Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended September 30, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
------------------------
COMMISSION FILE NUMBER: 000-28052
EN POINTE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2467002
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
100 NORTH SEPULVEDA BOULEVARD, 19TH FLOOR, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 725-5200
------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
------------------------
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
--- ---
- - Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
/ /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of January
6, 2000, was approximately $137,367,996.
The number of outstanding shares of the Registrant's Common Stock as of January
6, 2000 was 6,171,040.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF
STOCKHOLDERS (TO BE FILED WITH THE COMMISSION ON OR BEFORE JANUARY 28, 2000):
PART III, ITEMS 10-13.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, INCLUDING BUT
NOT LIMITED TO STATEMENTS CONTAINED IN "FACTORS WHICH MAY AFFECT FUTURE
OPERATING RESULTS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." READERS ARE CAUTIONED THAT
SUCH STATEMENTS, WHICH MAY BE IDENTIFIED BY WORDS INCLUDING "ANTICIPATES,"
"BELIEVES," "INTENDS," "ESTIMATES," "EXPECTS," AND SIMILAR EXPRESSIONS, ARE ONLY
PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, READERS SHOULD CONSIDER THE
VARIOUS FACTORS IDENTIFIED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING MATTERS
SET FORTH IN "FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS," WHICH COULD
CAUSE ACTUAL EVENTS, PERFORMANCE OR RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH STATEMENTS
References made in this Annual Report on Form 10-K to "En Pointe
Technologies" or "En Pointe" or the "Company" refer to En Pointe
Technologies, Inc. and its subsidiaries, En Pointe Technologies Sales, Inc.,
En Pointe Technologies Canada, Inc. and firstsource.com, Inc.. The following
En Pointe Technologies trademarks are mentioned or referred to in this Annual
Report: En Pointe Technologies-Registered Trademark- and the Building Blocks
design-Registered Trademark- are registered trademarks of the Company, and
ReqBuilder-TM-, Traconnect-TM-, EPIC III-TM-, SupplyAccess-TM- and
Firstsource.com-TM- are trademarks of the Company.
EN POINTE TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business............................................................................... 1
Item 2 Properties............................................................................. 25
Item 3 Legal Proceedings...................................................................... 27
Item 4 Submission of Matters to a Vote of Security Holders.................................... 28
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters............... 29
Item 6 Selected Financial Data................................................................ 29
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 30
Item 7a Quantative and Qualitive Disclosures About Market Risk................................. 39
Item 8 Financial Statements and Supplementary Data............................................ 40
Item 9 Disagreements on Accounting and Financial Disclosures.................................. 40
PART III
Item 10 Directors and Executive Officers of the Registrant..................................... 41
Item 11 Executive Compensation................................................................. 41
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 41
Item 13 Certain Relationships and Transactions................................................. 41
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 42
SIGNATURES
Chief Executive Officer, Chief Financial Officer, and Directors........................ F-25
PART I
ITEM 1. BUSINESS
En Pointe Technologies, Inc. ("En Pointe" or the "Company") is a
national provider of information technology products and value-added services to
large and medium sized companies and government entities. In addition to seeking
efficiencies and growth in its traditional large-enterprise focused core
business, En Pointe has recently devoted resources to two main areas, the
development of its professional services infrastructure, and the enhancement of
its business systems so as to continue to be in the forefront of industry
e-commerce capability.
Thus, revenue from service related activities increased by 74% over the
prior fiscal year to $23 million in fiscal 1999. The Company's firstsource.com
subsidiary, which sells information technology and related business products and
seeks to become a leading Internet supply source for small-to-medium-sized
businesses and others, achieved fourth quarter 1999 revenues of $10 million, an
increase of 121% over the same period in fiscal 1998. As is currently the case
with most new Internet-based companies, firstsource.com's losses have also
increased from $ 235,000 for the four-month period from commencement of
operations through September 30, 1998 to $ 17.4 million, without minority
interest elimination (or $13.7 million net of minority interest elimination),
for the year ended September 30, 1999. During fiscal 1999, firstsource.com also
completed a private placement of $9.3 million of its common stock.
The Company has deployed in its traditional large-enterprise focused
core business, effective October of 1999, a newly implemented
"business-to-business" electronic commerce process. The Company's proprietary
SupplyAccess(TM) application integrate the Company's new non-proprietary
software: a customized SAP-based integrated business system linked with
Microsoft Site Server. The Company's proprietary SupplyAccess(TM)
e-procurement workflow applications are electronically linked to the
extensive warehousing, purchasing and distribution functions of the allied
national distributors of information technology products. The Company's new
integrated e-commerce information-technology architecture enhances its
capacity in maintaining effective online communication links with its sales
representatives, selected distributors and certain customers. These links
also enhance the Company's capacity to continue to provide customers
automated direct access to an extensive range of products at competitive
prices, without assuming the risks and costs associated with maintaining
significant product inventories. The Company has recently formed a new
subsidiary, SupplyAccess, Inc., to continue the maintenance and enhancement
of these systems, and to offer some of the benefits of these systems to third
parties. A private placement of the capital stock of this subsidiary is
currently in process; there can be no assurance, however, that the private
placement will be successfully completed.
INDUSTRY OVERVIEW
1
The markets for information technology products and services are
expected to continue to experience significant growth over the next few years.
According to DataQuest Inc. ("DataQuest"), a leading industry market research
firm, the U.S. market for personal computers is expected to increase from $79
billion in 1998 to $103 billion in 2001, a compound annual growth rate of 9%.
The Company believes that the leading factors driving the growth in these
markets are the continued transition to distributed computing technologies such
as client/server, increased networking of personal computers into local area
networks ("LANs") and wide area networks ("WANs"), increased use of the Internet
and growing use of intranets in corporate environments.
Significant price competition and abbreviated product lifecycles
have forced information technology product manufacturers to pursue lower cost
manufacturing, assembly and distribution strategies. Additionally, certain
product manufacturers have elected to outsource the related integration,
installation and maintenance of their products to third party providers. The
initial beneficiaries of this trend were wholesale distributors, who stocked
the products of multiple vendors, and corporate resellers. They were able to
serve the needs of corporate end users who required diverse brands of
products and related information technology services.
Several changes in the marketplace initially resulted from
manufacturers' utilization of the information technology distribution channel
and their continued efforts to improve their cost structure. First, the
wholesale distributor and reseller markets experienced consolidations. The high
fixed costs associated with maintaining multiple warehouses and adequate
inventory, and the shift by manufacturers from exclusive distribution partners
to "open sourcing" forced a number of companies to align their businesses with
financially stronger partners. Second, the significant working capital required
to carry large in-stock product inventories, and the reductions in inventory
price protection and free financing by manufacturers, have caused many resellers
to adjust their current business models. Due to the working capital requirements
and risk related to stocking inventories, many corporate distributors and
resellers often have neither the quantities nor the range of products to fill
customer demands. Third, several product manufacturers have capitalized on their
demand-driven operating model and direct selling efforts to capture market share
from other manufacturers and corporate resellers.
In response to these changing market dynamics, En Pointe believes the
information technology product industry, and particularly corporate resellers,
will increasingly rely on electronic commerce to procure and deliver products
and services efficiently. The Company believes the ability to quickly access
product information, order and track products electronically, as well as to
transact business over the Internet will provide a competitive advantage for
corporate resellers. Additionally, the Company believes the ability of resellers
to integrate electronically with end users and to provide seamless e-procurement
workflow application access for product specifications, pricing, availability
and order tracking will enhance customer relationships and improve customer
retention.
The decision-making process that confronts organizations when planning,
selecting and implementing information technology solutions is growing more
complex. Organizations must select from numerous product options that have
shorter lifecycles. Organizations are continually faced with technology
obsolescence and must design new networks, upgrade and migrate to new systems.
According to The Gartner Group, an information technology research firm, the
total cost of ownership of a personal computer
2
over its lifetime may be as much as five times the initial capital expense.
As a result, corporate resellers are attempting to capitalize on their
customer relationships, initially developed through product procurement, in
order to provide related value-added services. These may include
installation, pre- and post-sale technical support, integration and
maintenance services, as well as higher-end service offerings, such as
network and asset management, consulting and application development.
Some manufacturers are switching to a business model that
establishes direct relationships with end user customers, bypassing
distribution networks and the reseller channel. This is being done to compete
with Dell Computer Corporation ("Dell"), and other similar organizations.
Other manufacturers have cut down on their distribution networks; one, Compaq
Computer Corporation ("Compaq") has both cut down its external distribution
network and announced the acquisition of the distribution and configuration
portions of one of the largest U.S. distributors; all these factors have
forced many of En Pointe's competitors to attempt to re-engineer their
business models to something closer to En Pointe's virtual inventory
electronic clearinghouse business model.
While manufacturers may, in fact, move to a direct model, the history
of the computer channel is that customers not only want, but demand, a
multi-vendor environment.
THE EN POINTE BUSINESS MODEL
En Pointe's growth since its inception is attributable to its
pioneering e-commerce business model. The model has been developed and
enhanced over time, although its core concepts remain. The model's essential
elements are (i) a low cost overhead structure resulting from the automation
of many management and operating functions; (ii) effective electronic
information systems; and (iii) reduced working capital requirements due to
the leveraging of its virtual inventory model and its allied distributor
relationships. The Company's newly-implemented proprietary SupplyAccess(TM)
application enhances the model by integrating the Company's new
non-proprietary software, a customized SAP-based integrated business system
linked with Microsoft Site Server, with the Company's e-procurement workflow
applications. The Company's new integrated e-commerce information-technology
architecture enhances the Company's capacity in maintaining effective online
communication links with its sales representatives, selected distributors and
certain customers.
The Company seeks to maintain a low-cost overhead structure through the
automation of many of its management and operating functions. Effective October
of 1999, the Company enhanced most of its information systems, as noted above,
in order to better monitor sales, product returns, inventories, profitability
and accounts receivable at the sales representative, sales office and customer
levels. Additionally, the Company has more-tightly integrated product purchasing
and customer invoicing into its information systems to expedite procurement and
billing. The Company believes that these enhancements will allow it to operate
more efficiently and to provide its customers with competitive pricing and
quality service.
An integral component of the Company's business model is its ability to
access an extensive virtual inventory of information technology products stocked
by a number of distributors through its integrated supply chain information
systems. This highly-scalable fusion of a leading back-end business system with
a pre-eminent Internet commerce server
3
application and the Company's own workflow applications, makes product
pricing and availability data available to the Company's sales
representatives and a fast-growing set of direct customers, downloaded on a
daily basis, from several large distributors including Ingram Micro Inc.
("Ingram Micro"), InaCom Corporation ("InaCom"), Pinacor, Inc. ("Pinacor"),
Synnex Information Technologies, Inc. ("Synnex") and Tech Data Corporation
("Tech Data") (collectively, the "allied distributors"). The data provided by
the Company's customized information systems allows its sales representatives
to design each customer's order according to the particular needs of that
customer. If obtaining the best price for a particular product is the
customer's primary objective, the Company's information systems allow the
sales representative to identify which of the allied distributors can supply
the desired product at the best price. If immediate availability of products
is the primary objective, then the Company's information systems can indicate
the availability of products from various allied distributors at different
warehouse locations across the country, and the order can be placed at the
location that can deliver the desired products in the shortest time possible.
Furthermore, the Company's enhanced information systems allow customers to
place a single order that may include a number of different products from
multiple manufacturers or distributors. Each product ordered might ship
overnight to a desired integration center or directly to the customer's
location for delivery to the end user. The Company's systems can therefore
reduce the number of unfulfilled customer orders and the need to back-order
products. One of the most important features of the Company's new business
system is a customized feature which allows the Company's sales
representatives to consolidate real time availability from its allied
distributors to achieve a higher fill rate on every order. Additionally, the
Intelligent Purchasing feature of the software allows the Company's
purchasing department to place multiple line-item orders automatically from a
single source at the lowest possible price, maximizing not only fill rate but
also profitability on each order.
The third element of the Company's business model is to reduce its
working capital requirements by leveraging its virtual inventory model and
utilizing the extensive warehousing, purchasing and distribution functions of
its allied distributors. Since inception, the Company has been an innovator
in using the drop shipping capabilities of its distributors to avoid many of
the costs and risks associated with maintaining inventory, which also enables
the Company to quickly adapt to changing market demands. As product
proliferation has occurred, the Company's limited inventory model has given
it a competitive advantage with respect to price and availability on a broad
range of products without the costs and risks associated with carrying large
amounts of physical inventory. The Company believes its business model allows
it to continue to increase sales without a significant capital investment in
inventory.
NEW CUSTOMIZED INTEGRATED E-COMMERCE BUSINESS SYSTEMS REPLACE ORIGINAL
PROPRIETARY INFORMATION SYSTEMS
The original development and function of the Company's proprietary
information systems have been critical factors in its success. These
information systems provided online access to the collective inventory and
pricing information of the allied distributors for all of the Company's sales
offices, as well as for certain customers. These information systems have
been installed at the Company's sales offices and could also be installed, if
desired, directly at a customer's facility. They have
4
enabled the Company's sales representatives and customers to access product
pricing and availability by manufacturer, part number or product description,
and provide detailed product specifications for most major manufacturers.
Customers could then directly enter orders online, check the status of their
orders (including those being integrated by En Pointe at its Ontario, California
facility), access prior orders and serial numbers by purchase order numbers,
check on back-ordered products and verify FedEx and UPS tracking and shipping
numbers. The Company's systems could also provide the customer with customized
reports showing invoice, purchase order, price, ship-to address, serial numbers,
dates and totals of the products purchased from the Company.
In 1999, the Company evaluated its business information system needs
with a view to maintaining the elements described above which have driven
Company growth in such a short time. The Company developed a new EPIC III(TM)
system and determined that the new EPIC III(TM) system was the most flexible
and appropriate platform for the firstsource.com subsidiary in view of its
target market and that markets needs and the adaptability and responsiveness
of EPIC III(TM).
However, in order to support and sustain En Pointe's growth, the
Company determined that it needed systems that would:
- - Scale to the increased number of transactions required for open-ended
growth.
- - Enhance integration of En Pointe's quote, order, purchase order,
credit and inventory/distribution functional management systems with
its accounting and financial reporting systems.
- - Provide enhanced business processes, to streamline and better manage
the interdependencies and communications between En Pointe's
functional departments.
- - Provide enhanced real-time customizable reporting capabilities to
provide detailed snapshots of vital business statistics, to allow
management to better understand key business fundamentals and to react
accordingly in a timely fashion.
- - Provide an enhanced platform architecture with which to link a
sophisticated business-to-business e-procurement application so as to
allow more customers to place orders electronically with En Pointe.
- - Offer an enhanced electronic transaction interface to En Pointe's
suppliers and customers, which would support not only existing robust
EDI (Electronic Data Interchange) transaction activity, but also newer
XML-based transaction exchange, and ERP to ERP (Enterprise Resource
Planning) integration capability, so as to seek to maintain the Company
as a leader in the business-to-business e-commerce marketplace.
- - Provide a practical and cost-effective system that would support future
business initiatives in Europe and Asia.
The Company created an investigative committee to evaluate its
systems and to examine alternatives. After analysis and evaluation, the
Company determined to change the parent company systems so as to integrate
its proprietary applications with non-proprietary systems. The Company chose
for its non-proprietary systems, SAP's R/3 and Microsoft's Site Server,
Commerce Edition.
5
The project to implement, at the parent, the integration of the
Company's proprietary applications with SAP's R/3 and Microsoft's Site Server
all in a single business-to-business e-procurement, browser-based, workflow
application called SupplyAccess(TM), was accomplished on time at the
beginning of October, 1999. While the Company did not escape the difficulties
common to all such fundamental re-engineering of processes and modification
and implementation of systems, the end result is an extremely powerful
integrated business system combined with a leading-edge e-procurement web
application which assists the Company in competing in the marketplace.
In the course of designing and developing the SupplyAccess(TM)
e-procurement application, the Company became aware of the dynamism that exists
in the e-commerce and portal marketplace, outside of the traditional computer
reseller industry. Forrester Research, Inc. ("Forrester"), a well-known market
research firm has estimated that U.S. business trade on the Internet will grow
from $43 billion in 1998 to $1.3 trillion in 2003. Forrester has stated its
expectation that on-line business trade would surpass 9% of total U.S. business
sales by 2003. That marketplace includes such companies as Ariba, Commerce One,
BuyRight, and Purchase Pro. It became apparent that the SupplyAccess(TM)
application, could be designed to take advantage of certain strengths and
experience levels that have been developed by the Company in the course of
providing e-commerce, high-volume information technology fulfillment solutions
to Fortune 2000 customers for six years; experience that purely dot.com founded
companies lacked, and which can affect the success of any network designed to
effectively sell the complex products required by large customers in this
sector.
The Company has formed a new subsidiary, SupplyAccess, Inc., to
continue the maintenance and enhancement of these systems, and to offer some of
the benefits of these systems to third parties. A private placement of the
securities of this subsidiary is currently in process; there can be no
assurance, however, that the private placement will be successfully completed.
PRODUCTS
The majority of En Pointe's sales to date have been attributable to the
resale of information technology products. The Company currently makes available
to its customers an extensive selection of products at what it believes to be a
competitive combination of price and availability. The Company currently offers
over 172,000 information technology products from over 2,000 manufacturers,
including International Business Machines Corporation ("IBM"), Compaq Computer
Corporation ("Compaq"), Hewlett Packard Company ("Hewlett Packard" or "HP"),
Dell Computer Corporation, ("Dell"), Apple Computer ("Apple"), 3Com Corp.
("3Com"), Microsoft Corp. ("Microsoft"), Toshiba Corp. ("Toshiba"), NEC
Technologies ("NEC"), Novell, Inc. ("Novell"), Kingston Technology Corporation
("Kingston"), Lexmark International Group, Inc. ("Lexmark"), Sony Corporation
("Sony") and Nortel, Inc. ("Nortel"). The Company is also certified as a
Microsoft Senior Partner. Products offered by the Company include desktop and
laptop computers, monitors, servers, memory, midrange systems, peripherals and
operating system and application software. Products manufactured by IBM, Hewlett
Packard and Compaq accounted for 26%, 17% and 14%, respectively, of the
Company's net sales in fiscal 1999.
6
VALUE-ADDED SERVICES
The Company also provides additional value-added services to its
customers through its PC lifecycle management and consulting services
offerings. The gross profit margin on these value-added services is
significantly higher than the gross profit margin on the Company's
information technology products reselling business. En Pointe is focusing on
technical services, project management and professional and consulting
services. The Company provides these services through defined contracts as
well as on a time-and-materials basis. Services revenues increased from 2.3%
in fiscal 1998 to 3.4% of net sales in fiscal 1999. This increase is a result
of the Company's continuing investments in this portion of its business and a
number of large service contracts that were sold during fiscal 1999.
The Company continues to grow its National Services Group and
develop the infrastructure to support client engagements. This includes the
enterprise wide implementation of the award winning Clarify help desk
software and the aggressive hiring of skilled technical resources to service
the increased demand. The Company's technical services include product
integration, configuration, installation, technical desktop support, hardware
maintenance, network design, application and operating system migrations. The
ability to configure product orders and provide post sale on-site technical
support has become increasingly important to En Pointe's targeted customer
base. The configuration center in Ontario, California that opened in July
1998 recently became ISO 9002 certified. This certification provides the
Company with the credentials and documented process controls to deliver
sophisticated configurations in compliance with industry quality assurance
standards. The Company's project rollout services generally involve the
procurement of large volumes of computer equipment with standard
configurations, delivered on a specific timetable over a relatively short
period of time. Rollout projects may include support capabilities such as
project management, product scheduling, software loading and testing,
coordinating shipments to multiple customer locations and overall quality
control.
En Pointe's professional and consulting services currently include
LAN/WAN integration, website development and special projects. Its LAN/WAN
integration services include consultation regarding communication equipment
requirements, configuring proposed solutions, systems integration, installation
and training. To support these services, En Pointe personnel continuously
participate in software solution provider certification and authorization
programs. En Pointe currently has attained the following nationwide
certifications and designations: Microsoft Certified Solution Provider and Large
Account Reseller, Novell Gold Reseller, 3Com NETBuilder II and LinkBuilder III
GHAuthorized, Compaq Authorized Service Provider, IBM PSE Certified, Premier
Computer Associates Reseller, Citrix Gold Reseller, Cisco Premier and Hewlett
Packard Advancenet Certified.
CUSTOMERS
The Company's business model has allowed it to capture the business of a number
of large and medium sized corporate and government customers. En Pointe's policy
is to attract major customers by offering them a full service solution at
competitive pricing. Typically,
7
En Pointe handles specialized roll outs and projects for its customers. En
Pointe has been able to raise the level of customer service and reduce the
cost of acquisition for many of its clients by combining full service
offerings with "cost plus" pricing; the Company's cost plus an additional
percentage negotiated with the customer. Once the Company has been approved
as a supplier to a customer, it seeks to capture a significant portion of
their business, which is typically spread over a number of resellers. En
Pointe believes that maintaining high customer satisfaction will enable it to
more effectively expand the range of value-added services it provides to
include sales of technical, consulting and customer information services.
The entities listed below illustrate the wide range of customers that
have purchased information technology products and/or services from the Company
during fiscal 1999:
Kaiser-Hill IBM CitiCorp Los Angeles County
Northrop Fulton County Starbucks Nordstrom
GTE State of Washington International Paper Continental Airlines
New York City Board of Education Baylor University Abbot Labs
US West MCI Motorola Taco Bell
Salvation Army Stanford University
A substantial portion of the Company's net sales is derived under long
term contracts, typically of at least one to two years' duration. However, these
contracts are usually non-exclusive agreements that are terminable upon 30 days'
notice by either party. Purchases by customers are made using individual
purchase orders.
Since 1995, the Company has been one of a very limited number of
resellers awarded non-exclusive national contracts with IBM to supply
information technology products to IBM, its wholly owned subsidiaries, as well
as certain operating divisions and customers of IBM. IBM has extended the
contract with no fixed termination date. For the fiscal years ended September
30, 1999, 1998, and 1997, net sales to IBM and its customers accounted for
approximately 19%, 21%, and 30%, respectively, of the Company's net sales. See
"Factors Which May Affect Future Operating Results and Risks Associated With
Dependence on Relationships With IBM And Other Large Customers."
SALES AND MARKETING
The Company's sales efforts for most customers are based in the
regional sales offices, while certain larger customer relationships are
maintained at the Company's headquarters. En Pointe employed approximately
306 sales, marketing and related support personnel as of September 30, 1999
in 20 sales offices located throughout the U.S. (including its headquarters
located in El Segundo, California). All of En Pointe's sales personnel have
access to the Company's information systems, which allow them to focus more
on sales and less on the administrative tasks associated with processing
orders. Although the Company is highly reliant on its various automated
systems, it believes in maintaining a high level of personal interaction with
customers to ensure their complete satisfaction and loyalty.
8
The Company's practice is to hire experienced industry sales
representatives. Sales representatives are compensated based on the
profitability of their sales and their subsequent management of the account. En
Pointe will only guarantee the salary of selected new sales representatives for
several months, after which they are compensated solely on commission. This
compensation structure has been very successful for the Company, as the most
effective sales personnel enjoy a high level of compensation relative to the
industry average.
As of September 30, 1999, En Pointe had sales representatives in
Palo Alto, CA; Riverside, CA; San Diego, CA; Santa Ana, CA; Denver, CO; New
York City, NY; Albany, NY; Austin, TX; Dallas, TX; Houston, TX; Portland, OR;
Salt Lake City, UT; Seattle, WA; Chicago, IL; Atlanta, GA; Charlotte, NC;
Minneapolis, MN; Boston, MA; and Memphis, TN, in addition to its El
Segundo-based sales force. firstsource.com has its offices in Santa Ana, CA.
The Company has adopted an entrepreneurial approach with respect to its sales
offices. Local personnel are usually given a high degree of autonomy,
including limited pricing authority. Larger sales offices also have profit
and loss responsibility, with compensation of sales office managers tied to
the performance of their office.
En Pointe expanded its marketing reach into the small business and
consumer markets in June 1998 by establishing firstsource.com, an emerging
Internet division for computer systems and related peripherals. With the
rapid growth in sales of technology products via the web, on-line business is
consistent with En Pointe's strategy to capture additional Internet sales.
firstsource.com's fourth quarter '99 revenues were $10 million. This
represents an increase of 121% over the same period in fiscal '98. Its
aggregate profit margins for products and services in the fourth quarter of
'99 reached 8.2% (a notable improvement over the five to six percent margins
enjoyed by most online computer sellers). firstsource.com seeks to become a
premier business resource that small-to-medium-sized businesses need.
Firstsource.com added eight new storefronts in the last quarter -- three
product-based and five service-based -- complementing its Internet-based
computer hardware and software stores. Since July 1999, firstsource.com has
added office equipment and furniture, office supplies and telecommunications
equipment product categories. Its newest and most unique offerings are its
four new service categories: technology support services, including a
national computer and information technology consulting directory; financing
services for purchases; Internet access, hosting and web-site development;
and on-line software and hardware tutorials, including management and
marketing tools.
DISTRIBUTION
Many resellers of information technology products have assumed some of
the functions of distributors, including stocking inventory, developing and
maintaining inventory control systems and establishing distribution systems. By
doing so, these resellers have incurred additional capital costs associated with
the warehousing of products, including the costs of leasing warehouse space,
maintaining inventory and tracking systems and employing personnel for stocking
and shipping duties. Furthermore, resellers that stock inventory risk
obsolescence costs, which the Company believes may be significant due to the
frequent product innovation, and associated product obsolescence, that
characterizes this market. These overhead and "touch" costs require many
resellers
9
to incur expenses that En Pointe believes more than offset the advantages of
the lower purchase prices that those resellers may realize through their
direct purchasing relationships with manufacturers.
The Company's business model allows it to eliminate many overhead and
"touch" costs and risks. It has sought to take advantage of the operational
strengths of its allied distributors, who have developed extensive warehousing,
purchasing and distribution functions. As a result, the Company's continuing
strategy is to reduce its investment in product inventory and capital costs
associated with these "back office" functions, so as to be able to accept lower
gross profit margins than many of its competitors.
En Pointe's ability to fill and deliver customer orders with an
extremely high degree of speed and accuracy is one key benefit of the Company's
business model. Its information systems, which include all order processing
functions, enable the Company to place orders on a same-day basis. Most orders
for in-stock product are picked, staged and drop shipped to the customer from
the allied distributor within 24 hours of receipt of order, and on the same
business day for orders received by 2 p.m. Pacific Time. The standard delivery
time is two to three business days. The integration process will usually add a
maximum of three business days. After an order is entered, it is reviewed and
approved at the Company's purchasing center and transmitted electronically to
the chosen distributor. Once the order is shipped by the distributor, delivery
information is downloaded by the Company usually the day after the order is
placed into its information systems. It then uses that information to produce an
invoice, which is sent to the customer. If a customer places an order that
cannot be filled by an individual distributor, En Pointe will split the order
among multiple distributors.
A noted industry development was Compaq's decision to reduce the
number of authorized distributors that receive its lowest volume price from
21 to 4. This decision affected two of the six distributors En Pointe relied
upon to get pricing and availability information, and to price Compaq product
competitively on a daily basis. The effect of this change is thus far
negligible; the Company has been able to effectively obtain its requirements
from the remaining distributors.
En Pointe's allied distributors currently fill most of its
information technology product orders. By choosing to rely on the physical
inventory strengths of its distributors, the Company is able to maximize its
expertise and concentrate on its more customer oriented activities:
researching, specifying, and recommending solutions to customers. After
helping a customer select the most appropriate technology, En Pointe's sales
representatives use the Company's information systems to determine the best
combination of pricing and availability for a wide variety of information
technology products.
COORDINATING AND OPTIMIZING PRODUCT DISTRIBUTION
Because En Pointe's sales representatives have the ability to access
the current inventory and availability records of its allied distributors, they
are able to determine which distributor can best supply the customer.
Furthermore, if any one distributor is unable to supply all of a customer's
needs, En Pointe is generally able to fill the order using multiple allied
distributors. To facilitate product distribution to its customers, En Pointe
uses various carriers' (including FedEx and UPS) tracking software with tracking
numbers furnished through allied distributors to monitor shipments.
10
En Pointe has been able to successfully implement its strategy due in
large part to the close relationships it has developed with the allied
distributors. The Company has been able to maintain these relationships for
several reasons, most importantly the volume of business that it generates. This
volume enables En Pointe to negotiate with its allied distributors to receive
discounts on certain products, which the Company may pass along to its
customers. As sales have grown, En Pointe has been able to take advantage of
these discounts as well as others provided by product manufacturers. The Company
seeks to participate in these discounts, either directly through agreements with
the manufacturer, or indirectly as discounts are made available to distributors,
who in turn will pass a portion along to resellers. See "Factors Which May
Affect Future Operating Results--Risks Associated With Dependence on
Distributors And Manufacturers."
COMPETITION
En Pointe operates in a segment of the information technology industry
that is highly competitive. It competes with a large number and wide variety of
resellers of information technology products, including traditional personal
computer retailers, computer superstores, consumer electronics and office supply
superstores, mass merchandisers, corporate resellers, value-added resellers,
specialty retailers, distributors, franchisers, mail order and web order
companies. Increasingly, the competition also includes hardware manufacturers
and national computer retailers that have commenced marketing directly to end
users. Many of these companies compete principally on the basis of price and may
have lower costs than the Company, allowing them to offer the same products and
services at a lower price. Many of En Pointe's competitors are larger, have
substantially greater financial, technical, marketing and other resources, and
offer a broader range of value-added services. The Company has traditionally
competed with, among others, CompuCom Systems, Inc. ("CompuCom"), Elcom
International, Inc. ("Elcom"), Inacom Corp. ("InaCom"), MicroAge, Inc.
("MicroAge"), and CDW Computer Centers, Inc. ("CDW"). During the past year, four
of our traditional major competitors have consolidated down to two: Inacom has
absorbed Vanstar and Compucom has acquired Entex's product business.
Dell and Gateway Computers ("Gateway") demonstrated the ability of a
manufacturer-direct model to profitably gain market share, which has lead
other manufacturers (e.g. IBM, Compaq, and HP) to announce plans intended to
reduce the role of distributors and resellers, particularly in major
accounts, which are the Company's target market. En Pointe expects to face
additional competition from these manufacturers and other new market entrants
in the future. As a balancing factor to this business model shift by major
manufacturers, no single manufacturer has the capability to display and
deliver multi-vendor solutions for any customers with which they may choose
to have a direct relationship. This leaves open the interesting possibility
that they may ultimately have to choose to display their direct-priced
product to their direct customers through an IT-centric e-procurement
application with the ability to present customer-specific bundles of mixed
manufacturer standards, like SupplyAccess (TM). SupplyAccess (TM) is capable
of being used as a free-standing e-procurement application; using XML
integration, any customer, whatever its ERP system's document type, can link
to the Company either via the SupplyAccess(TM) web client or via the SAP
backend. This permits processing of transactions whether or not the customer
or supplier system is
11
SAP-based, and whether or not the processing must occur in the
customer's system or the supplier's system.
Competitive factors include price, service and support, the variety of
products and value-added services offered, and marketing and sales capabilities.
While En Pointe believes that it competes successfully with respect to most--if
not all--of these factors, there can be no assurance that it will continue to do
so in the future. The information technology industry has come to be
characterized by aggressive price-cutting and the Company expects pricing
pressures will continue in the foreseeable future. In addition, the industry is
characterized by abrupt changes in technology and the associated inventory and
product obsolescence, rapid changes in consumer preferences, short product life
cycles and evolving industry standards. The Company will need to continue to
provide competitive prices, superior product selection and quick delivery
response time in order to remain competitive. If it were to fail to compete
favorably with respect to any of these factors, the Company's business,
financial position, results of operations and cash flows would be materially and
adversely affected. See "Industry Overview" and "Factors Which May Affect Future
Operating Results and Competition."
INTELLECTUAL PROPERTY
The Company's ability to effectively compete in its market will depend
significantly on its ability to protect its intellectual property. While the
Company is entitled to copyright protection for some of its software (notably
EPIC III), it does not have any patents on any other technology which the
Company believes to be material to its future success. En Pointe relies
primarily on trade secrets, proprietary knowledge and confidentiality agreements
to establish and protect its rights in its intellectual property, and to
maintain its competitive position. There can be no assurance that others may not
independently develop similar or superior intellectual property, gain access to
the Company's trade secrets or knowledge, or that any confidentiality agreements
between the Company and its employees will provide meaningful protection for the
Company in the event of any unauthorized use or disclosure of its proprietary
information.
There can be no assurance that the Company will not become subject to
claims of infringement involving its information systems, or any other system,
including its software. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights. Any
claims could be time consuming, result in costly litigation or lead the Company
to enter into royalty or licensing agreements rather than disputing the merits
of such claims.
The Company conducts its business under the trademark and service mark
"En Pointe Technologies" as well as its logo, "firstsource", "SupplyAccess" and
other marks. It has been issued registrations for its "En Pointe" and "Building
Blocks" marks in the United States and has pending registrations in Canada,
Mexico and the European Community. En Pointe does not believe that its
operations are dependent upon any of its trademarks or service marks. It also
sells products and provides services under various trademarks, service marks,
and trade names that are the property of owners other than the Company. These
owners have reserved all rights with respect to their respective
12
trademarks, service marks, and trade names. See "Factors Which May Affect
Future Operating Results and Risks Associated With Dependence on Technology".
SEGMENT INFORMATION
See Note 15 to the Consolidated Financial Statements, "Segment
Information", for financial information regarding the Company's operating
segments.
EMPLOYEES
As of September 30, 1999, En Pointe employed approximately 706
individuals, including approximately 306 sales, marketing and related support
personnel, 184 service and support personnel, 49 warehousing/manufacturing/test
personnel and 167 employees in MIS, administration and finance. The Company
believes that its ability to recruit and retain highly skilled MIS technical and
other management personnel will be critical to its ability to execute its
business model and growth strategy. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1993 AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934. IN LIGHT OF THE IMPORTANT FACTORS THAT CAN
MATERIALLY AFFECT RESULTS, INCLUDING THOSE SET FORTH IN THIS PARAGRAPH AND
BELOW, THE INCLUSION OF FORWARD-LOOKING INFORMATION HEREIN SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES OR PLANS FOR THE COMPANY WILL BE ACHIEVED. THE COMPANY MAY ENCOUNTER
COMPETITIVE, TECHNOLOGICAL, FINANCIAL AND BUSINESS CHALLENGES MAKING IT MORE
DIFFICULT THAN EXPECTED TO CONTINUE TO RESELL INFORMATION TECHNOLOGY PRODUCTS;
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.
IN ADDITION TO THE INFORMATION SET FORTH ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND ITS BUSINESS
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
13
COMPANY ON CERTAIN ALLIED DISTRIBUTORS, (III) CONTINUED DOWNWARD PRICING
PRESSURES IN THE INFORMATION TECHNOLOGY MARKET, (IV) THE LIMITED PRIOR
EXPERIENCE OF THE COMPANY IN THE PROVISION OF VALUE-ADDED SERVICES, AND (V)
THE DECISION BY THE COMPANY TO EXPAND ITS SALES FORCE INTO VARIOUS NEW
GEOGRAPHIC TERRITORIES. 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, WHICH SPEAK AS
OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K.
RISKS ASSOCIATED WITH DEPENDENCE ON RELATIONSHIP WITH IBM AND OTHER LARGE
CUSTOMERS.
For the years ended September 30, 1999, 1998 and 1997, net sales to IBM
and certain IBM customers under the Company's current contract with IBM
accounted for approximately 19%, 21% and 30% respectively, of the Company's net
sales. The Company's contracts for the provision of products or services,
including its contract with IBM, are generally non-exclusive agreements that are
terminable by either party upon 30 days notice. The loss of IBM or any other
large customer, the failure of IBM or any other large customer to pay its
accounts receivable on a timely basis, or a material reduction in the amount of
purchases made by IBM or any other large customer could have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows. See "Business--Customers."
RISKS ASSOCIATED WITH DEPENDENCE ON DISTRIBUTORS AND MANUFACTURERS
A key element of the Company's past success and future business
strategy involves the establishment of alliances with certain large distributors
of information technology products and services, including Ingram Micro, InaCom,
Pinacor, Synnex and Tech Data. These alliances enable the Company to make
available to its customers a wide selection of products without subjecting the
Company to many of the costs and risks associated with maintaining large amounts
of inventory. Products and services purchased from three allied distributors,
Ingram Micro, Tech Data and Merisel accounted for 57 % of the Company's
aggregate purchases in fiscal 1999. Certain allied distributors provide the
Company with substantial incentives in the form of allowances passed through
from manufacturers, discounts, credits and cooperative advertising, which
incentives directly affect the Company's operating income. There can be no
assurance that the Company will continue to receive such incentives in the
future and any reduction in the amount of these incentives could have a material
adverse effect on the Company's business, financial position, results
14
of operations and cash flows. Furthermore, the Company directly competes with
certain allied distributors for many of the same customers and therefore
there can be no assurance that any such allied distributor will not use its
position as a key supplier to the Company to pressure the Company from
directly competing with it. Substantially all of the Company's contracts with
its allied distributors are terminable by either party upon 30 days' notice
or less and several contain minimum purchase volume requirements as a
condition to providing discounts to the Company. The termination or
interruption of the Company's relationships with any of the allied
distributors, modification of the terms or discontinuance of agreements with
any of the allied distributors, failure to meet minimum purchase volume
requirements, or the failure to establish a good working relationship with
any significant new distributor of information technology products could
materially adversely affect the Company's business, financial position,
results of operations and cash flows. See "Business--Distribution."
Certain of the products offered by the Company are subject to
manufacturer allocations, which limit the number of units of such products
available to the allied distributors, which in turn may limit the number of
units available to the Company for resale to its customers. In addition, because
certain products offered by the Company are subject to manufacturer or
distributor allocations, which limit the number of units of such products
available to the Company for resale to its customers, there can be no assurance
that the Company will be able to offer popular new products or product
enhancements to its customers in sufficient quantity or in a timely manner to
meet demand. In order to offer the products of most manufacturers, the Company
is required to obtain authorizations from such manufacturers to act as a
reseller of such products, which authorizations may be terminated at the
discretion of the manufacturers. As well, certain manufacturers provide the
Company with substantial incentives in the form of allowances, financing,
rebates, discounts, credits and cooperative advertising, which incentives
directly affect the Company's operating income.
There can be no assurance that the Company will continue to receive
such incentives in the future and any reduction in these incentives could have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows. There can be no assurance that the Company will be
able to obtain or maintain authorizations to offer products, directly or
indirectly, from new or existing manufacturers.
Termination of the Company's rights to act as a reseller of the
products of one or more significant manufacturers or the failure of the Company
to gain sufficient access to such new products or product enhancements could
have a material adverse effect on the Company's business, financial position,
results of operations and cash flows. See "Business--Products and Value-Added
Services."
Recent changes in the information technology industry, especially
pressure on gross profit margins, has adversely affected a number of
distributors of information technology products, including certain allied
distributors. There can be no assurance that the continuing evolution of the
information technology industry will not further adversely affect the Company's
distributors. Because the Company's overall business strategy depends on the
Company's relationships with the allied distributors, the Company's business,
financial position, results of operations and cash flows would be materially
adversely affected in the event that distributors in general and allied
distributors in
15
particular continue to suffer adverse consequences due to ongoing changes in
the information technology industry. There has recently been a consolidation
trend in the information technology industry, including consolidation among
distributors of information technology products. Because the Company's
business model is dependent upon the availability of a number of information
technology product distributors, any further consolidation would result in
fewer distributors available to supply products to the Company, which could
have a material adverse impact on the Company's business, financial position,
results of operations and cash flows. See "Business-- Industry Overview."
RISKS ASSOCIATED WITH COMPETITION
The segment of the information technology industry in which the Company
operates is highly competitive. The Company competes with a large number and
wide variety of resellers of information technology products, including
traditional personal computer retailers, computer superstores, consumer
electronics and office supply superstores, mass merchandisers, corporate
resellers, value-added resellers, specialty retailers, distributors,
franchisers, mail-order and web-order companies, national computer retailers and
manufacturers which have commenced their own direct marketing operations to
end-users. Many of these companies compete principally on the basis of price and
may have lower costs than the Company, which allow them to offer the same
products and services at a lower price. Many of the Company's competitors are
larger, have substantially greater financial, technical, marketing and other
resources and offer a broader range of value-added services than does the
Company. The Company competes with, among others, CompuCom, Dell, Elcom,
Gateway, InaCom, MicroAge, and CDW. The Company expects to face additional
competition from new market entrants in the future.
Competitive factors include price, service and support, the variety of
products and value-added services offered, and marketing and sales capabilities.
While the Company believes that it competes successfully with respect to most,
if not all of these factors, there can be no assurance that it will continue to
do so in the future. The information technology industry has come to be
characterized by aggressive price-cutting and the Company expects pricing
pressures will continue in the foreseeable future. In addition, the information
technology products industry is characterized by abrupt changes in technology
and associated inventory and product obsolescence, rapid changes in consumer
preferences, short product life cycles and evolving industry standards. The
Company will need to continue to provide competitive prices, superior product
selection and quick delivery response time in order to remain competitive. If
the Company were to fail to compete favorably with respect to any of these
factors, the Company's business, financial position, results of operations and
cash flows would be materially and adversely affected. See "Business--Industry
Overview" and "--Competition."
RISKS ASSOCIATED WITH INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS
OF DISTRIBUTION
The information technology industry is undergoing significant change.
The industry has become more accepting of large-volume, cost-effective channels
of distribution and accordingly such channels have proliferated. In addition,
many traditional
16
computer resellers are consolidating operations and acquiring or merging with
other resellers in an effort to increase efficiency. This current industry
reconfiguration has resulted in increased pricing pressures. Decreasing
prices of information technology products requires the Company to sell a
greater number of products to achieve the same level of net sales and gross
profit. Additionally, there has been continuing erosion in the
"price-protection" historically offered to offset the negative effects of
decreasing prices. The exacerbation of such trends could make it more
difficult for the Company to continue to increase its net sales and earnings
growth. In addition, it is possible that the historically high rate of growth
of the information technology industry may slow at some point in the future,
resulting in a material adverse effect on the Company's business, financial
position, results of operations and cash flows. Furthermore, new methods of
distributing and selling information technology products, such as on-line
shopping services and catalogs published on CD-ROM, have and may further
develop in the future. Hardware and software manufacturers have sold, and may
in the future further intensify their efforts to sell, their products
directly to end-users. From time to time, certain vendors have instituted
programs for the direct sale of large orders of hardware and software to
certain major corporate customers. These types of programs may continue to be
developed and used by various vendors. While the Company attempts to
anticipate and influence current and future distribution trends, any of these
distribution methods or competitive programs, if successful, could have a
material adverse effect on the Company's business, financial position,
results of operations and cash flows.
Recently, a trend has emerged whereby major manufacturers have begun to
develop programs whereby final assembly will be performed by resellers and
distributors on the sites of manufacturers ("co-location") as compared to the
"build-to-forecast" or "channel assembly" methodologies previously employed by
these manufacturers. The Company has not, to date, been authorized to
participate in any announced "co-location" process, and there can be no
assurance that the Company will ever be authorized to participate in any such
process. The failure of the Company to obtain any such authorization could have
a material adverse effect on the Company's business, financial position, results
of operations and cash flows. If the Company eventually participates in a
"co-location" process, the Company may have to make a significant capital
investment in order to successfully participate in such process.
RISKS ASSOCIATED WITH DEPENDENCE ON TECHNOLOGY
In the past, the Company's ability to effectively compete in its market
depended significantly on its ability to protect its proprietary technology. The
Company relied primarily on trade secrecy and confidentiality agreements in
order to establish and protect its rights in its proprietary technology. There
was no assurance that the existing methods for protecting the Company's
proprietary technology would be successful in defending either the
confidentiality of, or the unauthorized use of, this technology, nor could any
assurance be given that the Company would have been able to achieve or maintain
a meaningful technological advantage. However, the extent of the Company's
reliance on proprietary technology has been significantly reduced by the
replacement of its legacy systems with a customized version of SAP (not
proprietary), and a sophisticated open architecture web-commerce application
based on Microsoft Site Server, Commerce Edition. While some of the web
application coding is proprietary, the ability to reverse-
17
engineer that code exists. The Company would be required to incur substantial
costs in seeking enforcement of any such residual proprietary rights against
infringers. Insofar as the Company relies on trade secrets and proprietary
know-how to maintain its competitive position, there can be no assurance that
others may not independently develop similar or superior technologies or gain
access to the Company's trade secrets or know-how. The Company's competitive
position now relies much more on its expert implementation of open standards
world-class customized applications which support the valuable e-commerce
distribution experience gained in six years of successful fulfillment of
large entity customer requirements. See "Business--Intellectual Property."
RISKS ASSOCIATED WITH POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly net sales and operating results may vary
significantly as a result of a variety of factors, including: the demand for
information technology products and the Company's value-added services; adoption
of internet commerce models; introduction of new hardware and software
technologies; introduction of new value-added services by the Company and its
competitors; changes in manufacturers' prices or price protection policies;
changes in shipping rates; disruption of warehousing or shipping channels;
changes in the level of operating expenses; the timing of major marketing or
other service projects; product supply shortages; inventory adjustments; changes
in product mix; entry into new geographic markets; the timing and integration of
acquisitions or investments; difficulty in managing margins; the loss of
significant customer contracts; the necessity to write-off a significant amount
of accounts receivable; and general competitive and economic conditions. In
addition, a substantial portion of the Company's net sales in each quarter
results from orders booked in such quarter. Accordingly, the Company believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
As has occurred in the past it is possible that in future periods, the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the market price of the Common Stock
would likely be materially adversely affected. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
RISKS ASSOCIATED WITH LOW MARGIN BUSINESS
The Company's historical growth in net income has been driven primarily
by net sales growth rather than increased profit margins. The Company's gross
profit margins are low compared to many other resellers of information
technology products. In fiscal 1999, the Company's aggregate gross profit margin
was 8%.
Given the significant levels of competition that characterize the
reseller market, as well as the lower gross profit margins generated by the
Company as a result of its reliance on purchasing information technology
products from its allied distributors, it is unlikely that the Company will be
able to increase gross profit margins in its core business of reselling
information technology products. Moreover, in order to attract and retain many
of its larger customers, the Company frequently must agree to volume discounts
and maximum allowable mark-ups that serve to limit the profitability of product
sales to such
18
customers. Accordingly, to the extent that the Company's sales to such
customers increase, the Company's gross profit margins may be reduced, and
therefore any future increases in net income will have to be derived from
continued net sales growth, effective expansion into higher margin business
segments or a reduction in operating expenses as a percentage of net sales,
none of which can be assured. Furthermore, low gross profit margins increase
the sensitivity of the Company's business to increases in costs of financing,
because financing costs to carry a receivable can be relatively high compared
to the low dollar amount of gross profit on the sale underlying the
receivable itself. Low gross profit margins also increase the sensitivity of
the business to any increase in product returns and bad debt write-offs, as
the impact resulting from the inability to collect the full amount for
products sold will be relatively high compared to the low amount of gross
profit on the sale of such product. Any failure by the Company to maintain
its gross profit margins and sales levels could have a material adverse
effect on the Company's business, financial position, results of operations
and cash flows.
RISKS ASSOCIATED WITH DEPENDENCE ON AVAILABILITY OF CREDIT; RISKS ASSOCIATED
WITH DEPENDENCE ON IBMCC
The Company's business requires significant capital to finance accounts
receivable and, to a lesser extent, product inventories. In order to obtain
necessary working capital, the Company relies primarily on lines of credit that
are collateralized by substantially all of the Company's assets. As a result,
the amount of credit available to the Company may be adversely affected by
numerous factors beyond the Company's control, such as delays in collection or
deterioration in the quality of the Company's accounts receivable, economic
trends in the information technology industry, interest rate fluctuations and
the lending policies of the Company's creditors. Any decrease or material
limitation on the amount of capital available to the Company under its lines of
credit and other financing arrangements will limit the ability of the Company to
fill existing sales orders or expand its sales levels and, therefore, would have
a material adverse effect on the Company's business, financial position, results
of operations and cash flows. In addition, any significant increases in interest
rates will increase the cost of financing to the Company and would have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows. The Company is dependent on the availability of
accounts receivable financing on reasonable terms and at levels that are high
relative to its equity base in order to maintain and increase its sales. There
can be no assurance that such financing will continue to be available to the
Company in the future or available under terms acceptable to the Company. The
inability of the Company to have continuous access to such financing at
reasonable costs could materially adversely impact the Company's business,
financial position, results of operations and cash flows. As of September 30,
1999, the Company had outstanding borrowings under its credit facilities of
$62.3 million out of a total availability under its credit facilities of $121
million.
The Company has primarily funded its working capital requirements
through an $80 million Inventory and Working Capital Agreement (the "IBMCC
Financing Agreement") with IBM Credit Corporation ("IBMCC") and with a $40
million Inventory and Working Capital Agreement (the "Finova" Agreement) with
Finova Capital Corporation ("Finova"). Additionally the Company has a term loan
with IBMCC of $0.5 million. At September 30, 1999, the outstanding principal
balance under the IBMCC
19
Financing Agreement was approximately $47.2 million; the outstanding
principal balance under the Finova Agreement was approximately $14.6 million;
as well, the $0.5 million term loan with IBMCC was outstanding. Borrowings
under the IBMCC Financing Agreement and the Finova Agreement are
collateralized by substantially all assets of the Company, including accounts
receivable, inventory and equipment. The IBMCC Financing Agreement expires
April 14, 2000 if not renewed. IBMCC may terminate the IBMCC Financing
Agreement at any time upon the occurrence of and subsequent failure to cure,
an "Event of Default," as such term is defined in the IBMCC Financing
Agreement. In the event of such termination, the outstanding borrowings under
the IBMCC Financing Agreement become immediately due and payable in their
entirety. The termination of the IBMCC Financing Agreement and the subsequent
inability of the Company to secure a replacement credit facility on terms and
conditions similar to those contained in the IBMCC Financing Agreement could
have a material adverse effect on the Company's business, financial position,
results of operations and cash flows. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RISKS RELATED TO DEPENDENCE ON SENIOR MANAGEMENT AND OTHER KEY PERSONNEL
The Company believes that its success has been and will continue to be
dependent on the services and efforts of its existing senior management and
other key personnel. The loss of the services of one or more of any of the
Company's existing senior management and other key personnel would have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows.
The Company's success and its plans for future growth also depend on
its ability to attract and retain highly skilled personnel in all areas of its
business, including application development, sales and technical services.
Competition for qualified personnel in the information technology industry is
intense, and although the Company believes that it has thus far been successful
in attracting and retaining qualified personnel for its business, the inability
to attract and retain qualified personnel in the future could have a material
adverse effect upon the Company's business, financial position, results of
operations and cash flows.
RISKS RELATED TO MANAGEMENT OF GROWTH
Since its inception, the Company has experienced rapid growth in net
sales, the number of its employees and branch offices, the amount of
administrative overhead and the type of services offered. This growth has and,
if continued, will continue to put strains on the Company's management,
operational and financial resources. To execute the Company's growth strategy,
the Company expects to require the addition of new management personnel,
including sales and technical services personnel, and the development of
additional expertise by existing personnel. The Company's ability to manage
growth effectively will require it to continue to implement and improve its
operational, financial and sales systems at both the national and local level,
to develop the skills of its managers and supervisors and to hire, train,
motivate, retain and effectively manage its employees. There can be no assurance
that the Company will be successful in
20
managing any future expansion, and the failure to do so could materially
adversely affect the Company's business, financial position, results of
operations and cash flows.
While the Company recently completed an upgrade of its accounting
software system, management believes that further improvements will be
necessary. Failure to implement such improvements may adversely affect timely
availability of financial information. The Company believes that such
improvements will utilize a considerable amount of the Company's management
resources. Failure to hire and retain qualified personnel would have a material
adverse effect upon the Company's ability to implement such improvements. There
can be no assurance that the Company will be able to successfully implement such
improvements and such failure could have a material adverse impact on the
Company's business, financial position, results of operations and cash flows.
RISKS ASSOCIATED WITH EXPANDING SERVICES CAPABILITIES
The Company is expanding the nature and scope of its value-added
services. There can be no assurance that the value-added services business will
be successfully integrated with the Company's information technology products
reselling business or that the Company will be able to effectively compete in
this market. If the Company is unable to effectively provide value-added
services, it may be unable to effectively compete for the business of certain
large customers that require the provision of such services as a condition to
purchasing products from the Company. In addition, the Company will be subject
to risks commonly associated with a value-added services business, including
dependence on reputation, volatility of workload and dependence on ability to
recruit and retain qualified technical personnel. The expansion of the Company's
value-added services required a significant capital investment, including a
large increase in the number of technical employees. If the Company is unable to
attain sufficient customer orders for value-added services, it will then be
unable to fully recover the costs of these investments. Also, a portion of the
Company's value-added service revenue may be derived from the performance of
services pursuant to fixed-price contracts. As a result, cost overruns due to
price increases, unanticipated problems, inefficient project management or
inaccurate estimation of costs could have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
See "Business--Products and Value-Added Services."
RISKS RELATED TO GEOGRAPHIC EXPANSION
The Company's growth has been driven, in part, by sales generated
through expansion into new geographic markets. The Company has already opened
sales offices in many of the metropolitan markets that the Company believes
offer the most potential for sales growth. The Company is not planning any
further bricks-and-mortar branch openings. Expansion in new markets will be
through the virtual model utilizing the new SAP/Microsoft-based e-commerce
integrated business system. Sales representatives will work out of their homes
utilizing these internet tools. These "remote" Account Executives will be
supported by Customer Service Representatives located in Southern California.
This model will enable En Pointe to have face to face contact with customers
without incurring the usual start up costs and further expenses associated with
new branch offices. There are no assurances that this method of expansion will
experience the same success
21
as the branch model has. Such failure could have a material adverse effect on
the Company's business, financial position, results of operations and cash
flows.
RISKS ASSOCIATED WITH ACQUISITIONS OF AND INVESTMENTS IN COMPLEMENTARY
BUSINESSES
One element of the Company's growth strategy may include expanding its
business through strategic acquisitions and investments in complementary
businesses. The Company has not had significant acquisition or investment
experience, and there can be no assurance that the Company will be able to
successfully identify suitable acquisition or investment candidates, complete
acquisitions or investments, or integrate acquired businesses into its
operations. Acquisitions and investments involve numerous risks, including
difficulties in the assimilation of the operations, services, products, vendor
agreements, and personnel of the acquired company, the diversion of management's
attention and other resources from other business concerns, entry into markets
in which the Company has little or no prior experience, and the potential loss
of key employees, customers, or contracts of the acquired company. Acquisition
and investments could also conflict with restrictions in the Company's
agreements with existing or future distributors or manufacturers. The Company is
unable to predict whether or when any prospective acquisition or investment
candidate will become available or the likelihood that any acquisition or
investment will be completed or successfully integrated. The Company's failure
to successfully manage any potential acquisitions or investments in
complementary businesses could have a material adverse effect on the Company's
business, financial position, results of operations and cash flows.
RISKS ASSOCIATED WITH PLANNED INTERNATIONAL OPERATIONS
Although the Company to date has not generated significant foreign
sales, one of the elements of its growth strategy may be to expand
internationally. There can be no assurance that the Company will be able to
successfully expand its international business. There are certain risks inherent
in doing business on an international level, such as remote management,
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, and potentially adverse
tax consequences, any of which could adversely impact the success of the
Company's international operations. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business, financial
position, results of operations and cash flows.
RISKS ASSOCIATED WITH BUSINESS INTERRUPTION; RISKS ASSOCIATED WITH DEPENDENCE ON
CENTRALIZED FUNCTIONS
22
The Company believes that its success to date has been, and future
results of operations will be, dependent in large part upon its ability to
provide prompt and efficient service to its customers. As a result, a
substantial disruption of the Company's day-to-day operations could have a
material adverse effect upon the Company's business, financial position, results
of operations and cash flows. In addition, the Company's success is largely
dependent on the accuracy, quality and utilization of the information generated
by its information systems, which are primarily based in Ontario and El Segundo,
California. Repairs, replacement, relocation or a substantial interruption in
these systems or in the Company's telephone or data communications systems,
servers or power could have a material adverse effect on the Company's business,
financial position, results of operations and cash flows. Although the Company
has business interruption insurance, an uninsurable loss could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows. The Company's current use of a single configuration
facility in Ontario, California also makes the Company more vulnerable to
dramatic changes in freight rates than a competitor with multiple,
geographically dispersed sites. Losses in excess of insurance coverage, an
uninsurable loss, or change in freight rates could have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows. See "Business--Information Systems."
RISKS ASSOCIATED WITH DEPENDENCE ON THIRD-PARTY SHIPPERS
The Company presently ships products from Ontario, California,
primarily by Federal Express Corporation ("FedEx") or United Parcel Service of
America, Inc. ("UPS"), and the vast majority of products that the Company sells
are drop-shipped for the Company to its customers by the allied distributors via
these carriers. Changes in shipping terms, or the inability of these third-party
shippers to perform effectively (whether as a result of mechanical failure,
casualty loss, labor stoppage, other disruption, or any other reason), could
have a material adverse effect on the Company's business, financial position,
results of operations and cash flows. There can be no assurance that the Company
or others can maintain favorable shipping terms or replace such shipping
services on a timely or cost-effective basis. See "Business--Distribution."
RISKS ASSOCIATED WITH PRODUCT RETURNS
As is typical of the information technology industry, the Company
incurs expenses as a result of the return of products by customers. Such returns
may result from defective goods, inadequate performance relative to customer
expectations, distributor-shipping errors and other causes that are outside the
Company's control. Although the Company's distributors and manufacturers have
specific return policies that enable the Company to return certain products for
credit, to the extent that the Company's customers return products which are not
accepted for return by the distributor or manufacturer of such products, the
Company will be forced to bear the cost of such returns. Any significant
increase in the rate of product returns, or the unwillingness by the Company's
distributors or manufacturers to accept goods for return, could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows.
23
RISKS ASSOCIATED WITH EXTENSIONS OF CREDIT
As a marketing enhancement, the Company offers unsecured and secured
credit terms for qualified customers. Historically, the Company has not
experienced losses from write-offs in excess of established reserves. While the
Company evaluates customers' qualifications for credit and closely monitors its
extensions of credit, defaults by customers in timely repayment of these
extensions of credit could have a material adverse effect on the Company's
business, financial position, results of operations and cash flows. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH POTENTIAL INFLUENCE BY EXECUTIVE OFFICERS AND PRINCIPAL
STOCKHOLDERS
The directors, executive officers and principal stockholders of the
Company and their affiliates beneficially own, in the aggregate, approximately
44% of the outstanding Common Stock. As a result, these stockholders acting
together will be able to exert considerable influence over the election of the
Company's directors and the outcome of most corporate actions requiring
stockholder approval, such as certain amendments to the Company's Certificate of
Incorporation. Additionally, the directors and executive officers have
significant influence over the policies and operations of the Company's
management and the conduct of the Company's business. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change of
control of the Company and consequently could affect the market price of the
Common Stock.
POTENTIAL VOLATILITY OF STOCK PRICE
Factors such as the announcement of acquisitions by the Company or its
competitors, quarter to quarter variations in the Company's operating results,
changes in earnings estimates by analysts, governmental regulatory action,
general trends and market conditions in the information technology industry, as
well as other factors, may have a significant impact on the market price of the
Common Stock. Moreover, trading volumes in the Company's Common Stock have been
low historically and could exacerbate price fluctuations in the Common Stock.
Further, the stock market has recently and in other periods experienced extreme
price and volume fluctuations, which have particularly affected the market
prices of the equity securities of many companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may materially and adversely affect the market price of the Common
Stock. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters."
24
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, qualifications, limitations and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or preventing a third
party from acquiring a majority of the outstanding voting stock of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could adversely affect the market price of the Common Stock.
RISKS ASSOCIATED WITH POTENTIAL "YEAR 2000" LEAP-YEAR PROBLEMS
The Company was aware of the issues associated with the programming
code in existing computer systems as the year 2000 approached. As a result of
the fact that January 1, 2000 has come and gone, and as result of the
Company's analysis of its computer programs and operations, it has concluded
that its business systems are Year 2000 compliant. A related potential
problem stems from the fact that 2000 is a rare leap-year and some have
expressed concern that programmers or component designers may have forgotten
to properly take that fact into account. While there may be some risk
relating to the anomalous leap-year in 2000, management believes that any
remaining Year 2000 problems will not seriously impact or have a material
adverse effect on the Company's expenses, business, including data gathering
and interpretation, or its operations.
ITEM 2. PROPERTIES
The Company leases approximately 35,000 square feet of office space
for its headquarters in El Segundo, California, under a lease expiring in May
2001. The Company also leases an approximately 126,000 square foot facility
in Ontario, California, which is primarily, used for configuration and
maintenance services. This facility has been operational since July 1, 1998.
At that time the facility was planned, the Company believed that there would
be an emerging "channel assembly" market for final assembly by resellers,
such as the Company, of computer products. However, instead, certain
manufacturers began requiring distributors to "co-locate" their final
assembly operations at the manufacturer's facility instead of outsourcing
final assembly at separate sites. In reaction to the change in this emerging
market, in January 1999, En Pointe's Board of Directors authorized the
Company to sell and leaseback the Ontario facility, while continuing the
product configuration operation at that location. The sale-leaseback
transaction was concluded in June, 1999. As a result of these shifts in the
industry the Ontario facility has more capacity and space than usable for
current configuration services. In consequence the Company incurred a
non-recurring charge of $6.2 million associated therewith. The charge was
determined using the "held for use" model contained in SFAS
25
No.121. The Company's intent then was to sub-lease approximately 45% of the
facility space to an unrelated company. However, no such sub-lease has been
executed. The Company continues to evaluate its options with regard to the
excess capacity at the Ontario facility.
As of September 30, 1999, the Company leased twenty sales offices
nationwide. The following table identifies the Company's sales offices:
APPROXIMATE DATE
FACILITY OPENED
------------------------------------------------------------------- ------------------
Corporate Headquarters and Sales Office:
El Segundo, California...............................................April 1993
Sales Offices:
Dallas, Texas........................................................March 1993
Palo Alto, California................................................April 1993
Seattle, Washington..................................................June 1993
Portland, Oregon.....................................................July 1993
Austin, Texas........................................................May 1994
New York, New York...................................................July 1994
Denver, Colorado.....................................................August 1994
Salt Lake City, Utah.................................................May 1996
Chicago, Illinois....................................................July 1996
Santa Ana, California...(moved from Irvine, California)..............September 1996
Atlanta, Georgia.....................................................April 1997
Charlotte, North Carolina............................................April 1997
Memphis, Tennessee...................................................April 1997
Minneapolis, Minnesota...............................................July 1997
Boston, Massachusetts................................................April 1998
Houston, Texas.......................................................April 1998
Albany, New York.....................................................July 1998
San Diego, California................................................April 1998
Riverside, California................................................September 1997
Management believes the Company's headquarters, sales offices and
configuration facilities are adequate to support its current level of
operations.
26
ITEM 3. LEGAL PROCEEDINGS
The Company was named, along with CEO, Bob Din, as a defendant in a
lawsuit filed on April 29, 1997 in Los Angeles County (California) Superior
Court as Case No. BC 170234, captioned Novaquest Infosystems, et al v. En
Pointe Technologies, Inc. et al. The lawsuit alleged that the Company
knowingly accepted trade secret information and interfered with the
plaintiffs' prospective economic advantage in tort, and that these actions
also constituted breach of a prior contract. Plaintiffs' trade secret claim
was dropped on the eve of trial. The remaining claims were tried to a jury.
On March 23, 1999, the jury arrived at verdicts awarding $50,000 for
the breach of contract claim and $375,000 for the intentional interference
with plaintiffs' prospective economic advantage tort claim. On April 2, 1999,
the jury arrived at a verdict awarding $1,000,000 in punitive damages on the
tort claim. After various post-trial motions, Judgement on the above verdicts
was entered on June 15, 1999.
Because plaintiffs prevailed on their contract claim, they were
entitled to seek the court (not a jury) to award them their "reasonable
attorney's fees" incurred in enforcing that contract and receiving a verdict
of $50,000 on the contract. Plaintiffs are not entitled to attorney's fees
incurred in enforcing their tort claim or in obtaining the punitive damages
award.
Plaintiffs are entitled to seek recovery of the "costs" (as defined
in California Code of Civil Procedure section 1033.5; e.g. filing fees,
deposition costs, etc.) on claims on which they prevailed. After the judgment
was entered on June 15, 1999, plaintiffs, on June 29, 1999, served their
request for the court to award them approximately $100,000 in "costs" and
approximately $1,800,000 in attorney's fees, to which the Company has timely
objected. Because one of the factors required to be considered by the court
in awarding reasonable attorney's fees is the amount of the recovery, the
Company does not believe that a judge would find reasonable the expending of
$1,800,000 to recover $50,000. On December 10, 1999, the court took under
submission Plaintiff's above claim for costs and attorney's fees, and set a
return hearing date of January 21, 2000.
During the quarter ended March 31, 1999, the Company recorded a reserve
for litigation expense of $1,725,000, which included $50,000 for contract
damages, $375,000 for tort damages, $1,000,000 for punitive damages and $300,000
as an estimate of costs and attorneys' fees which might be awarded to
plaintiffs.
The Company believes that the accrual made at March 31, 1999 remains a
reasonable estimate for the loss incurred with respect to this matter.
The Company was named as a defendant in a lawsuit filed on August 4,
1998 in the 151st Judicial District Court of Harris County, Texas (Case No.
98-36715). The case name is Allstar Systems, Inc. v. En Pointe Technologies,
Inc., et al., and the complaint alleges that the Company, along with an
individual defendant who was a former employee of the plaintiff, conspired to
steal Allstar's customers, employees and trade secrets. The Company is currently
unable to estimate the loss in the event of an unfavorable outcome.
The Company was named as a defendant in two lawsuits filed in Santa
Clara County Superior Court (Case Nos. CV773074 AND CV774589). The two cases are
virtually identical and have been consolidated (pursuant to stipulation) for all
purposes
27
other than trial. The cases involve three plaintiffs who were former
employees for En Pointe, and all three are alleging fraud in the inducement,
breach of contract (failure to set performance standards and then termination
for poor performance), and unpaid wages (in the form of commissions). In
addition, all three plaintiffs are pursuing several claims under Business &
Professions Code Section 17200 on behalf of the general public. In these
regards, the complaints seek equitable relief only. The Company is currently
unable to estimate the loss in the event of an unfavorable outcome.
In April 1996 the Company, Bob Din and Naureen Din entered into a
settlement agreement with a former employee of the Company, pursuant to which
the former employee has released the Company and Bob Din and Naureen Din from
any and all claims with respect to the Company's use of certain computerized
information system software originally developed by the former employee prior
to his employment with the Company (the "Settlement Agreement"). As
consideration for entering into the Settlement Agreement, the Company agreed
to pay the former employee payments totaling $1,225,000. The remaining unpaid
balances as of September 30, 1999 and 1998 were $135,000 and $214,000,
respectively.
The Company filed suit against its insurance carrier in order to
recoup both legal costs incurred by the Company in connection with its
defense of the foregoing litigation as well as for amounts paid to the former
employee pursuant to the settlement. In August 1996 the insurance company
settled with the Company paying the full amount of the original settlement.
The Company is also subject to other legal proceedings and claims
that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management, after
consulting with counsel, 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 matter of authorizing an increase of the limit of shares
issuable pursuant to the Company's Employee Stock Purchase Plan by 250,000
additional shares was submitted to a vote of security holders and was
approved by written consent of the holders of a majority of the
outstanding shares, effective as of October 18, 1999. All prior filings with
the Commission are incorporated by reference.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market
under the symbol "ENPT." The following table sets forth, for the period
indicated, the high and low sale prices for the Common Stock as reported by the
NASDAQ National Market.
High Low
------------ -----------
Fiscal 1998
First quarter........................ $ 23 1/2 $ 8 5/8
Second quarter....................... 12 1/2 8 1/4
Third quarter........................ 11 1/4 5 5/16
Fourth quarter....................... 10 1/2 5 9/32
Fiscal 1999
First quarter........................ $ 9 15/16 $ 2 1/2
Second quarter....................... 10 1/2 5
Third quarter........................ 9 1/4 5 3/8
Fourth quarter....................... 14 15/64 6 1/16
Fiscal 2000
First quarter........................ $ 30 $ 7 11/16
On January 6, 2000, the closing sale price for the Common Stock on the
NASDAQ National Market was $39.44 per share. As of January 6, 2000, there were
40 stockholders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all available funds
for use in the operation of its business, and does not intend to pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other factors, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions. The
Company's ability to pay cash dividends is currently restricted by certain of
the Company's credit facilities, and the terms of future credit facilities or
other agreements may contain similar restrictions.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of September 30, 1999
and 1998 and for each of the years in the three year-period ended September
30, 1999 have been derived from the Company's Consolidated Financial
Statements and the related notes thereto that have been audited by
PricewaterhouseCoopers LLP, independent accountants, which financial
statements and report thereon are included elsewhere in this Annual Report on
Form 10-K.
The data set forth below should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------ ------------- ----------- ------------
(in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 668,270 $ 567,739 $ 491,358 $ 345,093 $ 200,797
Cost of sales 614,564 514,168 447,276 316,165 184,761
--------------- ------------ ------------- ----------- ------------
Gross profit 53,706 53,571 44,082 28,928 16,036
Operating expenses:
Selling and marketing expenses 37,942 34,257 22,340 15,253 9,307
General and administrative expenses 30,775 13,665 10,905 5,948 3,755
Non-recurring charges 7,917 -- -- 525 --
--------------- ------------ ------------ ---------- ------------
Operating (loss) income (22,928) 5,649 10,837 7,202 2,974
Interest expense 3,172 2,166 1,239 1,673 1,843
Gain on sale of investment (4,428) -- -- -- --
Other income, net (117) (237) (194) (116) (61)
Minority interests (3,747) -- -- -- --
--------------- ------------ ------------- ----------- ------------
29
Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------ ------------- ----------- ------------
(in thousands, except share and per share data)
(Loss) Income before income taxes (17,808) 3,720 9,792 5,645 1,192
(Benefit) provision for income taxes (1,214) 1,488 3,961 2,315 489
--------------- ------------ ------------- ----------- ------------
Net (loss) income $ (16,594) $ 2,232 $ 5,831 $ 3,330 $ 703
=============== ============ ============= =========== ============
Net (loss) income per share:
Basic $ (2.79) $ 0.38 $ 1.03 $ 0.78 $ 0.21
=============== ============ ============ =========== ============
Diluted $ (2.79) $ 0.37 $ 1.00 $ 0.77 $ 0.21
=============== ============ ============ =========== ============
Weighted average shares and share
equivalents outstanding (1):
Basic 5,942 5,875 5,681 4,255 3,410
=============== ============ ============= =========== ============
Diluted 5,942 6,071 5,811 4,304 3,410
=============== ============ ============= =========== ============
As of September 30,
--------------- -----------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------ ----------- ---------- ------------
(in thousands)
BALANCE SHEET DATA:
Working capital $ 23,495 $ 19,831 $ 24,753 $ 18,338 $ 2,286
Total assets $ 133,609 $ 132,567 $ 90,862 $ 64,923 $ 36,792
Borrowings under lines of credit and
current
portion of notes payable $ 62,567 $ 80,388 $ 50,890 $ 36,668 $ 29,202
Long term liabilities and notes payable $ 5,581 $ 6,602 $ 463 $ 284 $ 1,733
Stockholders' equity $ 26,271 $ 31,019 $ 28,319 $ 20,875 $ 1,832
(1) See Note 1 of Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT ON FORM 10-K.
OVERVIEW
The Company was incorporated in January 1993 and commenced operations
in March 1993 as a reseller of information technology products. The Company
began emphasizing its value-added services to its customers in fiscal 1998.
Value-added services accounted for 3.4% of the Company's net sales in fiscal
1999. The gross profit margins on the value-added services that the Company
currently offers are significantly higher than the gross profit margins on the
Company's information technology products reselling business.
firstsource.com, an Internet and call center based
business-to-business provider of products, services and information necessary
to operate small to medium sized businesses, began operations in June of 1998
as a wholly-owned subsidiary. In July of 1999, through a private placement of
firstsource.com's common stock, $9.3 million of additional capital was
raised. Total shares issued in connection with the private placement were
2,659,886, which reduced the Company's ownership interest to 71.4%.
The Company's net sales have increased from $110.0 million in fiscal
1994 (the Company's first full year of operations) to $668.3 million in
fiscal 1999, representing a compound annual growth rate of 43.4%. The growth
in net sales has principally been driven by sales to new customers and
increased sales to existing customers as well as geographic expansion through
the opening of additional sales offices. The Company's gross profit margins
expanded in earlier years from 8.1% in fiscal 1994 to 9.4% in fiscal 1998,
but contracted to 8.0% in fiscal 1999, principally from highly competitive
market pressures.
Because of the tighter margins, there has not been sufficient gross
margins to provide for the disproportionately larger operating expenses of
$19.3 million (before allocation to minority interest) related to
firstsource.com, and for the non-recurring charges of $7.9 million. A major
30
factor in the increase in firstsource.com's operating expenses was $10.4
million of non-cash expense related to the issuance of stock options (see
discussion in general and administrative comparison section). Most of the
non-recurring charges related to the impairment charge of $6.2 million for
the Ontario facility (see following discussion). Thus, the Company incurred
its first operating loss of $22.9 million in fiscal 1999.
In June 1998, the Company completed construction of its 126,000
square foot Ontario facility. The Company believed the facility would enable
it to compete in what it believed would be an emerging market for final
assembly of certain computer products being
31
performed by third-parties, including corporate resellers and distributors,
rather than being done in-house under the "build-to forecast" methodology
traditionally employed by computer manufacturers. As this market developed, it
became apparent that certain manufacturers would require distributors to
co-locate their final assembly operations at the manufacturer's facility instead
of outsourcing final assembly to distributors at a separate site. In reaction to
the change in this emerging market, in January 1999, the Company decided to sell
and leaseback the Ontario facility, continuing the product configuration
operation.
During the quarter ended March 31, 1999 the Company recorded an
impairment charge of $6.2 million against operations to write-down the net
book value of its Ontario facility to its estimated fair value. The
write-down was determined using the held for use model contained in SFAS
No.121.
At the time of the sale/leaseback, it was the intent of the Company
to sublease approximately 45% of the facility space to an unrelated party.
However, no sublease has been executed to date and the Company continues to
evaluate its options with regard to the use of the excess space.
Because the Company's business model involves the resale of
information technology products held in inventory by certain distributors,
the Company does not maintain significant amounts of inventory on hand for
resale. The Company typically does not place an order for product purchases
from distributors until it has received a customer purchase order. Inventory
is then drop-shipped by the distributor to either the customer or shipped to
the Company's configuration center in Ontario, California. The distributor
typically ships products within 24 hours following receipt of a purchase
order and, consequently, substantially all of the Company's net sales in any
quarter result from orders received in that quarter. Although the Company
maintains a relatively small amount of inventory in stock for resale, it
records as inventory the merchandise being configured and products purchased
from distributors, but not yet shipped to customers.
Product revenues are recognized upon shipment and satisfaction of
significant vendor obligations, if any. Service revenues are recognized based on
contractual hourly rates as services are rendered or upon completion of
specified contract services. Net sales consist of product and service revenues,
less discounts. Cost of sales includes product and service costs and current and
estimated allowances for returns of products that are not accepted by the
Company's distributors or manufacturers, less any incentive credits.
The Company's effective tax rate varied significantly from the
statutory rate in the current fiscal year. This was attributable principally to
net operating losses generated by firstsource.com that could not be utilized by
the Company due to a reduction in ownership that precluded consolidation for tax
filing purposes. See Note 9 to the Consolidated Financial Statements for a
fuller explanation.
32
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage
of net sales for the periods indicated:
Fiscal Year Ended September 30,
-------------------------------
1999 1998 1997
---- ---- ----
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 92.0 90.6 91.0
------- ------ ------
Gross profit 8.0 9.4 9.0
Selling and marketing espenses 5.7 6.0 4.6
General and administrative expenses 4.6 2.4 2.2
Non-recurring charges 1.1 - -
------- ------ ------
Operating (loss) income (3.4) 1.0 2.2
Interest expense 0.5 0.4 0.2
Gain on sale of investment (0.7) - -
Other income, net - (0.1) -
Minority interests (0.5) - -
------- ------ ------
(Loss) income before taxes (2.7) 0.7 2.0
(Benefit) provision for income taxes (0.2) 0.3 0.8
------- ------ ------
Net (loss) income (2.5) % 0.4 % 1.2 %
======= ====== ======
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NET SALES. Net sales increased $100.6 million, or 17.7%, to $668.3
in fiscal 1999 from $567.7 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 focused business, contributed $30.0
million during its first full fiscal year of operations, or 4.5% of total net
sales, an increase of $24.6 million from the four months of initial
operations in fiscal 1998.
Services revenues increased $9.8 million, or 74.4%, to $23.0 million in
fiscal 1999 from $13.2 million in fiscal 1998 and were 3.4% of total net sales
versus 2.3% in the prior year. Net sales under the IBM contract accounted for
18.8% of total net sales and 18.5% of total accounts receivable for the 1999
fiscal year compared with 21.4% and 20.8% respectively for the prior fiscal
year. However, in absolute dollars IBM net sales increased $4.2 million to
$125.7 million in fiscal 1999 from $121.5 million in fiscal 1998, trailing the
17.7% overall growth of Company net sales, and are expected to do so in the
future.
GROSS PROFIT. Gross profit increased $0.1 million, or 0.2% to $53.7
million in fiscal 1999 from $53.6 million for 1998, but decreased as a
percentage of net sales to 8.0% in 1999 as compared to 9.4% in 1998. The
decrease in gross margin is attributable to the pricing pressures throughout the
industry on information technology products. The
33
Company believes the past year's trend of declining gross profits will abate in
the coming year.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased $3.7 million, or 10.8% to $37.9 million in fiscal 1999, from $34.3
million in fiscal 1998, primarily as a result of increased net sales volume. As
a percentage of net sales, selling and marketing expense decreased to 5.7% in
1999 from 6.0% in 1998, due to the increased volume of net sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $17.1 million, or 125.2% to $30.8 million in fiscal 1999,
from $13.7 million in fiscal 1998 with $14.6 million of the increase related
to the Company's subsidiary, firstsource.com. The increase in general and
administrative expense at firstsource.com was primarily the result of a
non-cash charge for compensation related to the grant of stock options at
firstsource.com. Of the total charge, $10.0 million was incurred in the
fourth quarter of fiscal 1999 and was due in large part to an acceleration in
that quarter of the vesting schedule of the options granted. The remaining
deferred compensation of $1.4 million at September 30, 1999, will be
amortized over the next 16 quarters. In addition, $4.3 million of the $14.6
million increase was the result of hiring additional personnel necessary to
support the growth of firstsource.com's Internet business.
As a percentage of net sales, general and administrative expenses
increased to 4.6% in fiscal 1999 as compared to 2.4% in fiscal 1998.
Excluding the non-cash stock option compensation charge, general and
administrative expenses were 3.1% of net sales in fiscal 1999. The 3.1%
increase over the 2.4% of the prior year is primarily due to increased
staffing at firstsource.com.
NON-RECURRING CHARGES. Non-recurring charges consist of a $6.2
million impairment charge for the write down of the Ontario configuration
facility to market value and a $1.7 million charge for a reserve for
litigation expense.
OPERATING INCOME. Operating income decreased $28.6 million, or
(505.9)%, to a loss of $(22.9) million in fiscal 1999 from $5.6 million
operating profit in fiscal 1998, primarily as a result of increased general
and administrative expenses for firstsource.com accompanied by decreased
gross profit margins. Operating (loss) income, as a percent of net sales,
declined to (3.4)% in fiscal 1999 from 1.0% in fiscal 1998.
INTEREST EXPENSE. Interest expense increased $1.0 million, or 46.5%
to $3.2 million in fiscal 1999 from $2.2 million in fiscal 1998. The increase
in interest expense was primarily due to $0.6 million of interest incurred on
borrowings incurred for the Ontario facility. Under SFAS 98, all future
rental payments related to the Ontario sale/leaseback, which for fiscal 2000
are estimated to be $.5 million, will be characterized as interest expense.
GAIN ON SALE OF INVESTMENT. The gain on sale of investment resulted
from the sale of shares held by the Company in Shopping.com. Net proceeds
received were $4,990,000
34
on an adjusted carrying value of the shares of $562,000.
MINORITY INTEREST. firstsource.com, a formerly wholly-owned subsidiary,
on July 28, 1999 issued 2,659,886 shares of common stock in a private placement
that grossed $9.3 million and resulted in the Company's ownership declining to
71.4%. Minority interest reflects the 28.6% allocable portion of the
subsidiary's loss since July 28, 1999.
NET (LOSS) INCOME. Net income decreased $18.8 million, or (843.4)%,
to a $16.6 million net loss in fiscal 1999 from $2.2 million net income in
fiscal 1998. The decrease in fiscal 1999 earnings resulted primarily from
declining profit margins coupled with an increase in operating expenses of
firstsource.com of $18.3 million (before allocation to minority interest),
and non-recurring charges of $7.9 million. As a percentage of net sales, net
(loss) income declined to (2.5)% from 0.4% in fiscal 1998.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES. Net sales increased $76.3 million, or 15.5% to $567.7 in
fiscal 1998 from $491.4 million in fiscal 1997. The increase in sales was
attributable to sales to new customers, increased sales to existing customers,
and increased sales of value-added services.
Four new sales territories were opened in fiscal 1998, which
contributed $10.3 million in net sales. In pre-existing territories, net sales
increased by $60.7 million, an increase of 12.4%. firstsource.com, an Internet
business venture, contributed an additional $5.3 million in its initial four
months of operations.
Services revenues increased $7.2 million, or 21.8%, to $13.2 million in
fiscal 1998 from $5.9 million in fiscal 1997 and were 2.3% of total net sales
versus 1.2% in the prior year. Sales under the IBM contract accounted for 21.4%
of total sales and 20.8% of total accounts receivable for the 1998 fiscal year
compared with 29.6% and 24.2% respectively for the prior fiscal year.
GROSS PROFIT. Gross profit increased $9.5 million, or 21.5% to $53.6
million in fiscal 1998 from $44.1 million for 1997, and increased as a
percentage of net sales to 9.4% in 1998 as compared to 9.0% in 1997. The
increase in gross margin is attributable in part to increased services revenue,
which was partially offset by a general decrease in margins on information
technology products.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased $12.0 million, or 53.3% to $34.3 million in fiscal 1998, from $22.3
million in fiscal 1997, primarily as a result of increased net sales volume.
As a percentage of net sales, selling and marketing increased to 6.0% in 1998
from 4.6% in 1997, due to additional staffing, the opening of new branch
offices, and costs related to commencing operations of an Internet business,
firstsource.com.
35
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $2.8 million, or 25.3% to $13.7 million in fiscal 1998, from
$10.9 million in fiscal 1997, primarily as a result of hiring additional
personnel necessary to support the growth of the Company and other
administrative duties, as well as administrative costs related to
firstsource.com. As a percentage of net sales, general and administrative
expenses increased to 2.4% in fiscal 1998 as compared to 2.2% in fiscal 1997.
OPERATING INCOME. Operating income decreased $5.2 million, or 47.9%, to
$5.6 million in fiscal 1998 from $10.8 million in fiscal 1997, primarily as a
result of increased selling and marketing expenses accompanied by flattening
gross profit margins. Operating income, as a percent of net sales, declined to
1.0% in fiscal 1998 from 2.2% in fiscal 1997.
INTEREST EXPENSE. Interest expense increased $1.0 million, or 74.8%
to $2.2 million in fiscal 1998 from $1.2 million in fiscal 1997. The increase
in interest expense was primarily due to increased borrowing under lines of
credit, which at the end of fiscal 1998 had increased $28.9 or 57.0%. The
borrowing was used primarily to fund the $25.1 million (32.6%) growth in
accounts receivable as well as the $2.3 million (50.3%) increase in
inventories. Additionally, in July 1998, operations commenced in the Ontario
configuration, repair, and RMA ("Returned Merchandise Authorization")
facility that resulted in $0.2 million of interest expense.
NET INCOME. Net income decreased $3.6 million, or 61.7% to $2.2 million
in fiscal 1998 from $5.8 million for fiscal 1997. The decrease in fiscal 1998
net income resulted primarily from the $11.9 million (53.3%) increase in selling
and marketing expense, the $2.8 million (25.3%) increase in general and
administrative expense, and the $0.9 million (74.8%) increase in the interest
expense. These expenses totaled $15.6 million, exceeding the increase in gross
profits of $9.5 million by $6.1 million. As a percentage of net sales, net
income declined to 0.4% from 1.2% in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999 operating activities provided cash totaling $12.3
million compared to a use of cash of $21.2 million in the prior fiscal year.
The largest non-cash reconciling items between net loss and cash provided by
operating activities were the $6.2 impairment loss related to the Ontario
facility and the $10.4 million of compensation related to subsidiary option
grants. A total of $19.3 million of cash was provided from the increase in
accounts payable, accrued expenses and other current liabilities.
In fiscal 1999, growth of accounts receivable consumed a modest $1.7
million in cash, compared with $25.8 million in the prior fiscal year.
Historically, the Company has satisfied its accounts receivable cash
requirements principally by borrowings under its lines of credit. The Company's
accounts receivable balance at September 30, 1999 and 1998, was $101.7 million
and $102.0 million, respectively. The number of days' sales outstanding in
36
accounts receivable was 56 days and 66 days, as of September 30, 1999 and 1998,
respectively.
Investing activities provided cash totaling $5.6 million for fiscal
1999 compared with $11.1 million used in the prior year. The cash provided
from investing activities was principally the result of the proceeds received
from sale of the Ontario facility of $5.5 million and proceeds from the sale
of Shopping.com stock of $5.0 million. Offsetting the proceeds received was
additional investment of $4.9 million in property, plant and equipment as
compared to $10.6 million in 1998.
Financing activities used net cash totaling $14.3 million in fiscal
1999, as compared to providing cash of $32.3 million in fiscal 1998. Net cash of
$17.3 million was used for the reduction of borrowings on lines of credit. Such
lines have been used primarily to finance accounts receivable balances and have
remained relatively constant, not requiring the capital investment of prior
years.
The Company's subsidiary, firstsource.com, on July 28, 1999 completed a
private placement of 2,659,886 shares of common stock at $3.50 per share that
netted, after expenses, $9.1 million and represented a 28.6% interest in the
subsidiary. On June 24, 1999 the Company closed escrow on the sale/leaseback of
its Ontario facility and in conjunction with that sale/leaseback retired the
debt related to the land and building of $3.4 million and the equipment
financing of $1.6 million.
As of September 30, 1999, the Company had approximately $6.9 million in
cash, including $0.1 million in restricted cash, and working capital of $23.5
million. The Company has several revolving credit facilities collateralized by
accounts receivable and all other assets of the Company, including $80.0 million
in lines with IBM Credit Corporation ("IBMCC"). As of September 30, 1999 and
1998, such lines of credit provided for maximum aggregate borrowings of
approximately $121.0 million and $105.0 million, respectively, of which
approximately $62.3 million and $79.6 million was outstanding, respectively.
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. At September 30, 1999 the Company has obtained a waiver on
non-compliance with a covenant relating to minimum percentage of net income to
sales and remains in compliance with all remaining covenants.
RISKS ASSOCIATED WITH POTENTIAL "YEAR 2000" LEAP-YEAR PROBLEMS
37
The Company was aware of the issues associated with the programming
code in existing computer systems as the year 2000 approached. As a result of
the fact that January 1, 2000 has come and gone, and as a result of the
Company's analysis of its computer programs and operations, it has concluded
that its business systems are Year 2000 compliant. A related potential
problem stems from the fact that 2000 is a rare leap-year and some have
expressed concern that programmers or component designers may have forgotten
to properly take that fact into account. While there may be some risk
relating to the anomalous leap-year in 2000, management believes that any
remaining Year 2000 problems will not seriously impact or have a material
adverse effect on the Company's expenses, business, including data gathering
and interpretation, or its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. The Company does not expect the adoption of SOP No. 98-5 to have
a material impact on the Company's financial position, results of operations
or cash flows. The Company will be required to implement SOP No. 98-5 in the
first quarter of fiscal 2000.
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.
38
ITEM 7A. QUANTATIVE AND QUALITIVE DISCLOSURES 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' prime
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 fiscal year 2000 as compared to fiscal year 1999.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed in the Index to Financial
Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information appearing
under the captions "ELECTION OF DIRECTORS" and "COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934" from the Company's definitive proxy
statement for the 1999 Annual Meeting of the Stockholders to be filed with the
Commission on or before January 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference information appearing under
the caption "EXECUTIVE COMPENSATION" from the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders to be filed with the
Commission on or before January 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" from the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders to be filed with the Commission on or before January 28,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing
under the caption "EXECUTIVE COMPENSATION" from the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders to be filed with the
Commission on or before January 28, 2000.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The list of financial statements contained in the accompanying Index to
Financial Statements covered by Report of Independent Accountants is
herein incorporated by reference.
(2) Financial Statement Schedules
The list of financial statements schedules contained in the accompanying
Index to Financial Statements covered by Report of Independent
Accountants is herein incorporated by reference.
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) Exhibits
The list of exhibits on the accompanying Exhibit Index is herein
incorporated by reference.
(b) Reports on Form 8-K.
On July 30, 1999, the Company filed a report on Form 8-K and
announced that it had completed a funding of a private placement of common
stock of its formerly wholly-owned internet subsidiary, Purchase Pointe, Inc.
dba firstsource.com, in the gross amount of $9,307,431, less about $160,000
of related costs. Such funding resulted in the sale of 2,659,266 shares at
$3.50 per share representing 28.58% of Purchase Pointe, Inc.'s outstanding
capital stock.
On September 13, 1999, the Company filed a report on Form 8-K and
announced that as of August 31, 1999 certain principal stockholders of the
Company and their affiliates in the aggregate no longer owned or beneficially
owned over 50% of the stock of the Company. As a result, the Company would no
longer consider itself to be a "minority owned" company for purposes of bidding
on sales contracts.
42
En Pointe Technologies, Inc.
INDEX TO FINANCIAL STATEMENTS
Page
-----------
Report of Independent Accountants F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the Three Years
in the Period Ended September 30, 1999 F-4
Consolidated Statements of Stockholders' Equity for each of the
Three Years in the Period Ended September 30, 1999 F-5
Consolidated Statements of Cash Flows for each of the Three Years
in the Period Ended September 30, 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-24
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
En Pointe Technologies, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects,
the consolidated financial position of En Pointe Technologies, Inc. and its
subsidiaries at September 30, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles. In addition, in our opinion, the consolidated
financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
December 20, 1999
F-2
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
September 30,
-----------------------------------------------------
1999 1998
-------------------------- -------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 6,838 $ 3,365
Restricted cash 120 1,999
Accounts receivable, net of allowance for returns
and doubtful accounts of $2,291 and $1,976
respectively 101,707 101,956
Inventories 8,588 7,009
Refundable income taxes 1,669 --
Prepaid expenses and other current assets 1,005 448
-------------------------- -------------------------
Total current assets 119,927 114,777
Property and equipment, net of accumulated
depreciation and amortization 13,114 16,113
Other assets 568 1,677
-------------------------- -------------------------
Total assets $ 133,609 $ 132,567
========================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 62,289 $ 79,598
Accounts payable 15,373 8,838
Accrued liabilities 10,960 5,015
Other current liabilities 7,413 564
Current portion of notes payable 278 790
Deferred taxes 119 141
-------------------------- -------------------------
Total current liabilities 96,432 94,946
Long term liability and notes payable 5,581 6,602
-------------------------- -------------------------
Total liabilities 102,013 101,548
Minority interest 5,325 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Shares authorized - 5,000,000
No shares issued or outstanding -- --
Common stock, $.001 par value:
Shares authorized - 15,000,000
Issued and outstanding - 6,076,348 and
5,900,210, respectively 6 6
Additional paid-in capital 32,083 18,757
Treasury stock -- (6)
Unearned compensation (1,486) --
(Accumulated deficit) retained earnings (4,332) 12,262
-------------------------- -------------------------
Total stockholders' equity 26,271 31,019
-------------------------- -------------------------
Total liabilities and stockholders' equity $ 133,609 $ 132,567
========================== =========================
See Notes to Consolidated Financial Statements.
F-3
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Year Ended September 30,
---------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
Net sales $ 668,270 $ 567,739 $ 491,358
Cost of sales 614,564 514,168 447,276
-------------------- ------------------- -------------------
Gross profit 53,706 53,571 44,082
Selling and marketing expenses 37,942 34,257 22,340
General and administrative expenses 30,775 13,665 10,905
Non-recurring charges 7,917 -- --
-------------------- ------------------- -------------------
Operating (loss) income (22,928) 5,649 10,837
Interest expense 3,172 2,166 1,239
Gain on sale of investment (4,428) -- --
Other income, net (117) (237) (194)
Minority interest (3,747) -- --
-------------------- ------------------- -------------------
(Loss) income before income taxes (17,808) 3,720 9,792
(Benefit) provision for income taxes (1,214) 1,488 3,961
-------------------- ------------------- -------------------
Net (loss) income $ (16,594) $ 2,232 $ 5,831
==================== =================== ===================
Net (loss) income per share
Basic $ (2.79) $ 0.38 $ 1.03
==================== =================== ===================
Diluted $ (2.79) $ 0.37 $ 1.00
==================== =================== ===================
Weighted average shares and share
equivalents outstanding
Basic 5,942 5,875 5,681
==================== =================== ===================
Diluted 5,942 6,071 5,811
==================== =================== ===================
See Notes to Consolidated Financial Statements.
F-4
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Common Stock Additional
------------------------------------- Paid-In Treasury
Shares Amount Capital Stock
--------------- --------------- ------------------- --------------
Balance at September 30, 1996 5,607 $ 6 $ 16,671 $ --
Issuance of common stock under stock
option and stock purchase plans 168 -- 1,258 --
Issuance of common stock on exercise of
warrants 4 -- -- --
Amortization of deferred compensation -- -- 90 --
Income tax benefits related to stock options -- -- 264 --
Net income -- -- -- --
--------------- --------------- ------------------- --------------
Balance at September 30, 1997 5,779 6 18,283
Issuance of common stock under stock
option and stock purchase plans 44 -- 390 --
Issuance of common stock on exercise of
warrants 77 -- -- --
Amortization of deferred compensation -- -- 24 --
Income tax benefits related to stock options -- -- 60 --
Treasury stock -- -- -- (6)
Net income -- -- -- --
--------------- --------------- ------------------- --------------
Balance at September 30, 1998 5,900 6 18,757 (6)
Issuance of common stock under stock
option and stock purchase plans 163 -- 873 --
Issuance of common stock on exercise of --
warrants 13 -- -- --
Warrants issued for services performed -- -- 300 --
Deferred compensation related to issuance -- -- --
of stock options -- -- 11,875 --
Amortization of deferred compensation -- -- --
Income tax benefits related to stock options -- -- 284 --
Treasury stock reissued under stock purchase plan -- -- (6) 6
Net loss -- -- -- --
--------------- --------------- ------------------- --------------
Balance at September 30, 1999 6,076 $ 6 $ 32,083 $ --
=============== =============== =================== ==============
Retained
Earnings
Unearned (Accumulated
Compensation Deficit) Total
------------------ --------------- ---------------
Balance at September 30, 1996 $ -- $ 4,199 $ 20,876
Issuance of common stock under stock
option and stock purchase plans -- -- 1,258
Issuance of common stock on exercise of
warrants -- -- --
Amortization of deferred compensation -- -- 90
Income tax benefits related to stock options -- -- 264
Net income -- 5,831 5,831
------------------ --------------- ---------------
Balance at September 30, 1997 10,030 28,319
Issuance of common stock under stock
option and stock purchase plans -- -- 390
Issuance of common stock on exercise of
warrants -- -- --
Amortization of deferred compensation -- -- 24
Income tax benefits related to stock options -- -- 60
Treasury stock -- -- (6)
Net income -- 2,232 2,232
------------------ --------------- ---------------
Balance at September 30, 1998 12,262 31,019
Issuance of common stock under stock
option and stock purchase plans -- -- 873
Issuance of common stock on exercise of -- -- --
warrants -- -- --
Warrants issued for services performed -- -- 300
Deferred compensation related to issuance -- -- --
of stock options (11,875) -- --
Amortization of deferred compensation 10,389 -- 10,389
Income tax benefits related to stock options -- -- 284
Treasury stock reissued under stock purchase plan -- -- --
Net loss -- (16,594) (16,594)
------------------ --------------- ---------------
Balance at September 30, 1999 $ (1,486) $ (4,332) $ 26,271
================== =============== ===============
See Notes to Consolidated Financial Statements.
F-5
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997
------------------- -------------------- --------------------
Operating activities:
Net (loss) income $ (16,594) $ 2,232 $ 5,831
Adjustments to reconcile net (loss) income
to net cash provided (used) by operating activities:
Depreciation and amortization 2,447 1,728 1,238
(Gain) loss on sale of assets (4,428) 232 --
Impairment loss - Ontario facility 6,192 -- --
Allowance for doubtful accounts 944 329 347
Allowance for returns 78 370 (86)
Allowance for inventory obsolescence 323 100 --
Deferred taxes (22) 50 (135)
Amortization of deferred compensation 10,389 24 90
Warrants issued for services performed 300 -- --
Minority interest in loss of subsidiary (3,747)
Changes in operating
assets and liabilities:
Restricted cash 1,879 (1,587) 198
Accounts receivable (773) (25,779) (21,463)
Inventories (1,902) (2,446) (2,857)
Refundable income taxes (1,386) -- --
Prepaid expenses and other current assets (557) 1,120 (1,004)
Other assets (216) (927) --
Accounts payable 6,535 5,040 2,017
Accrued expenses 5,945 (115) 284
Other current liabilities 6,849 (1,547) 1,733
--------------- ----------------- ----------------
Net cash provided (used) by operating activities 12,256 (21,176) (13,807)
--------------- ----------------- ----------------
Investing activities:
Proceeds from sale of property 5,500 -- --
Proceeds from sale of investment 4,990
Acquisition of business -- (514) --
Purchase of property and equipment (4,936) (10,571) (1,695)
--------------- ----------------- ----------------
Net cash provided (used) by investing activities 5,554 (11,085) (1,695)
--------------- ----------------- ----------------
Financing activities:
Net (repayments) borrowings under lines of credit (17,307) 28,905 14,189
Net proceeds from sale of shares in subsidiary 9,072 -- --
Proceeds from notes payable -- 3,432 402
Payment on notes payable (6,975) (410) (190)
Net proceeds from sale of common stock 873 390 1,258
Treasury stock -- (6) --
--------------- ----------------- ----------------
Net cash (used) provided by
financing activities (14,337) 32,311 15,659
--------------- ----------------- ----------------
Increase in cash 3,473 50 157
Cash and cash equivalents at beginning of period 3,365 3,315 3,158
--------------- ----------------- ----------------
Cash and cash equivalents at end of period $ 6,838 $ 3,365 $ 3,315
=============== ================= ================
Supplemental disclosures of cash flow information:
Interest paid $ 3,172 $ 2,166 $ 1,288
=============== ================= ================
Income taxes paid $ 28 $ 1,898 $ 5,988
=============== ================= ================
Supplemental schedule of non-cash financing and
investing activities:
Warrants issued for services performed $ 300
===============
Credit to reflect capitalization of Ontario lease $ 5,442
===============
Long-term debt acquired in purchase of plant $ 3,710
=================
Tax benefit related to stock options $ 284 $ 60 $ 264
=============== ================= ================
Receipt of stock in exchange for EPIC license $ 750
================
See Notes to Consolidated Financial Statements.
F-6
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company was originally incorporated in Texas in 1993 and
reincorporated in Delaware in 1996.
The Company is a reseller of information technology products and
value-added services to large and medium sized companies and government
entities and currently has a configuration facility in Ontario, California
and 20 sales offices, including its corporate headquarters, throughout the
United States.
In June 1998, the Company's previously wholly-owned subsidiary,
firstsource.com, commenced operations to sell information technology products
to the small and medium sized businesses and the consumer markets via the
internet. In July 1999, firstsource.com raised gross proceeds of $9.3 million
through a private placement of its common stock resulting in the Company's
ownership percentage decreasing to 71.4%.
In November 1999, the Company formed a new subsidiary, SupplyAccess,
Inc., to address the larger corporate customers' needs to find product on the
internet at the most favorable prices. SupplyAccess, Inc. is designed as an
internet portal charging transaction fees to the seller. The Company is
currently attempting to raise capital for this business through a private
placement of SupplyAccess, Inc.'s capital stock. As of September 30, 1999,
SupplyAccess, Inc. had not yet commenced operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly and majority-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
ACCOUNTING FOR SALES OF STOCK BY A SUBSIDIARY
The Company accounts for sales of stock by its subsidiaries in
accordance with Statement of Accounting Bulletins (SAB) Nos. 51 and 84. Sale
of stock by firstsource.com has been accounted for as a capital transaction
in the consolidated financial statements of the Company. During the fourth
fiscal quarter ended September 30, 1999, firstsource.com, a previously wholly
owned subsidiary, raised gross proceeds of $9.3 million through a private
placement in which it sold approximately 2,660,000 shares of its common stock
at $3.50 per share resulting in the Company's ownership decreasing form 100%
to 71.4%.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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
reporting period. The significant estimates in the preparation of the
consolidated financial statements relate to the assessment of the carrying value
of accounts receivable, including vendor purchase rebates and volume purchasing
incentives, and inventories. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product revenues are recognized upon shipment and satisfaction of
significant vendor obligations, if any. Service revenues are recognized based on
contracted hourly rates, as services are rendered, or upon completion of
specified contracted services. Net sales consist of product and service
revenues, less discounts and estimated allowances for sales returns. Cost of
sales include the cost of product and services sold and current and estimated
allowances for product returns that will not be accepted by the Company's
suppliers, less estimated volume purchase incentives and other
F-7
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase rebates received by the Company from its vendors. At September 30,
1999 and 1998, the allowance for returns and price protection was
approximately $649,000 and $784,000 respectively.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
time deposits and highly liquid investments with original maturities of three
months or less to be cash equivalents. The Company has bank balances, including
cash equivalents, which at times may exceed federally insured limits.
RESTRICTED CASH
Restricted cash at September 30, 1999 represents deposits maintained
for certain government tax agencies and at September 30, 1998 primarily
represented unexpended equipment loan proceeds.
INVENTORIES
Inventories consist principally of merchandise being configured for
customer orders and merchandise paid for by the Company but not yet shipped by
its vendors to the Company's customers, and are stated at the lower of cost
(specific identification method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of three to seven years. Leasehold improvements are amortized over
the lessor of the remaining lease term or their estimated useful lives. Upon
sale, any gain or loss is included in the statement of operations. Maintenance
and minor replacements are charged to operations as incurred.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. During the
year ended September 30, 1998, interest of approximately $354,000 was
capitalized. No interest was capitalized in fiscal years 1999 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, restricted cash, accounts receivable and payable, accrued and other
current liabilities and current maturities of long-term debt approximate fair
value due to their short maturity. The carrying amount of long-term liabilities
and debt also approximates fair value.
LONG-LIVED ASSETS
The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
non-discounted future operating cash flows derived from such assets are less
than their carrying value. During 1999, the Company recorded an impairment
charge of $6.2 million for its Ontario facility (see Note 7) which is included
in non-recurring charges in the consolidated statement of operations. No
impairment losses were recorded in fiscal years 1998 and 1997.
F-8
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING
The Company reports the costs of all advertising in the periods in
which those costs are incurred. For the year ended September 30, 1999,
advertising expense was approximately $1,955,000. During the years ended
September 30, 1998 and 1997, advertising was not a significant item of expense
for the Company.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws which will be
in effect when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense represents the tax payable for the period and
the change during the period in deferred tax assets and liabilities.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash deposits
and trade accounts receivable. The Company's cash deposits are placed with
various financial institutions; at times such balances with any one financial
institution may be in excess of the FDIC insurance limits.
For the years ended September 30, 1999, 1998 and 1997, one of the
Company's customers accounted for approximately 19%, 21% and 30% of net sales,
respectively. At September 30, 1999 and 1998 that customer accounted for 18% and
21% of accounts receivable, respectively. No other customer accounted for 10% or
more of net sales.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. Estimated credit
losses and returns, if any, have been provided for in the financial statements
and have, to date, generally been within management's expectations.
STOCK BASED EMPLOYEE COMPENSATION AWARDS
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for the Awards for Stock-Based Compensation." Under APB 25,
compensation expense is recognized over the vesting period based on the
difference, if any, on the date of grant between the deemed fair value of the
Company's stock for accounting purposes and the exercise price. The Company
accounts for stock issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force 96-18.
VENDOR PROGRAMS
The Company receives volume incentives and purchase rebates from
certain manufacturers related to sales of certain products, which are recorded
as a reduction of cost of goods sold when
F-9
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earned. The Company also receives manufacturer reimbursement for certain
training, promotional and marketing activities that offset the expenses incurred
by the Company.
EARNINGS PER SHARE
Basic net (loss) income per share is computed by dividing the net
(loss) income for the period by the weighted average number of common shares
outstanding during the period. Diluted net (loss) income per share is computed
by dividing the net (loss) income for the period by the weighted average number
of common shares and common share equivalents outstanding during the period.
Common share equivalents, consisting of stock options and warrants, are not
included in the calculation to the extent they are antidilutive.
COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted the provisions
of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in financial statements. SFAS No. 130 requires that all items that are required
to be reported under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company does not have any components of
comprehensive income for fiscal years ended September 30, 1999, 1998 and 1997.
SEGMENT REPORTING
In the first quarter of 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 supercedes No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 15,
"Segment Information".
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. The Company does not expect the adoption of SOP No.
98-5 to have a material impact on the Company's financial position, results
of operations or cash flows. The Company wil be required to implement SOP
No. 98-5 in the first quarter of fiscal 2000.
In June 1998, The Financial Accounting Standards Board issued SFAS
No. 1333 "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.
F-10
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
September 30,
---------------------
1999 1998
---------- --------
Land................................................$ 1,264 $ 1,264
Building............................................ 3,459 7,861
Warehouse equipment................................. 328 906
Computer equipment and software..................... 12,174 8,168
Office equipment and other.......................... 1,569 1,341
Leasehold improvements ............................. 420 381
---------- --------
19,214 19,921
Less: Accumulated depreciation and amortization .... (6,100) (3,808)
---------- --------
$ 13,114 $ 16,113
---------- --------
---------- --------
Depreciation expense was $2,296,000, $1,706,000, and $248,000, for
the years ended September 30, 1999, 1998, and 1997, respectively.
3 LINES OF CREDIT
At September 30, 1999 and 1998, the Company had outstanding borrowings
of $62,289,000 and $79,598,000, respectively, under lines of credit with various
financial institutions.
The line of credit agreements provide for total financing of up to $121
million and $105 million at September 30, 1999 and 1998, respectively, at annual
interest rates of prime less .25% for both periods. Total borrowings under the
line of credit agreements are collateralized by eligible accounts receivable (as
defined in the agreements) and substantially all of the Company's assets.
Borrowings are limited to specific percentages of the Company's accounts
receivable and inventory balances. The line of credit agreements contain various
covenants, which provide, among other things, a restriction on dividend payments
and the requirement for the maintenance of certain financial ratios. At
September 30, 1999 the Company has obtained a waiver on non-compliance with a
covenant relating to minimum percentage of net income to sales. The prime rate
of interest was 8.25%, and 8.50% at September 30, 1999 and 1998, respectively,
and the weighted average interest rates for the years ended September 30, 1999,
1998 and 1997 were 7.63%, 8.25%, and 8.17%, respectively.
The principal line of credit agreement for $80 million expires on April
13, 2000, if not renewed.
F-11
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 NOTES PAYABLE
Notes payable consist of the following (in thousands):
September 30,
-------------------------------------
1999 1998
---------------- ----------------
Note payable, collateralized by deed of trust on property
interest at prime plus .25% per annum, payable in monthly
installments of $40, due in full on October 31, 2007 ....... $ -- $ 3,587
Note payable, collateralized by certain equipment, interest
at 8.15% per annum, payable in monthly installments of $39,
due in full on April 30, 2005 .............................. -- 2,388
Note payable, collateralized by certain equipment, interest
at 5.25% per annum, payable in monthly installments of
$14, due in full on April 30, 2005 ......................... -- 950
Note payable, interest at 1.9% per annum payable in
monthly installments of $1, due in full on
December 31, 2000 .......................................... 10 17
Note payable under legal settlement, non interest bearing
payable in monthly installments of $7, due in full on
April 9, 2001, includes discount to present value at
6.40% interest per annum ................................... 135 214
Installment note payable, collateralized by equipment, at
8.76% interest per annum, payable in 36 monthly install-
ments of $13 ............................................... 100 236
Installment now payable, collateralized by equipment, at
8.50% interest per annum, payable in monthly install-
ments of $8 ................................................ 173 --
---------------- ----------------
418 7,392
Less, current portion .......................................... (278) (790)
---------------- ----------------
$ 140 $ 6,602
---------------- ----------------
---------------- ----------------
Maturities of long term debt as of September 30, 1999 are as follows (in
thousands):
2000 ........................................................... $ 278
2001 ........................................................... 140
----------------
$ 418
----------------
----------------
In conjunction with the sale/leaseback of its Ontario facility (See
Note 7), the Company repaid in full the notes payable previously due in 2005 and
2007.
F-12
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 NON-RECURRING CHARGES
The results of operations for the year ended September 30, 1999
included non-recurring charges of $7,917,000. The charges consist of a provision
for litigation of $1,725,000 related to an adverse judgement received on a legal
matter (see Note 14), and an impairment loss of $6,192,000 related to the
Company's Ontario facility (See Note 7).
6 GAIN ON SALE OF INVESTMENT
The gain on sale of investment resulted from the sale of shares held by
the Company in Shopping.com. Net proceeds received were $4,990,000 on an
adjusted carrying value of the shares of $562,000.
7 SALE-LEASEBACK OF ONTARIO FACILITY
On June 24 1999 the Company entered into a sale-leaseback arrangement.
Under the arrangement, the Company sold its Ontario facility for $5.5 million
and leased it back under a triple net lease term of 15 years. The base rent is
$544,000 the first year with 3% increases in each of the following 15 years. The
terms of the lease permit the Company to terminate the lease, at no cost nor
penalty, at the end of the seventh and tenth year.
The Company currently occupies approximately 55% of the facility and
originally planned to sublease the remaining space. However, under SFAS No. 98
"Accounting for Leases", subleasing space in excess of 10% is considered
retaining a financial interest in the property and requires that the property
remain on the financial statements. The balance sheet therefore reflects the
property at its estimated fair value ($5.4 million) and related liability until
the lease qualifies as a "normal leaseback" under SFAS No. 98. Management is
attempting to restructure the lease so that the Company no longer has a
financial interest in the property, but there can be no assurance that the
restructuring will be successful.
The lease is being accounted for under SFAS No. 98, as a financing
lease. The aggregate non-cancellable and annual future minimum lease payments
for the term up to which the Company may terminate the lease for the Ontario
facility are as follows (in thousands):
2000 ...................................................$ 544
2001 ................................................... 561
2002 ................................................... 577
2003 ................................................... 595
2004 ................................................... 613
2005 through 2006 ...................................... 1,281
-----------
$ 4,171
-----------
-----------
F-13
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the three months ended March 31, 1999, the Company, in
accordance with SFAS No. 121, recognized a charge for impairment relating to the
Ontario facility of approximately $6.2 million. The $6.2 million impairment loss
was based on a $5.5 million estimated sale price less $11.1 million of carrying
costs, less estimated selling expenses of $0.2 million, less capitalized
interest and loan fees of $0.4 million. Approximately 73% of the impairment loss
related to the property decline related to the special purpose improvements,
with the balance applicable to personal property, including warehouse and
computer equipment.
For the year ended September 30, 1999, Ontario facility rent expense,
which is characterized as interest expense under SFAS No. 98, was $148,000.
8 EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan (the "401(k) Plan") that
covers substantially all full-time employees who are twenty-one years of age or
older. Company contributions to the 401(k) Plan are at the discretion of the
Board of Directors and vest over seven years of service. To date the Company has
made no contributions to the 401(k) Plan.
9 INCOME TAXES
The components of the income tax (benefit) provision are as follows (in
thousands):
Year Ended September 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Current:
Federal ..................... $ (1,240) $ 1,139 $ 3,202
State ....................... 48 299 896
---------- --------- ---------
(1,192) 1,438 4,098
---------- --------- ---------
Deferred:
Federal ..................... (53) 37 (123)
State ....................... 31 13 (14)
---------- --------- ---------
(22) 50 (137)
---------- --------- ---------
$ (1,214) $ 1,488 $ 3,961
---------- --------- ---------
---------- --------- ---------
F-14
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The (benefit) provision for income taxes differs from the amount
computed by applying the federal statutory rate to (loss) income before
(benefit) provision for income taxes as follows:
Year Ended September 30,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
Federal statutory rate ................ (34)% 34% 34%
State taxes, net of federal benefits .. 1 5 6
Non-deductible expenses ............... 19 1 --
Losses providing no tax benefits ...... 14 -- --
Minority Interest ..................... (7) -- --
------------ ------------ -----------
(7)% 40% 40%
------------ ------------ -----------
------------ ------------ -----------
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
are as follows (in thousands).
September 30,
---------------------------------------
1999 1998
------------------ ----------------
Deferred tax assets:
Accounts receivable and allowance for returns .... $ 1,187 $ 556
Expenses not currently deductible ................ 468 605
State income taxes ............................... -- 63
------------------ ----------------
1,655 1,224
------------------ ----------------
Deferred tax liabilities:
Discount on receivables............................. (957) (1,113)
Depreciation........................................ (817) (252)
------------------ ----------------
(1,774) (1,365)
------------------ ----------------
Net deferred tax liability $ (119) $ (141)
------------------ ----------------
------------------ ----------------
All subsidiaries were previously included in the filing of a
consolidated federal tax return. Effective July 28, 1999, because of a
reduction in the ownership percentage of firstsource.com, the Company can no
longer include firstsource.com in its consolidated income tax filings. As a
result of loss limitations and due to the deconsolidation, tax benefits of
$1.4 million representing operating losses of firstsource.com recognized in
prior fiscal quarters, were recaptured in the fourth fiscal quarter of 1999.
In addition, for the period from July 28, 1999 through September 30, 1999, no
tax benefit has been recognized for the operating loss of approximately $1.1
million generated by firstsource.com during that period. The firstsource.com
net operating loss may be carried forward twenty years to September 30, 2019.
F-15
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and various office equipment.
These leases extend over a period of up to five years, many of which contain
renewal options and/or escalation clauses. These are accounted for as operating
leases.
Estimated future minimum lease payments under operating leases
having initial or remaining non-cancelable lease terms in excess of one year at
September 30, 1999 were approximately as follows (in thousands):
2000 ...................................... $ 1,885
2001 ...................................... 1,455
2002 ...................................... 809
2003 ...................................... 361
2004 ...................................... 105
--------------
$ 4,615
--------------
--------------
Rent expense for the years ended September 30, 1999, 1998, and 1997
under all operating leases was approximately $2,296,000, $1,419,000 and
$1,665,000 respectively.
The Company has entered into employment contracts with certain of its
officers. The agreements provide for annual base salary with bonuses at the
discretion of the Board of Directors. In addition, agreements with two officers
provide for bonuses of 3 1/2% and 2 1/2% of pre-tax profit, provided certain
minimum pre-tax profit levels are obtained. The agreements have three to five
year terms ending at various times through fiscal 2001 and provide for
guaranteed severance payments upon termination of employment other than for
cause.
F-16
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
(loss) income per share (in thousands, except per share amounts):
Year Ended September 30,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
Net (loss) income ................................ $ 16,594 $ 2,232 $ 5,831
---------- ---------- ----------
---------- ---------- ----------
Denominator:
Weighted-average shares outstanding ........... 5,942 5,875 5,681
Effect of dilutive securities:
Dilutive potential of options and warrants . -- 196 130
---------- ---------- ----------
Weighted-average shares and share equivalents
outstanding ................................ 5,942 6,071 5,811
---------- ---------- ----------
---------- ---------- ----------
Basic (loss) income per share .................... $ (2.79) $ 0.38 $ 1.03
---------- ---------- ----------
---------- ---------- ----------
Diluted (loss) income per share .................. $ (2.79) $ 0.37 $ 1.00
---------- ---------- ----------
---------- ---------- ----------
The dilutive potential of stock options and warrants has been
excluded from the calculation of diluted loss per share in 1999 because the
effect of their inclusion would have been anti-dilutive.
12 STOCK OPTIONS AND WARRANTS
In March 1996, the Company instituted a qualified (Incentive Stock
Option Plan) and non-qualified stock option plan which provides currently that
options for a maximum of 1,260,000 shares of common stock may be granted to
directors, officers, and key employees with an exercise period not to exceed ten
years. The stock options are generally exercisable at fair market value at the
date of grant and generally vest on a pro-rata basis ending on the third, ninth
and twenty-seventh months following the grant date or 25% in six months with the
remaining 75% vesting quarterly over three and one half years. In addition to
the above plan, on September 2, 1997, the Company issued options to the
Company's then president in connection with her employment agreement, under
terms similar to that of the Company's Incentive Stock Option Plan, to purchase
275,000 shares at $14.38 per share, which was the market value of the common
stock on the grant date. None of the options issued to the former president were
ever exercised and upon termination with the Company, all of the options were
cancelled. As of September 30, 1999 and 1998, the shares available for grant
under the plan were 141,718 and 150,245, respectively.
F-17
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option activity:
Total
Exercise
Non Value Price Range
Incentive Incentive (In Thousands) Per Share
----------- ----------- --------------- --------------
Outstanding at September 30, 1996 190,000 95,500 $ 1,996 $ 6.40-$8.00
Granted ..................................... 10,000 532,600 6,622 $9.50-$22.87
Exercised ................................... (32,998) (43,398) (574) $ 6.40-$9.5O
Cancelled ................................... (13,334) (10,998) (187) $ 7.20-$9.50
----------- ----------- --------------- --------------
Outstanding at September 30, 1997 153,668 573,704 7,857 $6.40-$22.87
Granted .................................... 10,000 417,800 3,478 $6.50-$11.62
Exercised .................................. -- (17,136) (154) S 8.00-$9.50
Cancelled................................... (10,000) (33,781) (461) $6.40-$22.87
----------- ----------- --------------- --------------
Outstanding at September 30, 1998 153,668 940,587 10,720 $6.40-$14.38
Granted .................................... 10,000 334,000 2,062 $ 5.05-$6.31
Exercised .................................. (87,167) (41,775) (916) $ 6.40-$9.50
Cancelled .................................. -- (413,505) (5,125) $6.31-$14.38
----------- ----------- --------------- --------------
Outstanding at September 30, 1999 76,501 819,307 $ 6,741 $5.05-$10.45
----------- ----------- --------------- --------------
----------- ----------- --------------- --------------
Weighted Remaining
Options Average Contractual
Exercisable Exercise Price Life
--------------- --------------------- ------------
September 30, 1997 ............................... 289,523 $ 8.94 7.33
September 30, 1998 ............................... 392,427 $ 8.69 7.72
September 30, 1999 ............................... 499,549 $ 8.09 8.03
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------------
Number Weighted- Number
Outstanding at Average Weighted- Exercisable at Weighted-
Range of Exercise September 30, Remaining Average September 30, Average
Prices 1999 Life Exercise Price 1999 Exercise Price
-------------- ---------- --------------- -------------- ---------------
$4.62-$5.05............................ 73,333 9.2 $4.84 27,958 $4.84
$6.31-$6.50 ........................... 312,418 8.2 $6.33 130,189 $6.33
$7.51-$8.70 ........................... 295,192 8.2 $7.85 132,648 $7.85
$9.00-$10.45........................... 214,865 7.7 $9.73 208,754 $9.73
At September 30, 1999 warrants to purchase 73,100 shares of the
Company's common stock were also outstanding. Of the total warrants outstanding,
23,100 were issued by the Company to the underwriter of the initial public
offering, and are exercisable at any time through May 7, 2001 at an exercise
price of $9.60 per share. The remaining 50,000 warrants were issued for services
and are exercisable any time after December 1999 over a five year life at an
exercise price of $5 per share.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." If compensation expense for the stock
options had been determined using "fair value" at the grant date for awards in
1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and net (loss) income per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
F-18
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended September 30,
---------------------------------
1999 1998 1997
----------- ----------- -------
Net (loss) income as reported ....................... $ (16,594) $ 2,232 $ 5,831
Net (loss) income pro forma ......................... $ (18,089) $ 714 $ 4,930
Basic (loss) earnings per share as reported ......... $ (2.79) $ 0.38 $ 1.03
Diluted (loss) income per share as reported ......... $ (2.79) $ 0.37 $ 1.00
Basic (loss) income per share pro forma ............. $ (3.04) $ 0.12 $ 0.87
Diluted (loss) income per share pro forma ........... $ (3.04) $ 0.12 $ 0.85
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997:
Expected Risk Free
Dividend Expected Interest Expected
Yield Volatility Rate Lives
-------- ---------- --------- --------
Year ended September 30, 1997 ............ 0% 67% 6.16% 2.5
Year ended September 30, 1998 ............ 0% 68% 5.66% 5.0
Year ended September 30, 1999 ............ 0% 75% 5.12% 5.0
In May 1999, firstsource.com, a subsidiary of the Company, 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
firstsource.com and its parent, En Pointe Technologies, Inc. Options vest, as
determined by firstsource.com's Board of Directors, and are exercisable for a
period no longer than ten years from the date of grant.
During 1999 and as of September 30, 1999, firstsource.com issued
options to purchase 4,196,500 shares of its common stock at exercise prices of
$0.13 to $7.00 per share. Of those options granted, options to purchase
3,233,061 shares of common stock were exercisable at September 30, 1999.
In connection with the stock options granted by firstsource.com, the
Company recorded unearned deferred compensation of $11,801,000. In September
1999 firstsource.com modified the vesting schedule of stock options
outstanding to accelerate vesting. During the fiscal year ended September 30,
1999 $10,315,000 was expensed, of which approximately $9,600,000 was due to
the accelerated vesting.
13 EMPLOYEE STOCK PLAN
The Company also has an Employee Stock Purchase Plan (the "Plan")
under which there remains authorized and available for sale to employees an
aggregate of 208,666 shares of the Company's common stock at September
30, 1999. The Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, permits eligible employees to purchase common stock,
subject to certain limitations, up to 20% of their compensation. Purchases of
stock under the Plan are made twice annually from amounts withheld from
payroll at 85% of the lower of the fair market value of the common stock at
the beginning or end of the six month offering period.
F-19
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 LITIGATION
The Company was named, along with CEO, Bob Din, as a defendant in a
lawsuit filed on April 29, 1997 in Los Angeles County (California) Superior
Court as Case No. BC 170234, captioned Novaquest Infosystems, et al v. En
Pointe Technologies, Inc. et al. The lawsuit alleged that the Company
knowingly accepted trade secret information and interfered with the
plaintiffs' prospective economic advantage in tort, and that these actions
also constituted breach of a prior contract. Plaintiffs' trade secret claim
was dropped on the eve of trial. The remaining claims were tried to a jury.
On March 23, 1999, the jury arrived at verdicts awarding $50,000 for
the breach of contract claim and $375,000 for the intentional interference
with plaintiffs' prospective economic advantage tort claim. On April 2, 1999,
the jury arrived at a verdict awarding $1,000,000 in punitive damages on the
tort claim. After various post-trial motions, Judgement on the above verdicts
was entered on June 15, 1999.
Because plaintiffs prevailed on their contract claim, they were
entitled to seek the court (not a jury) to award them their "reasonable
attorney's fees" incurred in enforcing that contract and receiving a verdict
of $50,000 on the contract. Plaintiffs are not entitled to attorney's fees
incurred in enforcing their tort claim or in obtaining the punitive damages
award.
Plaintiffs are entitled to seek recovery of the "costs" (as defined
in California Code of Civil Procedure Section 1033.5; e.g. filing fees,
deposition costs, etc.) on claims on which they prevailed. After the
judgment was entered on June 15, 1999, plaintiffs, on June 29, 1999, served
their request for the court to award them approximately $100,000 in "costs"
and approximately $1,800,000 in attorney's fees, to which the Company has
timely objected. Because one of the factors required to be considered by the
court in awarding reasonable attorney's fees is the amount of the recovery,
the Company does not believe that a judge would find reasonable the expending
of $1,800,000 to recover $50,000. On December 10, 1999, the court took under
submission Plaintiff's above claim for costs and attorney's fees, and set a
return hearing date of January 21, 2000.
During the quarter ended March 31, 1999, the Company recorded a
reserve for litigation expense of $1,725,000, which included $50,000 for
contract damages, $375,000 for tort damages, $1,000,000 for punitive damages
and $300,000 as an estimate of costs and attorneys' fees which might be
awarded to plaintiffs.
The Company believes that the accrual made at March 31, 1999 remains
a reasonable estimate for the loss incurred with respect to this matter.
The Company was named as a defendant in a lawsuit filed on August 4,
1998 in the 151st Judicial District Court of Harris County, Texas (Case No.
98-36715). The case name is Allstar Systems, Inc. v. En Pointe Technologies,
Inc., et al., and the complaint alleges that the Company, along with an
individual defendant who was a former employee of the plaintiff, conspired to
steal Allstar's customers, employees and trade secrets. The Company is
currently unable to estimate the loss in the event of an unfavorable outcome.
The Company was named as a defendant in two lawsuits filed in Santa
Clara County Superior Court (Case Nos. CV773074 AND CV774589). The two cases
are virtually identical and have been consolidated (pursuant to stipulation)
for all purposes other than trial. The cases involve three plaintiffs who
were former employees for En Pointe, and all three are alleging fraud in the
inducement, breach of contract (failure to set performance standards and then
termination for poor performance), and unpaid wages (in the form of
commissions). In addition, all three plaintiffs are
F-20
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pursuing several claims under Business & Professions Code Section 17200 on
behalf of the general public. In these regards, the Complaints seek equitable
relief only. The Company is currently unable to estimate the loss in the event
of an unfavorable outcome.
In April 1996 the Company, Bob Din and Naureen Din entered into a
settlement agreement with a former employee of the Company, pursuant to which
the former employee has released the Company and Bob Din and Naureen Din from
any and all claims with respect to the Company's use of certain computerized
information system software originally developed by the former employee prior to
his employment with the Company (the "Settlement Agreement"). As consideration
for entering into the Settlement Agreement, the Company agreed to pay the former
employee payments totaling $1,225,000. The remaining unpaid balance as of
September 30, 1999 and 1998 was $135,000 and $214,000, respectively.
The Company filed suit against its insurance carrier in order to recoup
both legal costs incurred by the Company in connection with its defense of the
foregoing litigation as well as for amounts paid to the former employee pursuant
to the settlement. In August 1996 the insurance company settled with the Company
paying the full amount of the original settlement.
The Company is also subject to other legal proceedings and claims
that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, after consulting
with counsel, management, after consulting with counsel, 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.
15 SEGMENT INFORMATION
The Company consists primarily of two business units (companies), En
Pointe Technologies and 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 medium
sized businesses.
The accounting policies of the segments are the same as those described
in "Organization and Summary of Significant Accounting Policies" included in
this report on Form 10-K for the year ended September 30, 1999. The Company
evaluates the performances (Segment Profit) of its segments and allocates
resources to them based on earnings after income taxes.
F-21
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present information about reported segments for the
years ended September 30, 1999 and 1998. There was only one business segment in
1997, as firstsource.com did not commence operations until June 1998.
En Pointe
Technologies, Inc. firstsource.com Total
------------------ --------------- ---------
YEAR ENDED SEPTEMBER 30, 1999 (IN THOUSANDS):
Net sales ................................... $ 638,270 $ 30,000 $ 668,270
Gross profit ................................ $ 51,633 S 2,073 $ 53,706
Other income ................................ $ 46 $ 71 $ 117
Interest expense ............................ $ 2,914 $ 258 $ 3,172
Depreciation and amortization ............... $ 2,142 $ 305 $ 2,447
Other noncash items ......................... $ 3,789 $ 10,668 $ 14,457
Gain on sale of investment .................. $ 4,428 $ -- $ 4,428
Nonrecurring charges ........................ $ 7,917 $ -- $ 7,917
Income tax benefit .......................... $ 1,214 $ -- $ 1,214
Segment (loss) profit ....................... $ (2,930) $ (13,664) $ (16,594)
Segment assets .............................. $ 122,777 $ 10,832 $ 133,609
Additions to long-lived assets .............. $ 4,640 $ 801 $ 4,936
En Pointe
Technologies, Inc. firstsource.com Total
------------------ --------------- ---------
YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS):
Net sales .................................. $ 562,395 $ 5,344 $ 567,739
Gross profit ............................... $ 52,847 $ 724 $ 53,571
Other income ............................... $ 236 $ 1 $ 237
Interest expense ........................... $ 2,113 $ 53 $ 2,166
Depreciation and amortization .............. $ 1,682 $ 46 $ 1,728
Income tax provision (benefit).............. $ 1,522 $ (74) $ 1,448
Segment (loss) profit ...................... $ 2,467 $ (235) $ 2,232
Segment assets ............................. $ 128,987 $ 3,580 $ 132,567
Additions to long-lived assets ............. $ 10,525 $ 46 $ 10,571
The Company operates in only one geographic segment.
F-22
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in the fiscal
years ended September 30, 1999 and 1998 is presented below (in thousands, except
per share amounts):
Fiscal 1999 Quarter Ended
-------------------------------------------------------------
December March June September
-------------- -------------- ------------- ------------
Net sales ............................... $ 170,607 $ 144,918 $ 182,938 $ 169,807
Gross profit ............................ 13,382 11,040 13,724 15,560
Net (loss) .............................. (87) (4,536) (936) (11,035)
Diluted net (loss) per share ............ (0.01) (0.76) (0.16) (1.85)
Fiscal 1998 Quarter Ended
-------------------------------------------------------------
December March June September
-------------- -------------- ------------- ------------
Net sales ............................... $ 130,189 $ 135,303 $ 143,811 $ 158,436
Gross profit ............................ 13,391 12,793 13,553 13,834
Net income .............................. 1,139 209 720 164
Diluted net income per share ............ 0.18 0.04 0.12 0.03
F-23
SCHEDULE II
EN POINTE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance At Charged to Balance At
Beginning of Cost and End of
Period Expenses Deductions Period
------------- -------------- ------------- --------------
YEAR ENDED SEPTEMBER 30, 1999 (IN THOUSANDS):
Allowance for doubtful accounts .......... $ 1,191 $ 944 $ (493) $ 1,642
Allowance for returns .................... $ 489 $ 78 $ -- $ 567
Allowance for price protection ........... $ 295 $ -- $ (213) $ 82
Allowance for inventory valuation ........ $ 100 $ 323 $ -- $ 423
------------- -------------- ------------- --------------
$ 2,075 $ 1,345 $ (706) $ 2,714
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS):
Allowance for doubtful accounts ......... $ 862 $ 329 $ -- $ 1,191
Allowance for returns ................... $ 300 $ 189 $ -- $ 489
Allowance for price protection .......... $ 115 $ 18O $ -- $ 295
Allowance for inventory valuation ....... $ -- $ 100 $ -- $ 100
------------ -------------- ------------- --------------
$ 1,277 $ 798 $ -- $ 2,075
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS):
Allowance for doubtful accounts ......... $ 515 $ 488 $ (141) $ 862
Allowance for returns ................... $ 387 $ 27 $ (114) $ 300
Allowance for price protection .......... $ -- $ 115 $ -- $ 115
------------- -------------- ------------- --------------
$ 902 $ 630 $ (255) $ 1,277
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
F-24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
EN POINTE TECHNOLOGIES, INC.
BY: /S/ BOB DIN
--------------------------------------
Attiazaz "Bob" Din,
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
Dated: January 12, 2000
F-25
POWER OF ATTORNEY
We, the undersigned directors and officers of En Pointe
Technologies, Inc. do hereby constitute and appoint Attiazaz "Bob" Din and Javed
Latif, or either of them, with full power of substitution and resubstitution,
our true and lawful attorneys and agents, to do any and all acts and things in
our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, or their substitutes,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
- --------------------------------------------------------- -------------------
By /s/ ATTIAZAZ "BOB" DIN January 12, 2000
--------------------------------------------
Attiazaz "Bob" Din
Chairman of the Board, Chief Executive Officer and
Director (Principal Executive Officer)
By /s/ JAVED LATIF January 12, 2000
--------------------------------------------
Javed Latif
Chief Financial Officer (Principal Financial and
Principal Accounting Officer)
By /s/ NAUREEN DIN January 12, 2000
--------------------------------------------
Naureen Din,
Director
By /s/ ZUBAIR AHMED January 12, 2000
--------------------------------------------
Zubair Ahmed,
Director
By /s/ MARK BRIGGS January 12, 2000
--------------------------------------------
Mark Briggs
Director
By /s/ VERDELL GARROUTTE January 12, 2000
--------------------------------------------
Verdell Garroutte,
Director
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.18 Ontario Lease
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule