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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
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COMMISSION FILE NUMBER 000-28052
EN POINTE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2467002
(State or other jurisdiction (I.R.S. Employer
of I. D. Number)
incorporation or organization)
100 N. SEPULVEDA BLVD., 19TH
FLOOR, 90245
EL SEGUNDO, CALIFORNIA
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (310) 725-5200
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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 _
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 13, 1996 was $27,195,280 (2,653,198 shares at a
closing price of $10.25).
As of December 13, 1996, 5,665,698 shares of Common Stock of the Registrant
were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED IN
CONNECTION WITH THE SOLICITATION OF PROXIES FOR THE ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
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. [ ]
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EN POINTE TECHNOLOGIES, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business................................................................................ 1
Item 2 Properties.............................................................................. 12
Item 3 Legal Proceedings....................................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders..................................... 13
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters................ 13
Item 6 Selected Financial Data................................................................. 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 8 Financial Statements and Supplementary Data............................................. 18
Item 9 Disagreements on Accounting and Financial Disclosures................................... 32
PART III
Item 10 Directors and Executive Officers of the Registrant...................................... 32
Item 11 Executive Compensation.................................................................. 32
Item 12 Security Ownership of Certain Beneficial Owners and Management.......................... 32
Item 13 Certain Relationships and Transactions.................................................. 32
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 32
SIGNATURES
Chief Executive Officer, Chief Financial Officer, and Directors......................... 35
i
PART I
This Report, including documents incorporated into this Report by reference,
contains certain forward-looking statements that are based on current
expectations. 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 Computer Products; the Company may be unable to retain
existing key sales and management personnel; there may be other material adverse
changes in the Computer Products industry or in the Company's operations or
business, and any or all of these factors may affect the Company's ability to
continue its current rate of sales growth or may result in lower sales volume
than currently experienced. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i) the
lack of prior experience of the Company in the provision of value-added
services, (ii) the lack of prior experience of the Company in the sales of
midrange systems and related services, (iii) continued downward pricing
pressures in the Computer Products market, (iv) continued dependence by the
Company on certain Allied Distributors, (v) a significant portion of the
Company's sales continuing to be to certain large customers, and (vi) 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
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 Report.
ITEM 1. BUSINESS
En Pointe Technologies, Inc. ("En Pointe" or the "Company") is a provider of
computers and computer-related products and services. By utilizing its
specialized information systems, which include its "EPIC" (En Pointe Information
Connection) system (the "EPIC System"), the Company is able to establish on-line
communications links with its sales representatives, certain distributors of
computers and computer-related products, including hardware, software,
peripherals, communications and other equipment ("Computer Products") and
certain of the Company's customers, which enables the Company to serve as an
electronic clearinghouse of Computer Products without many of the risks and
costs associated with maintaining inventory. The Company also has begun to
expand the range of fee-based services which it provides to its customers. The
Company has increased its sales, solely through internal growth, from $19
million in fiscal year 1993, the year the Company commenced operations, to $110
million in fiscal year 1994, to $201 million in fiscal year 1995 and to $345
million in the current fiscal year.
In addition to offering Computer Products, the Company offers certain
value-added services, such as specifying, researching and recommending
technology and coordinating and optimizing product distribution. En Pointe's
sales personnel help their customers manage the entire life-cycle of the
technology acquisition process (which includes assembly, design, integration,
software installation, asset management (which tracks computer equipment) and
systems servicing). In addition, the Company has begun offering value-added
services to include more sophisticated services, such as network design,
maintenance, engineering and software programming. The Company also has begun
selling midrange systems as well as related software design and consulting
services.
The Company is constructing a site on the World Wide Web with the aim of
facilitating future sales growth by increasing the Company's exposure to the
small business and home user markets, as well as other potential customers
interested in conducting on-line electronic commerce over the Internet.
1
THE EN POINTE BUSINESS MODEL
The Company provides its customers with an integrated approach to the
acquisition of computer technology, encompassing the provision of advice
regarding the selection, implementation and support of computers and the supply
of Computer Products, as well as a selection of value-added services designed to
help manage the customer's product investment throughout the entire life-cycle
of the computer technology acquisition process. An important part of the
Company's business is its ability to serve as a computerized clearinghouse of
Computer Products stocked and sold by a number of large Computer Products
distributors through its specialized information systems, including the EPIC
System. These information systems provide product pricing and availability
information, downloaded on a daily basis, from several Computer Products
distributors (the "Allied Distributors"). Information concerning approximately
$2 billion of inventory at 22 locations nationwide is usually available at any
given time. The Company's sales representatives and customers are able to access
prices for a variety of Computer Products. In addition to pricing information,
users of the Company's information systems can access information on product
availability (by both type and warehouse location), available delivery times for
products to be purchased and the delivery status of products already ordered.
For example, if immediate availability is of greatest importance to a customer,
then the Company's information systems can indicate the availability of products
from several Allied Distributors at different warehouse locations across the
country, and the order can be placed at the Allied Distributor location which
will enable the customer to receive the products in the shortest time period
possible.
Because the Company does not stock significant amounts of inventory, but
instead uses the drop-shipping facilities of distributors to supply its
customers directly, the Company avoids many of the costs and risks associated
with maintaining inventory. Most distributors of Computer Products provide
discounts to resellers, such as the Company, which make volume purchases. The
reseller can then pass along all or a portion of these discounts to its
customer. As the Company's sales have grown, it has been able to take advantage
of these discounts. In addition, many manufacturers also make discounts
available from time to time to customers who place large-volume orders. The
Company seeks to participate in these discounts either directly through
agreements with the manufacturer, or indirectly as discounts are made available
to distributors, which in turn will pass a portion along to resellers,
especially those resellers which are responsible for a large portion of
purchases of a manufacturer's products. Although the Company's reliance on the
inventory of its Allied Distributors results in it paying higher prices and
receiving lower gross margins for the Computer Products it resells, the Company
believes that the costs of such reliance are outweighed by the reduced inventory
risks and costs associated with such strategy.
The Company's customers benefit from the Company's ability to split large
orders among two or more Allied Distributors, thereby allowing orders to be
filled more conveniently than from a single distributor. As computers and
certain computer-related products become increasingly standardized and price and
availability become more important factors in customer purchasing decisions, the
Company believes its approach will allow its customers to realize increased
benefits from the Company's access to pricing and availability information among
Allied Distributors. The Company is also able to obtain additional discounts
from Allied Distributors by utilizing pricing information to negotiate with
Allied Distributors to match the best current price available for certain
products, a portion of which may, at the Company's discretion, be passed along
to customers. However, increased standardization of Computer Products and
increased price competition may adversely impact the Company's profit margins.
Therefore, a strategy that emphasizes expansion into computer-related services
is critical to future improvements in the Company's profit margins.
EN POINTE PRODUCTS AND SERVICES
The Company currently makes available to its customers an extensive
selection of Computer Products at what it believes to be a competitive
combination of price and service. The Company offers over 30,000 Computer
Products from over 700 manufacturers, including IBM, Compaq, Hewlett Packard,
Apple, Digital Equipment Corp., 3Com Corp. ("3Com"), Microsoft Corp.
("Microsoft"), Toshiba Corp., NEC, Tektronics, and Novell, Inc. ("Novell").
Products include midrange systems, desktop and laptop computers,
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monitors, servers, memory, peripherals, and operating systems and application
software. Due to the Company's purchasing power with the Allied Distributors,
the Company receives volume discounts from its major suppliers.
DISTRIBUTION
Many resellers of Computer Products have assumed certain 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 capital costs associated with the warehousing of
products, including the costs of leasing warehouse space, the costs of computer
inventory and tracking systems, as well as the costs associated with the need to
employ personnel for stocking and shipping duties. Furthermore, resellers which
stock inventory incur obsolescence costs. The Company believes these
obsolescence costs are significant due to the frequent product innovation and
associated product obsolescence that characterizes the Computer Products market.
The Company believes that these overhead and "touch" costs require many
resellers to incur expenses which the Company believes more than offset the
advantages of the lower purchase prices that may be available to such resellers.
Except for its configuration center at Memphis, which is maintained to
assure high customer satisfaction, the Company's business model allows it to
eliminate many of these overhead and "touch" costs and risks. The Company has
sought to take advantage of the operational strengths of its Allied
Distributors, which include Ingram Micro, InaCom, MicroAge, Inc., Merisel Fab,
and Intelligent Electronics. These Allied Distributors have developed extensive
warehousing, purchasing and distribution functions, on which the Company has
relied, rather than assuming those roles for itself. As a result, En Pointe is
able to reduce inventory and capital costs associated with these "backroom"
functions and accept lower margins than many of its competitors and still remain
profitable. In addition, by choosing to rely on the "backroom" strengths of its
Allied Distributors, the Company is also able to concentrate on what it believes
to be its core strengths; namely:
- SPECIFYING, RESEARCHING AND RECOMMENDING TECHNOLOGY. En Pointe's sales
representatives can use its information systems, including the EPIC
System, to assist its customers in selecting the most appropriate
technology to meet their needs, as well as to determine the best
combination of pricing and availability of a wide variety of Computer
Products.
- COORDINATING AND OPTIMIZING PRODUCT DISTRIBUTION. Because En Pointe's
sales representatives have the ability to access the current inventory and
availability records of several large distributors which collectively own
approximately 3.2 million square feet of warehouse space and stock
approximately $2 billion of product, these representatives are able to
determine which distributor is in the best position to supply the
customer. Furthermore, if any one distributor is unable to supply all of a
customer's needs, En Pointe is generally able to fill a customer's order
using several Allied Distributors. In order for En Pointe to facilitate
the distribution of Computer Products to its customers, En Pointe uses
various carriers (including FedEx and United Parcel Service ("UPS"))
tracking software and tracking numbers supplied by Allied Distributors to
track customer shipments.
En Pointe has been able to successfully implement its strategy due in large
part to the close relationships which it has developed with the Allied
Distributors. The Company has been able to maintain these relationships due to
several factors, the most important of which is the increasing volume of
business that the Company generates. The volume of business which the Company
generates enables the Company to negotiate with its Allied Distributors to
receive discounts on certain products, which the Company may, at its discretion,
pass along to its customers.
En Pointe believes the future success of its Computer Product sales business
will be dependent on its ability to bridge the gap between major customers and
major distributors, while retaining sufficient margins to operate profitably.
While En Pointe believes that its sales volume and customer base give it an
advantage over new entrants into the reseller market, other companies could
duplicate the En Pointe
3
business model, especially if the Company is unable to generate increases in
sales to increase its ability to bargain for volume discounts.
SPECIALIZED INFORMATION SYSTEMS; EPIC SYSTEM
The Company's specialized information systems provide users (including
customers, suppliers and En Pointe sales representatives) access to the
inventory and pricing information of a number of major Computer Products
distributors. The Company's information systems can be installed, if desired,
directly at a customer's designated facility. These information systems enable
the Company's customers to look up product pricing and availability information
by manufacturer part number, product description, or by En Pointe's "intelligent
part number," and provide detailed product descriptions for most major computer
manufacturer product lines. En Pointe usually will negotiate agreements with
those customers which have the Company's information systems installed on-site
to provide those customers with a "cost plus" pricing arrangement, pursuant to
which the customer pays the price indicated on the information systems plus an
additional percentage to En Pointe. Customers can also, if they choose, enter
orders on-line, check on the status of their orders, look up old orders and
serial numbers by purchase order numbers, check on back-ordered products as well
as verify FedEx and UPS tracking and shipping numbers.
The Company's EPIC System is designed to allow the Company to make
modifications as necessary in order to respond to changes in the reseller
marketplace as well as changes in the Company's business. The EPIC System can
also be customized to integrate with the customer's existing system. The EPIC
System has the capacity to store comments regarding each customer who has placed
an order through the Company, which allows it to anticipate and respond to
individual customer needs and requirements. En Pointe customers can also provide
feedback to the Company through the EPIC System regarding each purchase made,
which allows the Company to self-monitor its performance and make adjustments as
necessary.
The Company has successfully completed its first phase of EPIC Suite
Development, i.e. "Sales Management Module", and is in the process of completing
the EPIC back office modules (the "Order Management Module"). The target date
for completion of the back office module is the end of calendar 1997.
VALUE-ADDED SERVICES
The Company believes it can provide value to its customers not only by
allowing them to choose products from a variety of manufacturers and
distributors, but also by offering individualized, value-added services. En
Pointe believes that maintaining a direct contact and a technical support link
with its customers is an important competitive factor that promotes customer
satisfaction and is necessary in order to attract and retain customers. In
addition, certain manufacturers require their remarketers (which include
resellers such as En Pointe) to provide technical support as an ongoing
condition to authorizing the remarketers to sell their products.
En Pointe's network integration services include local and wide area network
design and installation, telecommunications consulting and data cabling
services. To support these services, En Pointe personnel participate in software
solution provider certification and authorization programs. En Pointe currently
has attained the following certifications and designations: Novell Authorized,
Microsoft Senior Partner, Microsoft Windows NT Certified, 3Com NETBuilder II and
LinkBuilder III GH Authorized, DEC Alpha, IBM RS 6000/AIS and HP 9000.
CUSTOMERS
The Company's clearinghouse approach, together with its development of
strategic alliances with Allied Distributors, has allowed the Company to capture
the business of a number of large corporate and government accounts. Once the
Company has been approved as a supplier to a customer, the Company seeks to
capture a significant portion of a customer's order placements, which are
typically spread over a number of resellers. In 1995, the Company was awarded a
three-year non-exclusive national contract with
4
IBM (with two one-year extensions at IBM's option) to supply Computer Products
to IBM wholly-owned subsidiaries as well as to certain internal IBM operating
divisions and certain customers of IBM. In 1996 the Company was awarded
contracts with Northrop Grumman Corp. and the State of California through its
California Multiple Award Schedule ("CMAS"). In the future, the Company believes
that maintaining high customer satisfaction will enable the Company to more
effectively expand the range of services provided to its customers to include
sales of midrange systems, software consulting and software development work.
The Company encourages customers to enter into long-term contracts,
typically of at least one to two years' duration. However, these contracts are
usually terminable upon 30 days' notice by either party. Purchases under these
contracts are made pursuant to individual purchase orders. The Company's policy
is to attract major customers by offering these customers "cost-plus" pricing,
whereby the Company prices Computer Products at the Company's cost plus a
certain additional percentage negotiated with the customer. While margins under
"cost-plus" pricing may be low, the Company believes that such pricing policy
enables the Company to increase its sales volume and solidifies the client
relationship.
The entities listed below are illustrative of the wide range of customers
which have purchased Computer Products from the Company. There can be no
assurance that any of these listed entities will continue to utilize the
Company's services in the future:
Bay Networks, Inc. Mercury Insurance State of Texas
Electronic Data Systems Southwestern Bell Mobile State of Washington
Hillhaven Corporation State of Oregon Time Warner
IBM Northrop Grumman Corp. State of California (CMAS)
En Pointe believes that a necessary element of its future success will be
the retention of its customer base. Therefore, the Company is dedicated to
providing high levels of customer support and satisfaction. The Company attempts
to ensure that its sales employees are committed to ensuring the highest level
of customer satisfaction by providing them with financial incentives directly
tied to customer satisfaction levels. The Company believes that this approach
encourages its sales employees who interact with the Company's customers to take
innovative approaches towards ensuring that customers' needs are met.
SUPPLY AND DISTRIBUTION
Most of the Company's Computer Product orders are currently filled by five
Allied Distributors: Ingram Micro, InaCom, Micro Age, Merisel Fab, and
Intelligent Electronics. The Company has entered into contracts with each of
these distributors for terms of one year, with annual one-year automatic
renewals. The Company has attempted to cultivate and develop close relationships
with its Allied Distributors in order to better implement its clearinghouse
approach, in which distributor cooperation is crucial to success.
One key feature of the Company's clearinghouse approach is the ability of
the Company to reliably deliver products purchased through the Company in a
timely fashion. The Company's information systems, which also serve as the
Company's ordering systems, allow the Company to place orders on a same-day
basis. Orders placed prior to 4:00 p.m. Pacific Time usually ship the same day.
After an order is entered, it is reviewed and approved at the Company's El
Segundo headquarters, and sent out electronically to the distributor. Once the
order is shipped by a distributor, shipping information is downloaded by the
Company (usually done the day after the order is placed) into its information
systems. The Company will then use that information to produce an invoice, which
is sent to the customer. The standard delivery time is two days. If a customer
places an order which cannot be filled solely by a single distributor, then the
Company will split the order among one or more distributors.
If the customer requests integration or configuration services, then the
Company will integrate the order either at its Memphis, Tennessee integration
facility (chosen due to its proximity to the FedEx hub facility located in
Memphis), or at one of four integration and configuration locations nationwide
operated by certain of the Allied Distributors. Integration needs can range from
building servers to desktop
5
upgrades and from installing office productivity software to sophisticated
network management configurations.
COMPETITION
The segment of the computer industry in which the Company operates is highly
competitive. Pricing is very aggressive and the Company expects pricing
pressures to continue. The Company competes with a large number and wide variety
of resellers of Computer Products, including traditional personal computer
retailers, computer superstores, consumer electronics and office supply
superstores, mass merchandisers, national direct marketers (including
value-added resellers and specialty retailers, distributors, franchisers,
manufacturers and national computer retailers 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.
Many of the Company's competitors are larger, have substantially greater
resources and offer a broader range of services than does the Company. The
Company competes with, among others, CompuCom Systems, Inc., CDW Computer
Centers, Inc., Vanstar Corp., Entex and Elcom International, Inc. in the
personal computer products distribution market. The Company expects to compete
with Vanstar, CompuCom and Entex in the systems integration and network services
market.
Competitive factors include price, service and support, the variety of
products 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 industry has come to be characterized by aggressive price cutting, and the
Company expects that pricing pressures will continue to increase in the
foreseeable future. In addition, the Computer Products industry is characterized
by rapid 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 continually provide
competitive prices, superior product selection and delivery response time in
order to remain competitive. If the Company were to fail to compete favorably
with respect to any of these factors, the Company's business and operating
results would be adversely affected.
INTELLECTUAL PROPERTY
The Company's success to date is and will be dependent in part on its
ability to protect its proprietary technology, especially its rights in the EPIC
System. The Company relies primarily upon trade secrecy and confidentiality
agreements to establish and protect its rights in its proprietary technology.
While the Company has a copyright on its EPIC System, it does not have any
patents on any of its proprietary technology which the Company believes to be
material to its future success, and the Company cannot be certain that others
will not develop substantially equivalent or superseding proprietary technology.
Furthermore, there can be no assurance that any confidentiality agreements
between the Company and its employees will provide meaningful protection of the
Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information.
The Company has recently settled litigation with respect to intellectual
property rights associated with one of its computerized information systems with
a former employee of the Company. See "Legal Proceedings." There can be no
assurance that the Company will not become the subject of additional claims of
infringement involving this computerized information system, or any other
system, including the Company's EPIC System. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Any such claims could be time consuming, result in costly
litigation or lead the Company to enter into royalty or licensing agreements
rather than disputing the merits of such claims.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 330
individuals, including 140 sales representatives and marketing agents, 48 in
customer support and 112 in administration, finance and MIS (and an additional
30 in Pakistan responsible for programming services). The Company believes that
its
6
ability to recruit and retain highly skilled technical and other management
personnel will be critical to its ability to execute its business plans. 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.
RECENT DEVELOPMENTS
On May 8, 1996 the Company completed its initial public offering of
2,250,000 shares at $8.00 per share, realizing $15,544,943 in net proceeds.
Proceeds from the offering were used to retire all of the long term debt and to
reduce the balance outstanding on the line of credit. Because of the Company's
improved financial condition, the borrowing rate on its line of credit has been
reduced from 2.75% over prime to 1% over prime.
In May 1996, the Company opened its Salt Lake City branch sales office and
two months later opened a Chicago sales office. In September 1996, the Company
moved its head office from Los Angeles to El Segundo, acquiring 24,000 square
feet of office space under a five year rental agreement.
In July 1996, a contract from Northrop Grumman Corporation to supply
computer equipment, software and peripherals was received by the Company, which
is renewable annually for three years.
Software development, upgrades, and maintenance of the EPIC system continued
with a portion being done by employees in Pakistan and El Segundo, as well as by
outside contractors. Also under development was construction of the Company's
home page on the World Wide Webb (WWW), as well as software allowing on-line
order placement using EPIC on the WWW. In October 1996, the Company's home page
became operational.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
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 Allied Distributors. These
alliances enable the Company to make available to its customers a wide selection
of products without subjecting the Company to many of the risks and costs of
maintaining large amounts of inventory. Purchases from key Allied Distributors
account for the majority of the Company's aggregate purchases for fiscal 1996.
The Company directly competes with certain Allied Distributors for many of the
same accounts 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. Certain Allied
Distributors provide the Company with substantial incentives in the form of
rebates passed through from the manufacturer, discounts, credits and cooperative
advertising. There can be no assurance that the Company will continue to receive
such incentives in the future.
Substantially all of the Company's contracts with its Allied Distributors
are terminable upon 30 days' notice or less and several contain minimum volume
requirements as a condition to providing discounts to the Company. Termination
or interruption of the Company's relationships with any of the Company's
significant Allied Distributors, modification of the terms or discontinuance of
agreements the Company has with these Allied Distributors or failure of the
Company to meet minimum volume requirements could materially adversely affect
the Company's financial position, operating results, and cash flows. 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. In order to offer the products of most manufacturers, the Company is
required to obtain authorizations from the manufacturers to act as a reseller of
such products, which authorizations may be terminated at the discretion of the
manufacturers. 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 could have a
material adverse effect on the Company's financial position, operating results,
and cash flows.
7
Recent changes in the computer industry, especially pressure on gross profit
margins, has adversely affected a number of Computer Products distributors,
including certain Allied Distributors. There can be no assurance that the
continuing evolution of the computer industry will not adversely affect such
distributors. Because the Company's overall business strategy depends on the
Company's relationships with Allied Distributors, the Company 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 computer industry.
DEPENDENCE ON AVAILABILITY OF CREDIT.
The Company's business is capital intensive in that the Company is required
to finance the purchase of Computer Products in order to fill sales orders. In
order to obtain necessary capital, the Company relies primarily on lines of
credit that are collateralized by accounts receivable. As a result, the amount
of credit available to the Company may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's accounts
receivable, economic trends in the computer industry, interest rate fluctuations
and the lending policies of the Company's lenders. Many of these factors are
beyond the Company's control. Any decrease or material limitation on the amount
of capital available to the Company under its credit lines 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 financial position, operating results, 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 financial position, operating results, 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 be available to the Company in the future. The inability of the Company to
have continuous access to such financing at reasonable costs could severely and
adversely impact the Company's financial position, operating results, and cash
flows.
RISK OF LOW MARGIN BUSINESS.
The Company's past growth in net income has been fueled primarily by sales
growth rather than increased profit margins. Given the significant levels of
competition that characterize the computer reseller market as well as the lower
gross margins generated by the Company as a result of its reliance on the
inventory of its Allied Distributors, it is unlikely that the Company will be
able to substantially increase profit margins in its core business of reselling
Computer 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 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 sales
growth or effective expansion into higher margin business segments, neither of
which can be assured. Furthermore, low margins increase the sensitivity of the
business to increases in costs of financing, because financing costs to carry a
receivable can be very high compared to the low amount of gross profit on the
sale underlying the receivable itself. Any failure by the Company to increase
its profit margins and sales levels could have a material adverse effect on the
Company's stock price and prospects for future growth.
COMPETITION.
Many of the Company's competitors compete principally on the basis of price
and may have lower costs than the Company. There can be no assurance that the
Company will not be subject to increased price competition, which could have a
material adverse effect on its results of operations. Many of the Company's
current and potential competitors are larger and have substantially greater
resources than the Company and the Company believes that a number of its
competitors are employing or are contemplating adopting business models similar
to that employed by the Company. The Company believes that competition may
increase in the future, which could require the Company to reduce prices,
increase marketing
8
expenditures or take other actions which may have a material adverse effect on
the Company's financial position, operating results, and cash flows. There can
be no assurance that the Company will continue to compete successfully against
existing or new competitors that may enter markets in which the Company
operates.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS.
For the year ended September 30, 1996, sales to International Business
Machines Corporation ("IBM") accounted for approximately 27% of the Company's
net sales and accounts receivable. The loss of IBM or any other large customer
or the failure of any customer to pay its accounts receivable on a timely basis
could have a material adverse effect on the Company's financial position,
operating results, and cash flows.
DEPENDENCE ON PROPRIETARY TECHNOLOGY.
The Company's ability to effectively compete in its market will depend
significantly on its ability to protect its proprietary technology in general
and its newly-developed EPIC System in particular. The Company relies primarily
on trade secrecy and confidentiality agreements in order to protect its rights
in its proprietary technology. There can be no assurance that proprietary
information can be maintained as confidential or be protected from unauthorized
use or that the Company will be able to achieve or maintain a meaningful
technological advantage. The Company could incur substantial costs in seeking
enforcement of its proprietary rights against infringement or unauthorized use
by others or in defending itself against similar claims of others. While the
Company has a copyright on its EPIC system, it does not have any patents on the
proprietary technology which the Company believes is material to the Company's
future success, and 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 may experience delays, complications or expenses in installing,
integrating and operating the EPIC System, any of which could have an adverse
effect on the Company's operations and financial performance. In addition,
interruptions or disruptions in EPIC System operations could adversely affect
the financial results of the Company. The Company believes that its EPIC System
will require modification, improvement or replacement as the Company expands.
Such modifications, improvements or replacements may require substantial
expenditures to design and implement and may require interruptions in operations
during periods of implementation, any of which could have a material adverse
effect on the Company's financial position, operating results, and cash flows.
RISK OF GEOGRAPHIC EXPANSION.
The Company's growth has been and will continue to be fueled, in part, by
revenues generated through expansion into new geographic markets. The Company
has already opened branch offices and targeted many of the metropolitan markets
that the Company believes offer the most potential for sales growth.
Accordingly, to the extent the Company attempts to open additional branch
offices, there can be no assurance that the new offices will experience the same
success, if any, experienced by the Company's existing branch offices. The
failure of the Company to expand or the failure by the Company to generate
sufficient sales volumes in new branch offices could have a material adverse
effect on the Company's financial position, operating results, and cash flows.
RISK OF PRODUCT RETURNS.
As is typical of the computer 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 which are outside the Company's
control. Although the Company's distributors and manufacturers have specific
return policies that enable the Company to return certain types of goods for
credit, to the extent that the Company's customers return
9
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. The
Company has modified its return policies in an attempt to reduce the rate and
costs of product returns. There can be no assurance that such modifications will
be effective in achieving these goals. Any significant increase in the rate of
product returns coupled with the unwillingness by the Company's distributors or
manufacturers to accept goods for return could have a material adverse effect on
the Company's financial position, operating results, and cash flows.
MANAGEMENT OF GROWTH.
Since its inception, the Company has experienced rapid growth in the number
of its employees and 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. The
Company's growth, if any, is expected to require the addition of new management
personnel and the development of additional expertise by existing management
personnel. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational, financial and sales systems,
to develop the skills of its managers and supervisors and to hire, train,
motivate and effectively manage its employees. There can be no assurance that
the Company will be successful in managing any expansion, and the failure to do
so could materially adversely affect the Company's financial position, operating
results, and cash flows.
INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS OF DISTRIBUTION.
The personal computer industry is undergoing significant change. The
industry has become more accepting of large-volume, cost-effective channels of
distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer resellers are consolidating operations and acquiring
or merging with other resellers to increase efficiency. This current industry
reconfiguration has resulted in increased pricing pressures. Decreasing prices
of Computer Products require the Company to sell a greater number of products to
achieve the same level of net sales and gross profit. The continuation of such
trend could make it more difficult for the Company to continue to increase its
net sales and earnings growth, if at all. In addition, it is possible that the
historically high rate of growth of the personal computer industry may slow at
some point in the future. If the growth rate of the personal computer industry
were to decrease, the Company's financial position, operating results, and cash
flows could be materially adversely affected.
Furthermore, new methods of distribution and sales of Computer Products,
such as on-line shopping services and catalogs published on CD-ROM, may emerge
in the future. Hardware and software manufacturers have sold, and may in the
future 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 accounts.
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
financial position, operating results, and cash flows.
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS.
The Company has expanded its operations into Pakistan. There are certain
risks inherent in doing business on an international level, such as remote
management, unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, and potentially
adverse tax consequences, any of which could adversely impact the success of the
Company's international operations. There can be no assurance that
10
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
financial position, operating results, and cash flows.
RISKS OF CONSULTING SERVICES AND VALUE-ADDED BUSINESS.
The Company has begun to expand the nature and scope of its computer
consulting and value-added services. The Company has had limited experience in
providing such consulting and value-added services. There can be no assurance
that the consulting and value-added services business will be successfully
integrated with the Company's Computer Products reselling business or that the
Company will be able to effectively compete in this market. In addition, the
Company will be subject to the risks associated with a consulting and
value-added services business, including dependence on reputation, volatility of
workload and dependence on ability to retain qualified technical personnel.
Also, a portion of the Company's consulting and value-added services 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 financial position, operating results,
and cash flows.
POTENTIAL QUARTERLY FLUCTUATIONS.
The Company experiences variability in its net sales and net income on a
quarterly basis as a result of many factors, including the condition of the
computer industry in general, seasonal shifts in demand for Computer Products
and industry announcements of new products or upgrades. The Company's planned
operating expenditures each quarter are based on sales forecasts for the
quarter. If sales do not meet expectations in any given quarter, results of
operations for the quarter may be materially adversely affected.
11
ITEM 2. PROPERTIES
The Company currently has twelve sales branches nationwide including its
headquarters facility in El Segundo, California. Configuration services are
performed at the Memphis, TN facility. Internet development is done at the
Thousand Oaks, CA office. Part of the in house software development is done
overseas at the Pakistan facility. The following table identifies the principal
leased facilities:
APPROXIMATE
DATE SQUARE
FACILITY LOCATION OPENED FOOTAGE EXPIRATION DATE
- ------------------------ ---------------------------------------- --------- ------------- -------------------
Corporate 100 N. Sepulveda Blvd. 10/01/96 24,042 05/31/2001
Headquarters El Segundo, CA
Configuration 4132 New Getwell 11/01/94 8,000 11/30/99
Facility Memphis, TN
Internet Thousand Oaks, CA 09/09/96 598 09/08/97
Facility
Programming Pakistan 07/01/96 4,500 06/30/99
Facility
Palo Alto 1860 Embarcadero Road, Suite 140 04/01/95 6,566 03/31/2000
Sales Branch Palo Alto, CA
Dallas 13601 Preston Road, Suite 1000 East 02/01/94 5,787 04/30/97
Sales Branch Dallas, TX
Austin 200 E. Sixth Street, Suite 203 05/01/94 2,500 04/30/97
Sales Branch Austin, TX
Lake Oswego 5335 S.W. Meadows Road, Suite 325 10/01/96 2,758 09/30/99
Sales Branch Lake Oswego, OR
Denver 1873 South Bellaire Drive 08/01/94 2,989 07/31/99
Sales Branch Denver, CO
New York 500 Fifth Avenue, 58th Floor 04/30/96 2,500 07/31/97
Sales Branch New York, NY
Kirkland 10627 38th Circle, N.E., Bldg. 32 07/01/96 5,880 06/30/2002
Sales Branch Kirkland, WA
Chicago 2015 Spring Road, Suite 125 07/01/96 4,914 11/30/2001
Sales Branch Oak Brook, IL
Salt Lake City 2436 West 1500 South 05/01/96 2,214 Month to Month
Sales Branch Salt Lake City, UT
Sacramento 980 Ninth Street, Suite 2050 07/15/96 2,888 Month to Month
Sales Branch Sacramento, CA
Irvine 18001 Cowan, Suite C 09/20/96 4,939 04/30/98
Sales Branch Irvine, CA
ITEM 3. LEGAL PROCEEDINGS
In April 1996 the Company, Bob Din and Naureen Din entered into a settlement
agreement with a former employee of the Company, pursuant to which the former
employee has released the Company from any and all claims with respect to the
Company's use of certain computerized information system software originally
developed by the former employee prior to his employment with the Company (the
"Settlement Agreement"). As consideration for entering into the Settlement
Agreement, the Company has agreed to pay the former employee installment
payments which have the equivalent present value of $1.1 million.
12
Legal fees incurred in connection with the Settlement Agreement and related
litigation were expensed as incurred by the Company.
The Company filed suit against its insurance carrier in order to recoup both
legal costs incurred by the Company in connection with its defense of the
foregoing litigation as well as for amounts paid to the former employee pursuant
to the settlement. In August the insurance company settled with the Company
paying a total of $1,562,500.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended September 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on May 8, 1996 at $8.00 and is
traded on the Nasdaq National Market under the symbol ENPT. The following table
sets forth the quarterly high and low sale prices for the Common Stock as
reported by the Nasdaq National Market.
HIGH LOW
--------- ---------
FISCAL YEAR 1996
Third quarter............................................................. $ 13 1/8 $ 8 3/4
Fourth quarter............................................................ 11 1/4 8 1/4
On December 13, 1996, the closing sale price for the Company's Common Stock
was $10.25 per share. As of December 18, 1996, there were 28 holders of record
of the Company's Common Stock.
En Pointe has never declared or paid any dividends to stockholders. Certain
of the Company's debt agreements currently prohibit the payment of dividends by
the Company. At this time, the Company intends to continue its policy of
retaining earnings for the continued development and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
Company's financial statements and the related notes thereto that have been
audited by Coopers & Lybrand L.L.P., independent accountants. 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 financial statements
and the related notes thereto included elsewhere in this report on Form 10-K.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share amounts)
JANUARY 25,
1993 (DATE OF
INCEPTION)
YEAR ENDED SEPTEMBER 30, THROUGH
---------------------------------- SEPTEMBER 30,
1996 1995 1994 1993
---------- ---------- ---------- -------------
Net sales..................................................... $ 345,093 $ 200,797 $ 109,987 $ 19,327
Net income (loss)............................................. 3,330 703 187 (21)
Income (loss) per common share................................ 0.77 0.21 0.06 (0.01)
13
BALANCE SHEET DATA
(In thousands)
SEPTEMBER 30,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
Total assets........................................................... $ 64,923 $ 36,792 $ 24,462 $ 9,459
Long-term debt......................................................... 284 1,733 1,940 666
Total stockholders' equity (deficit)................................... 20,875 1,832 189 (11)
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 Company's
financial statements and the related notes thereto appearing elsewhere herein.
OVERVIEW
Revenues are recognized upon product shipment and satisfaction of
significant vendor obligations, if any. Net sales consist of product sales, less
discounts. Cost of sales includes current and estimated allowances for losses
from returns that will not be accepted by the Company's distributors. In
addition, cost of sales includes credits from rebates and incentives passed on
from Allied Distributors. The Company's return policy previously placed major
emphasis on customer accommodation at the expense of losses arising from product
that could not be returned to distributors. As a result of this policy, the
Company experienced high losses on product returns for fiscal year 1995 of .25%
of sales. During 1995, the Company recognized the need for tighter controls of
product returns and centralized the processing of returns. In October 1995, the
Company amended its return policy to more closely align its policies with those
of its distributors. In addition, a new database that could more closely monitor
the returned product authorization was initiated and additional personnel were
hired to assist in return processing. As a result of these controls and
attention to returns, loss estimates for product returns are not considered
significant for the year ended 1996.
Because the Company does not experience significant differences for tax and
financial reporting purposes, the Company's effective tax rate has not varied
significantly from the statutory rate in the past, and the Company does not
anticipate that its effective tax rate will vary significantly from the
statutory rate in the future.
The Company does not place an order for product purchases from distributors
until it has received a customer sales order. Inventory is then drop-shipped by
the distributor to either the customer or the Company's configuration center in
Memphis, Tennessee. The distributor typically ships its products within one to
two days of receipt of a purchase order and, consequently, substantially all of
the Company's revenues in any quarter result from orders received in that
quarter. Thus, although the Company does not maintain inventory in stock for
resale, it records as inventory merchandise being configured and merchandise
purchased from distributors, but not yet shipped to customers. As a result, the
Company generally reflects one or two day's cost of sales as inventory.
14
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
SEPTEMBER 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Net sales............................................................... 100.0% 100.0% 100.0%
Cost of sales........................................................... 91.6 92.0 91.9
----- ----- -----
Gross profit.......................................................... 8.4 8.0 8.1
Selling and marketing expenses.......................................... 4.4 4.6 5.0
General and administrative expenses..................................... 1.7 1.9 2.0
Litigation settlement and defense, net.................................. 0.2 0.0 0.0
----- ----- -----
Operating income...................................................... 2.1 1.5 1.1
Interest expense........................................................ 0.5 0.9 1.0
Other income, net....................................................... 0.0 0.0 (0.2)
----- ----- -----
Income before taxes................................................... 1.6 0.6 0.3
Provision for income taxes.............................................. 0.7 0.2 0.1
----- ----- -----
Net income............................................................ 0.9% 0.4% 0.2%
----- ----- -----
----- ----- -----
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for 1996 were $345.1 million, an increase of $144.3
million, or 71.9%, compared to $200.8 million for 1995. The increase in sales
was attributable to sales to new customers and increased sales to existing
customers. Sales to IBM accounted for 27% of total sales and 28% of total
accounts receivable for the 1996 fiscal year compared with 11% and 15%
respectively for the prior fiscal year. The Company anticipates continued sales
growth for fiscal 1997, but at a more moderate rate of increase than that
experienced in fiscal 1996.
GROSS PROFIT. Gross profit for 1996 was $28.9 million, an increase of $12.9
million, or 80.4%, compared to $16.0 million for 1995, and remained relatively
consistent as a percentage of sales at approximately 8.4% in 1996 as compared to
8.0% in 1995. Though the Company is seeking to expand into higher gross profit,
value-added services, the Company does expect the pressures on gross profit
margins from its core business to continue. Further, the Company anticipates
incentive rebates from manufacturers may decline which would result in a
reduction of gross margins.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for 1996
were $15.3 million, an increase of $5.9 million, or 63.9%, compared to $9.3
million in 1995, primarily as a result of increased sales volume. As a
percentage of sales, however, this expense decreased to 4.4% in 1996 from 4.6%
in 1995, due to fixed costs being spread over a higher volume of sales and a
lower commission rate paid on sales to high-volume customers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1996 were $5.9 million, an increase of $2.2 million, or 58.4%, compared to
$3.8 million in 1995, primarily as a result of increased staff necessary to
support the increase in sales volume and other administrative activities.
Software development, upgrades and maintenance was $.9 million. Except for $.6
million of cumulative capitalized software development costs, which is being
amortized over three years commencing June 1996, all software related costs have
been expensed as incurred. As a percentage of sales, general and administrative
expenses decreased slightly to 1.7% in 1996 as compared to 1.9% in 1995.
LITIGATION SETTLEMENT, DEFENSE, AND RECOVERY. In April 1996, the Company
entered into a settlement agreement with a former employee. See Item 3, Legal
Proceedings.
INTEREST EXPENSE. Interest expense for 1996 was $1.7 million, a decrease of
$.2 million, or 9.2%, compared to $1.8 million for 1995. The decrease in
interest expense was primarily due to a reduction
15
in debt of $14.7 million from applying proceeds of the public offering to debt
reduction as well as a reduction in the interest rate itself that gradually
declined during the year by 2.0%, which reflected a slight prime reduction and
an improved borrowing rate from the lender. Offsetting the reductions in debt
were increased borrowings to support accounts receivable growth of $24.1
million.
NET INCOME. Net income for 1996 was $3.3 million, an increase of $2.6
million, or 373.5%, compared to $.70 million for 1995. The increase in 1996 net
income resulted primarily from the 71.9% increase in sales and the related 80.4%
increase in gross profit in 1996, as discussed above. Additionally, although
gross profit remained relatively stable as a percentage of sales, selling and
marketing expenses and general and administrative expenses decreased as a
percentage of sales from 6.5% in 1995 to 6.1% in 1996.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1995 AND 1994
NET SALES. Net sales for 1995 were $200.8 million, an increase of $90.8
million, or 82.6%, compared to $110.0 million for 1994. The increase in sales
was attributable to sales to new customers, increased sales to existing
customers and the addition of IBM as a customer in early fiscal 1995.
GROSS PROFIT. Gross profit for 1995 was $16.0 million, an increase of $7.1
million, or 79.6%, compared to $8.9 million for 1994, and remained consistent as
a percentage of sales at approximately 8.0% in 1995 as compared to 8.1% in 1994.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for 1995
were $9.3 million, an increase of $3.8 million, or 69.4%, compared to $5.5
million in 1994, primarily as a result of increased sales volume. As a
percentage of sales, however, this expense decreased to 4.6% in 1995 from 5.0%
in 1994, due to fixed costs being spread over a higher volume of sales and a
lower commission rate paid on sales to high-volume customers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1995 were $3.8 million, an increase of $1.6 million, or 73.9%, compared to
$2.2 million in 1994, primarily as a result of increased staff necessary to
support the increase in sales volume and other administrative activities. As a
percentage of sales, general and administrative expenses decreased slightly to
1.9% in 1995 as compared to 2.0% in 1994.
INTEREST EXPENSE. Interest expense for 1995 was $1.8 million, an increase
of $.7 million, or 64.4%, compared to $1.1 million for 1994. The increase in
interest expense was primarily due to increased borrowings to support an
increase in the Company's accounts receivable balances resulting from growth in
its net sales and, to a lesser extent, a slight increase in interest rates.
NET INCOME. Net income for 1995 was $.7 million, an increase of $.5
million, or 276.5%, compared to $.19 million for 1994. The increase in 1995 net
income resulted primarily from the 82.6% increase in sales and the related 79.6%
increase in gross profit in 1995, as discussed above. Additionally, although
gross profit remained relatively stable as a percentage of sales, selling and
marketing expenses and general and administrative expenses decreased as a
percentage of sales from 7.0% in 1994 to 6.5% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996 operating activities used cash totaling $16.0 million
compared to $9.3 million used in the prior fiscal year. The primary cause for
the increased use of cash was to accommodate the increase in accounts receivable
of $24.1 million, resulting from sales growth. Restricted cash, representing
amounts on deposit with financial institutions pursuant to certain credit
arrangements, decreased $.5 million for the fiscal year 1996 due to the payoff
of Allied Distributor indebtedness from proceeds from the public offering. At
September 30, 1996, restricted cash represented primarily cash held in escrow as
security for a purchase agreement with an Allied Distributor. The agreement
requires $55 million in products to be purchased over an 18 month period
beginning October 1, 1996. A pro rata portion of the escrowed funds is
16
released as incremental $5 million dollar purchase levels are obtained. Should
the Company not meet the purchase commitment in full, any unreleased funds would
be forfeited to the Allied Distributor.
Investing activities used cash totaling $2.2 million for fiscal 1996
compared with $.8 million used in the prior year. About half of the $1.3 million
increase was for software development. The remainder was for computer equipment
and other office equipment and furnishings.
Financing activities provided net cash totaling $21.1 million, mostly from
net proceeds from the Company's IPO. Another source of cash has been borrowings
on lines of credit which have been used primarily to finance accounts receivable
balances which have grown as a result of increased sales.
The Company's accounts receivable balance at September 30, 1996 and 1995,
was $55.7 million and $31.9 million, respectively. The number of days' sales
outstanding in accounts receivable was 59 days and 58 days, as of September 30,
1996 and 1995, respectively.
As of September 30, 1996, the Company had approximately $3.8 million in
cash, including $.6 million in restricted cash, and working capital of $18.3
million. The Company has several revolving credit facilities collateralized by
accounts receivable and all other assets of the Company, including a $40 million
line with IBM Credit Corporation ("IBM Credit"). As of September 30, 1996 and
1995, such lines of credit provided for maximum aggregate borrowings of
approximately $48.6 million and $33.5 million, respectively, of which
approximately $36.5 million and $27.5 million was outstanding, respectively.
Outstanding borrowings on the lines of credit bear interest at up to prime
plus 1%. The lines of credit are automatically renewable on an annual basis
unless notification of an election not to renew is made by either the Company or
creditor on or prior to the annual renewal date. Borrowings are collateralized
by substantially all of the Company's assets. In addition, the lines of credit
contain certain financing and operating covenants relating to net worth,
liquidity, profitability, repurchase of indebtedness and prohibition on payment
of dividends. At September 30, 1996, the Company was in compliance with the
covenants under the Company's line of credit agreements.
The Company believes that the net proceeds from the recent sale of common
stock together with its current working capital, available lines of credit, and
cash flows from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next 12 months.
IMPACT OF INFLATION
The impact of inflation on the Company has not been significant in recent
years because of the relatively low rates of inflation experienced in the United
States.
RECENT PRONOUNCEMENTS
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The accounting or disclosure requirements of this statement are
effective for the Company's fiscal year 1997. The Company has not yet determined
whether it will adopt the accounting requirements of this standard or whether it
will elect only the disclosure requirements and continue to measure compensation
costs using Accounting Principles Board Opinion No. 25.
In 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"), was issued and was adopted by the Company for the year
ended September 30, 1996. This statement requires that long-lived assets and
certain identifiable intangible assets held and used be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. The adoption of SFAS No. 121 did not have a
material impact on the financial position, results of operations, or cash flows
of the Company.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EN POINTE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Accountants.......................................................................... 19
Balance Sheets as of September 30, 1996 and 1995........................................................... 20
Statements of Operations for each of the Three Years Ended in the Period Ended September 30, 1996.......... 21
Statements of Stockholders' Equity for each of the Three Years in the Period Ended September 30, 1996...... 22
Statement of Cash Flows for each of the Three Years in the Period Ended September 30, 1996................. 23
Notes to Financial Statements.............................................................................. 24
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts........................................................... 31
18
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
En Pointe Technologies, Inc.
We have audited the accompanying balance sheets of En Pointe Technologies,
Inc. as of September 30, 1996 and 1995 and the related statement of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1996. We have also audited the financial statement schedule
listed in the index on page 18 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of En Pointe Technologies, Inc.
as of September 30, 1996 and 1995, and the results of its operations and cash
flows for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
November 15, 1996
19
EN POINTE TECHNOLOGIES, INC.
BALANCE SHEETS
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 3,158,112 $ 290,181
Restricted cash.................................................................. 610,000 1,116,000
Accounts receivable, net of allowance for returns and doubtful accounts of
$901,600 and $511,600, for September 30, 1996 and 1995, respectively........... 55,672,676 31,928,669
Inventories...................................................................... 1,806,073 1,631,709
Deferred tax assets.............................................................. 288,925 239,945
Prepaid expenses and other current assets........................................ 565,676 306,869
------------- -------------
Total current assets........................................................... 62,101,462 35,513,373
Property and equipment, net of accumulated depreciation and amortization......... 2,821,051 1,278,895
------------- -------------
Total assets................................................................... $ 64,922,513 $ 36,792,268
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable--stockholder....................................................... $ -- $ 150,000
Current portion of notes payable................................................. 163,865 1,579,471
Borrowings under lines of credit................................................. 36,503,838 27,472,952
Accounts payable................................................................. 1,781,144 1,097,173
Accrued liabilities.............................................................. 2,425,099 2,314,870
Other current liabilities........................................................ 2,889,583 612,988
------------- -------------
Total current liabilities...................................................... 43,763,529 33,227,454
Notes payable...................................................................... 283,647 1,733,186
------------- -------------
Total liabilities.............................................................. 44,047,176 34,960,640
------------- -------------
Commitments and contingencies
Stockholders' equity (Note 1):
Preferred stock, $.001 par value:
Shares authorized--5,000,000
No shares issued or outstanding.................................................. -- --
Common stock, $.001 par value:
Shares authorized--15,000,000
Issued and outstanding at September 30, 1996 and 1995--5,607,500 and 3,350,000
respectively 5,608 3,350
Additional paid-in capital....................................................... 16,670,698 958,770
Retained earnings................................................................ 4,199,031 869,508
------------- -------------
Total stockholders' equity....................................................... 20,875,337 1,831,628
------------- -------------
Total liabilities and stockholders' equity....................................... $ 64,922,513 $ 36,792,268
------------- -------------
------------- -------------
See Notes to Financial Statements.
20
EN POINTE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Net sales....................................................... $ 345,092,672 $ 200,797,023 $ 109,987,311
Cost of sales................................................... 316,164,858 184,761,452 101,056,646
-------------- -------------- --------------
Gross profit.................................................. 28,927,814 16,035,571 8,930,665
Selling and marketing expenses.................................. 15,253,420 9,306,632 5,492,720
General and administrative expenses............................. 5,947,808 3,755,389 2,159,525
Litigation settlement and defense, net.......................... 524,913 -- --
-------------- -------------- --------------
Operating income.............................................. 7,201,673 2,973,550 1,278,420
Interest expense................................................ 1,672,558 1,842,527 1,121,325
Other income, net............................................... (115,839) (61,399) (158,589)
-------------- -------------- --------------
Income before income taxes.................................... 5,644,954 1,192,422 315,684
Provision for income taxes...................................... 2,315,431 489,182 128,902
-------------- -------------- --------------
Net income.................................................... $ 3,329,523 $ 703,240 $ 186,782
-------------- -------------- --------------
-------------- -------------- --------------
Net income per share.......................................... $ 0.77 $ 0.21 $ 0.06
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares and share equivalents outstanding..... 4,301,920 3,409,500 3,197,333
-------------- -------------- --------------
-------------- -------------- --------------
See Notes to Financial Statements.
21
EN POINTE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- ------------- ------------ -------------
Balance at September 30, 1993................. 2,077,004 $ 2,077 $ 7,923 $ (20,514) $ (10,514)
Common stock issued for cash................ 1,272,996 1,273 10,985 12,258
Net income.................................. 186,782 186,782
---------- --------- ------------- ------------ -------------
Balance at September 30, 1994................. 3,350,000 3,350 18,908 166,268 188,526
Conversion of notes payable to stockholder
to additional paid-in capital............. 939,862 939,862
Net income.................................. 703,240 703,240
---------- --------- ------------- ------------ -------------
Balance at September 30, 1995................. 3,350,000 3,350 958,770 869,508 1,831,628
Issuance of common stock, net of offering
costs..................................... 2,250,000 2,250 15,542,693 15,544,943
Shares issued for services performed related
to public offering........................ 7,500 8 (8) --
Sale of warrants to underwriter............. 100 100
Deferred compensation....................... 169,143 169,143
Net income.................................. 3,329,523 3,329,523
---------- --------- ------------- ------------ -------------
Balance at September 30, 1996................. 5,607,500 $ 5,608 $ 16,670,698 $ 4,199,031 $ 20,875,337
---------- --------- ------------- ------------ -------------
---------- --------- ------------- ------------ -------------
See Notes to Financial Statements.
22
EN POINTE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
Operating activities:
Net income......................................................... $ 3,329,523 $ 703,240 $ 186,782
Adjustments to reconcile net income to net cash used by operating
activities
Depreciation and amortization.................................... 627,626 306,207 169,906
Litigation settlement............................................ 478,922 -- --
Allowance for doubtful accounts.................................. 390,000 90,500 53,600
Allowance for returns............................................ -- 490,900 134,300
Deferred taxes................................................... (48,980) (172,397) 8,359
Deferred compensation............................................ 169,143 -- --
Changes in operating assets and liabilities:
Restricted cash................................................ 506,000 (500,000) (358,401)
Accounts receivable............................................ (24,134,007) (10,698,287) (13,184,429)
Inventories.................................................... (174,364) (618,300) (851,271)
Prepaid expenses and other current assets...................... (258,807) (105,664) (94,015)
Accounts payable............................................... 683,971 (15,757) 795,549
Accrued expenses............................................... 110,229 631,842 1,072,515
Other current liabilities...................................... 2,276,595 558,920 (189,226)
------------- ------------- -------------
Net cash used by operating activities............................ (16,044,149) (9,328,796) (12,256,331)
Investing activities:
Software costs..................................................... (456,072) (206,619) --
Purchase of property and equipment................................. (1,713,710) (627,332) (555,130)
------------- ------------- -------------
Net cash used by investing activities............................ (2,169,782) (833,951) (555,130)
Financing activities:
Book overdraft..................................................... -- (399,776) 285,713
Net borrowings under lines of credit............................... 9,030,886 8,400,895 11,228,895
Proceeds from stockholder loans.................................... -- 150,000 900,000
Proceeds from notes payable........................................ -- 3,312,657 1,000,000
Payment on notes payable to stockholders........................... (150,000) (12,077) (614,530)
Payment on notes payable........................................... (3,344,067) (1,000,000) --
Net proceeds from sale of common stock............................. 15,545,043 -- 12,258
------------- ------------- -------------
Net cash provided by financing activities........................ 21,081,862 10,451,699 12,812,336
------------- ------------- -------------
Increase in cash................................................... 2,867,931 288,952 875
Cash at beginning of period........................................ 290,181 1,229 354
------------- ------------- -------------
Cash at end of period.............................................. $ 3,158,112 $ 290,181 $ 1,229
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Interest paid...................................................... $ 1,759,780 $ 1,838,511 $ 1,036,954
------------- ------------- -------------
------------- ------------- -------------
Income taxes paid.................................................. $ 2,626,581 $ 151,486 $ 222,232
------------- ------------- -------------
------------- ------------- -------------
Supplemental schedule of non-cash financing activities:
Conversion of notes payable to stockholders to additional paid-in
capital........................................................ $ 939,862
-------------
-------------
Notes issued under settlement agreement.......................... $ 478,922
-------------
-------------
See Notes to Financial Statements.
23
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
The Company was incorporated under the laws of the State of Texas on January
25, 1993 under the name Infosystems,Inc., which name was later changed to
InfoTech Systems, and commenced operations in March 1993. On September 21, 1995,
the Company changed its name to En Pointe Technologies, Inc.
In February 1996, the Company's Board of Directors (the "Board") authorized
the reincorporation of the Company in the State of Delaware with total
authorized shares of all classes of stock to be 20,000,000 shares, consisting of
15,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $.001 par value per share, to be effected on or
before the effective date of a registration statement for an initial public
offering ("IPO") of common stock. In connection with such reincorporation, the
Company authorized a forward stock split of 207.7 shares for each share of
issued and outstanding common stock of the Company. All share and per-share
amounts have been adjusted to retroactively reflect this stock split. On May 8,
1996 the Company successfully completed its Initial Public Offering (IPO) for
2,250,000 shares at $8 per share.
The Company is a reseller of computers and computer-related products and
services and currently has sales offices in twelve locations.
REVENUE RECOGNITION
Revenues are recognized upon product shipment and satisfaction of
significant vendor obligations, if any. Net sales consist of product sales, less
discounts. An estimated allowance for returns is provided to the extent such
returns will not be accepted by the Company's vendors. At September 30, 1996 and
1995, the allowance for returns was approximately $386,600.
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. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all time
deposits and highly liquid investments with acquired maturities of three months
or less to be cash equivalents.
INVENTORIES
Inventories consist principally of merchandise being configured for customer
orders and merchandise purchased for resale by the Company but not yet shipped
by the Company's vendors to its 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
24
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 because of their short maturity. The carrying amount of long-term debt is
also assumed to approximate fair value.
ADVERTISING
The Company reports the costs of all advertising in the periods in which
those costs are incurred.
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.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable. The Company's cash deposits are placed with various
financial institutions.
For the years ended September 30, 1996 and 1995, one of the Company's
customers accounted for approximately 27% and 11% of net sales, respectively.
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
generally been within management's expectations.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding during each period, using the treasury
stock method. Common equivalent shares related to stock options are excluded
from the computation when their effect is antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The accounting or disclosure requirements of this statement are
effective for the Company's fiscal year 1997. The Company has not yet determined
whether it will adopt the accounting requirements of this standard or whether it
will elect only the disclosure requirements and continue to measure compensation
cost using Accounting Principles Board Opinion No.25.
25
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"), was issued and was adopted by the Company for the year
ended September 30, 1996. This statement requires that long-lived assets and
certain identifiable intangible assets held and used be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. The adoption of SFAS No. 121 did not have a
material impact on the financial position, results of operations, or cash flows
of the Company.
RECLASSIFICATIONS
Certain reclassification have been made to the 1995 financial statements to
conform to the 1996 presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
SEPTEMBER 30,
-----------------------
1996 1995
----------- ----------
Computer equipment....................................................................................... $ 2,598,369 $1,347,347
Software................................................................................................. 662,691 206,619
Office equipment......................................................................................... 307,949 115,594
Leasehold improvements................................................................................... 190,680 --
Furniture and fixtures................................................................................... 196,401 116,750
----------- ----------
3,956,090 1,786,310
Less: Accumulated depreciation......................................................................... (1,135,039) (507,415)
----------- ----------
$ 2,821,051 $1,278,895
----------- ----------
----------- ----------
3. LINES OF CREDIT:
At September 30, 1996 and 1995, the Company had outstanding borrowings of
$36,503,838 and $27,472,952, respectively, under lines of credit with various
financial institutions.
The line of credit agreements provide for total financing of up to
$48,550,000 and $33,500,000 at September 30, 1996 and 1995, respectively, at
annual interest rates of up to prime plus 1% and 2.50%, respectively. 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, including certificates of deposit of $10,000 and $1,116,000,
classified as restricted cash, at September 30, 1996 and 1995, respectively.
Borrowings are limited to specific percentages of the Company's accounts
receivable and inventory balances. The line of credit agreements contain various
covenants which provide, among other things, a restriction on dividend payments
and the requirement for the maintenance of certain financial ratios. At
September 30, 1996 the Company was in compliance with the covenants under its
line of credit agreements. The prime rate of interest was 8.25%, 8.75%, and
7.75% at September 30, 1996, 1995, and 1994 respectively, and the weighted
average interest rates for the years ended September 30, 1996, 1995, and 1994,
were 10.78%, 10.76%, and 8.74%, respectively.
The lines of credit are automatically renewable on an annual basis unless
notification of an election not to renew is made by either the Company or
creditor on or prior to the annual renewal date.
26
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE:
Notes payable consist of the following:
SEPTEMBER 30,
--------------------------
1996 1995
----------- -------------
Notes payable to a vendor with interest at 8.5%, payments of principal and interest of
$274,492 due quarterly with any unpaid balance due August 18, 1997, repaid during
fiscal 1996......................................................................... $ -- $ 2,000,000
Note payable to a vendor with interest at 10%, payments of principal and interest of
$65,000 due monthly with any unpaid balance due August 1, 1997, repaid during fiscal
1996................................................................................ -- 1,312,657
Stockholder note payable with interest at 10%, due on demand.......................... -- 150,000
Note payable under legal settlement, non interest bearing, due April 9, 1997, includes
discount to present value at 5.60% interest per annum............................... 97,787 --
Note payable under legal settlement, non interest bearing, payable in monthly
installments of $7,500 due in full on April 9, 2001, includes discount to present
value at 6.40% interest per annum................................................... 349,725 --
----------- -------------
447,512 3,462,657
Less, current portion................................................................. (163,865) (1,729,471)
----------- -------------
$ 283,647 $ 1,733,186
----------- -------------
----------- -------------
The above vendor notes were collateralized by substantially all assets of
the Company. Certain of the above notes also required the Company to maintain
specified financial ratios at September 30, 1995. The notes with one of the
vendors was entered into directly by the vendor and certain stockholders,
however, the notes were guaranteed by the Company and were collateralized by
substantially all assets of the Company. All principal and interest payments on
these notes were made by the Company.
Interest expense on notes payable to stockholders for the years ended
September 30, 1996, 1995, and 1994 was $5,630, $94,200, and $88,600
respectively.
Maturities of long-term debt as of September 30, 1996 are as follows:
1997.............................................................. $ 163,865
1998.............................................................. 69,873
1999.............................................................. 78,598
2000.............................................................. 83,778
2001.............................................................. 51,398
---------
$ 447,512
---------
---------
5. 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 7 years of service. No contributions were made by the
Company to the 401(k) Plan during fiscal years 1996 and 1995.
27
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
The components of the income tax (benefit) provision are as follows:
SEPTEMBER 30,
-------------------------------------
1996 1995 1994
------------ ----------- ----------
Current:
Federal.............................................. $ 1,846,325 $ 523,780 $ 97,450
State................................................ 510,813 137,799 23,093
------------ ----------- ----------
2,357,138 661,579 120,543
------------ ----------- ----------
------------ ----------- ----------
Deferred:
Federal.............................................. (48,999) (137,627) 5,150
State................................................ 7,292 (34,770) 3,209
------------ ----------- ----------
(41,707) (172,397) 8,359
------------ ----------- ----------
$ 2,315,431 $ 489,182 $ 128,902
------------ ----------- ----------
------------ ----------- ----------
The provision for income taxes differs from the amount computed by applying
the federal statutory rate to income before provision for income taxes as
follows:
SEPTEMBER 30,
-------------------------------------
1996 1995 1994
----- ----- -----
Federal statutory rate................................................... 34% 34% 34%
State taxes, net of federal benefits..................................... 6% 6% 6%
Non-deductible expenses.................................................. 1% 1% 1%
-- -- --
41% 41% 41%
-- -- --
-- -- --
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. Based on the level of
taxable income generated by the Company in prior periods, management believes it
is more likely than not that the Company will realize the benefit of its
recorded net deferred tax asset.
Significant components of deferred taxes were as follows:
1996 1995
----------- ----------
Deferred tax assets:
Accounts receivable and returned goods allowance................... $ 358,361 $ 209,171
Expenses not currently deductible.................................. 210,796 76,366
State income taxes................................................. 97,380 23,822
----------- ----------
666,537 309,359
----------- ----------
Deferred tax liabilities:
Prepaid sales commissions.......................................... (99,392) (25,867)
Depreciation and amortization...................................... (16,157) (43,547)
Software development costs......................................... (262,063) --
----------- ----------
(377,612) (69,414)
----------- ----------
Net deferred tax asset............................................... $ 288,925 $ 239,945
----------- ----------
----------- ----------
28
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities and various office equipment. These
leases extend over a period of up to six years and are accounted for as
operating leases. Estimated future minimum lease payments under operating leases
having initial or remaining noncancellable lease terms in excess of one year at
September 30, 1996 were as follows:
1997............................................................ $1,182,225
1998............................................................ 945,155
1999............................................................ 827,809
2000............................................................ 573,859
2001............................................................ 401,495
2002............................................................ 90,254
---------
$4,020,797
---------
---------
Rent expense for the years ended September 30, 1996, 1995, and 1994 under
all operating leases was approximately $1,104,000, $966,000, and $578,000,
respectively.
The Company has entered into employment contracts with certain of its
officers. The agreements provide for annual base salary with annual increases
and provide for annual bonuses as determined by the Board of Directors. The
agreements have five-year terms ending at various times through fiscal 2001 and
provide for guaranteed severance payments upon termination of employment.
On August 22, 1996 the Company entered into an agreement with a Distributor
that requires $55 million in products to be purchased from the Distributor over
an 18 month period at competitive market prices. Minimum quarterly purchases
beginning October 1, 1996 range from $3.6 million to $15 million. To guarantee
performance under the agreement, the Company has placed $600,000 in an escrow
account that is interest bearing. A pro rata portion of the escrowed funds is
released as $5 million dollar purchase levels are achieved.
8. STOCK OPTIONS AND WARRANTS
The Company has a qualified (Incentive Stock Option Plan) and non-qualified
stock option plan which provides that options for a maximum of 360,000 shares of
common stock may be granted to directors, officers, and key employees over a
period not to exceed ten years. The qualified stock options are exercisable at
fair market value at the date of grant and the non-qualified stock options are
at 80% of the fair market value at the date of grant.
STOCK OPTIONS
----------------------------------
TOTAL
NON EXERCISE PRICE RANGE
QUALIFIED QUALIFIED VALUE PER SHARE
--------- --------- ------------ -------------
Outstanding at March 31, 1996.................................. -- -- --
Granted........................................................ 104,000 190,000 $ 2,064,000 $6.40-$8.00
Exercised...................................................... -- -- --
Cancelled...................................................... (8,500) -- (68,000) $8.00
--------- --------- ------------
Outstanding at June 30, 1996................................... 95,500 190,000 $ 1,996,000 $6.40-$8.00
--------- --------- ------------
--------- --------- ------------
At September 30, 1996 warrants to purchase 217,500 shares of the Company's
common stock are outstanding. The warrants were issued by the Company to the
underwriter of the initial public offering, have a five year life and have an
exercise price of $9.60 per share.
29
EN POINTE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE STOCK PLAN
The Company also has an Employee Stock Purchase Plan (the "Plan") under
which there remains authorized and available for sale to employees an aggregate
of 250,000 shares of the Company's common stock. The Plan, which is intended to
qualify under Section 423 of the Code, permits eligible employees to purchase
common stock, subject to certain limitations, up to 20% of 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.
10. LITIGATION SETTLEMENT:
In April 1996 the Company, Bob Din and Naureen Din entered into a settlement
agreement with a former employee of the Company, pursuant to which the former
employee has released the Company from any and all claims with respect to the
Company's use of certain computerized information system software originally
developed by the former employee prior to his employment with the Company (the
"Settlement Agreement"). As consideration for entering into the Settlement
Agreement, the Company has agreed to pay the former employee installment
payments which have the equivalent present value of $1.1 million. Legal fees
incurred in connection with the Settlement Agreement and related litigation were
expensed as incurred by the Company.
The Company filed suit against its insurance carrier in order to recoup both
legal costs incurred by the Company in connection with its defense of the
foregoing litigation as well as for amounts paid to the former employee pursuant
to the settlement. In August the insurance company settled with the Company
paying a total of $1,562,500.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods for the fiscal
years ended 1996 and 1995 is presented below (in thousands, except per share
amounts):
FISCAL YEAR ENDED SEPTEMBER 30, 1996
----------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
----------- --------- --------- -----------
Net sales................................................. $ 77,016 $ 79,893 $ 88,938 $ 99,246
Gross profit.............................................. 6,061 6,639 7,473 8,755
Net income................................................ 702 683 459 1,486
Net income per share...................................... 0.21 0.20 0.10 0.26
FISCAL YEAR ENDED SEPTEMBER 30, 1995
----------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
----------- --------- --------- -----------
Net sales................................................. $ 43,584 $ 41,997 $ 56,852 $ 58,364
Gross profit.............................................. 3,290 3,761 4,425 4,560
Net income................................................ 21 117 314 251
Net income per share...................................... 0.01 0.03 0.09 0.07
In the third quarter of 1996, the Company settled its lawsuit with a former
employee for $1.3 million less partial recovery of $.7 million from its
insurance carrier or $.6 million net expense. In the fourth quarter of 1996, the
remaining insurance recovery of $.7 million was received, less related expenses
of $.1 million or $.6 million net recovery income.
30
SCHEDULE II
EN POINTE TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------------------------------- ----------- ----------- ----------- -----------
Year ended September 30, 1996
Allowance for doubtful accounts.............................. $ 125,000 $ 410,000 $ (20,000) $ 515,000
Allowance for returns........................................ $ 386,600 $ -- $ -- $ 386,600
Year ended September 30, 1995
Allowance for doubtful accounts.............................. $ 60,000 $ 90,500 $ (25,500) $ 125,000
Allowance for returns........................................ $ 134,300 $ 490,900 $ (238,600) $ 386,600
Year ended September 30, 1994
Allowance for doubtful accounts.............................. $ 10,000 $ 53,600 $ (3,600) $ 60,000
Allowance for returns........................................ $ -- $ 134,300 $ -- $ 134,300
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for its 1996 annual meeting of
stockholders (the "Proxy Statement"). The Proxy Statement will be filed with the
Securities and Exchange Commission on or about January 15, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by reference
to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by reference
to the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The financial statements included herein are filed as a part of this
Report.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts and Reserves
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
2.1* Agreement and Plan of Merger between the Registrant and Enpointe
Technologies, Inc., a Texas corporation, effective February 29,
1996
3.1* Certificate of Incorporation of Registrant
3.2* Bylaws of Registrant
4.1* Form of Representative's Warrant Agreement by and between the
Registrant and the Boston Group, L.P.
10.1* **En Pointe Technologies, Inc. 1996 Stock Incentive Plan
10.2* **En Pointe Technologies, Inc. Employee Stock Purchase Plan
10.3* Form of Directors' and Officers' Indemnity Agreement.
10.4* **Employment Agreement between the Registrant and Ellis M. Posner,
dated August 7, 1995.
10.5* **Employment Agreement between the Registrant and Attiazaz "Bob"
Din, dated March 1, 1996.
10.6* **Employment Agreement between the Registrant and Javed Latif, dated
March 8, 1996.
10.7* **Employment Agreement between the Registrant and Kevin Schatzle,
dated April 1, 1996.
32
10.12* Amended and Restated Revolving Loan and Security Agreement between
the Registrant and IBM Credit Corporation dated December 5, 1994,
including Attachment A dated June 1, 1995.
10.13* Lease dated September 13, 1994, between Paul A. Pearson and Patricia
L. Pearson and the Registrant for the property located at 1860
Embarcadero Road, Suite 140, Palo Alto, California.
10.14* Lease Agreement dated April 1, 1994 between Hanig Row Partnership
and the Registrant for the property located at 200 East Sixth
Street, Suite 203, Austin, Texas.
10.15* Lease Agreement dated June 2, 1993, between Broadbent Development
Company and Hayden Corporation, Delaware corporations, and the
Registrant for the property located at SW Meadows Road, Lake
Oswego, Oregon.
10.16* Lease dated June 10, 1994, between Signature Centerra LLC and the
Registrant for the property located at 1873 S. Bellaire Street,
Suite 320, Denver, Colorado.
10.17* Office lease dated August 16, 1995, between LPT Associates and the
Registrant for the property located at U.S. Bank Plaza, 980 9th
Street, Sacramento, California.
10.20* Lease Agreement dated September 16, 1994, between Meridian Point
Realty Trust '83, a California business trust, and the Registrant
for the property located at 4132 Getwell, Building No. 16B,
Airport Industrial Park, Memphis, Tennessee.
10.21* Office lease dated July 6, 1993, between G&W Investment Partners and
the Registrant for the property located at 3075 112th Avenue NE,
Bellevue, Washington.
10.22* Lease Agreement dated January 7, 1994, between Carillon/Alpha
Limited Partnership, Metro KLS, Inc., General Partner, and the
Registrant for the property located at 13601 Preston Road, Dallas,
Texas.
10.23* Sublease Agreement dated April 1994, between Daymon Associates, Inc.
and the Registrant for the property located at 500 Fifth Avenue,
New York, New York.
10.24* Information Processing Equipment Agreement between IBM and the
Registrant dated November 16, 1995. (Portions omitted pursuant to
Rule 406)
10.25 Office lease dated April 1996, between Linbrook Limited Partnership
and the Registrant for property located at 10627 38th Circle,
N.E., Bldg. 32, Kirkland, WA
10.26 Office lease dated June 28, 1996, between Metropolitan Life
Insurance Company and the Registrant for property located at 2015
sprint Road, Oak Brook, Illinois.
11.1 Statement of Computation of Earnings Per Share
16.1* Letter from Mercer & Woodford CPAs/P.C. on changes in certifying
accountant.
23.1* Consent of Stradling Yocca, Carlson & Rauth (see Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on signature page hereto).
33
27 Financial Data Schedule
- ------------------------
* Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form S-1, No. 333-2046.
** These exhibits are identified as management contracts or compensatory plans
or arrangements of the Company pursuant to item 13(a) of Form 10-K.
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none were required.
34
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized.
En Pointe Technologies, Inc.
By: /s/ ATTIAZAZ ("BOB") DIN
-----------------------------------------
Attiazaz ("Bob") Din December 13,
1996
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ ROBERT A. MERCER
-----------------------------------------
Robert A. Mercer December 13, 1996
CHIEF FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER
POWER OF ATTORNEY
We, the undersigned directors and officers of En Pointe Technologies, Inc.
do hereby constitute and appoint Attiazaz "Bob" Din and Robert A. Mercer, or
either of them, our true and lawful attorneys and agents with full powers of
substitution, 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, 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
hereto, 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
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURE AND TITLE DATE
- -------------------------------------------------------- -------------------
By /s/ ATTIAZAZ ("BOB") DIN, Director
-------------------------------------------- December 13, 1996
Attiazaz ("Bob") Din, Director
By /s/ NAUREEN DIN, Director
-------------------------------------------- December 13, 1996
Naureen Din, Director
By
-------------------------------------------- December , 1996
Zubair Ahmed, Director
By
-------------------------------------------- December , 1996
Mansoor Ijaz, Director
By /s/ VERDELL GARROUTTE, Director
-------------------------------------------- December 13, 1996
Verdell Garroutte, Director
35