "Placement Agent"). Those Shares being offered by the
Placement Agent are on a "best efforts" basis. With respect to all Shares placed
by the Placement Agent in this Offering, the Placement Agent will receive a
placement fee equal to 5% of the gross proceeds of such Shares which, in the
discretion of the Placement Agent, will be payable in cash or in Shares valued
at $3.50 per Share, so long as the Placement Agent places no less than one
hundred fifty thousand Shares. This fee shall be paid with respect to a maximum
of five hundred thousand Shares. The Placement Agent is responsible for all its
fees and expenses in the Offering. The Placement Agent may employ the services
of other selected registered broker-dealers which may receive some portion of
the placement fee and warrants. Shares not placed by the Placement Agent may be
placed directly by the Company. The Company may utilize the services of
qualified finders in placing such Shares. Such finders may be compensated by
warrants to purchase up to a maximum of 450,000 Shares at a price of $0.125 per
Share.
BUSINESS
Potential investors in the Offering are urged to review the description of
the business activities of the Company in the Company Profile which is annexed
hereto as Exhibit A and is incorporated herein by reference. Potential investors
should note that historical figures set forth in the Company Profile are
unaudited figures and that the books and records of the Company have not been
audited. See "CERTAIN RISK FACTORS."
9
<PAGE>
MANAGEMENT
Potential investors in the Offering are urged to review the backgrounds
of the directors and officers of the Company as set forth under "MANAGEMENT" in
the Company Profile which is annexed hereto as Exhibit A.
STOCKHOLDERS
Assuming the placement of all Shares available under the Offering, the
Company shall have approximately 9.7 million shares outstanding. This total
includes approximately 6.7 million shares owned by the Company. An additional
3.6 million shares have been reserved by the Company for use in conjunction with
grants of options under incentive and non-qualified stock option plans adopted
by the Company. The majority of these option shares (3.4 million) have already
been granted to key employees and others, including the members of the Board
(see "CERTAIN TRANSACTIONS AND RELATED PARTY TRANSACTIONS"). The Company
anticipates reserving an additional 2 million option shares for future use. The
9.7 million Shares referred to above do not include the warrants issuable to the
Placement Agent or to other qualified finders as described under "SUBSCRIPTION
PROCEDURE-PLAN OF DISTRIBUTION".
10
<PAGE>
CAPITALIZATION
11
<PAGE>
DILUTION
12
<PAGE>
CERTAIN RISK FACTORS
Potential investors should carefully consider the following risk
factors and all other information contained in this Offering Memorandum before
purchasing Shares. Investing in Shares in the Company involves a high degree of
risk. Any of the following risks could materially adversely affect the Company's
business, operating results and financial condition and could result in a
complete loss of an investor's investment.
OPERATIONAL RISKS
THE COMPANY HAS A LIMITED ONLINE OPERATING HISTORY WHICH PROVIDES LITTLE
INFORMATION WITH WHICH TO EVALUATE ITS ELECTRONIC COMMERCE BUSINESS
The Company commenced making sales on the Internet in June of 1998,
and, therefore, has only a limited operating history as an electronic commerce
company. As a result, there is little information on which to evaluate the
Company's business and prospects as an electronic commerce company. Potential
investors must consider the risks and difficulties that early-stage companies
frequently encounter in the new and rapidly evolving market of electronic
commerce. Such risks include:
the Company's evolving and unpredictable business model;
competitors of the Company that have more established electronic commerce
operations;
the Company's need and ability to manage growth; and
the rapid evolution of technology in electronic commerce.
THE COMPANY MAY NOT BE SUCCESSFUL IN IMPLEMENTING ITS STRATEGIES. EVEN IF THE
COMPANY ACCOMPLISHES ITS OBJECTIVES, IT STILL MAY NOT BE PROFITABLE IN THE
FUTURE
The Company has a history of losses and expects future losses. The
Company has not achieved profitability as an electronic commerce company, and
management expects the Company to continue to incur substantial net losses
through at least its fiscal year ending September 30, 2000. The Company plans to
continue to enhance its brand name through marketing and advertising programs,
offering additional categories of merchandise for sale through the Company's
online store and continued improvements and enhancements of its technology,
infrastructure and systems. These initiatives will likely result in operating
expenses that are higher than current operating expenses. The Company will need
to generate significant revenues to achieve and to thereafter maintain
profitability.
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THE COMPANY'S FUTURE REVENUES ARE UNPREDICTABLE AND ITS OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY
Because the Company has a limited operating history in electronic commerce
and because electronic commerce is a new, emerging market, future revenues
cannot be accurately forecast. Although the Company intends to base its current
and future expenditures on estimates of future revenues, its expenses are, to a
large degree, fixed. The Company may be unable to adjust spending in a timely
manner if it experiences an unexpected shortfall in revenues.
The Company expects that future quarterly operating results will fluctuate
significantly because of many factors, several of which are not within the
Company's control. Such factors include:
the Company's ability to satisfy customers, retain existing customers and
attract new customers at a steady rate;
the Company's ability to acquire, price and market merchandise inventory such
that it can maintain gross margins in its existing business and in future
product lines and markets;
price competition;
the level of traffic at the Company's Web site;
the Company's ability to fulfill customer orders;
the development, announcement or introduction of new sites, services or
products by the Company or by its competitors;
the amount that the Internet is used generally and, more specifically, for the
purchase of consumer products such as those offered by the Company;
the Company's ability to continue to upgrade and develop its systems and
infrastructure and attract new employees;
the occurrence of technical or communications failures, system downtime and
Internet disruptions;
the amount and timing of operating costs and capital expenditures that the
Company incurs to expand its business;
governmental regulation and taxation policies;
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disruptions in service by common carriers such as United Parcel Service and
Federal Express;
unanticipated increases in shipping and transaction-processing costs; and
general economic conditions and economic conditions specific to the Internet,
electronic commerce and the computer industry.
The amount of sales at the Company's online store depends in part on
the number of customers and the availability of merchandise from its suppliers.
The number of future customers or the future availability of merchandise cannot
be forecast with any degree of certainty. It is clear, however, that if the
number of customers does not increase or if the amount of merchandise available
to the Company decreases substantially, its business will suffer.
Because of these and other factors, the Company believes that
period-to-period comparisons of its historical results of operations are not
good indicators of its future performance.
SEASONALITY OF DEMAND
The Company expects to experience fluctuations in its operating results
due to seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. As a result
of such factors, the Company's operating results in one or more future quarters
may fall below the expectations of investors and any analysts that may, in the
future, follow the Company.
THE COMPANY MAY SUFFER SYSTEMS FAILURES AND BUSINESS INTERRUPTIONS
The success of the Company, especially its ability to receive and
fulfill customer orders, largely depends on the efficient and uninterrupted
operation of its computer and telephone communications systems. Almost all of
such computer and communications systems are located at a single leased facility
in Santa Ana, California. The Company's systems are vulnerable to damage from
fire, floods, power loss, telecommunications failures, break-ins, earthquakes
and other events. Although network security measures have been implemented, the
Company's servers are vulnerable to computer viruses, physical or electronic
break-ins, attempts by third parties deliberately to exceed the capacity of our
systems and similar disruptions. Any of these events could lead to interruptions
or delays in service, loss of data or the inability to accept and confirm
customer orders. The Company does not have back-up systems or a formal disaster
recovery plan, and coverage limits on its property and business interruption
insurance may not be adequate to compensate for losses that may occur.
POTENTIAL CAPACITY CONSTRAINTS
The revenues of the Company depend to a significant degree on the
number of customers
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who use its online store to buy merchandise. The Company depends on the
satisfactory performance, reliability and availability of its Web site,
transaction-processing systems, network infrastructure, customer support center
and delivery and shipping systems. These factors are critical to the Company's
reputation, its ability to attract and retain customers and to maintain adequate
customer service levels, and, therefore, its operating results. Capacity
constraints could prevent customers from gaining access to the Company's online
store or its customer support center for extended periods of time and decrease
the Company's ability to fulfill customer orders or decrease its level of
customer acquisition or retention. Such constraints would also decrease the
appeal of the online store and decrease the Company's sales. If the amount of
traffic or the number of orders at the Company's Web site increases
substantially, it may experience capacity constraints and may need to further
expand and upgrade its technology, transaction-processing systems and network
infrastructure. The Company may be unable to sufficiently predict the rate or
timing of increases in the use of its online store to enable it to quickly
upgrade systems to handle such increases. Also, the Company may be unable to
increase its capacity at its customer support center to handle the amount of
current or future customer telephone inquiries.
RISKS RELATING TO SYSTEMS DEVELOPMENT
The Company is heavily dependent on its technological systems. Although
the Company upgrades and expands these systems on an ongoing basis, in the near
future it will need to significantly upgrade and expand or replace its
transaction-processing systems to handle increased traffic at its online store
and to make certain elements of the systems Year 2000 compliant. The Company
also plans to upgrade and expand its systems to add automated customer service,
proactive email and customer feedback features to provide enhanced customer
service, more complete customer data and better management reporting
information. These efforts will require the Company to integrate newly developed
and/or purchased technologies into its existing systems and to hire more
engineering and information technology personnel in the near future. If the
Company is unable in a timely manner to hire required personnel and to add new
software and hardware or to develop and upgrade its existing system to handle
increased traffic and increased sales, the Company could experience
unanticipated system disruptions, slower response times, less effective customer
service and a decrease in its ability to fulfill customer orders.
RISKS RELATING TO MANAGEMENT OF FUTURE GROWTH
The ability of the Company to successfully implement the business plan
described in its Company Profile in a rapidly evolving market requires an
effective planning and growth-management process. If the Company is unable to
manage growth, it may not be able to implement its business plan, and its
results may suffer as a result. The Company expects that it will have to expand
its business to address potential growth in its number of customers, to expand
product and service offerings and to pursue other market opportunities. The
Company expects that it will need to continue to improve its operational,
financial and inventory systems, procedures and controls, and will need to
expand, train and manage its workforce, particularly its information technology
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staff. Furthermore, the Company expects that it will need to continue to manage
multiple relationships with various suppliers, freight companies, warehouse
operators, Web sites, Internet service providers, and other third parties to
keep control over strategic direction as its electronic commerce business
evolves.
THE ELECTRONIC COMMERCE MARKET IS INTENSELY COMPETITIVE
The electronic commerce industry is new, rapidly evolving and intensely
competitive. The Company may not be successful in competing against current and
future competitors. It is not difficult to enter the electronic commerce market,
and current and new competitors can launch new electronic commerce Web sites at
a relatively low cost. The Company expects competition in electronic commerce to
increase as retailers, suppliers, manufacturers and direct marketers who have
not traditionally sold computer products and consumer goods directly to
consumers through the Internet enter this market segment. Furthermore,
competition may increase to the extent that mergers and acquisitions result in
electronic commerce companies with greater market share and revenues. Increased
competition or failure by the Company to compete successfully is likely to
result in price reductions, fewer customer orders, reduced gross margins,
increased marketing costs or loss of market share, or any combination of these
factors.
The Company currently competes with a variety of companies that sell
personal computer products and other consumer goods through a variety of sales
channels to customers. These competitors include:
Catalog-based merchants with significant electronic commerce offerings, such as
CDW Computers Centers, Inc., Micro Warehouse, Inc., Insight Enterprises,
Inc., Multiple Zones International, Inc. and Creative Computers, Inc.;
Companies with electronic commerce sites such as Beyond.com Corporation, Buy.com
Inc. and Cyberian Outpost, Inc., and electronic software distributors such
as Digital River, Inc.;
Companies offering Internet auctions, such as ONSALE, Inc., uBid, Inc., Yahoo!
Inc., Internet Shopping Network, Inc., Micro Warehouse, Inc. and eBay Inc.;
Companies whose primary business is not online retailing but who derive
significant revenue from electronic commerce, including America Online,
Inc., Yahoo! Inc. and QVC, Inc.;
Traditional retailers of personal computer products such as CompUSA, Inc. and
Circuit City;
Manufacturers such as Dell Computer Corporation and Gateway 2000, Inc. that sell
directly to the consumer, including over the Internet;
Mass merchandisers such as Wal-Mart Stores, Inc., Costco Wholesale Corporation
and Best Buy
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Co., Inc. that primarily sell through traditional retail channels but
also sell over the Internet; and
Office products retailers such as Office Depot Inc. and Staples, Inc. that
primarily sell through traditional retail channels but also sell over the
Internet.
Management believes that the principal competitive factors affecting
the Company's market are brand name recognition, competitive pricing, quality of
customer service, quality of product information and availability, breadth of
merchandise offerings, cost of customer acquisition and ease of use of
electronic commerce sites. Although management believes that the Company
competes adequately with respect to such factors, no assurance can be made that
the Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to obtain
exclusive or semi-exclusive sources of merchandise. New competitors or alliances
among competitors and suppliers may emerge and rapidly acquire market share.
Also, manufacturers might elect to sell or liquidate their products directly
over the Internet. Many of the Company's current and potential competitors have
significantly greater financial, marketing, customer support, technical and
other resources. As a result, they may be able to secure merchandise from
suppliers on more favorable terms than those available to the Company, and they
may be able to respond more quickly to changes in customer preference or to
devote greater resources to the development, promotion and sale of their
merchandise than the Company can.
THE COMPANY RELIES HEAVILY ON CERTAIN THIRD PARTIES, INCLUDING INTERNET SERVICE
PROVIDERS AND TELECOMMUNICATIONS COMPANIES
The operations of the Company depend on a variety of third parties for
Internet access, telecommunications, operating software, order fulfillment,
merchandise delivery and credit card transaction processing. The Company has
limited control over these third parties, and no assurance can be made that the
Company will be able to maintain satisfactory relationships with any of them on
acceptable commercial terms.
The Company relies on Internet service providers to connect its Web
site to the Internet. From time to time, the Company has experienced temporary
interruptions in its Web site connection and also its telecommunications access.
Frequent or prolonged interruptions of these Web site connection services could
result in significant losses of revenues. The Company's Web site software
depends on operating systems, data bases and server software that were produced
by and licensed from third parties. From time to time, the Company has
discovered errors and defects in such software and, in part, relies on these
third parties to correct these errors and defects promptly.
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Third-party distribution centers fulfill a significant portion of the
sales for which the Company is responsible. Accordingly, any service
interruptions experienced by these distribution centers as a result of labor
problems or otherwise could disrupt or prevent the fulfillment of customer
orders. In addition, the Company uses United Parcel Service and Federal Express
as the primary delivery services for its products. The Company's business would
suffer if labor problems or other causes prevented these or any other major
carriers from delivering products for significant time periods. Furthermore,
Wells Fargo Bank is the sole processor of credit card transactions for the
Company. If computer systems failures or other problems were to prevent Wells
Fargo Bank from processing credit card transactions, the Company would
experience delays and business disruptions. Any such delays or disruptions in
customer service may damage the Company's reputation or result in loss of
customers.
THE COMPANY RELIES HEAVILY ON CERTAIN MANUFACTURERS, DISTRIBUTORS AND SUPPLIERS
The Company depends entirely on certain manufacturers, distributors and
suppliers to supply it with merchandise for sale at its online store. No
assurance can be made that the Company will be able to develop and maintain
satisfactory relationships with such parties on acceptable commercial terms, or
that it will be able to obtain sufficient quality and quantities of merchandise
at competitive prices. Also, the quality of service provided by such parties may
fall below the standard needed to enable the Company to conduct its business
effectively. The Company acquires products for sale both directly from
manufacturers and indirectly through distributors and suppliers. Purchases from
Merisel, Inc., Ingram Micro Inc. and Tech Data Corp., distributors of computers
and related products, accounted for approximately 75% of the Company's aggregate
merchandise purchases. The Company has no long-term contracts or arrangements
with manufacturers, distributors or suppliers that guarantee availability of
merchandise for its online store. No assurance can be made that current
manufacturers, distributors and suppliers will continue to provide merchandise
for sale by the Company or that it will be able to establish new manufacturer,
distributor or supplier relationships that ensure merchandise will be available
for sale. The Company also relies on many of its distributors and suppliers to
ship merchandise to customers. The Company has no control over the shipping
procedures of these distributors and suppliers, and such shipments have often
been subject to delays. Most merchandise sold by the Company carries a warranty
from the manufacturer or the supplier, and the Company is not obligated to
accept merchandise returns. Nevertheless, the Company in fact has accepted
returns from customers for which it did not receive reimbursements from the
suppliers or manufacturers, and the levels of returned merchandise in the future
may exceed the Company's expectations.
RISKS RELATING TO THE YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and
applications use two-digit fields to designate a year. Date-sensitive computer
systems and programs may fail to recognize or correctly process the year 2000 as
the century date change approaches or occurs. This inability to properly
recognize or address the year 2000 may cause systems errors or failures that
could
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seriously disrupt or prevent normal business operations. As a company engaged in
electronic commerce, the Company relies on computer programs and systems in
connection with its internal and external communication networks and systems
(including transmissions of information over the Internet), the operation of its
Web site, customer use of its Web site, order processing and fulfillment,
accounting and financial systems and other business functions. Not all of the
systems on which the Company relies are Year 2000 compliant, and no assurance
can be made that the Company's systems will be made Year 2000 compliant in a
timely manner or that the third parties upon which the Company's business
depends will achieve Year 2000 compliance. The Company may incur significant
additional expenses relating to Year 2000 issues.
Any failure of third party networks, systems or services upon which the
Company's business depends could have a material adverse impact on its business.
The Company's business depends on the satisfactory performance and reliability
of the external communication and computer networks, systems and services
integral to the Internet. These networks, systems and services are maintained or
provided by third parties and affect the ability of its customers to access and
purchase products at the Company's Web site. As a result, the success of the
Company's plan to address Year 2000 issues depends in part on parallel efforts
being undertaken by other third parties. The Company has begun to identify and
initiate communications with third parties whose networks, systems or services
are critical to its business to determine the status of these entities' Year
2000 compliance. However, no assurance can be made that all such parties will
provide accurate and complete information, or that all their networks, systems
or services will achieve full Year 2000 compliance in a timely fashion. The most
reasonably likely worst-case scenario for the Company resulting from Year 2000
issues is that third-party noncompliance would disrupt, reduce or eliminate for
a period of time the ability of the Company's customers to connect with and
purchase products at its Web site. If such occurrences are frequent or long in
duration, they could materially adversely affect the Company's business. The
compliance of third-party global, national and local communications networks and
the compliance of individual Internet service providers is not within the
control of the Company. Accordingly, a contingency plan for this worst-case
scenario does not exist, nor does the Company believe that it will be able to
develop one.
THE COMPANY DEPENDS ON ITS KEY PERSONNEL AND WILL NEED TO BE ABLE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL.
The performance of the Company is substantially dependent on the
continued services and on the performance of its and En Pointe's executive
officers and other key employees, particularly Azhar Hameed, Abdul Halim, and
John Walsh. The Company does not maintain "key person" life insurance policies.
Although some of the Company's executive officers and key employees have entered
into employment agreements with the Company (or in some cases with En Pointe
(the parent of the Company prior to this Offering)), none of these agreements
prevents any of them from leaving the Company. The loss of the services of any
of the Company's executive officers or other key employees could materially
adversely affect its business. Additionally, the Company believes that it will
need to expand significantly its information technology staff in the near future
and will
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need to identify, attract, hire, train and retain other highly-skilled personnel
to be successful. Competition for personnel in the electronic commerce industry
is intense. No assurance can be made that the Company will be able to expand its
information technology staff or successfully identify, attract, hire and retain
other highly-skilled personnel in a timely and effective manner.
ELECTRONIC COMMERCE POSES SECURITY RISKS TO THE COMPANY
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
company relies upon encryption and authentication technology licensed from third
parties to provide secure transmission of confidential information. No assurance
can be made that the Company's security measures will prevent security breaches,
and such breaches could expose the Company to operating losses, litigation and
possible liability. Advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that the Company uses to protect customer
transaction data. A party who is able to circumvent the Company's security
measures could steal proprietary information or interrupt the Company's
operations. The Company may need to spend a great deal of money and use other
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of online
transactions and the privacy of users may also inhibit the growth of the
Internet generally, and the Web in particular, especially as a means of
conducting commercial transactions.
THE COMPANY IS DEPENDENT ON INTELLECTUAL PROPERTY
The performance of the Company and its ability to compete are dependent
to a significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws to establish and
protect its proprietary rights. Although the Company has applied for trademark
protection for the "firstsource.com" name, this name is not currently a
registered trademark in the United States. No assurance can be made that the
Company will be able to secure significant protection for this trademark and its
other trademarks or service marks. It is possible that competitors or others
will adopt product or service names similar to "firstsource.com" or other
service marks or trademarks of the Company, thereby impeding the Company's
ability to build brand identity and possibly confusing customers.
The Company's proprietary software is protected by copyright laws. The
source code for its proprietary software is also protected under applicable
trade secret laws. There can be no assurance that the steps the Company takes to
protect its software will prevent misappropriation of its technology or that
agreements the Company enters into for that purpose will be enforceable. It
might be possible for a third party to copy or otherwise obtain and use the
Company's software or other proprietary information without authorization, or to
develop similar software independently. Policing unauthorized use of technology
is difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may not adequately protect the
Company's intellectual
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property.
The Company may in the future receive notices from third parties
claiming infringement by the software or other intellectual property used in its
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and distraction of management, and could require the Company to enter into
costly and burdensome royalty and licensing agreements. Such royalty and
licensing agreements, if required, may not be available on terms acceptable to
the Company, or may not be available at all. In the future, the Company may also
need to file lawsuits to defend the validity of its intellectual property rights
and trade secrets, or to determine the validity and scope of the proprietary
rights of others. Such litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of resources.
The Company also relies on a variety of technologies that it licenses
from third parties such as the database and Internet commerce server
applications. No assurance can be made that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms. If the Company loses any such licenses, or if it is unable to maintain or
obtain upgrades to any of these licenses, it could delay completion of its
proprietary software enhancements until equivalent technology is identified,
licensed or developed, and integrated.
THE COMPANY IS VULNERABLE TO THE RAPID EVOLUTION OF ELECTRONIC COMMERCE AND
RELATED TECHNOLOGY
The Internet and the electronic commerce industry are characterized by
rapid technological change, changes in user and customer requirements, frequent
new service or product introductions embodying new technologies, and the
emergence of new industry standards and practices. Changes in the Internet,
electronic commerce and related technology could render the Company's Web site
and technology obsolete. To remain competitive, the Company must continue to
enhance and improve its customer service features and the responsiveness and
functionality of its Web site. Success in achieving these goals depends on the
Company's ability to develop or license new technologies and respond promptly
and cost-effectively to technological advances and emerging industry standards
and practices. The development and licensing of technologies relating to the
Internet and electronic commerce involves significant technical, financial and
business risks. The Company may not be successful in developing, licensing or
integrating new technologies or promptly adapting its Web site, proprietary
technology and transaction-processing systems to customer needs or emerging
industry standards.
THE COMPANY IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET
INFRASTRUCTURE
The Company depends entirely on the Internet for revenue and the
increased use of the Internet for commerce is essential for its business to
grow. Accordingly, the future success of the Company depends in large part on
the continued development of the infrastructure for providing
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Internet access and services. The Internet could lose its viability or its usage
could decline due to many factors, including:
delays in the development of the Internet infrastructure;
power outages;
disruptions due to the inability of computer systems to recognize the year 2000;
the adoption of new standards or protocols for the Internet; or
changes or increases in governmental regulation.
The Company cannot be certain that the infrastructure or complementary
services necessary to maintain the Internet as a useful and easy means of buying
goods will be developed or that, if they are developed, the Internet will remain
a viable marketing and sales channel for the types of products and services that
are offered through the Company's online store.
ELECTRONIC COMMERCE MAY NOT GAIN MARKET ACCEPTANCE
The market for Internet products and services has only recently begun
to develop and is rapidly changing. If this market fails to develop, develops
more slowly than expected or becomes saturated with competitors, or if the
Company's online store does not achieve market acceptance, its business may
suffer. As is typical for a new and rapidly evolving industry, demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. The success of the Company's online store depends upon the adoption of
the Internet as a medium for commerce by a broad base of customers and
suppliers. The Company cannot assure investors that widespread acceptance of
electronic commerce in general, or of its online store in particular, will
occur.
THE COMPANY FACES RISKS ASSOCIATED WITH MAINTAINING THE VALUE OF ITS DOMAIN
NAMES
The Company currently holds various Web domain names relating to its
brand, including the "firstsource.com" domain. No assurance can be made that the
Company will be able to acquire or maintain relevant domain names in all
jurisdictions in which the Company conducts business. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. The regulation of domain names in the United States and in
foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, the Company may be unable to prevent
third parties from acquiring domain names that are similar to, infringe on or
otherwise decrease the value of its
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brand and its trademarks and other proprietary rights.
The Company may have future capital needs
The Company currently anticipates that the net proceeds of this
Offering, together with its available funds, will be sufficient to meet its
anticipated needs for working capital (including, without limitation, for
marketing and advertising expenses), capital expenditures and business expansion
until the end of the current fiscal year. Thereafter, the Company will need to
raise additional funds. However, the Company may need to raise additional funds
sooner in order to fund more rapid expansion, to develop new or enhanced
services or products, to respond to competitive pressures or to acquire
complementary businesses, products, services or technologies. If additional
funds are raised through the issuance of common stock or securities convertible
into or exercisable for common stock, the percentage ownership of the
shareholders of the Company at that time will decrease and such shareholders may
experience additional dilution. In addition, such securities may have rights,
preferences and privileges more favorable than those of the common stock. No
assurance can be made that additional financing will be available on terms that
are acceptable to the Company. If such financing is not available, the Company
may not be able to fund its expansion, take advantage of unanticipated
acquisition opportunities, develop or enhance services, products or technologies
or respond to competitive pressures.
THE COMPANY IS SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is currently subject to regulations applicable to
businesses generally, as well as laws or regulations directly applicable to
communications or commerce over the Internet. The adoption or modification of
laws or regulations relating to the Internet could adversely affect the
Company's business. The law of the Internet, however, remains largely unsettled,
even in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet or other
online services covering issues such as user privacy, security, pricing,
content, copyrights, distribution, taxation and characteristics and quality of
products and services. Furthermore, the growth and development of electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on electronic commerce companies.
THE COMPANY IS VULNERABLE TO ADDITIONAL TAX OBLIGATIONS
The Company currently collects sales tax only on sales of products
delivered to residents in the state of California. However, other states or
foreign countries may seek to impose sales tax collection obligations on the
Company and other electronic commerce companies. A number of proposals have been
made at the state and local levels that would impose additional taxes on the
sale of goods and services through the Internet. These proposals, if adopted,
could substantially impair
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the growth of electronic commerce and cause purchasing at the Company's online
store to be less attractive to customers as compared to traditional retail
purchasing. The U.S. Congress has passed legislation limiting for three years
the ability of the states to impose taxes on Internet-based transactions.
Failure to renew this legislation could result in the imposition by various
states of taxes on electronic commerce.
OTHER RISKS
THE COMPANY HAS A LIMITED OPERATING HISTORY
The Company was formed in July of 1997 and has had a limited history of
operations. Accordingly, the Company is subject to all of the risks, expenses,
delays and difficulties frequently encountered by new ventures.
EXISTING SHAREHOLDERS WILL CONTINUE TO HAVE CONTROL OF THE COMPANY AFTER THE
OFFERING
En Pointe Technologies, Inc., the parent of the Company, currently has
exclusive control of the operations of the Company. Even assuming sale of all of
the Shares being offered hereby, the existing shareholders of the Company and
their affiliates will own approximately 72% of the then outstanding shares of
Common Stock of the Company (on a diluted basis including 3.6 million Shares
issuable upon exercise of management options but excluding the possible
additional 2 million option Shares and Shares issuable to the Placement Agent
and others pursuant to the warrants being granted to the Placement Agent and
others in connection with this Offering, as described under "SUBSCRIPTION
PROCEDURE-PLAN OF DISTRIBUTION") and will continue to control all of the
Company's decisions and operations. Therefore, persons purchasing Shares will
not, either individually or collectively, have any effective influence over the
management of the Company.
THE PRICE AND TERMS OF THIS OFFERING WERE NOT INDEPENDENTLY DETERMINED
The price and terms of the Shares have been arbitrarily determined by
agreement of the Company and the Placement Agent and are not necessarily
reflective of any customary investment criteria. No independent review has been
made as to the fairness of the price or terms of such securities.
THE HISTORICAL FINANCIAL INFORMATION OF THE COMPANY HAS NOT BEEN AUDITED
The historical financial information of the Company set forth in the
Company Profile included as Exhibit A to this Memorandum has been prepared by
management of the Company from the Company's books and records and has not been
audited or reviewed by any public accounting firm. Accordingly, such numbers do
not contain adjustments and footnote disclosure of the type that would be
customary had the financial information been reviewed or audited.
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THE COMPANY's MANAGEMENT HAS DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS
OFFERING
The Company's management has broad discretion as to the use of the
proceeds from this Offering. The Company intends to use the net proceeds
substantially in the manner reflected under "USE OF PROCEEDS." No assurance can
be made that management will apply such funds effectively, nor is there
assurance that the proceeds will be invested to yield a favorable return.
PURCHASERS OF SHARES OF COMMON STOCK IN THIS OFFERING WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION
Purchasers of shares of common stock in this Offering will incur
immediate and substantial dilution in the net tangible book value of their
purchased shares of common stock. See "DILUTION." Investors may also experience
additional dilution as a result of the issuance of shares of common stock in
future business acquisitions and as a result of the issuance and exercise of
employee stock options, warrants and grants.
THE COMPANY'S RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS PROVIDE
DIRECTOR AND OFFICER INDEMNIFICATION AND LIMIT THEIR LIABILITY
The Company may have to spend significant resources indemnifying its
officers and directors or paying for damages caused by their conduct. The
General Corporation Law of Delaware provides for broad indemnification by
corporations of its officers and directors, and the Company's restated bylaws
implement this indemnification to the fullest extent permitted under applicable
law as it currently exists or as it may be amended in the future. Consequently,
subject to the applicable provisions of the General Corporation Law of Delaware
and to certain limited exceptions in the Company's by-laws, none of the
Company's directors will be liable to the Company or to its shareholders for
monetary damages resulting from their conduct as a director.
THE SHARES HAVE LIMITED TRANSFERABILITY AND THERE IS NOT CURRENTLY ANY TRADING
MARKET FOR SHARES
The Shares are intended for long-term investment only and are not
transferable except in compliance with the Securities Act and state securities
laws. Although, the Company may attempt to register its common stock under the
Securities Act in the future, the Company can give no assurance that it will
ever so register its common stock. In the absence of such registration, there
can be no assurance that an investor will ever be able to resell Shares
purchased in this Offering. In addition, in the event that the Company registers
Shares under the Securities Act, it is anticipated by the Company that investors
in this Offering will be required to sign lock-up agreements with the
underwriting syndicate restricting their ability to sell Shares in the public
market for a specified period of time.
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THE COMPANY DOES NOT ANTICIPATE THE PAYMENT OF ANY DIVIDENDS ON ITS COMMON STOCK
The Company has not paid any dividends on its common stock since its
inception and does not contemplate or anticipate paying any dividends on its
common stock in the foreseeable future. It is anticipated that earnings, if any,
will be used to finance the development and expansion of the Company's business.
INVESTORS SHOULD SEEK INDEPENDENT ADVICE ON TAX MATTERS RELATING TO THEIR
INVESTMENT IN SHARES
Each prospective investor in Shares should obtain advice from his or
her own tax advisor concerning the matters discussed in this Offering Memorandum
and the effect of an investment in the Company on his or her own tax situation.
CERTAIN TRANSACTIONS AND RELATED PARTY TRANSACTIONS
The Company has engaged in or is party to certain transactions with its
corporate parent, En Pointe. A summary of certain of these transactions is as
follows:
In order to secure its rights to the core operational technology that
is used both by the Company and En Pointe, the Company and En Pointe have
entered an agreement in principle pursuant to which the Company shall purchase
that technology from En Pointe for a promissory note in the principal amount of
$3,000,000. The Company shall then grant a license to En Pointe (and existing
licensees) to continue to use the technology in its current configuration for
three years. It is expected that this transaction shall be consummated on or
before July 30, 1999.
The current CEO and Chairman of the Company, Bob Din, is also the
Chairman and CEO of En Pointe. However, it is anticipated that upon
completion of the Offering, Mr. Din will cease functioning as CEO of Purchase
Pointe and that he will resign from Purchase Pointe's Board of Directors.
The Company intends to establish a director compensation plan. It is
currently anticipated that each member of the Board shall be issued 100,000
options to purchase Company stock at a price of 12.5 cents per share (or such
higher price which shall be a lawful minimum) pursuant to a directors' incentive
and/or non-qualified stock option plan. The Company currently has two directors
(see "MANAGEMENT" in the Company Profile attached as Exhibit A), though it
expects to increase that number to five in the near future.
The Company's principal facilities are currently located at a location
leased by En Pointe in Santa Ana, California (the "Santa Ana facility"). The
Company pays a pro-rata rent and other charges for the portion of the Santa Ana
facility that it presently utilizes (the balance is utilized by En Pointe),
although there is no formal sub-lease or other agreement that grants the Company
the right to use this real estate. The Company and En Pointe expect that on or
before December 31,
27
<PAGE>
1999, the Company will begin using all of the Santa Ana facility and that
appropriate documentation transferring the right to use the Santa Ana facility
shall be prepared at such time.
En Pointe also provides various administrative services to the Company,
including Accounting, Payroll, Human Resources, and Legal. The Company is
charged a pro-rata share of the cost of these services, which it believes is
calculated in a reasonable, good-faith manner, although there is no formal
documentation that either sets forth the terms of how the Company is to pay for
these services or that provides the Company with fixed rights to utilize such
services. As it grows, the Company expects to reduce its use of services
provided by En Pointe and develop its own internal capacity to handle such
matters.
The Company's on-going operations depend in part upon the ability and
willingness of En Pointe to continue to guarantee the Company's lines of credit.
Going forward, the Company will seek to support its lines of credit
independently on a stand-alone basis. However, until that internal capability is
established, the Company believes that En Pointe will continue to guarantee the
Company's lines of credit as needed.
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Summary of the Offering,"
"Certain Risk Factors," "Use of Proceeds," and "Business," and elsewhere in this
Memorandum and certain information set forth in the attached Company Profile
including projected amounts in the Company's statements of operations, balance
sheets and statements of cash flow, are "forward-looking statements." These
forward-looking statements include, but are not limited to, statements about the
Company's plans, objectives, expectations and intentions and other statements
that are not historical facts. When used in this Memorandum, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including the
Company's plans, objectives, expectations and intentions and other factors
discussed under "CERTAIN RISK FACTORS."
28
<PAGE>
USE OF PROCEEDS
The Company anticipates that the net proceeds from this Offering will
be applied in the following manner:
The Company anticipates that the net proceeds from this Offering will
be applied in the following manner (In Thousands $):
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
-------- --------
<S> <C> <C>
Proceeds From Sale of Common Stock 4,200 10,500
Use of Proceeds:
Marketing & Advertising 2,100 6,300
Research & Development 600 1,300
Acquisition of Equipment 300 600
Reduction of Line of Credit 1,800
Excess Working Capital 1,200 500
Total Use 4,200 10,500
</TABLE>
While the foregoing amounts are management's best estimates of the use
of the proceeds of the Offering, actual expenditures may vary depending on the
actual proceeds realized from this Offering and the extent to which future
revenues generated by the Company are sufficient to pay the Company's expenses.
Such conditions may influence management to alter the Company's proposed
activities and/or may require the Company to seek additional funds through
borrowing from banks or through other financial arrangements. No assurance can
be given that the Company would be successful in obtaining such additional
funds.
It is the Company's intention to invest the proceeds of this Offering,
pending their use, in short-term, interest-bearing financial instruments.
Interest earned on these investments will be added to the Company's working
capital.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion sets forth what the Company believes are the
material tax consequences of a purchase of Shares. This summary is based upon
the Internal Revenue Code of 1986, as amended (the " Code"), the U.S. Treasury
regulations promulgated thereunder, Internal Revenue Service (" IRS") rulings
and court decisions, all as in existence on the date of this
29
<PAGE>
Memorandum. These authorities may be repealed, revoked, reversed or modified so
as to result in Federal income tax consequences different from those discussed
below.
The sale of Shares will result in the recognition of gain or loss to
the holder in an amount equal to the difference between the amount realized and
his adjusted basis therein. The amount of the gain or loss will be considered a
capital gain or loss, provided the Shares are a capital asset in the hands of
the holder. Such capital gain or loss will be long-term capital gain or loss if
the Shares that are sold have been held for more than one year by the holder at
the time of such sale or exchange. In general, long-term capital gain is taxed
at a 20% rate if the property sold has been held for more than 18 months and is
otherwise taxed at a 28% rate.
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL,
STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF SHARES.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 22,000,000 shares of common stock,
$.001 par value. Each share of common stock entitles the shareholder to one
vote. Shareholders are not entitled to cumulative voting in the election of
directors and have no preemptive rights to purchase or subscribe for additional
securities of the Company. Shares of common stock have no redemption, sinking
fund or conversion privileges. All shares of common stock are entitled to share
equally in dividends paid from the funds legally available for the payment
thereof, when, as and if declared by the Board of Directors of the Company.
Holders of common stock are also entitled to share ratably in the assets of the
Company available for distribution to holders of common stock upon liquidation
or dissolution of the Company, whether voluntary or involuntary.
It is the present intention of the Company to register its common stock
in the future with the Securities and Exchange Commission and effect an initial
public offering of common stock at such time as management of the Company deems
market and other conditions to be most favorable for this type of offering.
Factors to be considered such as the income and assets of the Company will be
affected by the success of the Company's operations. There can be no assurance,
however, that operations of the Company, market conditions or other factors
would permit or make it desirable for the Company to issue its shares publicly
at any point in the future.
REPORTS TO SHAREHOLDERS
The Company will mail to each Shareholder following the end of each
fiscal year of the Company an audited financial statement of the Company's
operations. Each Shareholder will also receive unaudited quarterly reports of
the Company's operations in such form as the Company shall determine.
30
<PAGE>
ACCESS TO INFORMATION
Prospective investors are invited to review at the offices of the
Company, at any reasonable hour after prior notice, any materials available to
the Company relating to this Offering or other matters or documents discussed in
this Memorandum or accompanying this Memorandum.
Representatives of the Company will answer all inquiries from
prospective investors concerning the Company and the Offering, and will afford
prospective investors the opportunity to obtain any additional information (to
the extent that the Company possesses such information or can acquire it without
unreasonable effort or expense) necessary to verify the accuracy of any
representations or information set forth in this Memorandum.
31
<TABLE> <S> <C>
<PAGE>
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<CIK> 0001010305
<NAME> EN POINTE TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 118,643
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<CURRENT-ASSETS> 133,818
<PP&E> 11,053
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 140,188
<SALES> 176,033
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<TOTAL-COSTS> 169,215
<OTHER-EXPENSES> (105)
<LOSS-PROVISION> 440
<INTEREST-EXPENSE> 624
<INCOME-PRETAX> (1,440)
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