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, 2000
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 Identification No.)
of
incorporation or organization)
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
December 29, 2000, was approximately $14,199,931.
The number of outstanding shares of the Registrant's Common Stock as of
December 29, 2000 was 6,567,380.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF
STOCKHOLDERS (TO BE FILED WITH THE COMMISSION ON OR BEFORE JANUARY 28, 2001):
PART III, ITEMS 10-13.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EN POINTE TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 21
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 23
ITEM 6. SELECTED FINANCIAL DATA..................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES................................... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 35
ITEM 11. EXECUTIVE COMPENSATION...................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 36
CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
SIGNATURES
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER, AND
DIRECTORS...................................................
PART I
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., En Pointe Technologies Ventures, 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 corp-TM-. are trademarks of the Company.
ITEM 1. BUSINESS
En Pointe Technologies, Inc. ("En Pointe" or the "Company"), originally
incorporated in Texas on January 25, 1993 was reincorporated in Delaware on
February 6, 1996. En Pointe is a national provider of information technology
products and value-added services to large and medium sized companies and
government entities. The Company uses proprietary and non-proprietary software
and systems to drop-ship materials, repair and operation (MRO) products to its
customers through an electronically linked network of the largest allied
distributors in the United States. This software allows En Pointe to serve as an
electronic clearinghouse of computers and computer related products without many
of the risks and costs associated with maintaining inventory. In addition to
seeking efficiencies and growth in its traditional large-enterprise focused core
business, En Pointe continues to devote resources to the development of its
professional services infrastructure. En Pointe is represented in more than 20
sales and service markets throughout the United States, and maintains a
value-added ISO 9002 certified integration facility in Ontario, California.
En Pointe provides its customers with cost effective electronic commerce
tools that help them to maximize their purchasing power when searching for and
acquiring computer equipment and related technology products. One of the
Company's available tools, AccessPointe-TM-, is a uniquely powerful and flexible
Internet procurement system that is electronically linked to the extensive
warehousing, purchasing and distribution functions of the allied national
distributors of information technology products. AccessPointe-TM- provides
ease-of-use, real-time accuracy, and the power to control the purchasing
process, from paperless requisition creation to line-item detail delivery
tracking. These links directly to the distributors, enhance the Company's
capacity to continue to provide customers automated direct access to an
extensive range of products at competitive prices.
During the Company's first fiscal quarter of 2000, En Pointe founded
SupplyAccess, Inc. ("SupplyAccess"), a provider of e-procurement solutions,
private-labeled sell-side applications, and networked market exchanges for
global corporations, government and entities. SupplyAccess's flexible
1
hosted/ASP model facilitates business-to-business direct procurement of a broad
line of information technology (IT) and materials, repair and operation (MRO)
products and services, as well as a carefully targeted set of vertical market
exchanges, for example, maintenance parts and services for the aviation
industry. The Company has created a powerful e-procurement tool, tied to an
online network of e-enabled suppliers and marketplaces serving the domestic and
international procurement needs of some the largest companies, government
agencies, and educational institutions in the United States
SupplyAccess is located in El Segundo, California and has attracted
approximately $39 million in venture funding to date. Key investment partners
include, SAP Ventures, Peregrine Systems, En Pointe, TMCT (Times Mirror Chandler
Trust) Ventures, American Aircarriers Support, Avalon Investments and Tech Data
Corporation. With the completion of its supplemental private placement effective
April 4, 2000, because the Company's voting interest in SupplyAccess dropped
below 50% and the Company does not otherwise have control over SupplyAccess, the
Company began to account for its investment in SupplyAccess under the equity
method of accounting, (see Note 1 to the Consolidated Financial Statements).
INDUSTRY OVERVIEW
The markets for information technology products and services are expected to
continue to experience significant growth over the next few years. According to
Gartner DataQuest Inc. ("DataQuest"), a leading industry market research firm,
the United States market for personal computers is expected to increase from
$64 billion in 1999 to $89 billion in 2002, a compound annual growth rate of
15%. According to Raymond James, a national brokerage firm, average selling
prices (ASPs) are expected to stabilize, reversing the downward direction during
1998 and 1999. The Company believes that the leading factors driving the growth
in these markets continue to be the 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 the 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
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 continue in the marketplace resulting from manufacturers'
utilization of the information technology distribution channel and their
continued efforts to improve their cost structure. The wholesale distributor and
reseller markets continue to experience consolidation and business failures. 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
2
procure and deliver products and professional IT 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 continues to grow
more complex. Organizations must select from numerous product options that have
increasingly shorter lifecycles. Organizations are continually faced with
technology obsolescence and must design new networks, upgrade and migrate to new
systems. 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 IT support, integration and maintenance services, as well as
higher-end service offerings, such as network and asset management, consulting
and application development.
According to Gartner Dataquest, US PC sales for the Value Added Reseller
(VAR) channel will increase from 16% in 1999 to 17% in 2003 while manufacturers,
switching to a business model that establishes direct relationships with end
user customers, will increase from 34% to 42% during that same period. Most of
the share loss comes from the traditional dealer channel as well as retail and
large format footprints. This transition continues in response to the Dell
Computer Corporation ("Dell") model, 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 United States 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 offers
customers system rights to AccessPointe-TM- a proprietary WEB based application
that leverages the Company's non-proprietary software, a customized SAP-based
integrated business system linked with Microsoft Site Server. The Company's new
integrated e-commerce information-technology architecture enhances the Company's
capacity to maintain effective online communication links with its sales
representatives, selected distributors and many of its customers.
The Company continues to focus on cost drivers in its business model and
strives to maintain a low-cost overhead structure through the automation of many
of its management and operating functions. The highly sophisticated ERP system
that is in use allows En Pointe to better monitor sales, product returns,
inventories, profitability and accounts receivable at the sales representative,
sales office and customer levels. Additionally, the Company has tightly
integrated product purchasing and customer invoicing into its information
systems to expedite procurement and billing. The Company believes that
delivering the same type of information to its customers will provide added
value to the customer to
3
better evaluate their procurement processes more efficiently, thus providing a
competitive edge to En Pointe.
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 application and the Company's own
workflow applications, makes product pricing and availability data accessible to
the Company's sales representatives and a fast growing set of direct customers,
downloaded on a real time basis, from several large distributors including
Ingram Micro Inc. ("Ingram Micro"), Tech Data Corporation ("Tech Data"), Synnex
Information Technologies, Inc. ("Synnex"), Custom Edge Inc. ("Custom Edge") and
Gates Arrow (collectively the "allied distributors"). The data provided by the
Company's customized information system 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 system allows 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 system 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 system allows 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 system
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 that 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.
Another advantage of the Company's business model is the reduction of
working capital requirements achieved by leveraging its virtual inventory model
and utilizing the extensive warehousing, purchasing, distribution functions,
marketing, and IT 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. Likewise, En Pointe utilizes the infrastructure
of its allied distributors for marketing efforts with existing clients through
e-mail advertising and specialized marketing campaigns targeted at total
technology solutions.
CUSTOMIZED INTEGRATED E-COMMERCE BUSINESS SYSTEM
The development and function of the Company's information system and its
ability to provide detailed, quality information via the WEB is a crucial factor
in En Pointe's success. The back office is built around the highly scalable SAP
ERP system and, combined with the WEB front end, provides a comprehensive
e-commerce solution for clients. This information system provides access to real
time inventory and pricing information of the allied distributors to all of the
Company's sales offices, as well as certain customers. It has versatility in
application and can be installed both at the Company's sales offices as well as
at a customer's facility. This has enabled the Company's sales representatives
and
4
customers to access product pricing and availability by manufacturer, part
number or product description, and provide detailed product specifications for
most major manufacturers. Customers can 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 system can 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. The data resides in a secure and authenticated WEB site for access by
En Pointe employees and customers who are registered users.
Current system development plans for continued growth and expansion include:
- Enhanced back end integration with En Pointe's allied distributors and
customers for seamless B2B transaction processing and reporting.
- Continue to enhance business processes, to streamline and better manage
the interdependencies and communications between En Pointe's functional
departments and its strategic global business partners.
- 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 standard links for business-to-business e-procurement application
for customers migrating to industry standard platforms such as Ariba and
Commerce One to act as a complimentary IT solution provider in an
established enterprise environment.
- 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.
- Design of a cost-effective system to support existing business for
international support for US based customers and scale to the increased
number of transactions required for open-ended growth internationally.
En Pointe co-markets the SupplyAccess advanced e-commerce platform to
existing clients interested in expanding the functionality of the
AccessPointe-TM- solution to manage all indirect expenditures. The Company has a
significant equity position in SupplyAccess, Inc., the creator of En Pointe's
online procurement tool, AccessPointe-TM-. SupplyAccess continues the
maintenance and enhancement of this system and offers some of the benefits of
the system to third parties.
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 700,000 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"), Cisco Corporation ("Cisco") 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
5
Partner. Products offered by the Company include desktop and laptop computers,
monitors, servers, memory, peripherals and operating systems, IT accessories, IT
consumables and supplies, and application software. Products manufactured by
IBM, Hewlett Packard and Compaq accounted for 20%, 20% and 15%, respectively, of
the Company's net sales in fiscal 2000.
VALUE-ADDED SERVICES
The Company also provides value-added services to its customers through its
IT managed services and professional 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. The
Company provides these services through defined contracts as well as on a
time-and-materials basis. Services revenues increased from 3.4% in fiscal 1999
to 6.6% of net sales in fiscal 2000. This increase is a result of the Company's
continuing investments in this portion of its business which has resulted in the
growth of services provided to past customers as well as the continued addition
of large contracts with new customers.
The Company continues to focus on providing low cost, aggressively priced,
high quality pre and post sales support for all of our clients' IT
infrastructure needs, from the desk top to the wide area network, (WAN), and the
resulting interface to the internet. This includes the enterprise wide
implementation of the award winning Clarify help desk and service management
software, and the aggressive hiring of skilled technical resources to service
the increased demand. The Company's managed services include product
integration, configuration, installation, technical desktop support, hardware
maintenance, and network maintenance. En Pointe's professional and consulting
services currently include LAN/WAN design and integration, design and
installation of enterprise storage solutions, primarily Storage Area Networks
(SANs) and application and operating system migrations. The ability to configure
product orders for desk top and network implementations 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 is ISO 9002 certified. This certification provides the
Company with the credentials and documented process controls to deliver
sophisticated IT configurations in compliance with industry quality assurance
standards. The Company's project rollout services generally involve the
procurement of large volumes of computer and/or network equipment with standard
configurations, delivered on a specific timetable over a relatively short period
of time. Many of these projects are national in scope. 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 technicians are the key to our current and future success. To
insure our continued competitive position En Pointe personnel continuously
participate in manufacturer and 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, Compaq Authorized
Service Provider and Compaq Authorized Enterprise Reseller, IBM PSE Certified,
Premier Computer Associates Reseller, Check Point Authorized Partner, Intel
Premier Provider, Citrix Gold Reseller, Cisco Premier and Hewlett Packard
Advancenet Premier Partner.
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, En Pointe handles specialized rollouts 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; consisting of the
Company's cost plus an additional percentage negotiated with the
6
customer. Once the Company has been approved as a supplier of 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 2000:
Corning IBM CitiCorp Los Angeles County
Regus Business
Northrop Fulton County Starbucks Centers
GTE State of Washington Nortel GE Appliance
US West MCI Motorola Taco Bell
Salvation Army Stanford University Toyota Motor Novell
New York City Baylor University Abbot Labs State of Minnesota
Board of Education
A substantial portion of the Company's net sales is derived from long-term
contracts, typically of at least one to two year's duration. However, these
contracts are usually non-exclusive agreements that are terminable upon
30 day's notice by either party. Purchases by customers are made using
individual purchase orders or an automated process via AccessPointe-TM-.
For the fiscal year ended September 30, 2000, net sales under the IBM
contract accounted for approximately 12.8% of total net sales. No other customer
or contract accounted for more than 10% of the Company's net sales. The loss of
the IBM contract or a significant loss, reduction or rescheduling of orders from
any of the Company's customers could have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
SALES AND MARKETING
The Company's national sales force focuses on Fortune 500 customers as well
as the local government and education markets, while certain large commercial
and public sector accounts are maintained by specialized teams at the Company's
headquarters. En Pointe employed approximately 224 sales, marketing and related
support personnel as of September 30, 2000 in 20 markets located throughout the
United States (including its headquarters located in El Segundo, California).
All of En Pointe's sales personnel have access to the Company's information
systems, which allows them to focus more on sales and less on administrative
tasks associated with order processing. Although the Company is highly reliant
on its various automated systems, it believes in maintaining a high level of
personal interaction with its customers to ensure their complete satisfaction
and loyalty. The Company's practice is to hire experienced industry sales
representatives. Sales representatives are compensated based on the
profitability of their sales and the subsequent management of their accounts.
En Pointe guarantees the salary of selected new sales representatives for a
limited period, after which compensation is based solely on commission. This
compensation structure has been successful for the Company, as the most
effective sales personnel enjoy a high level of compensation relative to the
industry average.
As of the September 30, 2000, En Pointe had sales representatives in San
Jose, CA; Sacramento, CA; Ontario, CA, Denver, CO; Phoenix, AZ, Louisville, KY,
New York City, NY; Austin, TX; Dallas, TX; Houston, TX; Portland, OR; Salt Lake
City, UT; Kirkland, WA; Chicago, IL; Atlanta, GA; Charlotte, NC; Minneapolis,
MN; Boston, MA; and Memphis, TN, in addition to its El Segundo-based sales
force. En Pointe is strategically positioned as a national service and sales
organization registered and qualified to do business in all 50 states. The
Company has adopted an entrepreneurial approach with respect to its sales and
marketing efforts. Local personnel are usually given a high degree of
7
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.
During its fiscal fourth quarter 2000, En Pointe began transitioning some of
its traditional brick and mortar locations to the virtual offices. Today, En
Pointe maintains 11 branch offices and 9 virtual markets. En Pointe's virtual
markets include, Austin, Boston, Chicago, Houston, Louisville, Memphis, Phoenix,
Portland and Sacramento. En Pointe will continue to evaluate the transition of
current offices to virtual as well as the expansion into other markets with the
emphasis on maintaining super branches in markets that will provide regional
support and resources for the virtual markets.
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 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 limit 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, based on
product availablitiy, 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.
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
8
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.
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. With larger
sales volume, 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 "Business--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"), Sarcom Corp. ("Sar Com"), Pomeroy, Inc.
("Pomeroy"), and CDW Computer Centers, Inc. ("CDW"). During the past year, three
of the Company's traditional major competitors have ceased operations. Inacom
absorbed Vanstar and then went out of business, MicroAge filed Chapter 11, and
GEIS sold off their 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 opens the door to speculation that manufacturers may
ultimately have to choose to display their direct-priced products to their
direct customers through an IT-centric e-procurement application with the
ability to present customer-specific bundles of mixed manufacturer standards,
through an application like AccessPointe-TM- tool. The integration of En
Pointe's AccessPointe-TM- with the SupplyAccess-TM- solution is capable of being
used as a free-standing, neutral e-procurement application using XML
integration. En Pointe's solution has the advantage of an e-procurement tool
that can be used as a pilot to act as a logical interim step for interested
customers looking for a robust e-procurement solution. Additionally, the En
Pointe solution is compatible with all ERP system's document type and can link
to the Company either via the front end web site or the back end ERP system.
This permits processing of transactions whether or not the customer or supplier
system is SAP-based, and whether or not the processing must occur in the
customer's system or the supplier's
9
system. The En Pointe e-procurement offering and the total solution is
considered a competitive advantage.
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 "Business--Industry Overview" and "--Risks Associated
with Competition."
INTELLECTUAL PROPERTY
The Company's ability to effectively compete in its market will depend
significantly on its ability to protect its intellectual property. The Company
does not have patents on any 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.
Under an agreement with an affiliate of the Company, the affiliate is an
application support provider ("ASP") for SAP, Clarify, Microsoft, Gentran, and
Vertex software as well as certain other IT service needs. As a part of that
agreement, the Company was granted a limited, non-assignable, nonexclusive
license to use the affiliate's software, which is marketed by the Company as
AccessPointe-TM-. The software is used in conjunction with the Company's
sourcing of product for customers and is considered a vital part of sales
operations. Thus, the Company is dependent upon its affiliate to continue to
support its use of the AccessPointe-TM- software, until such time as another ASP
can be located to provide an alternative solution. There can be no assurances
that the Company will continue to have access to the AccessPointe-TM- software,
nor that others may not independently develop similar or superior software nor
that others may not be granted similar rights to the software.
The Company conducts its business under the trademark and service mark "En
Pointe Technologies" as well as its logo, "AccessPointe-TM-" 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 trademarks, service marks, and trade names. See
"Business--Risks Associated With Dependence on Technology."
SEGMENT INFORMATION
See Note 14 to the Consolidated Financial Statements, "Segment Information",
for financial information regarding the Company's operating segments.
10
EMPLOYEES
As of September 30, 2000, En Pointe employed approximately 546 individuals,
including approximately 224 sales, marketing and related support personnel, 238
service and support personnel, 30 warehousing/manufacturing/test personnel and
54 employees in administration and finance. The Company believes that its
ability to recruit and retain highly skilled 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 1933 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: (I) A SIGNIFICANT PORTION OF THE COMPANY'S SALES
CONTINUING TO BE TO CERTAIN LARGE CUSTOMERS, (II) CONTINUED DEPENDENCE BY THE
COMPANY ON CERTAIN ALLIED DISTRIBUTORS, (III) CONTINUED DOWNWARD PRICING
PRESSURES IN THE INFORMATION TECHNOLOGY MARKET, (IV) THE 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.
11
RISKS ASSOCIATED WITH DEPENDENCE ON RELATIONSHIP WITH IBM AND OTHER LARGE
CUSTOMERS.
For the years ended September 30, 2000, 1999 and 1998, net sales to IBM and
certain IBM customers under the Company's current contract with IBM accounted
for approximately 14%, 19% and 21% 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, 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
Synnex accounted for 48% of the Company's aggregate purchases in fiscal 2000.
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 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.
12
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 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 and providers 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, 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
13
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 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.
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-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 seven years of successful fulfillment of large entity
customer requirements. See "Business--Intellectual Property."
14
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH LOW MARGIN BUSINESS
The Company's net sales have increased from $110.0 million in fiscal 1994
(the Company's first full year of operations) to $494.4 million in fiscal 2000,
representing a compound annual growth rate of 28.5% for the six year period,
with most of the growth occurring in the first four years. The sales growth has
not lead to improved margins and the Company's gross profit margins are low
compared to many other resellers of information technology products. In fiscal
2000, the Company's aggregate gross profit margin was 9.8%.
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 appreciably 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 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.
15
RISKS ASSOCIATED WITH DEPENDENCE ON AVAILABILITY OF CREDIT; RISKS ASSOCIATED
WITH DEPENDENCE ON ASSET BASED FINANCING
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,
2000, the Company had outstanding borrowings under its credit facilities of
$41.2 million out of a total availability under its credit facilities of
$83.0 million.
The Company has primarily funded its working capital requirements through a
$44.0 million Inventory and Working Capital Agreement (the "IBMCC Financing
Agreement") with IBM Credit Corporation ("IBMCC") and with a $39.0 million
Inventory and Working Capital Agreement (the "Finova" Agreement) with Finova
Capital Corporation ("Finova"). At September 30, 2000, the outstanding principal
balance under the IBMCC Financing Agreement was approximately $19.8 million; the
outstanding principal balance under the Finova Agreement was approximately
$21.4 million.
Finova has announced that it will discontinue the financing segment of its
business. As a part of that decision, effective December 11, 2000 the Company
was advised that the Company's $39 million line of credit from Finova will no
longer be available after 60 days. Management believes that alternative
financing is available and is actively pursuing negotiations with other asset
based lenders, although there is no assurance that they will be successful, nor
that the terms will be as favorable. In addition IBMCC, effective December 15,
2000, announced that they were reducing the available credit to the Company from
$44.0 million to $30.0 million and increasing the interest rate by two and a
quarter percent to prime plus two percent. Subsequently IBMCC, effective
January 17, 2001, agreed to increase the amount available under the working
capital financing agreement from $30 million to $35 million and extend the date
of expiration, if not renewed, from April 14, 2001 to September 30, 2001.
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. 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
16
cash flows. See "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 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
17
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 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 lenders, 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
18
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
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.
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.
19
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
"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 31% 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 "Market for Registrant's Common Equity and Related Stockholder
Matters."
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.
20
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,
which it is currently renegotiating. 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 the time the facility was planned, the Company believed
that there would be an emerging "channel assembly" market for 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 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, 2000, the Company currently leases twelve 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
Seattle, Washington....................................... June 1993
Austin, Texas............................................. May 1994
New York, New York........................................ July 1994
Denver, Colorado.......................................... August 1994
Salt Lake City, Utah...................................... May 1996
Atlanta, Georgia.......................................... April 1997
Charlotte, North Carolina................................. April 1997
Minneapolis, Minnesota.................................... July 1997
Ontario, California....................................... July 1, 1998
San Jose, California...................................... April 2000
Management believes the Company's headquarters, sales offices and
configuration facilities are adequate to support its current level of
operations.
ITEM 3. LEGAL PROCEEDINGS
In March of 1999, a jury verdict in the Los Angeles County (California)
Superior Court relating to litigation brought by Novaquest Infosystems resulted
in the Company owing a total of $1,425,000. Under the court decree, $375,000 was
awarded for intentional interference with plaintiffs' prospective economic
advantage tort claim, $50,000 was awarded for breach of contract, and
$1 million was awarded for punitive damages. In addition, in April 2000 the
court awarded the plaintiffs attorneys' fees and costs under the breach of
contract claim of approximately $1,218,000. The Company has timely objected to
the amount of the cost reimbursement allowed for attorney fees and intends to
21
appeal the court's ruling. However, the Company recorded an additional
nonrecurring charge of $1,173,000 to increase the litigation accrual during the
quarter ended March 31, 2000.
In March of 2000, an action was brought against the Company in the Orange
County Superior Court contending fraud and breach of contract arising from the
purchase by a former subsidiary of the Company of certain assets from a company
formerly known as First Source International ("FSI"). The lawsuit is filed on
behalf of creditors of a defunct corporation, Paragon Solutions, Inc, formerly
known as FSI. It is contended that FSI was unable to obtain their contingent
earn-out under the agreement because of faulty software provided by the Company.
Damages sought range between $0.8 to $3.5 million with the plaintiff seeking
punitive damages of $10 million. The Company was successful in compelling the
action to be moved to arbitration, but since November 17, 2000 when the Court of
Appeals rejected the request by the plaintiff to prohibit arbitration, no
arbitration proceedings have commenced. The Company vigorously denies the
charges and contends that full disclosure was made as to any problems with the
software and that the former subsidiary to this date has not produced net
income. Management, after consulting with legal counsel, has determined that the
potential for an adverse outcome in this litigation cannot be estimated as the
case is in its preliminary stage.
In October of 2000, the Company and one of its officers were two of several
defendants in an arbitration matter before the New York Stock Exchange, Inc.
brought on by First Union Securities, Inc. ("First Union"). First Union seeks to
recover losses it incurred against all of the defendants relating to one of its
customers who acquired a large position in the Company's stock on margin and was
unable to repay the margin loan. The Company vigorously denies the allegations
and believes the case is without merit.
In January of 2001, five of the Company's directors, one current officer,
and certain former officers along with four unrelated parties were named in a
shareholder's derivative complaint alleging that such persons improperly
benefitted from the sales of shares of the Company's common stock and seeking a
recovery by the Company of the damages it sustained as a result of such
activities (Fredrick v. Din, et al., Superior Court of California, County of Los
Angeles Case No. YC 039456). The defendants intend to vigorously defend the
allegations and believe the case is without merit.
There are various other claims and litigation proceedings in which the
Company is involved in the ordinary course of business. While the outcome of
these claims and proceedings cannot be predicted with certainty, after
consulting with legal counsel, management does not believe that the outcome of
any of these matters will have a material adverse affect on the Company's
business, financial position and results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A written consent statement authorizing an increase to the aggregate amount
of shares issuable pursuant to the Company's 1996 Stock Incentive Plan by
1,500,000 additional shares was submitted to a vote of security holders but did
not obtain the necessary approval of a majority of the holders of outstanding
shares, based on the votes tabulated on September 30, 2000. Security holders
representing 1,453,418 shares of common stock voted in favor of the increase
(out of 6,529,354 shares outstanding on September 30, 2000). Security holders
representing 741,431 shares of common stock voted against the increase with
35,710 security holders abstaining. All prior filings with the Commission are
incorporated by reference.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $.001 per share, 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 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
Second quarter............................................ 55 26 3/4
Third quarter............................................. 41 3/16 8 1/2
Fourth quarter............................................ 10 1/2 5 3/4
Fiscal 2001
First quarter (through 12/29/00).......................... $ 8 5/8 $ 2 13/16
On December 29, 2000, the closing sale price for the Common Stock on the
NASDAQ National Market was $3.125 per share. As of December 29, 2000, there were
51 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, 2000 and
1999 and for each of the years in the three year-period ended September 30, 2000
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 "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.
23
During the June quarter of 2000, the Company deconsolidated Firstsouce and
SupplyAccess (see Note 1 to the Consolidated Financial Statements).
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $494,421 $668,270 $567,739 $491,358 $345,093
Cost of sales............................. 445,865 614,564 514,168 447,276 316,165
-------- -------- -------- -------- --------
Gross profit............................ 48,556 53,706 53,571 44,082 28,928
Operating expenses:
Selling and marketing expenses.......... 45,308 37,942 34,257 22,340 15,253
General and administrative expenses..... 22,830 30,775 13,665 10,905 5,948
Non-recurring charges................... 2,717 7,917 -- -- 525
-------- -------- -------- -------- --------
Operating (loss) income............... (22,299) (22,928) 5,649 10,837 7,202
Interest expense.......................... 1,718 3,172 2,166 1,239 1,673
Gain on sale of investment................ (3,938) (4,428) -- -- --
Other income, net......................... (348) (117) (237) (194) (116)
Minority interests........................ (512) (3,747) -- -- --
-------- -------- -------- -------- --------
(Loss) Income before income taxes....... (19,218) (17,808) 3,720 9,792 5,645
(Benefit) provision for income taxes...... (535) (1,214) 1,488 3,961 2,315
Equity (income)/Losses of Affiliates...... 702
-------- -------- -------- -------- --------
Net (loss) income....................... $(19,385) $(16,594) $ 2,232 $ 5,831 $ 3,330
======== ======== ======== ======== ========
Net (loss) income per share:
Basic................................... $ (3.02) $ (2.79) $ 0.38 $ 1.03 $ 0.78
======== ======== ======== ======== ========
Diluted................................. $ (3.02) $ (2.79) $ 0.37 $ 1.00 $ 0.77
======== ======== ======== ======== ========
Weighted average shares and share
equivalents
outstanding (1):
Basic................................... 6,419 5,942 5,875 5,681 4,255
======== ======== ======== ======== ========
Diluted................................. 6,419 5,942 6,071 5,811 4,304
======== ======== ======== ======== ========
AS OF SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................. $ 22,252 $ 23,495 $ 19,831 $24,753 $18,338
Total assets................................ $101,688 $133,609 $132,567 $90,862 $64,923
Borrowings under lines of credit and current
portion of notes payable.................. $ 41,251 $ 62,567 $ 80,388 $50,890 $36,668
Long term liabilities and notes payable..... $ 5,463 $ 5,581 $ 6,602 $ 463 $ 284
Stockholders' equity........................ $ 16,507 $ 26,271 $ 31,019 $28,319 $20,875
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K.
OVERVIEW
The Company began operations in March 1993 as a reseller of information
technology products. In fiscal 1999, the Company started emphasizing value-added
services to its customers. Value-added services accounted for 6.6% of the
Company's net sales in fiscal 2000. 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 corp. ("Firstsource", formerly firstsource.com and Purchase
Pointe, Inc.), 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, a private placement reduced the Company's ownership percentage to
71.4%. Subsequent private placements in fiscal 2000 reduced the Company's
ownership further. By May 16, 2000 the voting interest percentage had decreased
to 43.5%. Because the Company's voting interest dropped below 50% effective
May 16, 2000 and the Company does not otherwise have control, the Company began
to account for its investment in Firstsource under the equity method of
accounting.
In November 1999, the Company formed a new subsidiary, SupplyAccess, Inc.
("SupplyAccess"), to address the larger corporate customers' needs to find
product via the internet at the most favorable prices. SupplyAccess was designed
as an internet portal charging transaction fees to the seller. The Company
transferred its IT department and related computer equipment and software to
SupplyAccess in exchange for a $5.5 million note receivable. No gain or loss was
recognized on the transaction. Concurrently it was agreed that SupplyAccess
would provide the Company with IT services and would allow Company customers
access to its fulfillment engine for the initial year for a flat quarterly fee
of $500,000. In subsequent years the fee would be adjusted to a variable rate.
In February 2000, SupplyAccess completed an initial private placement of
12,000,000 shares of convertible preferred stock at $1.50 a share, which reduced
the Company's voting interest to 54%. On April 4, 2000, SupplyAccess completed a
supplemental private placement of stock of 5,088,318 shares of convertible
preferred stock at $1.50 a share that reduced the Company's voting interest to
45.10%. Subsequent private placements of convertible preferred stock hare
reduced the Company's voting interest to 38.69%. Because the Company's voting
interest dropped below 50% effective April 4, 2000 and the Company does not
otherwise have control, the Company began to account for its investment in
SupplyAccess under the equity method of accounting.
The Company's net sales have increased from $110.0 million in fiscal 1994
(the Company's first full year of operations) to $494.4 million in fiscal 2000,
representing a compound annual growth rate of 28.5% for that six year period.
The past growth in net sales was principally driven by sales to new customers
and increased sales to existing customers as well as geographic expansion
through the opening of additional sales offices. However, in fiscal 2000 the
Company experienced its first annual decline of $173.8 million in sales due to a
softer PC market and difficulties in transitioning to a new business ERP system.
Softening the impact of the sales decline was an overall improvement in
gross profit margins rising to 9.8% in fiscal 2000 from 8.0% a year ago,
principally from a lessening of competitive pricing and higher margins from the
Company's expanding service business. Nevertheless the increase in gross
25
profit margins was insufficient to offset the loss of margins from the sales
volume decline and total gross profits declined $5.2 million.
Operating expenses, exclusive of non-recurring charges, were $68.1 million
and were comparable with prior year operating expenses of $68.7 million.
Non-recurring charges declined $5.2 million compensating for the gross profits
decline resulting in an operating loss of $22.3 million, which was comparable
with the $22.9 million of the prior year. Prior year's non-recurring charges
were higher in large part due to an impairment charge of $6.2 million against
operations to write-down the net book value of the Company's Ontario facility to
its estimated fair value as well as litigation costs.
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 generally recognized upon shipment. 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 credit for losses varied significantly from
the statutory rate in the current fiscal year. This was attributable principally
to the limitation of the available loss carryback to prior years as well as to
the non-recognition of deferred tax assets due to uncertainty of future use. See
Note 8 to the Consolidated Financial Statements for further explanation.
RESULTS OF OPERATIONS
The following tables set forth certain financial data as a percentage of net
sales for the periods indicated. The first table presents the financial data
from the Statement of Operations expressed as percentage of net sales. The
second table presents the same type of financial data from the Statement of
Operations after giving pro-forma effect to the deconsolidation of the two
previously controlled subsidiaries by excluding them from operations for each of
the three years presented. By excluding
26
deconsolidated subsidiaries the reader will be better able to assess normalized,
core operations of the Company.
FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 90.2 92.0 90.6
----- ----- -----
Gross profit.............................................. 9.8 8.0 9.4
Selling and marketing expenses.............................. 9.2 5.7 6.0
General and administrative expenses......................... 4.6 4.6 2.4
Non-recurring charges....................................... 0.5 1.1 --
----- ----- -----
Operating (loss) income................................... (4.5) (3.4) 1.0
Interest expense............................................ 0.4 0.5 0.4
Gain on sale of investment.................................. (0.8) (0.7) --
Other income, net........................................... (0.1) -- (0.1)
Minority interests.......................................... (0.1) (0.5) --
----- ----- -----
(Loss) Income before income taxes......................... (3.9) (2.7) 0.7
Provision for income taxes.................................. (0.1) (0.2) 0.3
Equity Losses of Affiliates................................. 0.1 -- --
----- ----- -----
Net (loss) income......................................... (3.9)% (2.5)% 0.4%
===== ===== =====
NORMALIZED OPERATIONS
------------------------------
FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 90.0 91.9 90.6
----- ----- -----
Gross profit.............................................. 10.0 8.1 9.4
Selling and marketing expenses.............................. 8.5 5.3 6.0
General and administrative expenses......................... 2.6 2.5 2.4
Non-recurring charges....................................... 0.6 1.2 --
----- ----- -----
Operating (loss) income................................... (1.7) (0.9) 1.0
Interest expense............................................ 0.3 0.5 0.3
Other income, net........................................... (0.1) -- --
----- ----- -----
(Loss) Income before income taxes......................... (1.9)% (0.7)% 0.7%
===== ===== =====
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES. Net sales decreased $173.9 million, or 26.0%, to $494.4 million
in fiscal 2000 from $668.3 million in fiscal 1999. The decrease in sales was
attributable to softness in the marketplace and a loss of customer base during
implementation of the SAP business system. Net sales under the IBM contract
accounted for 12.8% of total net sales and 21.4% of total accounts receivable
for the 2000 fiscal year compared with 18.8% and 18.5% respectively for the
prior fiscal year. In absolute dollars IBM net sales decreased $62.3 million to
$63.4 million in fiscal 2000 from $125.7 million in fiscal 1999, reflecting the
same conditions noted above. Services revenues increased $7.2 million, or 31.3%,
to $30.2 million in fiscal 2000 from $23.0 million in fiscal 1999 and were 6.6%
of total net sales versus 3.6% in the prior year.
27
Firstsource, an Internet and call center based business-to-business provider
of products, services and information for small to medium sized businesses,
contributed $34.2 million in net sales for the seven and a half month period in
which the former subsidiary was consolidated with the Company. Net sales for
Firstsource in the seven and one-half month period prior to deconsolidation
("the consolidation period") exceeded the prior full fiscal year 1999 net sales
of $30.0 million. SupplyAccess, a start-up internet portal business-to-business
provider, did not record any net sales for the approximate six month period in
which the former subsidiary was consolidated with the Company.
Net sales for the last two quarters of fiscal 2000 increased on a sequential
basis $5.3 million in the September quarter and $2.2 million in the June quarter
compared with declines of $20.1 million in the March quarter and $33.6 million
in the December quarter. However, future sequential gains in net sales in the
upcoming quarter will be challenged by the overall disappointing sales
anticipated by the computer industry and are likely to be adversely affected.
GROSS PROFIT. Gross profit decreased $5.2 million, or 9.6% to
$48.6 million in fiscal 2000 from $53.7 million for 1999, but increased as a
percentage of net sales to 9.8% in 2000 as compared to 8.0% in 1999. The
increase in gross profit percentage is attributable to a lessening of pricing
pressures throughout the industry on information technology products as well as
increased margins from the rising service revenues.
Gross profits from Firstsource were $3.1 million during the consolidation
period, as compared with $2.1 million for twelve months of fiscal year 1999.
Gross margins improved to 9.0% from 6.9% in fiscal 1999.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$7.4 million, or 19.4% to $45.3 million in fiscal 2000, from $37.9 million in
fiscal 1999. Of the $7.4 million increase, $2.5 million was from increased
marketing efforts of Firstsource during the consolidation period with the
remainder primarily attributed to hiring additional sales personnel. As a
percentage of net sales, selling and marketing expense increased 3.5% to 9.2% in
2000 from 5.7% in 1999, 2.4% of which was attributed to the decline in the
volume of net sales, 0.9% was from increased Firstsource expenses, with the
remainder from the cost of additional sales personnel hired.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $7.9 million, or 25.8% to $22.8 million in fiscal 2000, from
$30.7 million in fiscal 1999. Most of the $7.9 million decline is due to less
general and administrative expenses incurred by Firstsource during the 2000
partial fiscal year that the former subsidiary was consolidated, and is the
result of an abnormally high prior year expense from the acceleration of the
vesting of Firstsource stock options in the fourth quarter of fiscal 1999.
Because of declining sales volume, general and administrative expenses as a
percentage of net sales remained constant at 4.6% in fiscal 2000.
NON-RECURRING CHARGES. Non-recurring charges consist of a $1.5 million for
restructuring charges and $1.2 million related to a legal suit in which attorney
fees and costs were awarded by the court. Restructuring charges occurred in the
June quarter when the workforce was reduced by 105 and five sales offices were
converted to virtual sales locations (see Note 4 to the Consolidated Financial
Statements). Non-recurring charges declined $5.2 million to $2.7 million from
the $7.9 million in fiscal 1999, when a $6.2 million impairment charge for the
write down of the Ontario configuration facility comprised most of the charge.
OPERATING LOSS. Operating loss decreased $0.6 million, or 2.8%, to a loss
of $22.3 million in fiscal 2000 from a $22.9 million operating loss in fiscal
1999. Although total operating expenses decreased $5.7 million in fiscal 2000 to
$70.9 million from $76.6 million in fiscal 1999, the decrease did not compensate
for the $5.2 decline in gross profits. The decline in total operating expenses
was from the $5.2 million decrease in non-recurring charges explained above.
Operating loss, as a percent of net sales, increased to 4.5% in fiscal 2000 from
3.4% in fiscal 1999, due to declining sales volume.
28
INTEREST EXPENSE. Interest expense decreased $1.5 million, or 45.9% to
$1.7 million in fiscal 2000 from $3.2 million in fiscal 1999. Of the
$1.5 million decrease, $0.6 million related to interest income that was netted
in interest expense. The remaining $0.9 million decrease in interest expense was
due to the decline in borrowing under the lines of credit.
GAIN ON SALE OF INVESTMENTS. In conjunction with a SupplyAccess private
placement, marketable securities were acquired that produced a gain of
$3.9 million upon sale. The securities were acquired on February 23, 2000 with a
cost basis of $6.8 million.
MINORITY INTEREST. Minority interest represents losses allocated to the
minority shareholders as of December 31, 1999, when Firstsource was still a
majority owned subsidiary and was eligible to be consolidated with the Company.
EQUITY IN LOSSES OF AFFILIATES. As a result of the deconsolidation of two
previously consolidated subsidiaries (see Note 1 to the Consolidated Financial
Statements), in the June quarter of 2000 the Company began using the equity
method of accounting to record its interest in the losses related to the two
affiliates. The Company does not anticipate recognizing further losses from its
affiliates since no additional financial support, that would be considered
additional investment, is planned for the future.
BENEFIT FOR INCOME TAXES. Benefit for income taxes decreased $0.7 million,
or 55.9% to a benefit of $0.5 million in fiscal 2000 from a $1.2 million benefit
in fiscal 1999. The reduction of the benefit in fiscal 2000 was due to the
limitation of the available loss carry back as well as to the non-recognition of
deferred tax assets due to uncertainty of future realization.
NET (LOSS) INCOME. Net loss increased $2.8 million, or 16.8%, to a
$19.4 million net loss in fiscal 2000 from $16.6 million net loss in fiscal
1999. As a percentage of net sales, net loss increased to 3.9% from 2.9% in
fiscal 1999.
PRO FORMA COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND 1999
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for fiscal 2000 should be analyzed after
excluding the effects of the subsidiaries that were deconsolidated in the
June 2000 quarter. As such, the following discussion and analysis focuses on
amounts and trends adjusted to exclude the impact of the deconsolidated
subsidiaries from normal operations.
NET SALES. Net sales decreased $178.1 million, or 27.9%, to $460.2 million
in fiscal 2000 from $638.3 million in fiscal 1999. The decrease in sales was
attributable to softness in the marketplace and a loss of customer base during
implementation of the SAP business system.
Net sales under the IBM contract accounted for 13.8% of total net sales for
the 2000 fiscal year compared with 19.7% for the prior fiscal year. In absolute
dollars IBM net sales decreased $62.3 million to $63.4 million in fiscal 2000
from $125.7 million in fiscal 1999, reflecting the same conditions noted above.
Services revenues increased $7.2 million, or 31.3%, to $30.2 million in fiscal
2000 from $23.0 million in fiscal 1999 and were 6.1% of total net sales versus
3.6% in the prior year.
GROSS PROFIT. Gross profit decreased $5.8 million, or 11.2% to
$45.8 million in fiscal 2000 from $51.6 million for 1999, but increased as a
percentage of net sales to 10.0% in 2000 as compared to 8.1% in 1999. The
increase in gross margin percentage is attributable to a lessening of pricing
pressures throughout the industry on information technology products as well as
increased margins from the rising service revenues.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$4.9 million, or 14.6% to $38.6 million in fiscal 2000, from $33.7 million in
fiscal 1999, primarily as a
29
result of hiring additional sales personnel. As a percentage of net sales,
selling and marketing expense increased 3.2% to 8.5% in 2000 from 5.3% in 1999,
2.4% of which was attributed to the decline in the volume of net sales with the
remainder from the cost of additional sales personnel hired.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $3.6 million, or 23.0% to $12.1 million in fiscal 2000, from
$15.7 million in fiscal 1999. As a percentage of net sales, general and
administrative expenses increased to 2.6% in fiscal 2000 from 2.5% in fiscal
1999 due to the decline in sales volume.
OPERATING LOSS. Operating loss increased $1.9 million, or 33.1%, to a loss
of $7.6 million in fiscal 2000 from a $5.7 million operating loss in fiscal
1999. Although total operating expenses decreased $3.9 million in fiscal 2000 to
$53.4 million from $57.3 million in fiscal 1999, the decrease did not compensate
for the $5.8 decline in gross profits. Operating loss, as a percent of net
sales, increased to 1.7% in fiscal 2000 from 0.9% in fiscal 1999, due mainly to
declining sales volume.
INTEREST EXPENSE. Interest expense decreased $1.3 million, or 45.1% to
$1.6 million in fiscal 2000 from $2.9 million in fiscal 1999. Of the
$1.3 million decrease, $0.6 million related to interest income that was netted
in interest expense. The remaining $0.7 million decrease in interest expense was
due to the decline in borrowing under the lines, due to declining sales volumes.
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, 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 month initial start of 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 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. The increase in general and administrative
expense at Firstsource was primarily the result of a non-cash charge for
compensation related to the grant of stock options at Firstsource. Of the total
charge, $10.0 million was
30
incurred in the fourth quarter of fiscal 1999 and was due in large part to an
acceleration of the vesting schedule of the options granted. The remaining
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'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.
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 accompanied by decreased gross profit margins.
Operating loss, 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 FAS 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 $5.0 million on an adjusted carrying value of the shares of $0.6 million.
MINORITY INTEREST. Firstsource, 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.
BENEFIT FOR INCOME TAXES. The benefit for income taxes of $1.2 million in
fiscal 1999 represents a change of $2.7 million from the $1.5 million provision
in fiscal 1998. The benefit in fiscal 1999 was limited so as to exclude the loss
before taxes of Firstsource of $13.7 million. The exclusion of any tax benefit
from the Firstsource loss was necessitated by the Company's ownership in
Firstsource declining to less than the mandatory 80% required for consolidated
filings.
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 increased operating expenses of the Company's
Internet-focused subsidiary of $14.4 million (net of $3.9 million allocated 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.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000 operating activities provided cash totaling $9.3 million
compared with $12.3 million in the prior fiscal year. A decline of
$14.6 million in accounts receivable represented the
31
largest cash producing reconciling item between net loss of $19.4 million and
cash provided by operating activities of $9.3 million.
In fiscal 2000, accounts receivable, before allowances for returns and
doubtful accounts declined 21.4% largely due to a 27.8% decline in sales volume.
The Company's accounts receivable balance at September 30, 2000 and 1999, was
$79.0 million and $101.7 million, respectively. The number of days' sales
outstanding in accounts receivable increased to 58 days from 56 days, as of
September 30, 2000 and 1999, respectively.
Investing activities used cash totaling $22.1 million for fiscal 2000 while
providing $5.6 million cash in the prior year. Of the total cash used from
investing activities of $22.1 million, $32.2 million was from the
deconsolidation of two subsidiaries. Partially offsetting the $32.2 million from
deconsolidation, were proceeds received from the sale of marketable securities
of $10.7 million. The marketable securities were received in a non-cash exchange
for the issuance of preferred stock by one of the subsidiaries before the
subsidiary was deconsolidated. The sale of the securities produced a gain of
$3.8 million, which has been eliminated above in arriving at cash provided from
operating activities.
Financing activities provided net cash totaling $8.6 million in fiscal 2000,
while using cash of $14.3 million in fiscal 1999. Most of the financing cash
provided came from $22.7 million raised from private placement sales of stock by
two former subsidiaries. The subsidiaries were subsequently deconsolidated,
after further stock sales resulted in the Company losing majority voting
control. In addition to the $22.7 million of cash raised by stock sales, an
additional $9.0 million of stock in the former subsidiaries was exchanged for
marketable securities in a non-cash transaction. Of the $9.0 million of
marketable securities received, $6.8 million was sold at a gain of
$3.8 million, as referenced in the investing activities above. Net cash of
$16.6 million was used for the reduction of borrowings on lines of credit. Such
lines have been used primarily to finance accounts receivable balances.
As of September 30, 2000, the Company had approximately $2.6 million in cash
and working capital of $22.3 million. The Company has two revolving credit
facilities collateralized by accounts receivable and all other assets of the
Company, including $44.0 million in lines with IBM Credit Corporation ("IBMCC").
As of September 30, 2000, such lines of credit provided for maximum aggregate
borrowings of approximately $83.0 million, of which approximately $41.2 million
was outstanding.
Outstanding borrowings under the IBMCC line of credit bore interest at prime
less .25% during fiscal 2000 and was increased to prime plus 2% effective
December 15, 2000. The line of credit is 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, 2000 the Company has obtained a waiver on non-compliance
with two covenants that relate to minimum percentage of net income to sales and
debt to equity. The Company remains in compliance with all other covenants.
As discussed in Note 3 to the consolidated financial statements, on
December 11, 2000 the Company was advised by one of its lenders, Finova Capital
Corporation ("Finova"), that Finova was discontinuing the financing segment of
its business. As a result, the Company was advised that its $39 million working
capital line of credit with Finova will no longer be available after 60 days
(February 9, 2001). Following the expiration of the Finova line of credit
agreement, the Company's only remaining working capital financing agreement is
with IBM Credit Corporation ("IBMCC").
32
Effective December 15, 2000, the Company was also advised by IBMCC that the
maximum available amount under the Company's working capital financing agreement
was reduced from $44 million to $30 million. Subsequently IBMCC, effective
January 17, 2001, agreed to increase the amount available under the working
capital financing agreement from $30 million to $35 million and extend the date
of expiration, if not renewed, from April 14, 2001 to September 30, 2001. To
diversify the Company's working capital financing, the Company is currently
seeking additional financing with various lenders to augment the IBMCC line of
credit agreement and believes that it will be successful in finding that
financing, although not necessarily with terms as favorable as with its current
lenders.
To address the profitability issue, in June of 2000, a new executive
management team has taken steps to improve profitability including the
implementation of a restructuring plan in June of 2000, which included a
reduction in the work force by 105 and conversion of five sales offices to
virtual sales locations. Additionally, the Company is focusing its efforts on
increasing service revenues, which yield a higher gross margin than product
sales.
Further, approximately $14.1 million and $13.7 million of the Company's
operating losses in the years ended September 30, 2000 and 1999, respectively
arose from the Company's investments in certain former subsidiaries. During the
June quarter, due to a reduction in voting interest in certain former
subsidiaries, the Company began to account for its investments in these former
subsidiaries under the equity method of accounting (see Note 1 "Investment in
Affiliates"). In accordance with the equity method of accounting, the Company
has suspended recognition of equity method losses after its adjusted basis was
reduced to zero and does not anticipate increasing its investment in affiliates.
As a result of the foregoing changes, in the fourth quarter of fiscal year
2000, the Company was able to record a profit of $174,000 before consideration
for the non-operational gain of $2.3 million from reversal of equity losses of
affiliates that resulted in $2.4 million of net income reported for the quarter.
There can be no assurance that management's plans will continue to be successful
in improving profitability or that management will be able to obtain an
additional financing facility to augment the IBMCC financing arrangement or that
IBMCC will renew its financing agreement with the Company at September 30, 2001.
However, management believes the increase in the amount available under the
working capital financing agreement with IBMCC to $35 million and extension of
the date of expiration to September 30, 2001 will provide sufficient working
capital for the year ending September 30, 2001.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 the Company's consolidated financial position, results of
operations or cash flows. SFAS No. 137 defers the effective date of SFAS
No. 133 until all fiscal years beginning after June 30, 2000.
In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management is currently assessing the impact of SAB101 and
believes the impact, if any, will not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of
33
APB Opinion No. 25." FIN No. 44 effective July 1 2000. This interpretation
provides guidance for applying APB Opinion No. 25, "Accounting for Stock issued
to Employees." Management does not believe that the adoption of FIN No. 44 will
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
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
line of credit with IBMCC bore interest at the prime rate less 0.25% during
fiscal 2000 and was increased to prime plus 2% effective December 15, 2000.
Assuming an increase of one-half a percentage point in the lenders' prime rate
on October 1, 2000 and no change in the outstanding borrowings under the lines
of credit at September 30, 2000, interest expense would increase by
approximately $50,000 for fiscal year 2001 as compared to fiscal year 2000.
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.
34
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 2001 Annual Meeting of the Stockholders to be filed with the Commission
on or before January 28, 2001.
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 2001 Annual Meeting of Stockholders to be filed with the Commission on
or before January 28, 2001.
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 2001 Annual Meeting of
Stockholders to be filed with the Commission on or before January 28, 2001.
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 2001 Annual Meeting of Stockholders to be filed with the
Commission on or before January 28, 2001.
35
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.
The Company filed no Current Reports on Form 8-K during the last quarter of
the period covered by this Report.
36
EN POINTE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of September 30, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for each of the Three
Years in the Period Ended September 30, 2000.............. F-4
Consolidated Statements of Stockholders' Equity for each of
the Three Years in the Period Ended September 30, 2000.... F-5
Consolidated Statements of Cash Flows for each of the Three
Years in the Period Ended September 30, 2000.............. F-6
Notes to Consolidated Financial Statements.................. F-8
Schedule II--Valuation and Qualifying Accounts.............. F-26
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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally accepted in the
United States, 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.
As discussed in Note 1, one of the Company's working capital lines of credit
will no longer be available after February 9, 2001 and the remaining working
capital agreement will expire on September 30, 2001, if not renewed.
PricewaterhouseCoopers LLP
Los Angeles, California
November 20, 2000, except for Notes 1, 3 and 13
as to which the date is January 17, 2001
F-2
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 2,616 $ 6,838
Restricted cash........................................... 73 120
Accounts receivable, net of allowance for returns and
doubtful accounts of $3,318 and $2,291, respectively.... 79,022 101,707
Inventories............................................... 9,296 8,588
Refundable income taxes................................... 1,420 1,669
Prepaid expenses and other current assets................. 1,503 1,005
-------- --------
Total current assets.................................... 93,930 119,927
Property and equipment, net of accumulated depreciation and
amortization.............................................. 7,487 13,114
Other assets................................................ 271 568
-------- --------
Total assets............................................ $101,688 $133,609
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit.......................... $ 41,198 $ 62,289
Accounts payable.......................................... 12,906 15,373
Accrued liabilities....................................... 10,198 10,960
Other current liabilities................................. 7,323 7,413
Current portion of notes payable.......................... 53 278
Deferred taxes............................................ -- 119
-------- --------
Total current liabilities............................... 71,678 96,432
Long term liability......................................... 5,463 5,581
Losses in excess of investments in unconsolidated
affiliates................................................ 8,040 --
-------- --------
Total liabilities....................................... 85,181 102,013
Minority Interest........................................... -- 512
Commitments and contingencies (Note 9)...................... -- --
Stockholders' equity:
Preferred stock, $.001 par value:
Shares authorized--5,000,000
No shares issued or outstanding......................... -- --
Common stock, $.001 par value:
Shares authorized--40,000,000
Issued and outstanding--6,529,354 and 6,076,348,
respectively............................................ 7 6
Additional paid-in capital................................ 40,905 36,896
Unearned compensation..................................... -- (1,486)
Treasury stock............................................ (518) --
Accumulated deficit....................................... (23,887) (4,332)
-------- --------
Total stockholders' equity................................ 16,507 31,084
-------- --------
Total liabilities and stockholders' equity................ $101,688 $133,609
======== ========
See Notes to Consolidated Financial Statements
F-3
EN POINTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Amounts)
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... $494,421 $668,270 $567,739
Cost of sales............................................... 445,865 614,564 514,168
-------- -------- --------
Gross profit.............................................. 48,556 53,706 53,571
Selling and marketing expenses.............................. 45,308 37,942 34,257
General and administrative expenses......................... 22,830 30,775 13,665
Non-recurring charges....................................... 2,717 7,917 --
-------- -------- --------
Operating (loss) income................................... (22,299) (22,928) 5,649
Interest expense............................................ 1,718 3,172 2,166
Gain on sale of investments................................. (3,938) (4,428) --
Other income, net........................................... (349) (117) (237)
Minority interests.......................................... (512) (3,747) --
-------- -------- --------
(Loss) income before income taxes and equity in losses
of affiliates........................................... (19,218) (17,808) 3,720
(Benefit) provision for income taxes........................ (535) (1,214) 1,488
Equity in losses of affiliates.............................. 702 -- --
-------- -------- --------
Net (loss) income....................................... $(19,385) $(16,594) $ 2,232
======== ======== ========
Net (loss) income per share
Basic................................................. $ (3.02) $ (2.79) $ 0.38
======== ======== ========
Diluted............................................... $ (3.02) $ (2.79) $ 0.37
======== ======== ========
Weighted average shares and share equivalents outstanding
Basic................................................. 6,419 5,942 5,875
======== ======== ========
Diluted............................................... 6,419 5,942 6,071
======== ======== ========
See Notes to Consolidated Financial Statements
F-4
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT)
------------------- PAID-IN TREASURY UNEARNED RETAINED
SHARES AMOUNT CAPITAL STOCK COMP. EARNINGS TOTAL
-------- -------- ---------- -------- -------- ------------ --------
Balance at September 30, 1997............ 5,779 $6 $18,283 $ $ $ 10,030 $ 28,319
Issuance of common stock under stock
option and stock purchase plans...... 44 -- 390 -- -- -- 390
Issuance of common stock on exercise of
warrants............................. 77 -- -- -- -- -- --
Amortization of deferred
compensation......................... -- -- 24 -- -- -- 24
Income tax benefits related to stock
options.............................. -- -- 60 -- -- -- 60
Treasury stock......................... -- -- -- (6) -- -- (6)
Net income............................. -- -- -- -- -- 2,232 2,232
----- -- ------- ------- -------- -------- --------
Balance at September 30, 1998............ 5,900 6 18,757 (6) -- 12,262 31,019
Issuance of common stock under stock
option and stock purchase plans...... 163 -- 873 -- -- -- 873
Issuance of common stock on exercise of
warrants............................. 13 -- -- -- -- -- --
Warrants issued for services
performed............................ -- -- 300 -- -- -- 300
Deferred compensation related to
issuance of stock options............ -- -- 11,875 -- (11,875) -- --
Amortization of deferred
compensation......................... -- -- -- -- 10,389 -- 10,389
Income tax benefits related to stock
options.............................. -- -- 284 -- -- -- 284
Treasury stock issued to stock purchase
plan................................. -- -- (6) 6 -- -- --
Effect of equity transactions of
subsidiary........................... 4,813 4,813
Net loss............................... -- -- -- -- -- (16,594) (16,594)
----- -- ------- ------- -------- -------- --------
Balance at September 30, 1999............ 6,076 6 36,896 -- (1,486) (4,332) 31,084
Issuance of common stock under stock
option and stock purchase plans...... 404 1 3,375 -- -- -- 3,376
Issuance of common stock on exercise of
warrants............................. 49 -- -- -- -- -- --
Treasury stock purchased............... -- -- -- (1,000) -- -- (1,000)
Treasury stock issued under stock
plans................................ -- -- (312) 482 -- (170) --
Income tax benefits related to stock
options.............................. -- -- 883 -- -- -- 883
Effect of deconsolidation.............. -- -- 63 -- 1,486 -- 1,549
Net loss............................... -- -- -- -- -- (19,385) (19,385)
----- -- ------- ------- -------- -------- --------
Balance at September 30, 2000............ 6,529 $7 $40,905 $ (518) $ -- $(23,887) $ 16,507
===== == ======= ======= ======== ======== ========
See Notes to Consolidated Financial Statements
F-5
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net (loss) income........................................... $(19,385) $(16,594) $ 2,232
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization............................. 2,278 2,447 1,728
Gain on sale of investments............................... (3,938) (4,428) 232
Loss on disposal of assets related to restructuring....... 186 -- --
Impairment loss--Ontario facility......................... -- 6,192 --
Allowance for doubtful accounts........................... 2,212 944 329
Allowance for returns and other allowances................ 25 78 370
Allowance for reserve for fixed assets.................... 419 -- --
Allowance for inventory obsolescence...................... 249 323 100
Deferred taxes............................................ (119) (22) 50
Amortization of deferred compensation..................... -- 10,389 24
Warrants issued for services performed.................... -- 300 --
Minority interest in loss of subsidiary................... (512) (3,747) --
Changes in operating assets and liabilities:
Restricted cash........................................... (3) 1,879 (1,587)
Marketable securities..................................... 63 -- --
Accounts receivable....................................... 14,620 (773) (25,779)
Inventories............................................... (1,101) (1,902) (2,446)
Refundable income taxes................................... 249 (1,386) --
Prepaid expenses and other current assets................. (1,249) (557) 1,120
Other assets.............................................. 153 (216) (927)
Accounts payable.......................................... (956) 6,535 5,040
Accrued expenses.......................................... 1,455 5,945 (115)
Other current liabilities................................. 4,048 6,849 (1,547)
Losses in excess of investments in unconsolidated
affiliates.............................................. 10,601 -- --
-------- -------- -------
Net cash provided (used) by operating activities............ 9,295 12,256 (21,176)
-------- -------- -------
Proceeds from sale of property.............................. -- 5,500 --
Proceeds from sale of investment............................ 10,700 4,990 --
Proceeds from notes receivable from affilates............... 2,205 -- --
Acquisition of business..................................... -- -- (514)
Purchase of property and equipment.......................... (2,877) (4,936) (10,571)
Net equity in deconsolidated subsidiaries................... (9,569) -- --
Reduction in cash due to deconsolidation.................... (22,603) -- --
-------- -------- -------
Net cash (used) provided by investing activities.......... (22,144) 5,554 (11,085)
-------- -------- -------
Net (repayments) borrowings under lines of credit........... (16,581) (17,307) 28,905
Net proceeds from sale of shares in subsidiary.............. 22,656 9,072 --
Proceeds from notes payable................................. -- -- 3,432
Payment on notes payable.................................... (306) (6,975) (410)
Net proceeds from sale of common stock under employee
plans..................................................... 3,376 873 390
Treasury stock.............................................. (518) -- (6)
-------- -------- -------
Net cash provided (used) by financing activities.......... 8,627 (14,337) 32,311
-------- -------- -------
(Decrease) increase in cash................................. (4,222) 3,473 50
Cash at beginning of year................................... 6,838 3,365 3,315
-------- -------- -------
Cash at end of year......................................... $ 2,616 $ 6,838 $ 3,365
======== ======== =======
See Notes to Consolidated Financial Statements
F-6
EN POINTE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 2,308 $3,172 $2,166
======= ====== ======
Income taxes (refunded) paid.............................. $(1,519) $ 28 $1,898
======= ====== ======
Supplemental schedule of non-cash financing and investing
activities:
Tax benefit related to stock options...................... $ 883 $ 284 $ 60
======= ====== ======
Unrealized gain on equity holdings by former subsidiary... $ 577
=======
Securities received in exchange for stock by former
subsidiary.............................................. $ 9,000
=======
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
======
See Notes to Consolidated Financial Statements
F-7
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 with sales
and service personnel in 20 markets located throughout the United States. The
Company is headquartered in El Segundo, California.
LIQUIDITY
As reflected in the accompanying financial statements, the Company has
incurred significant losses from operations during the fiscal years ended
September 30, 2000 and 1999. In addition, as discussed in Note 3, on
December 11, 2000 the Company was advised by one of its lenders, Finova Capital
Corporation ("Finova"), that Finova was discontinuing the financing segment of
its business. As a result, the Company was advised that its $39 million working
capital line of credit with Finova will no longer be available after 60 days
(February 9, 2001). Following the expiration of the Finova line of credit
agreement, the Company's only remaining working capital financing agreement is
with IBM Credit Corporation ("IBMCC").
Effective December 15, 2000, the Company was advised by IBMCC that the
maximum available amount under the Company's working capital financing agreement
was reduced from $44 million to $30 million. Subsequently IBMCC, effective
January 17, 2001, agreed to increase the amount available under the working
capital financing agreement from $30 million to $35 million and extend the date
of expiration, if not renewed, from April 14, 2001 to September 30, 2001. The
Company is currently seeking additional financing with various lenders to
replace the Finova line of credit agreement and believes that it will be
successful in securing that financing, although not necessarily with terms as
favorable as with its current lenders.
In June 2000, a new executive management team took steps to improve
profitability including the implementation of a restructuring plan, which
included a reduction in the work force by 105 employees and conversion of five
sales offices to virtual sales locations. In addition, the Company is focusing
its efforts on increasing revenues from the sale of services, which yield a
higher gross margin than product sales.
Approximately $14.1 million and $13.7 million of the Company's operating
losses in the years ended September 30, 2000 and 1999, respectively arose from
the Company's investments in certain former subsidiaries. During the June 2000
quarter, due to a reduction in voting interest in certain former subsidiaries,
the Company began to account for its investments in these former subsidiaries
under the equity method of accounting (see Note 1 "Investment in Affiliates").
In accordance with the equity method of accounting, the Company has suspended
recognition of equity method losses after its adjusted basis was reduced to zero
and does not anticipate increasing its investment in such affiliates.
There can be no assurance that management's plans will be successful in
improving profitability or that management will be able to obtain an additional
financing facility to augment the IBMCC financing arrangement or that IBMCC will
renew its financing agreement with the Company at September 30, 2001. However,
management believes the increase in the amount available under the working
capital financing agreement with IBMCC to $35 million and extension of the date
of expiration to September 30, 2001 will provide sufficient working capital for
the year ending September 30, 2001.
F-8
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DECONSOLIDATION
In June 1998, the Company's previously wholly-owned subsidiary, firstsource
("Firstsource," previously named Purchase Pointe, Inc. and 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 raised $9.3 million through a private placement of its
common stock resulting in the Company's ownership percentage decreasing to 71.4%
at September 30, 1999. The sales of common stock by Firstsource was accounted
for as a capital transactions in the consolidated financial statements of the
Company in accordance with Staff Accounting Bulletins (SAB) Nos. 51 and 84.
Under SAB Nos. 51 and 84, if a subsidiary sells stock to a third party at a
price per share which is different than the parent company's carrying value per
share, the parent company's share of equity in the subsidiary changes. Due to
Firstsource being a newly developed company the changes were recognized by the
En Pointe as an equity transaction in the Consolidated Statements of
Stockholders' Equity and not as a gain or loss in the Statement of Operations.
During the fiscal year 2000, Firstsource completed a series of private
placements that aggregated 8,630,197 shares of convertible preferred stock
(ranging in prices from $3.50 per share to $4.19 per share). With the increase
in shares outstanding, as of May 16, 2000, the Company's 6,645,000 shares of
common stock in Firstsource represented a 43.5% voting interest. Effective
May 16, 2000, because the Company did not otherwise have control of Firstsource,
the Company began to account for its investment in Firstsource under the equity
method of accounting.
In November 1999, the Company formed a new subsidiary, SupplyAccess, Inc.
("SupplyAccess"), to address the larger corporate customers' needs to find
product on the internet at the most favorable prices. SupplyAccess was designed
as an internet portal charging transaction fees to the seller. The Company
transferred its Information Technology (IT) department and related computer
equipment and software to SupplyAccess in exchange for a $5.5 million note
receivable. There was no gain or loss recognized on this transaction. At
September 30, 2000, the balance of the note receivable from SupplyAccess was
$750,000. Concurrently it was agreed that for a flat quarterly fee of $500,000
SupplyAccess would provide the Company with IT services and would allow Company
customers access to its fulfillment engine. In future periods, SupplyAccess will
charge the Company a transaction fee based on the volume of IT services
provided. During the year ended September 30, 2000, the Company paid
SupplyAccess $2,000,000 for IT services.
In February 2000, SupplyAccess completed an initial private placement of
12,000,000 shares of convertible preferred stock at $1.50 per share, which
reduced the Company's voting interest to 54%. In addition, in April 2000,
SupplyAccess completed a supplemental private placement of 5,088,318 shares of
convertible preferred stock at $1.50 per share that reduced the Company's voting
interest to 45.10%. Two subsequent private placements of 5,196,000 shares of
convertible preferred stock at $1.50 per share reduced the Company's voting
interest even further to 38.65%. Effective April 4, 2000, because the Company's
voting interest in SupplyAccess dropped below 50% and the Company does not
otherwise have control over SupplyAccess, the Company began to account for its
investment in SupplyAccess under the equity method of accounting.
F-9
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the periods prior to the reduction in the Company's voting interest
to below 50%, the Company consolidated the operating results and assets and
liabilities of Firstsource and SupplyAccess. At the dates of deconsolidation,
the Company did not recognize the gain of approximately $10.0 million resulting
from the accumulated losses recognized in excess of the Company's ownership
interest in the former subsidiaries. The gain was deferred due primarily to the
Company's continued guarantee of certain debt obligations and other commitments,
which are considered to be an increase in the Company's investment basis
("adjusted basis") under the equity method of accounting.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
As explained above, two of the Company's former subsidiaries, SupplyAccess
and Firstsource issued additional shares of stock in the June 2000 quarter
resulting in a reduction of En Pointe's voting control to less than 50%.
Thereafter the Company deconsolidated these subsidiaries and accounted for its
investment in unconsolidated affiliates under the equity method of accounting.
During the year ended September 30, 2000, En Pointe recognized equity losses
from unconsolidated affiliates of $702,000.
The Company has recognized accumulated losses in excess of the Company's
ownership interest in the former subsidiaries during the periods in which the
former subsidiaries were consolidated. As of September 30, 2000, the Company's
adjusted basis under the equity method of accounting has been reduced to zero.
In accordance with the equity method of accounting, the Company has suspended
recognition of equity method losses after its adjusted basis was reduced to
zero. Any future losses generated are monitored but not reported. Equity method
income is recognized in future periods only after the Company's share of equity
method income equals previously unreported equity method losses accumulated
during periods in which recognition of equity method losses were suspended.
The following summarizes the most recent combined financial information
available of the unconsolidated affiliates (in thousands):
SEPTEMBER 30, 2000
AND FOR THE YEAR THEN
ENDED
FIRSTSOURCE AND
SUPPLYACCESS
---------------------
(UNAUDITED)
Current assets............................................ $ 38,591
Non-current assets........................................ $ 11,257
Current liabilities....................................... $ 17,376
Non-current liabilities................................... $ 3,776
Shareholders' equity...................................... $ 28,696
Net revenue............................................... $ 67,603
Net loss.................................................. $(28,391)
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
F-10
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 purchase rebates
received by the Company from its vendors.
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, 2000 and 1999 represents deposits
maintained for certain government tax agencies.
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.
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
F-11
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 6), which is included in non-recurring charges in the consolidated
statements of operations. No impairment losses were recorded in fiscal years
2000 and 1998.
ADVERTISING
The Company reports the costs of all advertising in the periods in which
those costs are incurred. For the fiscal years ended September 30, 2000 and
1999, advertising expense was approximately $3,343,000 and $1,955,000
respectively. During the year ended September 30, 1998, 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 AND VENDORS
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, 2000, 1999 and 1998, one of the Company's
customers accounted for approximately 14%, 19% and 21% of net sales,
respectively. At September 30, 2000 and 1999 that customer accounted for 21% and
18% 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.
For the year ended September 30, 2000, purchases from three vendors
accounted for 48% of total purchases.
TREASURY STOCK
The Company uses the specific identification method for accounting for
treasury stock. During the fiscal year, the Company purchased 88,300 shares for
$1,000,000, and subsequently, issued 42,522 shares for employee stock benefit
plans for $312,000. At September 30, 2000 45,778 shares with a cost of
approximately $518,000 remained in treasury stock.
F-12
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
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 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 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
SFAS No. 130, "Reporting Comprehensive Income," 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, 2000, 1999 and 1998.
SEGMENT REPORTING
The Company discloses segment information in accordance with 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.
See Note 15, "Segment Information."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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
F-13
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
the Company's consolidated financial position, results of operations or cash
flows. SFAS No. 137 defers the effective date of SFAS No. 133 until all fiscal
years beginning after June 30, 2000.
In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management is currently assessing the impact of SAB101 and
believes the impact, if any, will not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN
No. 44 effective July 1 2000. This interpretation provides guidance for applying
APB Opinion No. 25, "Accounting for Stock issued to Employees." Management does
not believe that the adoption of FIN No. 44 will have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
2 PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Computer equipment and software............................ $6,112 $11,850
Office equipment and other................................. 1,195 1,501
Leasehold improvements..................................... 436 421
Capitalized lease (see Note 6)............................. 5,442 5,442
------ -------
13,185 19,214
Less: Accumulated depreciation and amortization............ (5,698) (6,100)
------ -------
$7,487 $13,114
====== =======
Depreciation expense was $2,278,000, $2,296,000 and $1,706,000 for the years
ended September 30, 2000, 1999, and 1998 respectively.
3 LINES OF CREDIT
At September 30, 2000 and 1999, the Company had outstanding borrowings of
$41,198,000 and $62,289,000, respectively, under lines of credit with various
financial institutions.
The line of credit agreements provide for total financing of up to
$83 million and $121 million at September 30, 2000 and 1999, 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
F-14
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 LINES OF CREDIT (CONTINUED)
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. The Company has
obtained a waiver on non-compliance with a covenant relating to minimum
percentage of net income to sales and debt to equity. On January 4, 2001, in
connection with obtaining the waiver of non-compliance, IBMCC reduced the credit
available to the Company from $44 million to $30 million and increased the
interest rate to prime plus 2%. Subsequently IBMCC, effective January 17, 2001,
agreed to increase the amount available under the working capital financing
agreement from $30 million to $35 million and extend the date of expiration, if
not renewed, from April 14, 2001 to September 30, 2001.
Finova, with whom the Company has a $39 million line of credit and which is
a part of the $83.0 million credit facility mentioned above, has announced that
it will discontinue the financing segment of its business. As a part of that
decision, on December 11, 2000 the Company was advised that the Company's
$39 million line of credit from Finova will no longer be available after
60 days.
The prime rate of interest was 9.50%, and 8.25% at September 30, 2000 and
1999, respectively, and the weighted average interest rates for the years ended
September 30, 2000, 1999 and 1998 were 8.49%, 7.63%, and 8.25%, respectively.
Interest expense for the years ended September 30, 2000, 1999 and 1998 was
$2,308,000, $3,172,000, and $2,166,000 respectively.
4 NON-RECURRING CHARGES
Non-recurring charges for the fiscal year ended September 30, 2000 include a
provision for litigation of $1,173,000 related to an adverse judgment received
on a legal matter (see Note 13), and restructuring charges of $1,544,000.
In June 2000, the Company underwent the restructuring charges as a result of
reorganizing certain aspects of its business. Elements of the restructuring plan
included streamlining the organization, reducing costs and expenses, and
aligning resources to accelerate the growth potential in the Company's core
business. In executing the restructure, the workforce was reduced by 105
employees and independent contractors at various levels. Five offices were also
closed and converted to virtual sales locations.
The following table summarizes the restructuring charges and the remaining
reserves associated with the restructuring:
EXPENSED REMAINING
THROUGH CASH ACCRUAL
SEPTEMBER 30, 2000 PAYMENTS SEPTEMBER 30, 2000
------------------- -------- -------------------
(IN THOUSANDS)
Separation costs for terminated
employees............................... $ 928 $ 909 $ 19
Facilities closing and downsizing......... 616 451 165
------ ------ ----
$1,544 $1,360 $184
====== ====== ====
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 judgment received on a legal
matter (see Note 13), and an impairment loss of $6,192,000 related to the
Company's Ontario facility (see Note 6).
F-15
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 GAIN ON SALE OF INVESTMENT
In conjunction with a former subsidiary's private placement, marketable
securities were acquired that produced a gain of $3,938,000 upon sale. The
securities were acquired on February 23, 2000 with a cost basis of $6,800,000.
The gain on sale of investment in 1999 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.
6 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 and equipment at its estimated fair value and related liability until
the lease qualifies as a "normal leaseback" under SFAS No. 98.
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):
2001........................................................ $ 565
2002........................................................ 581
2003........................................................ 599
2004........................................................ 617
2005........................................................ 636
2006 and thereafter......................................... 6,440
------
$9,438
======
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, 2000 and 1999, Ontario facility rent
expense, which is characterized as interest expense under SFAS No. 98, was
$551,122 and $148,000.
F-16
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 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.
8 INCOME TAXES
The components of the income tax (benefit) provision are as follows (in
thousands):
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Current:
Federal................................................... $(368) $(1,240) $1,139
State..................................................... (48) 48 299
----- ------- ------
(416) (1,192) 1,438
----- ------- ------
Deferred:
Federal................................................... (119) (53) 37
State..................................................... -- 31 13
----- ------- ------
(119) (22) 50
----- ------- ------
$(535) $(1,214) $1,488
===== ======= ======
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,
------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory rate...................................... (34)% (34)% 34%
State taxes, net of federal benefits........................ -- 1 5
Expenses not currently deductible........................... 22 19 1
Valuation allowances........................................ (22) -- --
Losses providing no tax benefits............................ 23 14 --
Minority interest........................................... 1 (7) --
Net operating loss carryback................................ 7 -- --
--- --- --
(3)% (7)% 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. Due to the uncertainty
surrounding the realization of the net deferred tax asset of
F-17
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 INCOME TAXES (CONTINUED)
$4.7 million, management has provided a valuation allowance. Significant
components of deferred taxes are as follows (in thousands).
SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Deferred tax assets:
Accounts receivable and allowance for returns............. $ 1,406 $ 1,187 $ 556
Expenses not currently deductible......................... 870 468 605
Depreciation.............................................. 69 -- --
Net operating loss........................................ 2,732 -- --
Affiliate losses not currently deductible................. 267 -- --
State income taxes........................................ -- -- 63
------- ------- -------
5,344 1,655 1,224
------- ------- -------
Deferred tax liabilities:
Discount on receivables................................... (681) (957) (1,113)
Depreciation.............................................. -- (817) (252)
------- ------- -------
(681) (1,774) (1,365)
------- ------- -------
Net deferred tax asset (liability)........................ 4,663 (119) $ (141)
Valuation allowance....................................... (4,663) -- --
------- ------- -------
Deferred tax liability/asset.............................. $ -- $ (119) $ (141)
======= ======= =======
The Company has a net operating loss ("NOL") of $7.8 million that may be
carried forward twenty years to September 30, 2020. Since the NOL is
attributable to the exercise of stock options by employees, any realization of
income tax benefits from the NOL will be considered an adjustment to additional
paid-in capital and will not benefit future earnings.
9 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):
2001........................................................ $1,689
2002........................................................ 1,033
2003........................................................ 396
2004........................................................ 121
------
$3,239
======
Rent expense for the years ended September 30, 2000, 1999, and 1998 under
all operating leases was approximately $2,273,000, $2,296,000 and $1,419,000
respectively.
F-18
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 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,
------------------------------
2000 1999 1998
-------- -------- --------
Net (loss) income....................................... $(19,385) $(16,594) $2,232
======== ======== ======
Denominator:
Weighted-average shares outstanding................... 6,419 5,942 5,875
Effect of dilutive securities:
Dilutive potential of options and warrants.......... -- -- 196
-------- -------- ------
Weighted-average shares and share equivalents
outstanding........................................... 6,419 5,942 6,071
======== ======== ======
Basic (loss) income per share........................... $ (3.02) $ (2.79) $ 0.38
======== ======== ======
Diluted (loss) income per share......................... $ (3.02) $ (2.79) $ 0.37
======== ======== ======
The dilutive potential of stock options and warrants has been excluded from
the calculation of diluted loss per share because the effect of their inclusion
would have been anti-dilutive.
11 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. As of
September 30, 2000 and 1999, the shares available for grant under the plan were
88,604 and 141,718, respectively.
F-19
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 STOCK OPTIONS AND WARRANTS (CONTINUED)
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, 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) $ 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
Granted............................. 10,000 100,250 1,589 $12.50-$36.40
Exercised........................... (66,501) (302,243) (2,871) $ 4.63-$10.25
Cancelled........................... -- (57,136) (434) $ 6.31-$12.25
------- -------- ------
Outstanding at September 30, 2000..... 20,000 560,178 $5,025 $ 4.62-$36.40
======= ======== ======
WEIGHTED REMAINING
OPTIONS AVERAGE CONTRACTUAL
EXERCISABLE EXERCISE PRICE LIFE
----------- -------------- -----------
September 30, 1998................................ 392,427 $8.69 7.72
September 30, 1999................................ 499,549 $8.09 8.03
September 30, 2000................................ 305,968 $8.39 7.63
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE WEIGHTED- EXERCISABLE AT WEIGHTED-
SEPTEMBER 30, REMAINING AVERAGE SEPTEMBER 30, AVERAGE
RANGE OF EXERCISE PRICES 2000 LIFE EXERCISE PRICE 2000 EXERCISE PRICE
- ------------------------ -------------- --------- -------------- -------------- --------------
$4.62-$5.05............. 43,126 8.2 $ 4.81 24,371 $ 4.81
$6.31-$6.50............. 172,504 8.6 $ 6.31 80,621 $ 6.31
$7.51-$8.70............. 179,040 7.8 $ 7.82 113,636 $ 7.82
$9.00-$10.45............ 84,008 6.7 $10.03 84,008 $10.03
$12.25-$36.40........... 101,500 9.6 $19.78 3,333 $19.78
At September 30, 2000 warrants to purchase 18,668 shares of the Company's
common stock were outstanding that were issued by the Company to the underwriter
of the Company's initial public offering, and are exercisable at any time
through May 7, 2001 at an exercise price of $9.60 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
F-20
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 STOCK OPTIONS AND WARRANTS (CONTINUED)
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):
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net (loss) income as reported........................... $(19,385) $(16,594) $2,232
Net (loss) income pro forma............................. $(20,716) $(18,089) $ 714
Basic (loss) earnings per share as reported............. $ (3.02) $ (2.79) $ 0.38
Diluted (loss) income per share as reported............. $ (3.02) $ (2.79) $ 0.37
Basic (loss) income per share pro forma................. $ (3.23) $ (3.04) $ 0.12
Diluted (loss) income per share pro forma............... $ (3.23) $ (3.04) $ 0.12
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 2000, 1999 and 1998:
EXPECTED RISK FREE
DIVIDEND EXPECTED INTEREST EXPECTED
YIELD VOLATILITY RATE LIVES
-------- ---------- --------- --------
Year ended September 30, 1998.................... 0% 68% 5.66% 5.0
Year ended September 30, 1999.................... 0% 75% 5.12% 5.0
Year ended September 30, 2000.................... 0% 99% 6.28% 5.0
In May 1999 Firstsource adopted a stock option plan. During the year ended
September 30, 1999, Firstsource 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, the Company
recorded unearned deferred compensation of $11,801,000. In September 1999
Firstsource 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 is due to the accelerated
vesting.
12 EMPLOYEE STOCK PLAN
The Company has an Employee Stock Purchase Plan (the "Plan") under which
there remains authorized and available for sale to employees an aggregate of
172,145 shares of the Company's common stock at September 30, 2000. 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.
13 LITIGATION
In March of 1999, a jury verdict in the Los Angeles County (California)
Superior Court relating to litigation brought by Novaquest Infosystems resulted
in the Company owing a total of $1,425,000. Under the court decree, $375,000 was
awarded for intentional interference with plaintiffs' prospective
F-21
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 LITIGATION (CONTINUED)
economic advantage tort claim, $50,000 was awarded for breach of contract, and
$1 million was awarded for punitive damages. In addition, in April 2000 the
court awarded the plaintiffs attorneys' fees and costs under the breach of
contract claim of approximately $1,218,000. The Company has timely objected to
the amount of the cost reimbursement allowed for attorney fees and intends to
appeal the court's ruling. However, the Company recorded an additional
nonrecurring charge of $1,173,000 to increase the litigation accrual during the
quarter ended March 31, 2000.
In March of 2000, an action was brought against the Company in the Orange
County Superior Court contending fraud and breach of contract arising from the
purchase by a former subsidiary of the Company of certain assets from a company
formerly known as First Source International ("FSI"). The lawsuit is filed on
behalf of creditors of a defunct corporation, Paragon Solutions, Inc, formerly
known as FSI. It is contended that FSI was unable to obtain their contingent
earn-out under the agreement because of faulty software provided by the Company.
Damages sought range between $0.8 to $3.5 million with the plaintiff seeking
punitive damages of $10 million. The Company was successful in compelling the
action to be moved to arbitration, but since November 17, 2000 when the Court of
Appeals rejected the request by the plaintiff to prohibit arbitration, no
arbitration proceedings have commenced. The Company vigorously denies the
charges and contends that full disclosure was made as to any problems with the
software and that the former subsidiary to this date has not produced net
income. Management, after consulting with legal counsel, has determined that the
potential for an adverse outcome in this litigation cannot be estimated as the
case is in its preliminary stage.
In October of 2000, the Company and one of its officers were two of several
defendants in an arbitration matter before the New York Stock Exchange, Inc. by
First Union Securities, Inc. ("First Union"). First Union seeks to recover
against all of the defendants relating to one of its customers who acquired a
large position in the Company's stock on margin and was unable to repay the
entire margin loan, even upon eventual liquidation of the stock. The Company
vigorously denies the allegations and believes the case is without merit.
In January of 2001, five of the Company's directors, one current officer,
and certain former officers along with four unrelated parties were named in a
shareholder's derivative complaint alleging that such persons improperly
benefitted from the sales of shares of the Company's common stock and seeking a
recovery by the Company of the damages it sustained as a result of such
activities (Fredrick v. Din, et al., Superior Court of California, County of Los
Angeles Case No. YC 039456). The defendants intend to vigorously defend the
allegations and believe the case is without merit.
There are various other claims and litigation proceedings in which the
Company is involved in the ordinary course of business. While the outcome of
these claims and proceedings cannot be predicted with certainty, after
consulting with legal counsel, management does not believe that the outcome of
any of these matters will have a material adverse affect on the Company's
business, financial position and results of operations or cash flows.
14 SEGMENT INFORMATION
Before deconsolidation, the Company consisted primarily of three business
units (companies), En Pointe Technologies, Firstsource and SupplyAccess. Each of
the companies had separate management teams, infrastructures and facilities.
F-22
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 SEGMENT INFORMATION (CONTINUED)
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 sales representatives in
major metropolitan areas as well as available electronic interfaces between En
Pointe and its customers and vendors.
Firstsource focused its efforts on the sale of technology products and other
services primarily via the Internet to consumers and small to medium sized
businesses.
SupplyAccess offers a hosted business-to-business web application integrated
with a customized SAP-based enterprise fulfillment engine. SupplyAccess pays a
flat quarterly fee of $500,000 for the IT services and access by its customers
to the SupplyAccess fulfillment engine.
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, 2000. The Company evaluates
the performances (Segment Profit) of its segments and allocates resources to
them based on earnings after income taxes. During the quarter ended June 30,
2000, the Company began to account for its investments in Firstsource and
SupplyAccess under the equity method of accounting (see Note 1).
F-23
EN POINTE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 SEGMENT INFORMATION (CONTINUED)
The tables below present information about reported segments for the years
ended September 30, 2000, 1999 and 1998.
EN POINTE
TECHNOLOGIES, INC. FIRSTSOURCE SUPPLY ACCESS TOTAL
------------------ ----------- ------------- --------
YEAR ENDED SEPTEMBER 30, 2000 (IN THOUSANDS):
Net sales.................................... $460,237 $ 34,184 $ -- $494,421
Gross profit................................. $ 45,473 $ 3,083 $ -- $ 48,556
Other income................................. $ 439 $ (106) $ 16 $ 349
Interest expense............................. $ 1,727 $ (49) $ 40 $ 1,718
Depreciation and amortization................ $ 1,592 $ 214 $ 472 $ 2,278
Other noncash items.......................... $ 2,040 $ 865 $ -- $ 2,905
Gain on sale of investment................... $ -- $ -- $3,938 $ 3,938
Nonrecurring charges......................... $ 2,717 $ -- $ -- $ 2,717
Income tax benefit........................... $ 540 $ (5) $ -- $ 535
Segment (loss) profit........................ $ (9,409) $(10,368) $ 392 $(19,385)
Segment assets............................... $101,688 $ -- $ -- $101,688
Additions to long-lived assets............... $ 1,043 $ -- $ -- $ 1,043
EN POINTE
TECHNOLOGIES, INC. FIRSTSOURCE SUPPLY ACCESS TOTAL
------------------ ----------- ------------- --------
YEAR ENDED SEPTEMBER 30, 1999 (IN THOUSANDS):
Net sales.................................... $638,270 $ 30,000 $ -- $668,270
Gross profit................................. $ 51,633 $ 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 $ -- $ 5,441
EN POINTE
TECHNOLOGIES, INC. FIRSTSOURCE SUPPLY ACCESS TOTAL
------------------ ----------- ------------- --------
YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS):
Net sales.................................... $562,395 $ 5,344 $ -- $562,395
Gross profit................................. $ 52,847 $ 724 $ -- $ 52,847
Other income................................. $ 236 $ 1 $ -- $ 236
Interest expense............................. $ 2,113 $ 53 $ -- $ 2,113
Depreciation and amortization................ $ 1,682 $ 46 $ -- $ 1,682
Income tax provision (benefit)............... $ 1,522 $ (74) $ -- $ 1,522
Segment (loss) profit........................ $ 2,467 $ (235) $ -- $ 2,467
Segment assets............................... $128,987 $ 3,580 $ -- $128,987
Additions to long-lived assets............... $ 10,525 $ 46 $ -- $ 10,525
F-24
14 SEGMENT INFORMATION (CONTINUED)
The Company operates in only one geographic segment.
15 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in the fiscal years
ended September 30, 2000 and 1999 is presented below (in thousands, except per
share amounts):
FISCAL 2000 QUARTER ENDED
--------------------------------------------------
SEPTEMBER JUNE MARCH DECEMBER
--------- -------- -------- --------
Net sales.............................. $123,680 $118,372 $116,136 $136,233
Gross profit........................... 12,962 10,948 11,539 13,107
Net Income (loss)...................... 2,434 (10,468)(a) (5,507)(b) (5,844)(c)
Diluted net Income (loss) per share.... 0.37 (1.60)(a) (0.87)(b) (0.96)(c)
FISCAL 1999 QUARTER ENDED
--------------------------------------------------
SEPTEMBER JUNE MARCH DECEMBER
--------- -------- -------- --------
Net sales.............................. $169,807 $182,938 $144,918 $170,607
Gross profit........................... 15,560 13,724 11,040 13,382
Net (loss)............................. (11,035) (936) (4,536) (87)
Diluted net (loss) per share........... (1.85) (0.16) (0.76) (0.01)
(a) Net loss and net loss per share have been restated from previously
reported amounts of $9,003,000 and $1.38 per share, as described in
Note 8 to the Company's unaudited quarterly financial statements for the
quarter ended June 30, 2000.
(b) Net loss and net loss per share have been restated from previously
reported amounts of $4,897,000 and $0.78 per share, as described in
Note 5 to the Company's unaudited quarterly financial statements for the
quarter ended March 31, 2000.
(c) Net loss and net loss per share have been restated from previously
reported amounts of $5,182,000 and $0.85 per share, as described in
Note 5 to the Company's unaudited quarterly financial statements for the
quarter ended December 31, 1999.
F-25
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING OF COST AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ -------- ---------- ----------
YEAR ENDED SEPTEMBER 30, 2000 (IN THOUSANDS):
Allowance for doubtful accounts.................. $1,642 $2,377 $(1,624) $2,395
Allowance for returns............................ $ 567 $ -- $ (83) $ 484
Allowance for price protection................... $ 82 $ 357 $ (1) $ 438
Allowance for inventory valuation................ $ 423 $ 224 $ -- $ 647
------ ------ ------- ------
$2,714 $2,958 $(1,708) $3,964
====== ====== ======= ======
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 $ 180 $ -- $ 295
Allowance for inventory valuation................ $ -- $ 100 $ -- $ 100
------ ------ ------- ------
$1,277 $ 798 $ -- $2,075
====== ====== ======= ======
F-26
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 15, 2001
POWER OF ATTORNEY
We, the undersigned directors and officers of En Pointe Technologies, Inc.
do hereby constitute and appoint Michael R. Shabazian and Kevin D. Ayers, 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 TITLE DATE
--------- ----- ----
Chairman of the Board
/s/ ATTIAZAZ "BOB" DIN Chief Executive Officer and
-------------------------------------- Director (Principal Executive January 15, 2001
Attiazaz "Bob" Din Officer)
/s/ MICHAEL R. SHABAZIAN
-------------------------------------- Director, President and Chief January 15, 2001
Michael R. Shabazian Operating Officer
/s/ KEVIN D. AYERS Chief Financial Officer
-------------------------------------- (Principal Financial and January 15, 2001
Kevin D. Ayers Principal Accounting Officer)
/s/ NAUREEN DIN
-------------------------------------- Director January 15, 2001
Naureen Din
/s/ ZUBAIR AHMED
-------------------------------------- Director January 15, 2001
Zubair Ahmed
/s/ MARK BRIGGS
-------------------------------------- Director January 15, 2001
Mark Briggs
/s/ VERDELL GARROUTTE
-------------------------------------- Director January 15, 2001
Verdell Garroutte
/s/ BARRY M. ABELSON
-------------------------------------- Director January 15, 2001
Barry M. Abelson
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger between the Registrant and En
Pointe Technologies, Inc., a Texas corporation, effective
February 29, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement
on Form S-1 filed May 8, 1996).
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 filed May 8, 1996).
3.2 Bylaws of Registrant (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement
on Form S-1 filed May 8, 1996).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed May 16, 2000.
4.3 Form of Common Stock Certificate (incorporated by reference
to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 filed May 8, 1996).
10.1 En Pointe Technologies, Inc. 1996 Stock Incentive Plan
(incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-1 filed
May 8, 1996).
10.2 En Pointe Technologies, Inc. Employee Stock Purchase Plan
(incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-1 filed
May 8, 1996).
10.3 Form of Directors' and Officers' Indemnity Agreement
(incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-1 filed
May 8, 1996).
10.5 Employment Agreement between the Registrant and Attiazaz
"Bob" Din, dated, 1996 (incorporated by reference to the
same numbered Exhibit to the Registrant's Registration
Statement on Form S-1 filed May 8, 1996).
10.10 Inventory and Working Capital Financing Agreement between
the Registrant and IBM Credit Corporation dated April 13,
1997 (incorporated by reference to the same numbered Exhibit
to the Registrant's Form 10-K filed December 29, 1997).
10.11 Sublease dated August 1996 between NCR International, Inc.
and the Registrant for the property located at 100 N.
Sepulveda Blvd., 19th Floor, El Segundo, California,
(incorporated by reference to Exhibit 28 to the Registrant's
Form 10-Q filed February 14, 1997).
10.18 Lease dated May 1999 between U.S. Real Estate Consortium and
the Registrant for property located at 1040 Vintage Avenue,
Ontario, (incorporated by reference to the same numbered
Exhibit to the Registrant's Form 10-K filed January 13,
2000).
23.1 Consent of PricewaterhouseCoopers LLP