<PAGE>
================================================================================
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, 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 August 14, 2000, 6,529,354 shares of Common Stock of the Registrant were
issued and outstanding.
================================================================================
<PAGE>
INDEX
EN POINTE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000 (unaudited) and September 30, 1999
Condensed Consolidated Statements of Operations and Comprehensive Income - Three months and
Nine Months ended June 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 2000 and 1999
(unaudited)
Notes to Condensed Consolidated Financial Statements - June 30, 2000
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantative and Qualitative Disclosure About Market Risk
PART II OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------------------- -----------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 1,935 $ 6,838
Restricted cash 73 120
Accounts receivable, net 76,503 101,707
Inventories 10,210 8,588
Refundable income taxes 3,980 1,669
Prepaid expenses and other current assets 1,015 1,005
----------------------- -----------------------
Total current assets 93,716 119,927
Property and equipment, net of accumulated
depreciation and amortization 7,490 13,114
Other assets -- 568
----------------------- -----------------------
Total assets $ 101,206 $ 133,609
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 43,088 $ 62,289
Accounts payable 11,564 15,373
Accrued liabilities 10,340 10,960
Other current liabilities 7,437 7,413
Current portion of notes payable 77 278
Deferred taxes 119 119
----------------------- -----------------------
Total current liabilities 72,625 96,432
Long term liability and notes payable 5,442 5,581
Losses in excess of investments in
unconsolidated affiliates 6,858
----------------------- -----------------------
Total liabilities 84,925 102,013
Minority Interest 512
Stockholders' equity:
Common stock 6 6
Additional paid-in capital 41,690 36,896
Unearned compensation (1,486)
Treasury stock (586)
(Accumulated deficit) (24,829) (4,332)
----------------------- -----------------------
Total stockholders' equity: 16,281 31,084
----------------------- -----------------------
Total liabilities and stockholders' equity $ 101,206 $ 133,609
======================= =======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
--------------------------------------- ----------------------------------
2000 1999 2000 1999
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 118,372 $ 182,938 $ 370,741 $ 498,463
Cost of sales 107,424 169,215 335,146 460,318
------------------ ------------------ ---------------- ----------------
Gross profit 10,948 13,723 35,595 38,145
Selling and marketing expenses 11,940 9,275 36,775 27,104
General and administrative expenses 5,045 5,369 19,136 13,881
Non-recurring charges 1,544 -- 2,717 7,917
------------------ ------------------ ---------------- ----------------
Operating (loss) income (7,581) (921) (23,033) (10,757)
Interest expense 476 624 1,814 2,395
Other income, net (498) (105) (816) (172)
Gain on sale of property and securities -- (3,938) (4,428)
Minority interest -- -- (512) --
------------------ ------------------ ---------------- ----------------
(Loss) Income before income taxes (7,559) (1,440) (19,581) (8,552)
and equity in loss of affiliates
Benefit for income taxes (1,516) (504) (2,188) (2,993)
Equity in losses of affiliates 2,960 -- 2,960 --
------------------ ------------------ ---------------- ----------------
Net (loss) $ (9,003) $ (936) $ (20,353) $ (5,559)
================== ================== ================ ================
Net (loss) per share:
Basic $ (1.38) $ (0.16) $ (3.20) (0.94)
================== ================== ================ ================
Diluted $ (1.38) $ (0.16) $ (3.20) (0.94)
================== ================== ================ ================
Weighted average shares outstanding:
Basic 6,537 5,935 6,363 5,931
================== ================== ================ ================
Diluted 6,537 5,935 6,363 5,931
================== ================== ================ ================
Comprehensive (loss) income:
Net (loss) $ (9,003) $ (936) $ (20,353) $ (5,559)
Other comprehensive income
Unrecognized holding gains -- -- 576 --
------------------ ------------------ ---------------- ----------------
Comprehensive (loss) income $ (9,003) $ (936) $ (19,777) $ (5,559)
================== ================== ================ ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
EN POINTE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (20,353) $ (5,559)
Adjustments to reconcile net loss to net cash used
by operations:
Amortization of deferred compensation 233 --
Depreciation and amortization 2,415 2,262
Loss from Disposal of Assets 88 --
Impairment loss - Ontario facility -- 6,092
Allowance for inventory, doubtful accounts, and other 2,497 467
Equity in the loss of affiliates, net of tax 2,960 --
Minority interest in subsidiary loss (512) --
Net change in operating assets and
liabilities 20,641 5,196
------------ ------------
Net cash provided by operating activities 7,969 8,458
Cash flows from investing activities:
Proceeds on sale of property -- 5,500
Net equity in deconsolidated subsidiaries (13,210) --
Purchase of property and equipment (2,954) (2,662)
------------ ------------
Net cash (used) provided by investing activities (16,164) 2,838
Cash flows from financing activities:
Net payments under lines of credit (14,692) (5,271)
Losses in excess of investment in unconsolidated affiliates 6,858 --
Net proceeds from sale of shares in subsidiaries 31,684 --
Payments on notes payable (304) (7,083)
Proceeds from sales of stock to employees 3,348 315
Payments for purchases of treasury stock (999) --
------------ ------------
Net cash provided (used) by financing activities 25,895 (12,039)
------------ ------------
Increase (Decrease) in cash $ 17,700 $ (743)
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,814 $ 2,734
============ ============
Income taxes (refunded) paid $ (1,419) $ 2,212
============ ============
Non-cash financing and investing activities:
Unrealized gain on equity holdings, net of taxes $ 577
============
Tax benefit related to stock options $ 1,670
============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<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,
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 June 30, 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
nine month periods ended June 30, 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.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------
2000 1999
------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
----------------------------------------
<S> <C> <C>
Net (loss) income $ (9,003) $ (936)
============= =============
Weighted-average shares outstanding 6,537 5,935
Effect of dilutive securities:
Dilutive potential of options and warrants -- --
Weighted-average shares and share equivalents ------------- -------------
outstanding $ 6,537 $ 5,935
============= =============
Basic (loss) income per share $ (1.38) $ (0.16)
============= =============
Diluted (loss) income per share $ (1.38) $ (0.16)
============= =============
NINE MONTHS ENDED JUNE 30,
----------------------------------------
2000 1999
------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
----------------------------------------
Net (loss) income $ (20,353) $ (5,559)
============= =============
Weighted-average shares outstanding 6,363 5,931
Effect of dilutive securities:
Dilutive potential of options and warrants -- --
Weighted-average shares and share equivalents ------------- -------------
outstanding $ 6,363 $ 5,931
============= =============
Basic (loss) income per share $ (3.20) $ (0.94)
============= =============
Diluted (loss) income per share $ (3.20) $ (0.94)
============= =============
</TABLE>
The dilutive potential of stock options and warrants has been excluded from
the calculation of 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 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.
<PAGE>
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.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN
No. 44 will be effective July 1, 2000. This interpretation provides guidance
for applying APB Opinion No. 25, "Accounting for Stock issued to Employees."
Management does not believe that the adoption of FIN No. 44 will have a
significant impact on the Company's consolidated financial position, results
of operations or cash flows.
NOTE 4 - SEGMENT INFORMATION
The Company consisted 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. At one point, SupplyAccess, did share 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.
Both firstsource and SupplyAccess were deconsolidated during the current
June quarter (see Note 6). Thus, the segment information below presents
operations for firstsource and SupplyAccess through the dates of
deconsolidation of May 16, 2000 and April 4, 2000, respectively. All amounts
are in thousands.
<TABLE>
<CAPTION>
EN POINTE INTER-CO
TECHNOLOGIES FIRSTSOURCE SUPPLYACCESS ELIMINATIONS TOTAL
---------------- ------------- ---------------- ---------------- -----------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues $ 111,389 $ 10,181 $ -- $ (3,198) $ 118,372
Gross Profit $ 10,657 $ 949 $ -- $ (658) $ 10,948
Segment pretax profit (loss) $ (4,811) $ (1,715) $ (249) $ (784) $ (7,559)
Segment Assets $ 108,570 $ -- $ -- $ -- $ 108,570
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
NINE MONTHS ENDED JUNE 30, 2000
Revenues $ 336,557 $ 34,184 $ -- $ -- $ 370,741
Gross Profit $ 32,512 $ 3,083 $ -- $ -- $ 35,595
Segment pretax profit (loss) $ (8,468) $ (12,609) $ 512 $ 984 $ (19,581)
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)
</TABLE>
<PAGE>
NOTE 5 - NON RECURRING EXPENSE - RESTRUCTURE CHARGES
In June 2000, the Company underwent a restructuring as a result of
reorganizing certain aspects of its business. Elements of the restructuring plan
included streamlining the organization, reducing costs and expenses, and
aligning resources to accelerate the growth potential in the Company's core
business. In executing the restructure, the workforce was reduced by 105
employees and independent contractors at various levels and five offices were
closed and converted to virtual sales locations.
The following table summarizes the restructuring charges and the remaining
reserves associated with the restructuring:
<TABLE>
<CAPTION>
EXPENSED REMAINING
THROUGH CASH ACCRUAL
JUNE 30, 2000 PAYMENTS JUNE 30, 2000
----------------- -------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Separation costs for terminated employees $ 928 $ 794 $ 134
Facilities closing and downsizing 616 -- 616
----------------- -------------- ------------------
$ 1,544 $ 794 $ 750
================= ============== ==================
</TABLE>
As of June 30, 2000, substantially all employee terminations as a result of
the Company's restructuring have taken place and, except for related payroll
taxes that were paid in the subsequent month, substantially all of the
related severance payments have been made.
NOTE 6 - DECONSOLIDATION
On May 16, 2000, firstsource corp., a subsidiary of the Company, completed
its third in a series of private placements of stock. A total of 2,388,344
shares of Series B convertible preferred stock was issued at a gross offering
price of $4.19 per share. With the completion of the latest offering, the
Company's voting interest has dropped to 43.5%.
On April 4, 2000, SupplyAccess, Inc., another Company subsidiary, completed
a supplemental private placement of stock. A total of 5,088,319 shares of Series
A convertible preferred stock was issued at a gross offering price of $1.50 per
share. With the completion of the April 4, 2000 offering, the Company's voting
interest has dropped to 45.1%. Since April 4, 2000, an additional 5,196,000
shares of preferred stock were issued that reduced the Company's voting interest
to 38.65%.
During the periods prior to the reduction in the Company's voting interest
to below 50%, the Company consolidated the operating results and assets and
liabilities of firstsource corp. and SupplyAccess, Inc. At the date of
deconsolidation, the Company has not recognized any gains for cumulative losses
which have been recorded in excess of the Company's ownership interest in
firstsource corp. and SupplyAccess, Inc. due primarily to the Company's
continuing guarantee of certain debt facilities.
<PAGE>
NOTE 7 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
During the three months ended June 30, 2000, two of the Company's subsidiaries,
SupplyAccess, Inc. and firstsource corp., issued additional shares of
convertible preferred stock resulting in a reduction of En Pointe's voting
control to less than 50%. Subsequent to the reduction in ownership the Company
deconsolidated these subsidiaries and accounted for its investment in
unconsolidated affiliates under the equity method of accounting. For the three
months ended June 30, 2000, En Pointe recognized equity losses of unconsolidated
affiliates for SupplyAccess, Inc. and firstsource corp. of approximately
$1,900,000 and $1,060,000, respectively. At June 30, 2000, firstsource corp.
and SupplyAccess, Inc. had loans and/ or advances from the Company, net of
receivables, from En Pointe of $2,479,000 and $3,988,000, respectively. In
addition, firstsource corp. has lines of credit facilities for borrowings of
up to $7 million, which are guaranteed by the Company.
The following summarizes the combined financial information of the
unconsolidated affiliates at June 30, 2000 and for the three and nine months
then ended (in thousands):
Current assets $ 42,417
Non-current assets $ 11,370
Current liabilities $ 15,762
Non-current liabilities $ 1,535
Shareholder's equity $ 36,490
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, 2000 June 30, 2000
------------------ -----------------
<S> <C> <C>
Net revenues $ 17,276 $ 45,476
Net loss $ (9,788) $ (17,525)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. 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
<PAGE>
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) Planned or unplanned changes in
the quantity and/or quality of the suppliers available for the Company's
products, (XVI) Changes in the costs or availability of products, (XVII)
Interruptions in transport or distribution, (XVIII) General business conditions
in the economy.
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.
As more fully described in Note 6, the Company has deconsolidated two of
its internet focused subsidiaries that were previously reported in prior
periods on a consolidated basis. For the current June quarter, the
subsidiaries have been included in the consolidated operating results up
until the period in which the Company's voting interest dropped to less than
50% and for the remainder of the period have been reported under the equity
method of accounting.
The following tables sets forth certain financial data as a percentage
of net sales for the periods indicated and include operating results, as
reported, as well as operating results adjusted to exclude the effects of
deconsolidation described above:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 90.8 92.5 90.4 92.3
--------- --------- ---------- ---------
Gross profit 9.2 7.5 9.6 7.7
Selling and marketing expenses 10.1 5.1 9.9 5.5
General and administrative expenses 4.2 2.9 5.2 2.8
Non recurring charges 1.3 0.7 1.6
--------- --------- ---------- ---------
Operating (loss) (6.4) (0.5) (6.2) (2.2)
Interest expense (0.4) (0.3) (0.5) (0.5)
Other income, net 0.4 0.0 0.2 0.0
Gain on sale of securities -- -- 1.1 1.0
Minority interest -- -- 0.1 --
--------- --------- ---------- ---------
(Loss) before taxes (6.4) (0.8) (5.3) (1.7)
Benefit for income taxes (1.3) (0.3) (0.6) (0.6)
Equity in losses of affiliates 2.5 0.8
--------- --------- ---------- ---------
Net (loss) (7.6)% (0.5)% (5.5)% (1.1)%
========= ========= ========== =========
Normalized Earnings Excluding Deconsolidated Subsidiaries
--------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 90.8 92.5 90.3 92.3
--------- --------- ---------- ---------
Gross profit 9.2 7.5 9.7 7.7
Selling and marketing expense 9.2 4.8 9.0 5.2
General and administrative expenses 2.9 2.1 2.5 2.3
Non recurring charges 1.4 -- 0.8 1.6
--------- --------- ---------- ---------
Operating (loss) income (4.3) 0.6 (2.6) (1.4)
Interest expense (0.4) (0.3) (0.5) (0.5)
Other income, net 0.4 0.1 0.2 0.0
Gain on sale of securities -- -- 0.9 0.9
--------- --------- ---------- ---------
(Loss) income before taxes (4.3) 0.4 (2.0) (1.0)
Benefit for income taxes (1.4) (0.3) (0.7) (0.6)
--------- --------- ---------- ---------
Net (loss) income (2.9)% 0.7 % (1.3)% (0.4)%
========= ========= ========== =========
</TABLE>
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these deconsolidated subsidiaries. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of the deconsolidated subsidiaries.
COMPARISON OF THE THIRD QUARTER AND NINE MONTHS ENDED JUNE 30, 2000 (FISCAL
2000) AND 1999 (FISCAL 1999)
NET SALES. Net sales decreased $63.0 million, or 36.1% to $111.4 million in
the third quarter of fiscal 2000 from $174.4 million in fiscal 1999. The
decrease in sales was a continuation of factors previously noted in the prior
quarters, softness in the marketplace and a loss of customer base during
implementation of the SAP business system. However, sales appear to have
stabilized as evidenced by a 9.8% improvement in the June quarter's sales to
$111.4 million compared with $101.5 million recorded in the prior sequential
March quarter.
<PAGE>
Service revenues increased $.3 million, or 4.3% to $7.2 million in the
third quarter of fiscal 2000 from $6.9 million in the prior fiscal year quarter
and were 6.5% of total net consolidated sales versus 4.0% in the prior fiscal
year quarter. Net sales under the IBM contract were $11.5 million and accounted
for 10.3% of total consolidated net sales in the third quarter of fiscal 2000
compared with $34.6 million or 18.9% 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 nine months decreased $ 141.7 million, or 29.6% to $336.6
million from $478.3 million in the prior fiscal year period. Service revenues
increased $4.6 million, or 28.0% to $16.8 million from $14.2 million in the
prior fiscal year period. Sales under the IBM contract were $41.0 million and
accounted for 12.2% of total consolidated net sales for the nine months of
fiscal 2000 compared with $96.2 million or 19.3% of total net sales in the prior
fiscal year period.
GROSS PROFIT. Gross profit decreased $2.8 million, or 21.4% to $10.3
million in the third quarter of fiscal 2000 as compared to $13.1 million in the
prior fiscal year quarter, which was reflective of declining sales volumes.
However, as a percentage of net sales, gross profits actually increased 1.7% to
9.2% from 7.5% in the prior fiscal year quarter. Of the 1.7% increase, 1.6%
reflects improvement in product margins with the remainder attributable to a one
time sale of equipment to SupplyAccess, Inc., an affiliate of the Company. On a
sequential basis, the percentage of net sales margins declined slightly by 0.7%
from the 9.9% recorded in the March quarter. Like trends were noted for the nine
month comparable periods with gross profits as a percentage of net sales
increasing to 9.7% from 7.7% in the prior year period. As reported in the
September 30, 1999 Form 10-K, the declining trend in gross profits in the
computer industry appears to be abating and the growth in higher margin service
sales is also contributing a positive factor.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$1.9 million, or 23.0% to $10.2 million in the third quarter of fiscal 2000,
from $8.3 million in prior fiscal year quarter. Part of the increase is due to
the additional sales personnel hired in the prior quarters that increased
selling and related marketing expenses by $1.6 million. The additional selling
and marketing expenses incurred were not accompanied by increased sales, as a
result, selling and marketing expenses as a percentage of net sales, increased
to 9.2% in 2000 from 4.8% in 1999.
For the nine month period, selling and marketing expenses increased $5.0
million, or 20.1% to $30.1 million, from the $25.0 million of the prior fiscal
period. As a percentage of net sales, selling and marketing expenses increased
to 8.9% from 5.2% in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $0.4 million, or 10.8% to $3.3 million in the third quarter of fiscal
2000, from $3.7 million in the prior fiscal year quarter.
As a percentage of net sales, general and administrative expenses
increased .08% to 2.9% from 2.1% in the prior fiscal year quarter. All of the
0.8% increase was due to declining net sales volume. Sequentially, general
and administrative expenses increased 0.7% as a percentage of net sales from
the quarter ended March 2000 when general and administrative expenses were
2.2%.
For the nine month period, general and administrative expenses decreased
$2.5 million, or 22.9% to $8.4 million, from $10.9 million in the prior fiscal
period. As a percentage of net sales, general and administrative expenses
increased to 2.5% from 2.3% in the prior fiscal period.
<PAGE>
NON-RECURRING CHARGE. Restructuring charges of $1.5 million were incurred
in the third quarter of the current fiscal year. See Note 5 above for an
explanation of the nature of the charges involved. For the nine month period,
non-recurring charges include both the above referenced restructuring charges
and a $1.2 million charge related to a legal suit in which attorney fees and
costs were awarded by the court.
OPERATING (LOSS) INCOME. Operating loss increased $5.8 million, to a
total loss of $4.8 million in the third quarter of fiscal 2000 from operating
income of $1.0 million in the prior fiscal year quarter. The increased loss
in the third quarter of fiscal 2000 was principally due to the decline in
gross margins from revenue contraction, and increases in selling and
marketing expenses and non-recurring charges. As a percentage of net sales,
the operating loss widened to 4.3% of net sales in the third fiscal quarter
of 2000 from operating income 0.6% in the 1999 fiscal quarter.
The operating loss for the nine month period increased $1.7 million, to an
$8.7 million loss from a $7.0 million loss in the prior fiscal period. As a
percentage of net sales, the nine months operating loss increased to 2.6% from
1.5% in the prior fiscal period.
INTEREST EXPENSE. Interest expense decreased $0.1 million, or 9.1% to $0.4
million in the third quarter of fiscal 2000 from $0.5 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 nine months
period as interest expense declined from $2.3 million to $1.7 million. While
interest expense decreased for the current quarter, interest expense
expressed as a percentage of net sales increased slightly, due to the decline
in net sales from the prior period.
BENEFIT FOR INCOME TAXES. The income tax benefit for the current quarter
has been computed at a 34.1% rate, which approximates the federal tax rate for
the carry back credits that are available to the Company. No benefit has been
recognized for the losses of deconsolidated subsidiaries, since the reduced
ownership of the subsidiaries prevents them from being included in the
Company's consolidated tax filings.
NET (LOSS) INCOME. Net loss increased $4.5 million, to a net loss of $3.3
million in the third quarter of fiscal 2000 from net income of $1.2 million in
the prior fiscal year quarter. The increased loss is attributable to the $5.8
million decline in operating income discussed above. For the nine months, the
net loss increased $5.8 million, to a net loss of $7.5 million from $1.7 million
in the prior fiscal year period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2000 operating activities provided
cash totaling $8.0 million compared to $8.5 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 June 30, 2000 and September
30, 1999, was $76.5 million and $101.7 million, respectively. The number of
days' sales outstanding in accounts receivable as of June 30, 2000 and September
30, 1999 was 62 days and 56 days, respectively.
Inventories also increased $1.8 million which was due mainly to a build up
of intransit inventories at quarter end.
Investing activities used cash of $16.2 million during the nine months
ended June 30, 2000 compared with providing cash of $2.8 million in the prior
year fiscal period. Computer equipment and software accounted for most of the
$3.0 million in purchases of property and equipment.
<PAGE>
Financing activities provided net cash of $25.9 million during the nine
months ended June 30, 2000. Net payments on lines of credit and other
outstanding debt amounted to $14.7 million was the principal activity that
used financing cash for the period. Proceeds from the sale of shares in
subsidiaries and the sale of shares of En Pointe stock to employees provided
cash of $36.7 million.
As of June 30, 2000, the Company had approximately $1.9 million in cash,
and working capital of $21.1 million. The Company has several revolving credit
facilities collateralized by accounts receivable and all other assets of the
Company, including a $50.0 million line with IBM Credit Corporation. As of June
30, 2000, such lines of credit provided for maximum aggregate borrowings of
approximately $80.0 million, of which approximately $43.1 million was
outstanding. Of the $80.0 million total line, the Company has guaranteed $7.0
million to one of its affiliates.
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 in the process of obtaining a
waiver for the June 30, 2000 quarter for non-compliance with two IBMCC loan
covenant that relate to minimum consolidated net income as a percentage of net
sales and debt to equity.
The Company believes that 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.
<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-K for 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 withthe 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
NUMBER DESCRIPTION
27 Financial Data Schedule for the quarter ended June 30, 2000
b. On April 14, 2000, the Company filed a report on Form 8-K and
announced that it's web procurement subsidiary, SupplyAccess,
Inc. completed a $7.6 million supplemental private placement of
Series A preferred stock. Total shares issued were 5.1 million
at $1.50 each and represented 16.3% of the total shares
outstanding. At the conclusion of the sale, the Company's
percentage ownership in firstsource corp. was 45.1%.
On May 22, 2000, the Company filed a report on Form 8-K and
announced that it's internet subsidiary, firstsource corp
(formerly known as firstsource.com, inc. and previously as
Purchase Pointe,Inc.)., completed an additional $10 million
private placement of Series A convertible preferred stock.
Total shares issued were 2,388,344 million. At the conclusion
of thesale, the Company's percentage ownership in SupplyAccess,
Inc. was 43.5%.
On June 1, 2000, the Company filed a report on Form 8-K and
announced that it's web procurement subsidiary, SupplyAccess,
Inc. completed a $3.8 million supplemental private placement of
Series A preferred stock. Total shares issued were 2,529,334 at
$1.50 each and represented 6.96% of the total shares
outstanding. At the conclusion of the sale, the Company's
percentage ownership in firstsource corp. was 38.65%.
On June 19, 2000, the Company filed a report on Form 8-K and
announced a realigned operating structure designed to
streamline the organization, reduce costs and expenses, and
align resources to accelerate the growth potential in the
Company's core business. The Company stated that it expected to
take certain non-recurring charges in the third quarter in
connection with the realignment. These charges, the amounts of
which were not yet finalized, would cover expected costs
including severance costs attributable to work force reduction,
cancellation of vendor contracts and leases,asset write-offs
and other loss accruals. In aggregate, management estimated
that these charges will be in the range of $2 to 2.5 million.
<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: August 14, 2000 By: /s/ KEVIN D. AYERS
-----------------------------------
Kevin D. Ayers, Chief Financial
Officer
