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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 OF1934
For the quarterly period ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 000-28052
EN POINTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State or other jurisdiction of I.R.S. Employer I. D.
incorporation or organization: Delaware Number: 75-2467002
100 N. Sepulveda Blvd., 19th Floor
El Segundo, California 90245
(Address of principal executive offices) (ZIP CODE)
Registrant's telephone number, including area code: (310) 725-5200
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: YES X NO
--- ---
As of May 11, 2000, 6,524,260 shares of Common Stock of the Registrant were
issued and outstanding.
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
------------
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive Income - Three months and
Six Months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Six months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - March 31, 2000 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3 Quantative and Qualitative Disclosure About Market Risk
PART II OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 27,492 $ 6,838
Restricted cash 122 120
Marketable securities 2,752
Accounts receivable, net 83,460 101,707
Inventories 7,075 8,588
Refundable income taxes 5,197 1,669
Prepaid expenses and other current assets 1,762 1,005
----------------------- -----------------------
Total current assets 127,860 119,927
Property and equipment, net of accumulated
depreciation and amortization 13,173 13,114
Other assets 161 568
----------------------- -----------------------
Total assets $141,194 $133,609
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 42,511 $ 62,289
Accounts payable 13,893 15,373
Accrued liabilities 13,093 10,960
Other current liabilities 7,369 7,413
Current portion of notes payable 194 278
Deferred taxes 503 119
----------------------- -----------------------
Total current liabilities 77,563 96,432
Long term liability and notes payable 5,509 5,581
----------------------- -----------------------
Total liabilities 83,072 102,013
Minority interest 35,224 5,325
Stockholders' equity:
Common stock 6 6
Additional paid-in capital 38,029 32,083
Unearned compensation (1,300) (1,486)
Unrealized holding gains 576
Accumulated deficit (14,413) (4,332)
----------------------- -----------------------
Total stockholders' equity: 22,898 26,271
======================= =======================
Total liabilities and stockholders' equity $141,194 $133,609
======================= =======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------- -----------------------------------
2000 1999 2000 1999
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $116,136 $144,918 $252,368 $315,525
Cost of sales 104,597 133,878 227,722 291,103
------------------ ------------------ ---------------- -----------------
Gross profit 11,539 11,040 24,646 24,422
Selling and marketing expenses 12,461 9,065 24,835 17,830
General and administrative expenses 7,201 4,571 14,091 8,511
Non-recurring charges 1,173 7,917 1,173 7,917
------------------ ------------------ ---------------- -----------------
Operating loss (9,296) (10,513) (15,453) (9,836)
Interest expense (589) (916) (1,185) (1,771)
Other income, net 100 36 165 67
Gain on sale of assets 3,938 4,428 3,938 4,428
Minority interest 610 -- 1,784 --
------------------ ------------------ ---------------- -----------------
Loss before income taxes (5,237) (6,965) (10,751) (7,112)
Benefit for income taxes 340 2,429 670 2,489
------------------ ------------------ ---------------- -----------------
Net loss $ (4,897) $ (4,536) $(10,081) $ (4,623)
================== ================== ================ =================
Net loss per share:
Basic $ (0.78) $ (0.76) $ (1.62) (0.78)
================== ================== ================ =================
Diluted $ (0.78) $ (0.76) $ (1.62) (0.78)
================== ================== ================ =================
Weighted average shares outstanding:
Basic 6,302 5,935 6,205 5,929
================== ================== ================ =================
Diluted 6,302 5,935 6,205 5,929
================== ================== ================ =================
Comprehensive loss:
Net loss. $ (4,897) $ (4,536) $(10,081) $ (4,623)
Other comprehensive income
Unrecognized holding gains 576 -- 576 --
------------------ ------------------ ---------------- -----------------
Comprehensive loss $ (4,321) $ (4,536) $ (9,505) $ (4,623)
================== ================== ================ =================
</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>
Six months ended
March 31,
--------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,081) $ (4,623)
Adjustments to reconcile net loss
to net cash used by operations:
Depreciation and amortization 1,438 1,447
Reserve for loss on impairment of property 6,192
Deferred compensation 186 --
Allowance for inventory, doubtful accounts, and other 1,528 26
Minority interest in subsidiary operations (610) --
Net change in operating assets and
liabilities 16,408 15,855
------------------ ------------------
Net cash provided by operating activities 8,869 18,897
Cash flows from investing activities:
Purchase of property and equipment (1,747) (926)
------------------ ------------------
Net cash used by investing activities (1,747) (926)
Cash flows from financing activities:
Net payments under lines of credit (19,778) (18,186)
Net proceeds from sale of shares in subsidiary 30,509
Payment on notes payable (156) (429)
Proceeds from sales of stock to employees 2,957 129
------------------ ------------------
Net cash provided (used) by financing activities 13,532 (18,486)
------------------ ------------------
Increase (Decrease) in cash $ 20,654 $ (515)
================== ==================
Supplemental disclosures of cash flow information:
Interest paid $ 1,185 $ 1,255
================== ==================
Income taxes paid $ 3 $ 2,212
================== ==================
Non-cash financing and investing activities:
Unrealized gain on equity holdings, net of taxes $ 576
==================
Tax benefit related to stock options $ 2,989
==================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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EN POINTE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In the opinion of management, the unaudited condensed consolidated balance
sheet of En Pointe Technologies, Inc. (the "Company" or "En Pointe") at March
31, 2000, and the unaudited condensed consolidated statements of operations and
comprehensive income and unaudited condensed consolidated statements of cash
flows for the interim periods ended March 31, 2000 and 1999 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly these financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The year-end balance sheet data was derived from
audited financial statements, but does not include disclosures required by
generally accepted accounting principles. Operating results for the three and
six month periods ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending September 30, 2000. 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, 1999.
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.
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NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ -----------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net (loss) income $ (4,897) $ (4,536)
============ ===========
Weighted-average shares outstanding 6,302 5,935
Effect of dilutive securities:
Dilutive potential of options and warrants -- --
------------ -----------
Weighted-average shares and share equivalents
outstanding $ 6,302 $ 5,935
============ ===========
Basic (loss) income per share $ (0.78) $ (0.76)
============ ===========
Diluted (loss) income per share $ (0.78) $ (0.78)
============ ===========
SIX MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ -----------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net (loss) income $ (10,081) $ (4,623)
============ ===========
Weighted-average shares outstanding 6,205 5,929
Effect of dilutive securities:
Dilutive potential of options and warrants -- --
------------ -----------
Weighted-average shares and share equivalents
outstanding $ 6,205 $ 5,929
============ ===========
Basic (loss) income per share $ (1.62) $ (0.78)
============ ===========
Diluted (loss) income per share $ (1.62) $ (0.78)
============ ===========
</TABLE>
The dilutive potential of stock options and warrants has been excluded from
the calculation diluted loss per share in 2000 and 1999 because the effect of
their inclusion would have been anti-dilutive.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities". SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
Adoption of SOP No. 98-5 did not have a material impact on the Company's
financial position, results of operations or cash flows. The Company implemented
SOP No. 98-5 in the quarter ended December 31, 1999.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The statement
requires the recognition of all derivatives as either assets, or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments or engage
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in hedging activities, the impact of the adoption of SFAS No. 133 is not
currently expected to have a material impact on results of operations or
financial position. SFAS No. 137 defers the effective date of SFAS No. 133 until
all fiscal years beginning after June 30, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes the impact of SAB 101 will not have
a material impact on the financial position or results of operations of the
Company.
NOTE 4 - SEGMENT INFORMATION
The Company consists primarily of three business units (companies), En
Pointe Technologies, Inc., firstsource corp., (previously known as
firstsource.com, inc. and prior to that Purchase Pointe. Inc.), and
SupplyAccess, Inc. En Pointe and firstsource have separate management teams,
infrastructures and facilities, while SupplyAccess, currently shares with En
Pointe some of its infrastructure 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 corp. focuses its efforts on the sale of technology, including
recently added general office products, and other services primarily via the
Internet to consumers and small to mid-sized businesses.
SupplyAccess Inc. was recently incorporated on November 15, 1999. It offers
a hosted business-to-business web application integrated with a customized
SAP-based enterprise fulfillment engine. The Company transferred its IT
department and computer equipment and software to SupplyAccess effective October
1, 1999 in exchange for a $5.5 million note maturing September 30, 2004, and
pays a flat quarterly fee of $500,000 for the IT services and access by its
customers to the SupplyAccess fulfillment engine.
The tables below present information about reported segments for the three
month and six month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
EN POINTE INTER-CO
TECHNOLOGIES FIRSTSOURCE SUPPLYACCESS ELIMINATION TOTAL
------------ ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Revenues $101,453 $14,683 $ -- $ -- $116,136
Gross Profit $ 10,069 $ 1,470 $ -- $ -- $ 11,539
Segment pretax profit (loss) $ (3,836) $(2,569) $ 1,184 $ (16) $ (5,237)
Segment Assets $110,116 $19,399 $23,520 $(11,841) $141,194
THREE MONTHS ENDED MARCH 31, 1999
Revenues $138,036 $ 6,882 $ -- $ -- $144,918
Gross Profit $ 10,626 $ 414 $ -- $ -- $ 11,040
Segment pretax profit (loss) $ (5,762) $(1,203) $ -- $ -- $ (6,965)
Segment Assets $108,009 $ 3,943 $ -- $ -- $111,952
SIX MONTHS ENDED MARCH 31, 2000
Revenues $225,168 $27,200 $ -- $ -- $252,368
Gross Profit $ 22,234 $ 2,412 $ -- $ -- $ 24,646
Segment pretax profit (loss) $ (4,781) $(8,374) $ 636 $ 1,768 $(10,751)
SIX MONTHS ENDED MARCH 31, 1999
Revenues $303,906 $11,619 $ -- $ -- $315,525
Gross Profit $ 23,790 $ 632 $ -- $ -- $ 24,422
Segment pretax profit (loss) $ (5,233) $(1,879) $ -- $ -- $ (7,112)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
management's best judgment based on factors currently
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known, involve risks and uncertainties. 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 achieve 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 in a virtual manner, (V) Quarterly fluctuations in results, (VI)
Seasonal patterns of sales and client buying behaviors and potential fluctuation
or decline in demand for the Company's products and services, (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 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 two
internet businesses 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, 1999.
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 90.1 92.4 90.2 92.3
------- ------- -------- -------
Gross profit........................ 9.9 7.6 9.8 7.7
Selling and marketing expenses........ 10.7 6.2 9.8 5.6
General and administrative expenses... 6.2 3.2 5.6 2.7
Non recurring charges................. 1.0 5.5 0.5 2.5
------- ------- -------- -------
Operating (loss).................... (8.0) (7.3) (6.1) (3.1)
Interest expense...................... (0.5) (0.6) (0.5) (0.6)
Other income, net..................... 0.1 0.0 -- 0.0
Gain on sale of securities............ 3.4 3.1 1.6 1.4
Minority interest..................... 0.5 -- 0.7 --
------- ------- -------- -------
(Loss) before taxes................. (4.5) (4.8) (4.3) (2.3)
(Credit) for income taxes............. 0.3 1.7 0.3 0.8
------- ------- -------- -------
Net (loss).......................... (4.2)% (3.1)% (4.0)% (1.5)%
======= ======= ======== =======
</TABLE>
COMPARISON OF THE SECOND QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 (FISCAL
2000) AND 1999 (FISCAL 1999)
NET SALES. Net sales decreased $28.8 million, or 19.9% to $116.1 million
in the second quarter of fiscal 2000 from $144.9 million in fiscal 1999. The
decrease in sales was attributable to a $36.6 million decrease in En Pointe's
core business which was due in part to softness in the marketplace. Also
contributing to the decrease was a continuation of implementation difficulties
encountered during the transition to the new SAP business system in the first
and second quarters of fiscal year 2000. Partially offsetting this decrease was
an increase in net sales at firstsource corp. of $7.8 million for a 113%
increase over the prior fiscal year period and a 17% increase over the prior
sequential quarter.
Service revenues increased $2.6 million, or 54% to $7.5 million in the
second quarter of fiscal 2000 from $4.9 million in the prior fiscal year quarter
and were 6.5% of total net consolidated sales versus 3.4% in the prior fiscal
year quarter. Net sales under the IBM contract were $11.9 million and accounted
for 10.3% of total consolidated net sales in the second quarter of fiscal 2000
compared with $26.3 million or 18.1% for the prior fiscal year quarter. Net
sales under the IBM contract were adversely affected by systems implementation
difficulties mentioned above.
Net sales for the six months decreased $63.2 million, or 20.0% to $252.4
million from $315.5 million in the prior fiscal year period. Service revenues
increased $4.3 million, or 43.4% to $14.2 million from $9.9 million in the prior
fiscal year period. Sales under the IBM contract were $29.5 million and
accounted for 11.7% of total consolidated net sales for the six months of fiscal
2000 compared with $61.6 million or 19.5% of total net sales in the prior fiscal
year period.
GROSS PROFIT. Gross profit increased $0.5 million, or 4.5% to $11.5
million in the second quarter of fiscal 2000 as compared to $11.0 million in
the prior fiscal year quarter, which reflected an increase in margins in
product sales. As a percentage of net sales, gross profits increased to 9.9%
from 7.6% in the prior fiscal year quarter, and increased slightly compared
with the 9.6% of the prior sequential quarter, reflecting improvements in
product margins. Like trends were noted for the six months comparable periods
as gross profits as a percentage of net sales increased to 9.8% from 7.7% in
the prior year. As reported in the September 30, 1999 Form 10-K, the
declining trend in gross profits in the computer industry appears to be
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abating and the growth in higher margin service sales is also contributing a
positive factor.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$3.4 million, or 37.5% to $12.5 million in the second quarter of fiscal 2000,
from $9.1 million in prior fiscal year quarter. The largest contributor to the
increase was firstsource corp., incurring an additional $1.8 million related to
advertising and increased selling expenses. In addition, En Pointe hired
additional sales personnel that increased selling and related marketing expenses
by $1.6 million. The additional expenses incurred were not accompanied by
increased sales, as a result, selling and marketing expenses as a percentage of
net sales, increased to 10.7% in 2000 from 6.2% in 1999.
For the six month period, selling and marketing expenses increased $7.0
million, or 39.3% to $24.8 million, from the $17.8 million of the prior fiscal
period. As a percentage of net sales, selling and marketing expenses increased
to 9.8% from 5.6% in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $2.6 million, or 57.5% to $7.2 million in the second quarter of fiscal
2000, from $4.6 million in the prior fiscal year quarter. Most of the increase,
$2.4 million, was attributable to the build up of staff and other administrative
functions at firstsource corp. SupplyAccess was responsible for $1.7 million
(net of $0.5 million reimbursement by En Pointe for outsourcing of the IT
function) of the increase in general and administrative expenses. Most of the
SupplyAccess general and administrative expenses incurred relate to their
building of infrastructure and enhancement of their technical proprietary
properties. Offsetting the above $4.1 million increase in expenses by the
subsidiaries was a reduction in general and administrative expenses of En
Pointe of $1.5 million.
As a percentage of net sales, general and administrative expenses
increased 3.0% to 6.2% from 3.2% in the prior fiscal year quarter. Of the
3.0% increase, 1.2% is due to declining net sales volume, with the remaining
1.8% attributed to the costs noted above. General and administrative expenses
for the quarter ended March 2000 remained relatively constant. When expressed
as a percentage of the December 1999 quarter's net sales they were 5.3%,
compared with 5.1% in the prior sequential quarter. Exclusive of the internet
subsidiary and SupplyAccess, general and administrative expenses for the core
business as a percentage of net sales decreased to 2.2% (before consideration
for any unreimbursed operating costs transferred to SupplyAccess) for the
second quarter of fiscal 2000 from 2.6% in the prior year fiscal quarter.
For the six months period, general and administrative expenses increased
$5.6 million, or 65.6% to $14.1 million, from $8.5 million in the prior fiscal
period. As a percentage of net sales, general and administrative expenses
increased to 5.6% from 2.7% in the prior fiscal period.
NON-RECURRING CHARGE. On April 27, 2000, the Superior Court for the County
of Los Angeles issued its ruling related to recovery of legal and other costs by
the Plaintiff in the Novaquest Infosystems, et. al. v. En Pointe Technologies,
Inc., et al., matter described in the Company's Annual Report on Forms 10-K for
the fiscal year ended September 30, 1999. The court ruled that the Plaintiff was
entitled to attorneys' fees and costs of $1,112,853 and $105,249 respectively.
Accordingly, $1.2 million was accrued for the March 31, 2000 quarter in
recognition of this liability.
OPERATING LOSS. Operating loss decreased $1.2 million, to a $9.3 million
loss in the second quarter of fiscal 2000 from a $10.5 million loss in the prior
fiscal year quarter. The decreased loss in the second quarter of fiscal 2000 was
due to the decrease in non-recurring charges, chiefly from the prior year's
higher non-recurring charges necessary to reserve for loss on impairment of the
Ontario property. Because of the increase in operating expenses, the operating
loss, as a percentage of net sales, increased to a negative 8.0% in the second
fiscal quarter of 2000 from a negative 7.3% in the 1999 fiscal quarter.
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The operating loss for the six months period increased $5.6 million, to
a $15.5 million loss from a $9.8 million loss in the prior fiscal period. As
a percentage of net sales, the six months operating loss increased to 6.1%
from 3.1% in the prior fiscal period.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 35.7% to $0.6
million in the second quarter of fiscal 2000 from $0.9 million in the prior
fiscal year quarter. The decline in interest expense is attributed to decreased
average borrowing during the quarter under the credit lines due to the decline
in sales. A similar decline in interest expense was noted for the six months
period as interest expense declined from $1.8 million to $1.2 million.
GAIN ON SALE OF SECURITIES. In conjunction with the SupplyAccess private
placement, marketable securities were acquired that produced a gain of $3.9
million upon sale. The securities were acquired on February 23, 2000 with a cost
basis of $9.0 million. Of the $9.0 million of securities acquired, $6.8 million
were sold for $10.7 million (net of brokerage). The remaining securities with a
cost basis of $2.2 million were valued at $3.4 million at March 31, 2000. As of
May 8, 2000, the current market valuation had declined to $1.1 million.
MINORITY INTEREST. firstsource corp., formerly a wholly-owned
subsidiary, on July 28, 1999 issued 2,659,336 shares of common stock,
representing a minority interest of 28.6% in a private placement that grossed
$9.3 million. On February 14, 2000, an additional 3,582,517 shares of
convertible preferred stock, representing a cumulative minority interest of
48.4%, were offered in a private placement that grossed $15.0 million. The
minority interest related to the firstsource corp. loss was $1.7 million,
which expressed as a blended percentage of the minority interest in the loss
for the period was 39.8%.
On February 23, 2000, SupplyAccess, Inc. formerly a wholly-owned
subsidiary, issued 12,000,000 shares of Series A convertible preferred stock in
a private placement that grossed $18.0 million and represented a 46.1% minority
interest. The minority interest related to SupplyAccess, Inc. income was $1.1
million, which expressed as a blended percentage of the minority interest in the
income for the period was 47.9%.
BENEFIT FOR INCOME TAXES. Because the subsidiaries are less than 80%
owned, they may not be included in a consolidated tax filing with En Pointe.
No tax benefit has been recognized for losses from firstsource corp., since
the losses exceed taxable income available for refund and there is no
assurance of taxable income in the future.
NET (LOSS). Net loss increased $0.4 million, to a net loss of $4.9 million
in the second quarter of fiscal 2000 from $4.5 million net loss in the prior
fiscal year quarter. firstsource corp. was responsible for $2.6 million (net of
minority interest of $1.7 million) of the consolidated net loss for the quarter.
With SupplyAccess recording a substantial gain on sale of securities, net income
of $1.2 million was recognized for the period.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2000 operating activities provided
cash totaling $8.9 million compared to $18.9 million cash provided in the prior
fiscal year period. Most of the increase in cash provided by operating
activities can be attributed to the decrease in accounts receivable.
The Company's accounts receivable balance at March 31, 2000 and September
30, 1999, was $83.5 million and $101.7 million, respectively. The number of
days' sales outstanding in accounts receivable as of March 31, 2000 and
September 30, 1999 was 60 days and 56 days, respectively.
Inventories also decreased $1.1 million (gross after adjustment for a $0.4
million increase in valuation reserve), which also was sales related.
12
<PAGE>
Investing activities used cash of $1.7 million during the six months ended
March 31, 2000 compared with cash used of $0.9 million in the prior year fiscal
period. Computer equipment and software accounted for most of the $1.7 million
in purchases of property and equipment.
Financing activities provided net cash totaling $13.5 million during the
six months ended March 31, 2000. Proceeds from the sale of En Pointe stock to
employees provided cash of $3.0 million. Another $30.5 million of net capital
was raised from proceeds of shares of stock sold in two private placements by
subsidiaries. On February 14, 2000, firstsource corp. sold 3,582,517 shares of
common stock at $4.187 per share for a gross amount of $15 million. On February
23, 2000, SupplyAccess, Inc. sold 12,000,000 shares of Series A convertible
preferred at $1.50 per share for a gross amount of $18 million. Net payments on
lines of credit and other outstanding debt amounted to $20.0 million was the
principal activity that used financing cash for the period.
As of March 31, 2000, the Company had approximately $27.5 million in cash,
including $0.1 million in restricted cash, and working capital of $50.3 million.
The Company has several revolving credit facilities collateralized by accounts
receivable and all other assets of the Company, including a $70.0 million line
with IBM Credit Corporation. As of March 31, 2000, such lines of credit provided
for maximum aggregate borrowings of approximately $111.0 million, of which
approximately $42.5 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 each April first 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 is negotiating waiver terms with
IBMCC for non-compliance with certain loan covenants for the December 31, 1999
quarter and is in the process of obtaining a waiver for the March 31, 2000
quarter for non-compliance with one IBMCC loan covenant that relates to minimum
consolidated net income as a percentage of net sales.
On April 4, 2000, SupplyAccess completed a supplemental private placement
for an additional 5,088,319 of Series A convertible preferred stock at $1.50 per
share for a gross amount of $7.6 million. On April 27, 2000 SupplyAccess
completed another supplemental private placement for an additional 2,666,666
shares of Serices A convertible preferred stock at $1.50 per share for a gross
amount of $4.0 million.
Currently, firstsource corp. is seeking to raise additional financing
through a private placement. There can be no assurances that the private
placements will be completed or will be completed on terms favorable to the
Company. The Company believes that any financing raised from such private
placement together with the current borrowing capacity under its lines of credit
will provide sufficient working capital for the next twelve months.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates,
primarily as a result of its borrowings under lines of credit. The Company's
lines of credit bear interest at the prime rate less 0.25%. Assuming an increase
of one-half a percentage point in the lenders' rate on October 1, 1999 and no
change in the outstanding borrowings under the lines of credit at September 30,
1999, interest expense would increase by approximately $105,000 for the fiscal
year 2000 as compared to fiscal year 1999.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the legal proceedings
reported in the Company's Annual Report on Form 10-Kfor the year
ended September 30, 1999, except as follows: in the Company's
Annual Report on Forms 10-K for the fiscal year ended September 30
1999 (as filed with the Securities and Exchange Commission on
January 13, 2000) the Company reported that in connection with
that certain litigation originally filed April 29, 1997 in the
Superior Court for the County of Los Angeles, under the case name
Novaquest Infosystems, et. al. v. En Pointe Technologies, Inc., et
al., the court had taken under submission Plaintiffs' claim for
costs and attorney's fees, but had not yet ruled. The Company then
stated, in connection with the claim for attorney's fees, that it
did not believe that a judge would find reasonable the expending
of $1,800,000 to recover $50,000.On April 27, 2000, the court
issued its ruling on Plaintiffs' request for attorneys' fees and
costs. The court awarded plaintiffs $1,112,853 in attorneys' fees
for a recovery of $50,000, as well as $105,249 in costs.
The Company intends to appeal the Court's ruling on attorneys'
fees. The Company believes that an award of $1,112,853 in
attorneys' fees to recover $50,000 should not be sustained.
Nonetheless, in view of the ruling, the Company has recognized a
charge to reported income of approximately $1.175 million for the
quarter ending March 31, 2000, to provide for this potential loss.
The Company is subject to other legal proceedings and claims that
arise in the normal course of business. While the outcome of these
other proceedings and claims cannot be predicted with certainty,
after consulting with counsel, management does not believe that
the outcome of any of these matters will have a material adverse
effect on the Company's business, financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on March 17,
2000. The stockholders elected all of the Company's nominees for
director who constitute the entire Board of Directors. The
stockholders also approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors
for 2000. The votes were as follows:
1 Election of Directors:
Votes For Withheld
-----------------------------
Attiazaz "Bob" Din 5,797,963 273,859
Naureen Din 5,789,249 282,573
Zubair Ahmed 5,806,555 265,267
Verdell Garroutte 5,807,269 264,553
Mark Briggs 5,815,269 256,553
2 Approve amendments to the Company's Certificate of
Incorporation to increase the number of authorized shares of
common stock from 15,000,000 to 40,000,000:
For 5,759,787
Against 308,435
Abstain 3,600
3 Appointment of PricewaterhouseCoopers LLP:
For 5,757,761
Against 312,261
Abstain 1,800
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
-------- ------------
27 Financial Data Schedule for the quarter ended
March 31, 2000
b. On February 18, 2000, the Company filed a report on Form 8-K
and announced that it's internet subsidiary, firstsource corp.
completed a $15 million private placement of Series A
convertible preferred stock. Total shares issued were
3,582,517.32 at $4.187 each and represented 27.8% of the total
shares outstanding. At the conclusion of the sale, the
Company's percentage ownership in firstsource corp. was 52%.
On March 2, 2000, the Company filed a report on Form 8-K and
announced that it's web procurement business-to-business
subsidiary, SupplyAccess, Inc., completed an $18 million
initial private placement of Series Apreferred stock. Total
shares issued were 12 million at $1.50 per share and
represented 46.1% of the total shares outstanding. At the
conclusion of the sale, the Company's percentage ownership in
SupplyAccess, Inc. was 53.9%
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EN POINTE TECHNOLOGIES, INC.
----------------------------
(REGISTRANT)
Date: May 15, 2000 By: /s/ Javed Latif
------------------------------------
Javed Latif, Chief Financial Officer
16
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